Peyto Exploration & Development Corp. (TSX:PEY) is pleased to present the
results and analysis of the independent reserve report effective December 31,
2011. The evaluation encompassed 100% of Peyto's reserve assets and was
conducted by InSite Petroleum Consultants.
Peyto successfully executed the largest capital program in its thirteen year
history during 2011, resulting in substantial growth in production and reserves.
All of the activity was focused on the company's multi-zone, liquids rich,
natural gas resource plays located in the Alberta Deep Basin. Production(1) grew
38%, from 30,600 boe/d at year end 2010 to 42,100 boe/d at year end 2011, while
reserves grew 24% from 260 mmboes to 322 mmboes (33% and 19%, respectively per
share). This represents the 13th consecutive year that Peyto has grown its
reserves per share.
Historical
-- Since the company's inception in 1998, Peyto has explored for and
discovered 2.4 Trillion Cubic Feet equivalent ("TCFe") of Alberta Deep
Basin natural gas reserves, has developed with the drill bit 1.4 TCFe,
and has recovered and sold 0.5 TCFe. Peyto is actively working to
develop the remaining 1.0 TCFe of identified reserves, all while
continuing to explore for new reserves.
-- A total of $2.26 billion was invested in the development of the 1.4 TCFe
at an average cost of $1.58/MCFe. A weighted average field netback(1) of
$5.62/MCFe was also achieved over that time, for a cumulative recycle
ratio of 3.6 times.
-- Peyto now has $36.27/share of Proved plus Probable Additional Net
Present Value ("P+P NPV" - debt adjusted, 5% discount) comprised of
$20.26/share of developed reserves and $16.01/share of undeveloped
reserves.
2011 Highlights
-- For the year ending December 31, 2011, Peyto invested $379 million of
total capital(1) to build a record 21,700 boe/d of new production(1) at
a cost of $17,500/boe/d. This is the third year in a row that Peyto has
added new production for less than $18,000/boe/d, inclusive of
acquisitions, land, seismic, facilities and all well costs.
-- This capital investment created new Proved Producing ("PP") reserves
valued at $745 million (Before Tax, NPV5) for a NPV recycle ratio of
2.0, or $5.40/share.
-- Reserves increased by 15%, 25% and 24% to 0.8 TCFe, 1.35 TCFe and 1.9
TCFe for Proved Producing, Total Proved ("TP") and Proved plus Probable
Additional ("P+P"), respectively. Per share reserves were up 11%, 20%,
and 19% for these respective categories.
-- The Reserve Life Index ("RLI") for the PP reserves was reduced to 9
years from 11 years due to the significant increase in corporate
production, while the RLI for TP and P+P also dropped to 16 and 22
years, respectively.
-- For the year, the Proved Producing, Finding, Development and Acquisition
("PP FD&A") cost, inclusive of additions, revisions and production was
$2.12/MCFe ($12.73/boe) while the average field netback(1) before
hedging was $3.98/MCFe ($23.88/boe), resulting in a 1.9 times recycle
ratio.
-- Peyto replaced 452% of production with new Total Proved reserves at a
FD&A cost of $2.13/MCFe ($12.80/boe) and 585% of production with new P+P
reserves at a FD&A cost of $1.90/MCFe ($11.40/boe) (including increases
in Future Development Capital ("FDC") of $370 million and $484 million
for the respective categories). For comparative purposes, FD&A costs
before FDC were $1.08/MCFe ($6.47/boe) and $0.83/MCFe ($5.01/boe),
respectively.
-- At year end, P+P reserves had been assigned to 18% of Peyto's total Deep
Basin lands.
-- The ratio of year end net debt to the value of the producing reserves
(PP NPV5) was maintained at 18%, consistent with historical averages.
-- Natural Gas Liquids ("NGLs") which make up 17% of Peyto's P+P reserves
increased 64% due to planned deep-cut processing facilities.
