CALGARY, Alberta – Peyto Exploration & Development Corp. (“Peyto” or the “Company”) is pleased to present its operating and financial results for the third quarter of the 2020 fiscal year. While the COVID-19 pandemic continued to grip the world and global energy markets, Peyto was able to safely continue conducting drilling operations, achieving a significant operational milestone in the Company’s 22 year history with the completion of its 1,000th horizontal well. Results for the quarter included:
- Funds from operations of $0.30/share. Generated $49 million in Funds From Operations (“FFO”) in Q3 2020, down from $68 million in Q3 2019 due to 14% lower realized commodity prices offset by 2% higher production levels.
- Liquids production up 6%. Natural gas production increased 1% from 396 MMcf/d in Q3 2019 to 402 MMcf/d in Q3 2020 while Condensate and NGL production increased 6% from a year ago to 11,263 bbl/d. Liquid yields were 28 bbl/MMcf, up from 27 bbl/MMcf in Q3 2019, primarily due to new Cardium drilling. Total liquids production was comprised of 6,493 bbls/d of Condensate and Pentanes+, and 4,770 bbls/d of Propane and Butane. Total Q3 2020 production of 78,210 boe/d was up 2% from Q3 2019.
- Total cash costs of $1.01/Mcfe ($0.87/Mcfe or $5.25/boe excluding royalties). Industry leading total cash costs, included $0.14/Mcfe royalties, $0.32/Mcfe operating costs, $0.16/Mcfe transportation, $0.04/Mcfe G&A and $0.35/Mcfe interest, and combined with a realized price of $2.15/Mcfe, resulting in a $1.14/Mcfe ($6.83/boe) cash netback, down 29% from $1.61/Mcfe ($9.65/boe) in Q3 2019. Operating costs per unit for Q3 2020 were up 3% from Q3 2019, largely due to increased power and chemical costs.
- Capital investment of $62 million. A total of 18 gross wells (16.5 net) were drilled in the third quarter, 21 gross wells (19.5 net) were completed, and 21 gross wells (19.5 net) were brought on production. Over the last 12 months the 74 gross (67.35 net) wells brought on production accounted for approximately 24,000 boe/d at the end of the quarter, which, when combined with a trailing twelve month capital investment of $241 million, equates to an annualized capital efficiency of $10,000/boe/d. Peyto anticipates the 2020 full year capital efficiency will be approximately $9,000/boe/d based on continued drilling and completion cost improvements.
- Dividends of $0.01/share, Loss of $0.07/share. Dividends of $1.6 million were paid to shareholders during the quarter while a loss of $11.3 million was recorded.
Third Quarter 2020 in Review
Peyto increased drilling activity in the third quarter, following spring break up, with four drilling rigs active across the Company’s Deep Basin core areas. On September 23, 2020 drilling commenced on the Company’s 1,000th Deep Basin horizontal well at 14-01-054-19W5. The well was drilled to 4,250m measured depth with a 1,832m horizontal lateral in the Notikewin formation. Drilling was conducted by the Ensign #401 rig which has been drilling for Peyto for over 10 years without a single lost-time incident. The 14-01 well also set a new drilling pace record at Peyto, taking only 6.5 days from spud to total depth. The well is currently being completed as part of a multi-well pad site and will commence production shortly. Peyto has now drilled more horizontal wells in the Alberta Deep Basin than any other operator and continues to lead the industry in innovation, efficiency and safety while responsibly developing Alberta’s natural gas resources. Production grew from 76,000 boe/d at the start of the quarter to exit at 83,000 boe/d. Commodity prices also rebounded from Q2 2020 lows with NYMEX gas and WTI oil up 18% and 47%, respectively. Although Funds from Operations for the quarter were lower than Q3 2019, the higher commodity prices lifted FFO 49% from the previous quarter. Peyto maintained its industry leading low cash costs at $1.01/Mcfe which delivered a 53% Operating Margin1. The Company anticipates that the recent improvement in natural gas prices and continued growth in production will significantly improve financial performance in the quarters ahead.
1. Operating Margin is defined as funds from operations divided by revenue before royalties but including realized hedging gains/losses.
