CALGARY, Alberta – Peyto Exploration & Development Corp. (“Peyto” or the “Company”) (TSX: PEY) announces today an operational update, amended credit and note purchase agreements, and reaffirms its 2020 capital guidance supported by the Company’s sustainable business model.
The COVID-19 pandemic has had an unprecedented impact on near term hydrocarbon demand and placed a considerable economic burden on a struggling Canadian energy industry. Lower commodity prices, decreased liquidity and increased cost of capital has significantly reduced investment in new drilling not only in Canada but across North America. This reduced activity should eventually result in declines in production and rising commodity prices. While Peyto will ultimately benefit from those rising commodity prices, in the near term, the Company’s business is sustained by its long life, low cost natural gas assets that deliver industry leading operating margins.
Spring breakup conditions were unusually wet in the Edson area due to the above average winter snowfall and colder temperatures that drove frost deeper into the ground. Despite these challenges, Peyto was able to drill 11 new wells (10.3 net), complete 8 wells (7.5 net) and bring on production 9 wells (8.5 net) so far in the second quarter. In addition, the Company has 5 wells (4.3 net) drilled and awaiting completion. The Company expects to drill 29 gross wells (27.5 net) in the first half of 2020. Current production is consistent with the first quarter at approximately 78,500 boe/d.
New drilling in 2020 has added approximately 65 mmcf/d of natural gas and 1,700 bbls/d of natural gas liquids which continues to demonstrate a significant improvement in capital efficiency and which is expected to translate into a lower sustaining capital requirement going forward. Both drilling costs per meter and completion costs per stage in the second quarter have averaged 10% less than the first quarter of 2020, despite wet breakup conditions which add to cost, and Peyto targets a further 10-15% cost savings in the balance of the year. These combined savings are expected to directly translate into reduced cost to add new production and reserves.
Amended Credit Facility and Note Purchase Agreements
On June 29, 2020, Peyto finalized an agreement with its syndicate of lenders and term debt note holders to revise its credit and note purchase agreements and to reduce the size of its credit facility. The credit facility and long term notes are now secured by a floating debenture on Peyto’s assets and the $1.3 billion extendible revolving credit facility has been reduced to $950 million. This amended facility provides Peyto with adequate liquidity to execute its three-year strategic business plan while minimizing the increased cost of the unutilized credit capacity. On March 31, 2020, Peyto had drawn $715 million on its credit facility and had $415 million of long-term notes leaving it with significant liquidity.
In addition, Peyto has received relief from its previous financial covenants with new senior and total debt to EBITDA financial covenants ranging throughout the relief period from 3.5:1 up to 5.25:1, for senior debt, and 4:1 up to 5.75:1, for total debt. The total stamping fee under the credit facility will range between 200 basis points and 600 basis points on Canadian dollar bankers’ acceptance and US dollar LIBOR borrowings. Undrawn portions of the facility are subject to a standby fee in the range of 50 basis points to 150 basis points. An increase in the interest rate on the notes will range from 85 basis points and 285 basis points depending on the senior debt financial covenant. Peyto’s revolving credit facility has a stated term date of October 13, 2022 while the first long term note, of $50 million, is due on September 30, 2022. Peyto is pleased to report that all ten banks in its syndicate as well as the four note holders have continued their support of the Company and its go forward business model. This new agreement allows the Company to move forward with confidence and certainty over the next 2 years.
The Company is approximately halfway through its 2020 capital program, which is expected to range between $200 and $250 million. This capital program is now expected to result in 45-60 wells drilled, completed, and brought onstream. In addition, the capital program will expand Peyto’s 2,000 km gas gathering pipeline network, provide meaningful additional gas supply for its 845 mmcf/d processing facilities, and add to the Company’s database of 2,160 square miles of 3D seismic – twice that of Peyto’s land base.
As the capital required to hold Peyto at current production levels is now reduced, due to improved capital efficiency, the remaining free cashflow is expected to result in increasing production. Moving forward into 2021 and 2022, as base production declines are forecast to continue to moderate, the sustaining capital that is required for this current level of production is forecast to fall to $180 and $165 million, respectively. It should be noted that Peyto’s proved producing reserves are expected to continue to grow when production is held constant. As realized commodity prices strengthen, free cashflow is expected to significantly increase, resulting in increased growth capital or debt reduction.
Peyto’s unique asset base is a concentrated collection of lands, resources and infrastructure that continues to deliver an industry leading cost structure and operating margin while offering vertical integration along the value chain. Although accelerated development and growth of this asset is being deferred for the short term, over the medium to longer term, as market condition improve, this asset base will provide a stable platform for growth and improved returns for shareholders. The Company’s current three-year plan provides for a strategic path forward through a period of significant commodity price volatility, but immense opportunity. Peyto will continue to remain poised to capitalize on these opportunities while at the same time will be nimble to changing market dynamics with both the financial and operational flexibility to ramp up activity quickly and take advantage of attractive investment opportunities that may arise. The Peyto team, while small and efficient, has demonstrated the capability to execute up to three times the current capital program.
In the near term, shareholders can remain confident that a continued attention to financial flexibility and a disciplined, returns focused approach to all future capital investments will preserve and enhance total shareholder value. A pre-recorded annual general meeting presentation is now available on the Company’s website. To learn more about what makes Peyto one of North America’s most exciting energy companies visit www.peyto.com.