-- For every location drilled and converted to Proved Producing, Peyto was
able to recognize over two new undeveloped locations in its inventory of
future opportunities.
2012 Update
-- Based on the current commodity price forecast, Peyto plans to direct
more of the $400 to $450 million 2012 capital program towards its liquid
rich, natural gas plays, as well as accelerate the installation of deep-
cut gas processing facilities at its Oldman, Nosehill and Wildhay gas
plants. These new processing facilities are estimated to cost $60
million and are forecast to recover an incremental 12.5 mmboes of P+P
reserves and over $200 million (Before Tax, NPV5).
(1)Capital Expenditure, Field Netback, and Production are estimated and remain
unaudited at this time.
2011 RESERVES
The following table summarizes Peyto's reserves and the discounted Net Present
Value of future cash flows, before income tax, using variable pricing, at
December 31, 2011.
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Gas Oil & NGL BCFe MBOE
Reserve Category (mmcf) (mstb) (6:1) (6:1)
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Proved Producing 667,997 16,125 765 127,458
Proved Non-
producing 14,335 356 16 2,745
Proved
Undeveloped 421,606 24,834 571 95,101
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Total Proved 1,103,938 41,314 1,352 225,304
Probable
Additional 495,588 14,525 583 97,123
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Proved + Probable
Additional 1,599,526 55,839 1,935 322,427
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----------------------------------------------------------------------------
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Before Tax Net Present Value ($thousands)
Discounted at
Reserve Category 0% 5% 8% 10%
----------------------------------------------------------------------------
Proved Producing $ 4,809,495 $ 2,624,139 $ 2,049,171 $ 1,791,531
Proved Non-
producing $ 96,555 $ 42,531 $ 28,716 $ 22,878
Proved
Undeveloped $ 2,795,600 $ 1,305,678 $ 878,074 $ 681,252
----------------------------------------------------------------------------
Total Proved $ 7,701,651 $ 3,972,348 $ 2,955,961 $ 2,495,661
Probable
Additional $ 3,554,252 $ 1,511,454 $ 1,010,077 $ 794,928
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Proved + Probable
Additional $11,255,903 $ 5,483,802 $ 3,966,037 $ 3,290,588
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----------------------------------------------------------------------------
Note: Based on the InSite report effective December 31, 2011. Tables may not add
due to rounding.
Analysis
Peyto has analyzed the reserve evaluation in order to answer three fundamental
questions.
1. Base Reserves - How did the "base reserves" that were on production at
the time of the last reserve report perform during the year, and how did
any change in commodity price forecast affect their value?
2. Value Creation - How much value did the 2011 capital investments create,
both in current producing reserves and in undeveloped potential?
3. Growth and Income - Are the projected cashflows capable of funding the
growing number of undeveloped opportunities and a sustainable dividend
stream to shareholders without sacrificing financial flexibility?
BASE RESERVES
Peyto's existing Proved Producing reserves at the start of 2011 (base reserves)
were evaluated and adjusted for 2011 production as well as any technical
revisions resulting from the additional twelve months of data. As part of
InSite's independent engineering analysis, all 710 producing entities were
evaluated. These producing wells and zones represent a total gross Estimated
Ultimate Recoverable (EUR) volume of 1.2 TCF plus associated liquids.
Included in this group of producing wells are 43 horizontal wells which were
drilled and completed with multi-stage fracture stimulations prior to 2011.
Original reserve assignments for these wells were conservative due to a lack of
analog production performance data. Over time, these wells have outperformed
expectations and have received an average Proven Producing reserve increase of
10% from 3.2 BCFe/well to 3.5 BCFe/well.
In aggregate, Peyto is pleased to report that its total base reserves continue
to meet with expectation, which increases the confidence in the prediction of
future recoveries.
Price Forecasts
InSite's Alberta spot natural gas price forecast for the next 15 years, which
begins with $3.25 C$/MMBTU, is starting 18% lower today than a year ago. This is
due to a reduction in forecasted Henry Hub natural gas price and an increase in
the CND$/USD$ exchange rate.