Natural gas volumes recorded in thousand cubic feet (mcf) are converted to barrels of oil equivalent (boe) using the ratio of six (6) thousand cubic feet to one (1) barrel of oil (bbl). Natural gas liquids and oil volumes in barrel of oil (bbl) are converted to thousand cubic feet equivalent (Mcfe) using a ratio of one (1) barrel of oil to six (6) thousand cubic feet. This could be misleading, particularly if used in isolation as it is based on an energy equivalency conversion method primarily applied at the burner tip and does not represent a value equivalency at the wellhead.
|Three Months Ended Sep 30||%||Nine Months Ended Sep 30||%|
|Natural gas (mcf/d)||401,680||396,343||1%||401,692||426,648||-6%|
|Oil & NGLs (bbl/d)||11,263||10,650||6%||11,325||10,821||5%|
|Thousand cubic feet equivalent (mcfe/d @ 1:6)||469,259||460,243||2%||469,640||491,572||-4%|
|Barrels of oil equivalent (boe/d @ 6:1)||78,210||76,707||2%||78,273||81,929||-4%|
|Production per million common shares (boe/d)*||474||465||2%||475||497||-4%|
|Natural gas ($/mcf)||1.64||1.84||-11%||1.57||2.07||-24%|
|Oil & NGLs ($/bbl)||31.08||39.65||-22%||29.73||44.87||-34%|
|Operating expenses ($/mcfe)||0.32||0.31||3%||0.36||0.34||6%|
|Field netback ($/mcfe)||1.53||1.97||-22%||1.42||2.19||-35%|
|General & administrative expenses ($/mcfe)||0.04||0.05||-20%||0.04||0.05||-20%|
|Interest expense ($/mcfe)||0.35||0.31||13%||0.32||0.30||7%|
|Financial ($000, except per share*)|
|Revenue and realized hedging gains (losses) 1||92,853||105,944||-12%||264,457||373,130||-29%|
|Funds from operations||49,173||68,106||-28%||136,697||247,157||-45%|
|Funds from operations per share||0.30||0.41||-28%||0.83||1.50||-45%|
|Total dividends per share||0.01||0.06||-83%||0.08||0.18||-56%|
|Payout ratio (%)||3||15||-80%||10||12||-17%|
|Earnings (loss) per diluted share||(0.07)||0.04||-275%||(0.62)||0.79||-179%|
|Weighted average common shares outstanding||164,892,979||164,874,175||–||164,880,489||164,874,175||–|
|As at September 30|
|1excludes revenue from sale of third party volumes|
|Three Months Ended Sep 30||Nine Months Ended Sep 30|
|($000 except per share)||2020||2019||2020||2019|
|Cash flows from operating activities||48,074||64,913||150,169||241,993|
|Change in non-cash working capital||1,099||3,193||(13,472)||2,873|
|Performance based compensation||–||–||–||2,291|
|Funds from operations||49,173||68,106||136,697||247,157|
|Funds from operations per share||0.30||0.41||0.83||1.50|
(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 Activity
Third quarter 2020 drilling activity was spread throughout the Greater Sundance and Brazeau River areas and amongst both the liquids rich Cardium and drier Spirit River plays as shown in the following table:
|Field||Total Wells Drilled|
Drilling and completion costs for the third quarter of 2020 continued their downward trend. Peyto expects 2020 drilling cost per meter and completion costs per stage will be the lowest in Company history. Repeated success with a new extended reach horizontal well design is contributing to the lower costs. No lost time incidents occurred in Q3 2020 as Peyto and its service providers safely executed operations in drilling, completions, pipelining, and facility installations all while dealing with the added concerns of the COVID-19 pandemic.
|Gross Hz Spuds||99||123||140||126||135||70||61||17||12||18||47|
|Measured Depth (m)||4,179||4,251||4,309||4,197||4,229||4,020||3,848||4,069||4,335||4,219||4,222|
|Drilling conducted ($MM/well)||$2.72||$2.66||$2.16||$1.82||$1.90||$1.71||$1.62||$1.75||$1.69||$1.68||$1.71|
|$ per meter||$651||$626||$501||$433||$450||$425||$420||$430||$390||$398||$404|
|Completion conducted ($MM/well)||$1.63||$1.70||$1.21||$0.86||$1.00||$1.13||$1.01*||$0.98||$0.97||$0.91||$0.93|
|Hz Length MD-TVD (m)||1,409||1,460||1,531||1,460||1,241||1,348||1,484||1,563||1,587||1,720||1,632|
|$ per Hz Length (m)||$1,153||$1,166||$792||$587||$803||$835||$679||$624||$610||$528||$574|
|$ ‘000 per Stage||$188||$168||$115||$79||$81||$51||$38||$38||$37||$34||$36|
*excluding Peyto’s Wildhay Montney well.
