CALGARY, Alberta, Nov. 09, 2022 (GLOBE NEWSWIRE) — Peyto Exploration & Development Corp. (“Peyto” or the “Company”) is pleased to present its operating and financial results for the third quarter of the 2022 fiscal year. A 71% Operating Margin1,2 and a 30% Profit Margin3 in the quarter delivered a 14% Return on Capital4 and a 19% Return on Equity4, on a trailing twelve-month basis. Highlights for the quarter included:
- Funds from operations5 per share up 83%. Generated $197 million in Funds from Operations (“FFO”) in Q3 2022 ($1.15/share, $1.13/diluted share), up from $105 million in Q3 2021 ($0.63/share) due to higher commodity price realizations combined with higher production, despite a $92 million realized hedging loss in the quarter. FFO in the quarter exceeded capital expenditures, including acquisitions, by $57 million. This represented a free cashflow ratio6 of 29% of FFO while dividends of $25.7 million in the quarter represented a dividend payout ratio7 of 13%, and including capital investments, a total payout ratio7 of 84%.
- Production per share up 12%. Third quarter 2022 production of 104,071 boe/d, comprised of 545 MMcf/d of natural gas, 7,903 bbl/d of Condensate and Pentanes, and 5,360 bbl/d of Butane and Propane, was up 16% from 89,998 boe/d in Q3 2021. Total liquid yields remained the same from a year ago.
- Total cash costs of $1.57/Mcfe (or $0.87/Mcfe excluding royalties). Industry leading low total cash costs included $0.70/Mcfe royalties, $0.38/Mcfe operating costs, $0.26/Mcfe transportation, $0.02/Mcfe G&A and $0.21/Mcfe interest, which combined with a realized revenue of $5.01/Mcfe to result in a $3.44/Mcfe ($20.62/boe) cash netback, up 63% from $2.11/Mcfe ($12.68/boe) in Q3 2021. Royalties were up 94% due to higher commodity prices, while the remaining cash costs were virtually the same as the $0.86/Mcfe in Q3 2021 as reduced interest costs offset increased transportation.
- Net debt down 14%. Net debt was reduced $161 million from Q3 2021 to $970 million which reduced interest charges 19% from $0.26/Mcfe in Q3 2021 to $0.21/Mcfe in Q3 2022, despite increased interest rates. Net debt has now fallen for 8 consecutive quarters.
- Capital investment of $140 million including a $26 million acquisition. A total of 23 gross (22 net working interest) wells were drilled in the third quarter, 25 gross (20.25 net) wells were completed, and 25 gross (20.25 net) wells were brought on production. A $26 million acquisition of undeveloped lands, producing wells and infrastructure in the Brazeau area was closed in September 2022. Over the last 12 months new organic production additions accounted for approximately 38,000 boe/d at the end of the quarter, which, when combined with a trailing twelve-month capital investment of $475 million, inclusive of new facilities but excluding $48 million in total acquisitions, equates to an annualized capital efficiency of $12,500/boe/d. Peyto anticipates full year 2022 organic capital efficiency to be approximately $11,500/boe/d, up from $8,000/boe/d in 2021. This increase is primarily due to a 33% increase in infrastructure investments and service cost inflation.
- Earnings of $0.50/share, Dividends of $0.15/share ($0.05/month). Earnings of $85 million were generated in the quarter while dividends of $26 million were paid to shareholders.
Third Quarter 2022 in Review
Peyto was active with five drilling rigs in the third quarter, as well as pipeline and infrastructure projects designed to expand existing gathering systems to accommodate incremental production volumes. These projects continue into the fourth quarter. The Company also closed a property acquisition in the Brazeau area in the quarter which added 42 net sections of land, with over 40 internally identified drilling locations, and 12 producing wells. These new lands are expected to provide future production growth by filling the Company’s Aurora gas plant which was purchased in Q1 2022. Daily natural gas prices at Henry Hub were 7% higher in Q3, over Q2 2022, while AECO daily price was 43% lower than the previous quarter reflecting the ongoing issues with the NGTL system. Peyto’s realized gas price, before hedging, was 7% lower than Q2 2022 but up 39% from Q3 2021 due to increased exposure to non-AECO markets. Year over year realized price increases combined with higher production resulted in the 89% increase in FFO despite hedging losses. Over the first three quarters of 2022, Peyto has accumulated record earnings of $277 million.
