CALGARY, Alberta – Peyto Exploration & Development Corp. (“Peyto” or the “Company”) is pleased to present its operating and financial results for the second quarter of the 2021 fiscal year. A 59% Operating Margin (1) and a 9% Profit Margin (2) in the quarter delivered a 6% Return on Capital and a 6% Return on Equity, on a trailing twelve-month basis. Highlights for the quarter included:
- Funds from operations per share up 149%. Generated $82 million in Funds from Operations (“FFO”) in Q2 2021 ($0.50/share), up from $33 million in Q2 2020 ($0.20/share) due to higher commodity price realizations combined with higher production, despite a $22 million realized hedging loss in the quarter. FFO in the quarter exceeded capital expenditures by $25 million. This represents a free cashflow ratio of over 30% of FFO while dividends of $1.7 million in the quarter represent a payout ratio of 2%.
- Production per share up 13%. Second quarter 2021 production of 88,738 boe/d, comprised of 459 MMcf/d of natural gas, 7,253 bbl/d of Condensate and Pentanes, and 5,036 bbl/d of Butane and Propane, was up 14% from 78,097 boe/d in Q2 2020. Total liquid yields of 26.8 bbl/MMcf, or 14% of total production, was down from 27.7 bbl/MMcf in Q2 2020 due to an increased focus on leaner gas production.
- Total cash costs of $1.21/Mcfe (or $0.95/Mcfe ($5.69/boe) excluding royalties). Industry leading low total cash costs included $0.26/Mcfe royalties, $0.35/Mcfe operating costs, $0.22/Mcfe transportation, $0.05/Mcfe G&A and $0.33/Mcfe interest, which combined with a realized price of $2.92/Mcfe to result in a $1.71/Mcfe ($10.23/boe) cash netback, up 120% from $0.77/Mcfe ($4.65/boe) in Q2 2020. Operating costs per unit for Q2 2021 were similar to the $0.36/Mcfe in Q1 2021 and Q2 2020 despite significantly increased power prices and government fees, taxes and levies. Interest charges were down from $0.38/Mcfe in Q1 2021 due to lower interest rates and reduced debt levels.
- Capital investment of $57 million in organic activity. A total of 15 gross (13.4 net working interest) wells were drilled in the second quarter, 14 gross (13.3 net) wells were completed, and 14 gross (13.3 net) wells were brought on production. Over the last 12 months new production additions, inclusive of acquisitions, accounted for approximately 30,000 boe/d at the end of the quarter, which, when combined with a trailing twelve-month capital investment of $296 million, equates to an annualized capital efficiency of $9,900/boe/d. Peyto anticipates full year 2021 capital efficiency will be less than $9,000/boe/d.
- Earnings of $0.08/share, Dividends of $0.01/share. Earnings of $12.8 million were generated in the quarter while dividends of $1.7 million were paid to shareholders.
Second Quarter 2021 in Review
Peyto was active with four drilling rigs in Q2 2021 until the end of April when spring breakup required the shutdown of two of the rigs. The two remaining rigs continued drilling from pre-constructed pad sites right through to the end of the quarter. Startup of the two remaining rigs was delayed until late June due to upgrades to rig equipment to make them more efficient, which delayed some expected activity in the quarter. Completion activity was possible during approximately half the days in the quarter which resulted in production for the quarter averaging the same as Q1 2021, despite an extremely hot week in June that significantly affected compressor efficiency across Peyto’s facilities. AECO natural gas prices rose 59% throughout the quarter from $2.57/GJ at the start of April to $4.19/GJ by the end June, reflecting increased power demand due to the hot weather. Peyto’s unhedged realized natural gas price for the quarter was up 57% from Q2 2020, before hedging and market diversification costs, while its unhedged realized oil and NGL price was up 189%. Combined, Peyto’s realized revenue after hedging losses and market diversification costs was up 69% from $1.73/Mcfe in Q2 2020 to $2.92/Mcfe in Q2 2021 driving the 149% increase in FFO per share. Cash costs before royalties were held constant from the prior year period other than a $0.05/Mcfe increase in transportation tolls, resulting in a 120% improvement in cash netback. Finally, Peyto was pleased to release its inaugural ESG report in the quarter, highlighting its industry leading environmental, social and governance performance. This report, which is more comprehensive than the previous Sustainability report, can be found on Peyto’s website at www.peyto.com.
1. Operating Margin is defined as funds from operations divided by revenue before royalties but including realized hedging gains/losses.
2. Profit Margin is defined as net earnings for the quarter divided by revenue before royalties but including realized hedging gains/losses.