During the third quarter of 2020, Peyto invested 88% of total capital in well related expenditures, with $28.0 million in drilling, $20.1 million in completions and $6.0 million in wellsite equipment and tie-ins. A further $5.0 million was invested in facilities and major pipeline projects, and $2.5 million acquiring new land and seismic, for total capital investments of $61.6 million.
Peyto commissioned its Sundance water disposal well and associated pipeline during the quarter, along with several pipeline looping projects to debottleneck portions of the gathering system in the Greater Sundance area. This work, along with compressor upgrades and continued installation of reduced methane emission controllers, made up the majority of the $5 million in facility and pipeline expenditures. These reduced emission controllers have allowed Peyto to reduce it’s methane emissions per boe of production by over 40% from 2016.
During Q3 2020 Peyto sold 34% of its natural gas at AECO, 9% at Emerson, 5% at Ventura, and 52% at Henry Hub. Benchmark prices, Peyto realized prices, and aggregate gas marketing diversification costs are shown below. Moving forward, the Company expects to continue to market more of its gas at hubs outside of AECO but expects that market diversification costs will be significantly reduced over time.
Benchmark Commodity Prices
|Three Months ended September 30|
|AECO 7A monthly ($/GJ)||2.04||0.99|
|AECO 5A daily ($/GJ)||2.12||0.86|
|Ventura daily (US$/MMbtu)||1.80||2.00|
|Dawn daily (US$/MMbtu)||1.82||2.13|
|Canadian WTI ($/bbl)||54.50||74.55|
|Conway C3 (US$/bbl)||19.54||15.10|
Q3 2020 average CND/USD exchange rate of 1.332
Peyto Realized Commodity Prices by Component
|Three Months ended September 30|
|Natural gas ($/mcf)||2.62||2.17|
|Gas marketing diversification activities ($/mcf)||(1.01)||(0.70)|
|Gas hedging ($/mcf)||0.03||0.37|
|Oil, condensate and C5+ ($/bbl)||42.09||67.76|
|Butane and propane ($/bbl)||15.76||2.79|
|Oil and NGL hedging ($/bbl)||(1.78)||2.26|
Liquids prices are Peyto realized prices in Canadian dollars adjusted for fractionation, transportation, and market differentials.
Peyto natural gas has an average heating value of approximately 1.15 GJ/mcf
Details of Peyto’s ongoing marketing and diversification efforts are available on Peyto’s website at:
Approximately 36%, or $0.79/Mcfe, of Peyto’s unhedged revenue came from its associated condensate and natural gas liquids sales while 64%, or $1.38/Mcfe, is attributable to natural gas sales. Natural gas hedging increased revenue by $0.02/Mcfe while liquids hedging reduced revenue by $0.04/Mcfe for total revenue of $2.15/Mcfe. Cash costs of $1.01/Mcfe, included royalties of $0.14/Mcfe, operating costs of $0.32/Mcfe, transportation costs of $0.16/Mcfe, G&A of $0.04/Mcfe and interest costs of $0.35/Mcfe. Cash costs per unit of production were higher than Q3 2019 due to increased royalties and interest charges.
When the total cash costs of $1.01/Mcfe were deducted from realized revenues of $2.15/Mcfe, it resulted in a cash netback of $1.14/Mcfe or a 53% operating margin. Historical cash costs and operating margins are shown in the following table:
Depletion, depreciation, and amortization charges of $1.34/Mcfe, along with a provision for deferred tax and stock-based compensation payments reduced the cash netback to a loss of $0.26/Mcfe ($0.07/share). Dividends of $0.04/Mcfe ($0.01/share) were paid to shareholders in the quarter. No impairment charges were recorded in the quarter.
Peyto currently has 4 drilling rigs operating in the Greater Sundance and Brazeau core areas. These four rigs are scheduled to shut down in mid-December for the Christmas break but will resume drilling in early January. Since the end of the quarter, the Company has spud 11 wells, completed 10 wells, and brought on production 5 new wells. In addition, there are 7 wells at various stages of completion and tie-in.