The Insite forecast for Alberta Condensate price, which accounts for over 62% of
Peyto's total natural gas liquid production, starts 12% higher, or $102.90/bbl.
The debt adjusted NPV, discounted at 5%, of last year's Proved Producing
reserves, decreased 10% due to this change in commodity price forecasts, as
described in the following value reconciliation.
The InSite Petroleum Consultants price forecast used in the variable dollar
economics is available on their website at www.insitepc.com.
VALUE CREATION/RECONCILIATION
Peyto drilled 70 gross (62 net) wells in 2011 for a total capital investment of
$379 million. Of this total, 18% was spent on new lands, seismic and facilities,
while the remaining 82% was spent developing existing reserves and exploring for
new reserves. Of the 70 wells, 51 (46 net) were previously identified as
undeveloped reserves in last year's reserve report (27 Proved, 24 Probable
Additional). The remaining 19 wells were not recognized in last year's report as
they were deemed too exploratory in nature. The undeveloped reserves booked to
the 46 net locations at year end 2010 totaled 152 BCFe (3.3 BCFe/well) of Proved
Undeveloped plus Probable Additional reserves for a forecast capital investment
of $214 million ($1.41/Mcfe). In actuality, $209 million of capital was spent on
these 46 net wells during 2011, yielding Proved Producing plus Probable
Additional reserves of 151 BCFe ($1.39/Mcfe). The development of these 46 net
booked locations produced substantively the same outcome that was originally
projected. This analysis helps to validate the accuracy of the reserve and
capital assignments of past undeveloped locations and provides confidence in the
quality of the estimates for future undeveloped locations.
The economic result of 2011 capital investment allows Peyto to determine the
best use of shareholders capital on a go-forward basis, and demonstrates the
potential returns that can be generated from future undeveloped opportunities.
In order to measure the success of the 2011 capital program, it is necessary to
quantify the total amount of value created during the year and compare that to
the total amount of capital invested. The independent engineers have run last
year's evaluation with this year's price forecast to remove the change in value
attributable to both commodity prices and changing royalties. This approach
isolates the value created by the Peyto team from the value created (or lost) by
those changes outside of their control. Since the capital investments in 2011
were funded from a combination of cash flow, debt and equity, it is necessary to
know the change in debt and the change in shares outstanding to see if the
change in value is truly accretive to shareholders.
At year end 2011, Peyto's estimated net debt had increased by $60.7 million to
$465.6 million while the number of shares outstanding had increased by 5.6
million shares to 138.4 million shares. The change in debt includes all of the
capital expenditures, net of Drilling Royalty Credits earned, and the total
fixed and performance based compensation paid out during the year. Although
these estimates are believed to be accurate, they remain unaudited at this time
and are subject to change.
Based on this reconciliation of changes in BT NPV, the Peyto team was able to
create $928 million of Proved Producing, $1.8 billion of Total Proven, and $2.5
billion of Proved plus Probable Additional undiscounted reserve value, with $379
million of capital investment. The ratio of capital expenditures to value
creation is what Peyto refers to as the NPV recycle ratio, which is simply the
undiscounted value addition, resulting from the capital program, divided by the
capital investment. For 2011, the Proved Producing NPV recycle ratio is 2.4.
The following table breaks out the value created by Peyto's capital investments
and reconciles the changes in debt adjusted NPV of future net revenues using
forecast prices and costs as at December 31, 2011.