Natural gas volumes recorded in thousand cubic feet (mcf) are converted to barrels of oil equivalent (boe) using the ratio of six (6) thousand cubic feet to one (1) barrel of oil (bbl). Natural gas liquids and oil volumes in barrel of oil (bbl) are converted to thousand cubic feet equivalent (Mcfe) using a ratio of one (1) barrel of oil to six (6) thousand cubic feet. This could be misleading, particularly if used in isolation as it is based on an energy equivalency conversion method primarily applied at the burner tip and does not represent a value equivalency at the wellhead.
|Three Months Ended June 30||%||Six Months Ended June 30||%|
|Natural gas (mcf/d)||458,696||401,825||14||%||457,153||401,699||14||%|
|Oil & NGLs (bbl/d)||12,289||11,126||10||%||12,214||11,356||8||%|
|Thousand cubic feet equivalent (mcfe/d @ 1:6)||532,430||468,583||14||%||530,435||469,833||13||%|
|Barrels of oil equivalent (boe/d @ 6:1)||88,738||78,097||14||%||88,406||78,306||13||%|
|Production per million common shares (boe/d)*||537||474||13||%||535||475||13||%|
|Natural gas ($/mcf)||2.06||1.44||431||%||2.55||1.54||66||%|
|Oil & NGLs ($/bbl)||48.77||21.07||131||%||47.22||29.06||62||%|
|Operating expenses ($/mcfe)||0.35||0.36||-3||%||0.35||0.38||-8||%|
|Field netback ($/mcfe)||2.09||1.14||83||%||2.48||1.37||81||%|
|General & administrative expenses ($/mcfe)||0.05||0.04||25||%||0.05||0.04||25||%|
|Interest expense ($/mcfe)||0.33||0.33||–||0.35||0.31||13||%|
|Financial ($000, except per share*)|
|Revenue and realized hedging gains (losses) 1||140,457||73,883||90||%||315,784||171,605||84||%|
|Funds from operations||82,191||33,012||149||%||198,901||87,525||127||%|
|Funds from operations per share||0.50||0.20||149||%||1.20||0.53||126||%|
|Total dividends per share||0.01||0.01||–||0.02||0.07||-71||%|
|Earnings (loss) per diluted share||0.08||(0.14||)||100||%||0.31||(0.55||)||156||%|
|Weighted average common shares outstanding||165,343,937||164,874,175||–||165,207,341||164,874,175||–|
|As of June 30|
|1excludes revenue from sale of third party volumes|
|Three Months Ended June 30||Six Months Ended June 30|
|($000 except per share)||2021||2020||2021||2020|
|Cash flows from operating activities||85,914||36,254||205,666||102,095|
|Change in non-cash working capital||(3,723||)||(3,242||)||(6,765||)||(14,570||)|
|Funds from operations||82,191||33,012||198,901||87,525|
|Funds from operations per share||0.50||0.20||1.20||0.53|
(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
Second quarter 2021 activity was spread across the multiple stacked Cretaceous formations and throughout Peyto’s Deep Basin core areas as shown in the following table:
|Field||Total Wells Drilled|
Drilling costs per meter and completion costs per stage continued to fall as Peyto drilled another 5 Extended Reach Horizontal (“ERH”) wells in the quarter. The 5 wells averaged over 5,600 meters of total measured depth with average horizontal laterals in excess of 2,500 meters. These ERH wells allow Peyto to access more reservoir and develop more reserves per wellbore, thus minimizing both cost and environmental impact, while the lower per meter costs help offset any service cost inflation.
|Gross Hz Spuds||86||99||123||140||126||135||70||61||64||27||15|
|Measured Depth (m)||4,017||4,179||4,251||4,309||4,197||4,229||4,020||3,848||4,247||4,413||4,796|
|$ per meter||$694||$651||$626||$501||$433||$450||$425||$420||$396||$374||$387|
|Hz Length (m)||1,358||1,409||1,460||1,531||1,460||1,241||1,348||1,484||1,682||1,573||1,646|
|$ per Hz Length (m)||$1,231||$1,153||$1,166||$792||$587||$803||$835||$679||$560||$608||$562|
|$ ‘000 per Stage||$257||$188||$168||$115||$79||$81||$51||$38||$36||$33||$29|
*excluding Peyto’s Wildhay Montney well.
During the second quarter of 2021, Peyto invested $28 million on drilling, $15 million on completions, $4 million on wellsite equipment and tie-ins, $8 million on facilities and major pipeline projects, and $2 million acquiring new lands and seismic, for a total organic capital investment of $57 million. In addition, Peyto purchased 80 ultra low emissions wellsite packages and 30 km of new pipe which added $5.4 million to capital inventory. This equipment, which will serve new drilling until the summer of 2022, was ordered early to avoid cost inflation.