|Three Months Ended Sep 30||%||Nine Months Ended Sep 30||%|
|Natural gas (Mcf/d)||544,843||473,008||15||%||540,544||462,496||17||%|
|Thousand cubic feet equivalent (Mcfe/d @ 1:6)||624,423||539,990||16||%||618,461||533,655||16||%|
|Barrels of oil equivalent (boe/d @ 6:1)||104,071||89,998||16||%||103,077||88,943||16||%|
|Production per million common shares (boe/d)||608||541||12||%||608||537||13||%|
|Natural gas ($/Mcf)||3.68||2.48||48||%||3.94||2.53||56||%|
|Operating expenses ($/Mcfe)||0.38||0.35||9||%||0.39||0.35||11||%|
|Field netback(1) ($/Mcfe)||3.65||2.39||53||%||3.82||2.45||56||%|
|General & administrative expenses ($/Mcfe)||0.02||0.02||–||%||0.02||0.04||-50||%|
|Interest expense ($/Mcfe)||0.21||0.26||-19||%||0.22||0.32||-31||%|
|Financial ($000, except per share)|
|Revenue and realized hedging losses (2)||279,661||164,777||70||%||874,385||480,561||82||%|
|Funds from operations(1)||197,388||104,608||89||%||606,781||303,509||100||%|
|Funds from operations per share – basic(1)||1.15||0.63||83||%||3.58||1.83||96||%|
|Funds from operations per share – diluted(1)||1.13||0.62||82||%||3.48||1.80||93||%|
|Total dividends per share||0.15||0.01||1400||%||0.45||0.03||1400||%|
|Earnings per share – basic||0.50||0.18||178||%||1.63||0.49||233||%|
|Earnings per share – diluted||0.48||0.17||182||%||1.59||0.48||231||%|
|Total capital expenditures(1)||140,400||90,170||56||%||391,820||256,107||53||%|
|Total payout ratio(1)||84%||88%||-5||%||77%||86%||-10||%|
|Weighted average common shares outstanding – basic||171,230,853||166,440,704||3||%||169,642,562||165,622,980||2||%|
|Weighted average common shares outstanding – diluted||175,140,910||169,512,566||3||%||174,204,741||169,112,156||3||%|
(1) This is a Non-GAAP financial measure or ratio. See “non-GAAP and Other Financial Measures” in this news release and in the Q3 2022 MD&A
(2) Excludes revenue from sale of third-party volumes
Exploration & Development
Third quarter 2022 activity was spread out amongst the existing core areas of Greater Sundance (Cecilia, Oldman, Nosehill and Wildhay) as well as the Minehead and Chambers expansion areas. Target formations were also widespread, as summarized in the following table, along with development of a new Deep Basin play in the Dunvegan.
|Field||Total Wells Drilled|
Drilling costs per meter were up 4% from the previous quarter while completion costs per meter and stage were up 24% and 28%, respectively, due to service rate increases and increased frac intensities. A typical basket of goods analysis for drilling and completion costs, including rig rates, fuel, tubulars and stimulations, indicates an average increase of 23% for 2022 versus 2021. The Company continued to pursue Extended Reach Horizontal (“ERH”) wells in the quarter resulting in an increase in average measured depth and horizontal length, as a means to get more for less. As well, increased stage count and frac size, in order to enhance productivity, contributed to higher year over year completion costs.
||2022 Q1||2022 Q2||2022 Q3|
|Gross Hz Spuds||123||140||126||135||70||61||64||95||29||23||23|
|Measured Depth (m)||4,251||4,309||4,197||4,229||4,020||3,848||4,247||4,453||4,291||4,571||4,994|
|$ per meter||$626||$501||$433||$450||$425||$420||$396||$424||$496||$560||$580|
|Hz Length (m)||1,460||1,531||1,460||1,241||1,348||1,484||1,682||1,612||1,529||1,602||1,654|
|$ per Hz Length (m)||$1,166||$792||$587||$803||$835||$679||$560||$620||$801||$727||$902|
|$ ‘000 per Stage||$168||$115||$79||$81||$51||$38||$36||$37||$44||$40||$51|
*excluding Peyto’s Wildhay Montney well.