Peyto’s recent efforts to increase horizontal lateral length and increase stimulation intensity has yielded impressive results across several areas and in several different formations. The 2020 capital program, so far, has achieved the lowest total drilling and completion cost per meter of stimulated reservoir, while still delivering superior production performance compared to previous years. This superior performance combined with the strong spot natural gas prices, has resulted in some of the highest rates of return achieved in the last five years. Historical costs and the average of the first six months of production are shown below.
|Measured Depth (m)||4,041||4,017||4,179||4,251||4,309||4,197||4,229||4,020||3,848||4,222|
|Stimulated Hz Lateral (m)||1,138||1,123||1,264||1,269||1,287||1,224||1,241||1,377||1,351||1,500|
|Total Avg Drill & Complete ($MM/well)||$4.50||$4.28||$4.36||$4.31||$3.28||$2.59||$2.78||$2.78||$2.46||$2.63|
|D&C cost per meter of stimulated reservoir||$3,954||$3,809||$3,445||$3,393||$2,549||$2,119||$2,236||$2,018||$1,823||$1,753|
|Average IP180 (boe/d)||426||403||674||466||501||455||441||349||383||520|
Recently, the Company has started gathering and processing 8 mmcf/d of third-party production into Peyto’s under-utilized Sundance infrastructure. This will generate incremental fee revenue to Peyto while allowing the third party to share in Peyto’s lower cost structure. The Company is continuing its efforts in this regard in areas where pipeline and plant infrastructure have spare capacity and will not impact Peyto’s current volumes and future plans.
The improved well performance and recent strength in both NYMEX and AECO natural gas prices, combined with the continued reduction in Peyto’s drilling and completion costs, which has lowered the cost to add new production, significantly improves the Company’s return on invested capital. Consistent with year two of Peyto’s strategic three-year plan, the Board of Directors is currently examining a go-forward capital program that invests available free cashflow into resource development opportunities. While specifics of the 2021 budget are not yet finalized, a capital program of $300 to $350 million, funded entirely from free cashflow, is being contemplated, which could add a projected of 33,000-39,000 boe/d, based on current on-stream metrics. This volume addition would more than offset the annual forecast of approximately 25% base decline on anticipated 2020 exit production of 85,000 boe/d. The 2020 exit production and subsequent base decline will depend on the timing of year end activity.
Peyto believes it currently has all the necessary equipment and service providers in place to execute the proposed capital program and has demonstrated during the year an ability to conduct operations safely and efficiently during the COVID 19 pandemic. While this proposed capital program will be funded entirely from available free cashflow, it should result in production, cashflow and earnings growth, as well as bring total leverage metrics in line, allowing Peyto to exit its covenant relief period with lenders earlier than originally contemplated. In addition, by the end of 2021, a significant portion of Peyto’s production that had been exposed to higher cost AECO-NYMEX basis will be subject to much lower market diversification costs, resulting in improved gas price realizations. The subsequent growth in free cashflow beyond 2021 could then be used for further debt repayment and increased dividends.
As always, Peyto will ensure any capital plans will be nimble with the ability to react to changes in commodity prices and the global economic environment, both of which continue to be volatile and uncertain.
Mr. Timothy Louie, Peyto’s Vice President of Land, will be retiring at the end of November 2020. On behalf of directors, staff, and shareholders of Peyto, management would like to sincerely thank Mr. Louie for his contributions to Peyto over the last 9 years and wish him all the best in his retirement.
The Peyto business model has always been a simple one. Use technical expertise to invest capital into internally generated drilling projects that achieve the highest possible return on that capital. After 22 successful years of deploying this strategy, Peyto has built one of the highest quality, lowest cost natural gas asset bases in the industry. At times, this strategy requires patience as it takes time to build value and quality through the drill bit, but after $6.3 billion in cumulative capital investment to drill 663 vertical wells and over 1,000 horizontal wells, which have delivered $6.4 billion in cumulative funds from operations, this approach has proven to deliver.
Globally, the outlook for natural gas continues to strengthen in recognition that it will be a critical part of any transition to a larger, cleaner, and reliable energy complex. Peyto remains confident that demand for the products it is developing today, will only grow in the future.
Conference Call and Webcast
A conference call will be held with the senior management of Peyto to answer questions with respect to the 2020 third quarter financial results on Thursday, November 12th, 2020, at 9:00 a.m. Mountain Time (MT), or 11:00 a.m. Eastern Time (ET). 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 https://edge.media-server.com/mmc/p/px5ts8gk. The conference call will be archived on the Peyto Exploration & Development website at www.peyto.com.
Management’s Discussion and Analysis/Financial Statements
A copy of the third quarter report to shareholders, including the MD&A, unaudited financial statements and related notes, is available at http://www.peyto.com/Files/Financials/2020/Q32020FS.pdf and at http://www.peyto.com/Files/Financials/2020/Q32020MDA.pdf and will be filed at SEDAR, www.sedar.com at a later date.
President and CEO
November 11, 2020
Phone: (403) 261-6081
Fax: (403) 451-4100