As stated above, Peyto invested $8 million in facilities and major pipeline projects to continue to build out its midstream assets. This included condensate stabilization at its Brazeau gas plant, pipeline expansion work in Brazeau, Cecilia and Wildhay areas, and additional Methane emissions reduction projects at individual wellsites across the Greater Sundance area.
Peyto actively marketed all components of its production stream in the quarter including natural gas, condensate, pentane, butane and propane. Natural gas was sold in Q2 2021 at various hubs including AECO, Malin, Ventura, Emerson 2 and Henry Hub using both physical fixed price and basis transactions to access those locations (diversification activities). Natural gas prices were left to float on daily or monthly pricing or locked in using fixed price swaps at those hubs and Peyto’s realized price is benchmarked against those local prices, then adjusted for transportation (either physical or synthetic) to those markets. Peyto expects that the cost of market diversification activities will decrease significantly over the next two years as older basis deals expire and are replaced by new, lower cost basis deals.
During Q2 2021, Peyto sold 52% of its natural gas at Henry Hub, 28% at AECO, 8% at Emerson, 8% at Malin, and the remaining 4% at Ventura. Approximately 50% of AECO sales were at Daily prices while 50% were at Monthly prices. Net of diversification activities of CND$1.29/Mcf (US$1.01/MMBTU), Peyto realized a natural gas price of $2.39/Mcf before commodity risk management reduced this price by $0.33/Mcf, to $2.06/Mcf.
The Company’s liquids are also actively marketed with condensate being sold on a monthly index differential linked to West Texas Intermediate (“WTI”) oil prices. Peyto’s NGLs (a blend of pentanes plus, butane and propane) are fractionated by a third party in Fort Saskatchewan, Alberta and Peyto markets each product separately. Pentanes Plus are sold on a monthly index differential linked to WTI, with some volumes forward sold on fixed differentials to WTI. Butane is sold as a percent of WTI or a fixed differential to Mount Belvieu, Texas markets. Propane is sold on a fixed differential to Conway, Kansas markets. While some products like Butane and Propane require annual term contracts to ensure delivery paths and markets are certain, others can be sold on the daily spot market.
Condensate and Pentane Plus volumes were sold in Q2 2021 for an average price of $76.92/bbl, which is up 177% from $27.73/bbl in Q2 2020, and as compared to Canadian WTI oil price that averaged $81.10/bbl. The $4.18/bbl differential from light oil price was down from $10.69/bbl in the previous year due to reduced condensate differentials from stronger post-COVID demand. Butane and propane volumes were sold in combination at an average price of $25.76/bbl, or 32% of light oil price, up 121% from the $11.65/bbl in Q2 2020, again due to post-COVID demand increase.
In general, Peyto’s commodity risk management program is designed to smooth out the short-term fluctuations in the price of natural gas and natural gas liquids through future sales. This smoothing gives greater predictability of cashflows for the purposes of capital planning and dividend payments. The future sales are meant to be methodical and consistent to avoid speculation. In general, this approach will show hedging losses when short term prices climb and hedging gains when short term prices fall.
Peyto’s realized price by product and relative to benchmark prices is shown in the following table.
Benchmark Commodity Prices at Various Markets
|Three Months ended June 30|
|AECO 7A monthly ($/GJ)||2.70||1.81|
|AECO 5A daily ($/GJ)||2.93||1.89|
|Ventura daily (US$/MMbtu)||2.73||1.58|
|Canadian WTI ($/bbl)||81.10||38.42|
|Conway C3 (US$/bbl)||35.01||17.25|
|CND/USD Exchange rate||1.228||1.386|
Peyto Realized Commodity Price by Market (net of diversification)
|Three Months ended March 31|
|AECO monthly (CND$/GJ)||2.70||1.82|
|AECO daily (CND$/GJ)||2.88||1.89|
|Peyto Realized Commodity Prices|
|Natural gas (CND$/mcf)||3.68||2.35|
|Gas marketing diversification activities (CND$/mcf)||(1.29)||(0.94)|
|Gas hedging (CND$/mcf)||(0.33)||0.03|
|Oil, condensate and C5+ ($/bbl)||76.92||27.73|
|Butane and propane ($/bbl)||25.76||11.65|
|Liquid hedging ($/bbl)|| (7.18)
Peyto realized natural gas prices are at NIT, prior to fuel. Peyto gas has an average heating value of approx. 1.15GJ/Mcf.
Liquids prices are Peyto realized prices in Canadian dollars adjusted for fractionation, transportation, and market differentials.