During the third quarter of 2022, Peyto invested $114 million in organic activity with $59 million on drilling (52%), $29 million on completions (25%), $10 million on wellsite equipment and tie-ins (8%), and $16 million on facilities and major pipeline projects (14%). Peyto continues to pre-purchase wellsite equipment and additional pipe, for both casing and well tie-ins, to stay ahead of supply chain disruptions, however, debottlenecking projects in the quarter were delayed due to regulatory approvals.
Additionally, Peyto closed a $26 million acquisition in the Brazeau area that included 49 gross (41.7 net) sections of land, 12 producing wells totalling approximately 600 boe/d (20% liquids), a 15 MMcf/d compressor station and 59 km of pipelines. There are multiple prospective horizons in each section of rights which expand the 49 gross sections into 243 gross (220 net) zonal sections. Initially, Peyto has internally identified over 40 future drilling locations in the Cardium, Notikewin, Upper and Middle Falher, and Wilrich formations on the undeveloped lands that can tie in directly to Peyto’s Aurora gas plant that was purchased earlier this year.
Also, during the quarter, $0.7 million was spent acquiring 3 sections of new Crown land ($370/acre), for a total quarterly capital investment of $140 million.
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 Q3 2022 at various hubs including AECO, Empress, 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 continue to fall as more expensive basis deals are replaced with current lower cost basis deals.
During Q3 2022, Peyto sold 24% of its natural gas at Henry Hub, 26% at AECO, 34% at Emerson, 7% at Malin, 5% Empress, and the remaining 3% at Ventura. Approximately 45% of AECO sales were at Daily prices while 55% were at Monthly prices. Net of diversification activities of CND$0.79/Mcf, Peyto realized a natural gas price of $5.39/Mcf before commodity risk management reduced this price by $1.71/Mcf, to $3.68/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 Q3 2022 for an average price of $107.83/bbl, which is up 29% from $83.60/bbl in Q3 2021, and as compared to Canadian (“CND”) WTI oil price that averaged $119.46/bbl. The $11.63/bbl differential from CND WTI light oil price was up from $5.32/bbl in Q3 2021 due to higher condensate differentials primarily caused by the US SPR releasing lighter barrels into the market which competed with CND condensate. Butane and propane volumes were sold in combination at an average price of $46.96/bbl, or 39% of light oil price, up 24% from the $37.97/bbl in Q3 2021, due to continued demand increases and lower NGL supplies. Liquid hedging losses, reduced the combined realized liquids price of $83.24/bbl by $5.17/bbl.
In general, Peyto’s commodity risk management program is designed to smooth out the short-term fluctuations in the price of natural gas and natural gas liquids through future sales. This smoothing gives greater predictability of cashflows for the purposes of capital planning and dividend payments. The future sales are meant to be methodical and consistent to avoid speculation. In general, this approach will show hedging losses when short term prices climb and hedging gains when short term prices fall.
Peyto’s realized prices and benchmark prices are shown in the following table.
Benchmark Commodity Prices at Various Markets
|Three Months ended Sept 30|
|AECO 7A monthly ($/GJ)||5.50||3.36|
|AECO 5A daily ($/GJ)||3.95||3.41|
|Ventura daily (US$/MMbtu)||7.26||4.02|
|CND WTI ($/bbl)||119.46||88.92|
|Conway C3 (US$/bbl)||44.74||49.02|
|CND/USD Exchange rate||1.31||1.26|
|Peyto Realized Commodity Prices|
|Natural gas (CND$/Mcf)||6.18||4.75|
|Gas marketing diversification activities (CND$/Mcf)||(0.79||)||(0.85||)|
|Realized natural gas price before hedging (CND$/Mcf)||5.39||3.90|
|Gas hedging (CND$/Mcf)||(1.71||)||(1.42||)|
|Realized natural gas price (CND$/mcf)||3.68||2.48|
|Condensate and C5+ ($/bbl)||107.83||83.60|
|Butane and propane ($/bbl)||46.96||37.97|
|NGL price ($/bbl||83.24||65.29|
|Liquid hedging ($/bbl)||(5.17||)||(9.82||)|
|Realized NGL price (CND$/bbl)||78.07||55.47|
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 Q3 2022 was $6.18/Mcf, prior to $0.79/Mcf of market diversification activities and a $1.71/Mcf hedging loss, while its realized liquids price was $83.24/bbl, before a $5.17/bbl hedging loss, which yielded a combined revenue stream of $5.01/Mcfe (including $0.11/Mcfe of other income and $0.02/Mcfe realized gain on foreign exchange). This net sales price was 50% higher than the $3.33/Mcfe realized in Q3 2021. Cash costs of $1.57/Mcfe were higher than the $1.22/Mcfe in Q3 2021 due to increased royalties and transportation costs but offset by lower interest costs. Net of royalties, Peyto’s controllable cash costs have remained relatively consistent, averaging $0.88/Mcfe for the past four years. These same costs are expected to fall going forward as interest cost fall with reduced debt levels. When the total cash costs of $1.57/Mcfe were deducted from realized revenues of $5.01/Mcfe, it resulted in a cash netback of $3.44/Mcfe or a 70% operating margin. Historical cash costs and operating margins are shown in the following table:
|Cash cost pre-royalty||0.88||0.88||0.86||0.86||0.91||0.90||0.87||0.88||0.95||0.95||0.86||0.79||0.93||0.88||0.87|
|Total Cash Costs||1.02||0.89||0.89||0.98||1.03||0.96||1.01||1.06||1.24||1.21||1.22||1.32||1.53||1.83||1.57|
(1) Revenue includes other income, net third party sales and realized gains on foreign exchange.
Depletion, depreciation, and amortization charges of $1.32/Mcfe, along with a provision for deferred tax and stock-based compensation payments resulted in earnings of $1.53/Mcfe, or a 30% profit margin. Dividends to shareholders totaled $0.45/Mcfe.
While drilling in the fourth quarter 2022 has continued with 5 rigs, Peyto plans to taper activity towards year end and the traditional Christmas break. Production is expected to ramp up from 107,000 boe/d currently to 110,000 boe/d by year end as the Company completes and brings on 17 net new wells. The Company has already commenced drilling on the newly acquired lands in Brazeau which will begin to fill the 45 MMcf/d Aurora facility. This gas plant, which was 10% full upon acquisition, is projected to be filled by the end of Q1 2023.
Peyto now expects that approximately $450 million of total organic capital (before acquisitions) will be invested this year which will exceed the high end of earlier guidance ($350–$400 million) as the Company drills deeper and longer wells than those originally planned, as well as constructs new well pads, pipeline loops and gas plant installations, specifically in the highly successful Chambers area, that will facilitate future growth. Over $25 million will be invested in 2022 in large diameter pipelines in the Chambers area that establishes a core infrastructure position. In total, 2022 facility and major pipeline capital is now expected to account for over 20% of all organic capital, up from 15% in 2021 and 11% in 2020.
2023 Preliminary Budget and Plans
Peyto continues to enjoy increasing economic success with ERH well designs in several formations including the Cardium, Falher and Wilrich which opens up more resource for economic development and adds to future drilling inventory. In addition, during 2022 a new Dunvegan play emerged in the Cecilia area where the first 4 wells, using the latest ERH design, have exceeded initial expectations. These wells have proven up even more drilling inventory that will supply production to the Cecilia, Wildhay and Oldman North gas plants in 2023 and beyond. Applying the latest ERH design to these and other formations will be the focus of the 2023 capital program in the Greater Sundance core area along with a large $9 million pipeline project to connect the Swanson gas plant and Cascade power plant.
Peyto will also be developing a new core area called Whitehorse in 2023 which will involve land acquisition, development drilling and infrastructure investments (roads/pipelines/new gas plant). The development drilling in this area will commence in the first half of 2023 in support of a new 50 MMcf/d gas plant scheduled to be operational in the third quarter 2023. Much of the equipment for this new facility will be relocated from the currently shut-in Peyto Galloway plant site, meaning the Company will only have to spend on relocation and installation, rather than waiting to buy new equipment. As well, Peyto has committed to a multi-well farm-in intended to earn an additional 35 gross sections of Deep Basin rights, which contain over 60 internally identified ERH development locations. These new lands will complement the existing 72 sections, which already have over 120 internally identified Wilrich locations, and combined will help support the long-term utilization of this new facility. This initial development drilling will focus on deeper targets but is also expected to identify multiple shallower zones like in Peyto’s Greater Sundance and Brazeau areas.