Details of Peyto’s ongoing marketing and diversification efforts are available on Peyto’s website at:
The Company’s realized price for natural gas in Q2 2021 was $3.68/Mcf, prior to $1.29/Mcf of market diversification activities and a $0.33/Mcf hedging loss, while its realized liquids price was $55.95/bbl, before a $7.18/bbl hedging loss, which yielded a combined revenue stream of $2.92/Mcfe. This net sales price was 69% higher than the $1.73/Mcfe realized in Q2 2020. Cash costs of $1.21/Mcfe were higher than the $0.96/Mcfe in Q2 2020 principally due to increased royalties. Cash costs are forecast to return to traditional levels, with lower interest expenses as Peyto reduces indebtedness, and lower per unit transportation and operating costs as production volumes rise. When the total cash costs of $1.21/Mcfe were deducted from realized revenues of $2.92/Mcfe, it resulted in a cash netback of $1.71/Mcfe or a 59% operating margin. Historical cash costs and operating margins are shown in the following table:
Depletion, depreciation, and amortization charges of $1.28/Mcfe, along with a provision for deferred tax and stock-based compensation payments resulted in earnings of $0.26/Mcfe, or a 9% profit margin. Dividends to shareholders totaled $0.03/Mcfe.
Since the end of the quarter, the Company has drilled 10 gross (9.6 net) wells, completed 11 gross (9.8 net) wells, and brought onstream 9 gross (7.8 net) new wells. Six gross (6 net) wells are drilled and awaiting completion. To catch up from second quarter 2021 drilling delays, Peyto contracted a 5th drilling rig which began operations at the start of August. Development results from this rig are also expected to contribute additional gas production to take advantage of strong winter natural gas prices. Drilling will continue to focus on the many Deep Basin horizons across Peyto’s greater Sundance area, including its Cecilia acquisition, and in its Brazeau area. The Company is still targeting year end exit production of 100,000 boe/d.
Recent success on the acquired Cecilia lands has grown production from 2,900 boe/d to over 7,000 boe/d. Pipeline interconnections are allowing area production to be diverted to the Cecilia gas plant, Wildhay gas plant or Oldman gas plants where over 100 MMcf/d of available capacity exists. These interconnections will provide processing flexibility for unexpected outages and during facility turnarounds.
Additional success in Peyto’s south Brazeau area, called Chambers, has prompted the Company to design a new, sweet, gas processing plant for this area. Currently, production travels 36 km north through various pipelines before being processed at the Peyto Brazeau gas plant which is less hydraulically and environmentally efficient. This new Chambers gas plant is designed for 50 MMcf/d of gas processing and 2,000 bbls/d of condensate stabilization, with expansion capability to 100 MMcf/d and 4,000 bbls/d. Most of the equipment for the new plant will be sourced from existing surplus inventory with some minor equipment being repurposed from existing gas plants. The location of the new gas plant will be directly adjacent to NGTL’s mainline pipeline system. Peyto envisions this new, state of the art facility will include the latest low emissions technology, employing compressor vent gas capture and BTEX vapour recovery units, waste heat recovery, and zero emissions controllers and instrumentation. The existing gathering system will interconnect both the Brazeau and Chambers gas plants providing additional flexibility. Construction of the new plant will begin in the fall of 2021 with commissioning in Q1 2022. Peyto estimates 140 temporary, and 5 full time jobs will be created with this investment.
Commodity prices, particularly natural gas futures, have improved significantly since the last quarter. On March 31, 2021, AECO calendar strip prices were $2.37, $2.22, $2.22 and $2.33/GJ for 2022 through 2025. Today that same strip is $3.29, $2.75, $2.56, and $2.59/GJ. These better prices provide enhanced returns on Peyto’s current and future drilling prospects while at the same time significantly increasing Peyto’s free cashflow which can be used to further reduce indebtedness and improve the Company’s balance sheet. Peyto currently forecasts, at the current capital investment rate and strip prices, enough free cashflow can be generated over the next 4 years to leave the Company debt free.
The Peyto strategy of investing cashflows into internally developed, organic drilling projects remains the same after 22 successful years. The Company continues to focus on controlling costs, operating its assets, investing in the necessary infrastructure, maximizing efficiency and profitability, and reducing its environmental impact. As the world returns to normal post the pandemic, the Company is encouraged that demand for its products are forecast to continue to grow. Combining Peyto’s long life, high quality assets with increasing demand can only result in improved profitability, further debt reduction and, when appropriate, increased dividends.
Conference Call and Webcast
A conference call will be held with the senior management of Peyto to answer questions with respect to the Company’s Q2 2021 results on Thursday, August 12, 2021, 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/op9i8y4w. 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 first quarter report to shareholders, including the MD&A, unaudited financial statements and related notes, is available at http://www.peyto.com/Files/Financials/2021/Q22021FS.pdf and at http://www.peyto.com/Files/Financials/2021/Q22021MDA.pdf and will be filed at SEDAR, www.sedar.com at a later date.