Meanwhile in the Greater Brazeau area, Peyto plans to continue to fill up remaining plant capacity at both Brazeau and Aurora gas plants throughout 2023 using pre-existing drilling inventory and lands acquired in 2022. The new gas plant and pipelines installed in 2022 in the Chambers area will continue to support additional development there for decades to come.
Peyto is specifically scheduling a larger percentage of 2023 drilling in the summer months to take advantage of lower anticipated service rates, and greater equipment and materials availability. This will help offset service cost inflation pressures and allow Peyto to continue to add production at capital efficiencies less than or similar to those achieved in 2022. While specifics of the 2023 budget are still being finalized, an organic capital program of $425–$475 million is anticipated, which will use between 4 and 5 drilling rigs throughout the year and is estimated to add approximately 35,000 to 40,000 boe/d of new production by the end of the year. This volume addition would be more than sufficient to offset the annual forecast decline of 27% on anticipated 2022 exit production of 110,000 boe/d allowing Peyto’s production to grow to a target of approximately 120,000 boe/d by year end 2023. While this is a similar organic capital program to 2022, there may also be opportunities throughout the year for unplanned acquisitions or infrastructure investments that the Company chooses to pursue.
Approximately half of Peyto’s forecast 2023 after-tax cashflow will be used to reduce debt and fund the dividend, while the remainder will be used to fund the capital program. Peyto has already fixed pricing on over 50% of its forecast production for 2023 which will help achieve a meaningful debt reduction by year end, while also confidently funding the proposed dividend and planned capital program. As always, Peyto will ensure any capital plans will be nimble with the ability to react to changes in commodity prices, service costs and the global economic environment, which continue to be volatile and uncertain.
2023 Dividend Increase
Profit margins over the past 12 months have returned to historic levels of greater than 30%, and with the current futures strip, are anticipated to continue to increase. Peyto will maintain its ongoing three-year hedging practice to ensure a large portion of revenues for future years are fixed which secures funding for planned debt repayments, dividends and capital programs. The Company anticipates that approximately half of forecast profits for 2023 will be retained to reduce indebtedness, while the remainder will be paid to shareholders as dividends. In keeping with this strategy, the Board of Directors of Peyto is pleased to approve a monthly dividend of $0.11/share starting in January 2023 for shareholders of record as of January 31, 2023 (ex-dividend date January 30, 2023) and paid on February 15, 2023. This new dividend represents a 120% increase over the current $0.05/month dividend.
The global market for natural gas is rapidly growing as gas is increasingly recognized as the only affordable, reliable and available fuel that can solve much of the world’s energy needs with the least environmental impact. As consuming nations pivot to more reliable and secure sources, it creates new demand for North American natural gas which leads to rising prices. Peyto’s assets are well positioned to benefit from increased value as a result of these higher prices while its business can generate superior total returns on new capital invested in its Deep Basin opportunities.
As current, lower priced hedges fall off, Peyto’s market diversification activities, along with direct connect industrial sales like the Cascade power plant, which is anticipated to start Q4 2023, allow the Company to look forward to a rising realized natural gas price despite a falling future NYMEX natural gas price curve that settles towards $US4.50/MMBTU in 2025. Despite the backwardated futures curve, this long-term futures price is up over 60% from a year ago. For Peyto, a rising realized price, combined with growing production and reserves, is expected to result in growing FFO, earnings and dividends beyond 2023. At that time Peyto’s balance sheet is also expected to be sufficiently robust allowing for earnings, if deemed appropriate, to be exclusively allocated towards dividends. Continued protection of commodity price realizations and revenues will be key to solidifying those increased earnings and increased dividends in future years.
The combination of recent corporate and property acquisitions, farm-ins and successful crown land purchases, along with new gas plant infrastructure has allowed Peyto to significantly expand its Deep Basin position which sets the stage for several years of exciting development opportunities. In addition, Peyto has amassed sufficient take away capacity and market diversification to enable growing production volumes to access those improved commodity prices.