----------------------------------------------------------------------------
Proved Producing Total Proved
($millions)Discounted at 0% 5% 10% 0% 5%
----------------------------------------------------------------------------
Before Tax Net Present
Value at Beginning of
Year ($millions)
Dec. 31, 2010 Evaluation
using InSite Jan. 1, 2011
price forecast, less debt $4,098 $1,958 $1,177 $6,388 $2,999
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Per Share Outstanding at
Dec. 31, 2010 ($/share) $30.85 $14.75 $ 8.86 $48.10 $22.58
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2011 sales (revenue less
royalties and operating
costs) $ (346) $ (346) $ (346) $ (346) $ (346)
Net Change due to price
forecasts (using InSite
Jan 1, 2011 price
forecast) $ (336) $ (199) $ (144) $ (595) $ (371)
Value Change due to
discoveries (additions,
extensions, transfers,
revisions) $ 928 $ 745 $ 639 $1,789 $1,225
--------------------------------------------------
--------------------------------------------------
Before Tax Net Present
Value at End of Year
($millions)
Dec. 31, 2011 Evaluation
using InSite Jan. 1, 2012
price forecast, less debt $4,344 $2,159 $1,326 $7,236 $3,507
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Per Share Outstanding at
Dec. 31, 2011 ($/share) $31.40 $15.60 $ 9.58 $52.30 $25.35
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year over Year Change in
Before Tax NPV/share 2% 6% 8% 9% 12%
Year over Year Change in
Before Tax NPV/share
including Dividend
($0.72/share) 4% 11% 16% 10% 15%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total
Proved Proved + Probable Additional
($millions)Discounted at 10% 0% 5% 10%
----------------------------------------------------------------------------
Before Tax Net Present
Value at Beginning of
Year ($millions)
Dec. 31, 2010 Evaluation
using InSite Jan. 1, 2011
price forecast, less debt $ 1,727 $ 9,534 $ 4,333 $ 2,438
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Per Share Outstanding at
Dec. 31, 2010 ($/share) $ 13.00 $ 71.79 $ 32.63 $ 18.36
----------------------------------------------------------------------------
2011 sales (revenue less
royalties and operating
costs) $ (346) $ (346) $ (346) $ (346)
Net Change due to price
forecasts (using InSite
Jan 1, 2011 price
forecast) $ (276) $ (881) $ (543) $ (400)
Value Change due to
discoveries (additions,
extensions, transfers,
revisions) $ 925 $ 2,483 $ 1,575 $ 1,134
--------------------------------------------------
--------------------------------------------------
Before Tax Net Present
Value at End of Year
($millions)
Dec. 31, 2011 Evaluation
using InSite Jan. 1, 2012
price forecast, less debt $ 2,030 $ 10,790 $ 5,018 $ 2,825
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Per Share Outstanding at
Dec. 31, 2011 ($/share) $ 14.67 $ 77.99 $ 36.27 $ 20.42
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year over Year Change in
Before Tax NPV/share 13% 9% 11% 11%
Year over Year Change in
Before Tax NPV/share
including Dividend
($0.72/share) 18% 10% 13% 15%
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Tables may not add due to rounding.
GROWTH AND INCOME
As a dividend paying growth corporation, Peyto's objective is to grow the
resources which generate sustainable income (dividends) for shareholders. In
order for income to be more sustainable and grow, Peyto must profitably find and
develop more reserves. Simply increasing production from the existing reserves
will not make that income more sustainable. Reserve Life Index (RLI), or a
reserve to production ratio, provides a measure of this long term
sustainability.
During 2011, the Company was successful in replacing 230% of the annual produced
reserves, which resulted in a 15% increase in total Proved Producing reserves.
Annual production, however, increased 49%, from 8.7 mmboes to 12.9 mmboes, thus
accelerating reserve recovery and causing a 17% reduction in Proved Producing
reserve life. This acceleration has the benefit of shorter time to payout and
faster redeployment of capital for greater ultimate returns. Similarly, the
Total Proved and P+P reserve life index dropped to 16 and 22 years,
respectively. By comparison, Peyto's Proved Producing reserve life is still one
of the longest in the industry.
The following table highlights the company's historical Reserve Life Index.
RLI (years) 2003 2004 2005 2006 2007 2008 2009 2010 2011
----------------------------------------------------------------------------
Proved Producing 10 9 11 12 13 14 14 11 9
Total Proved 13 12 14 14 16 17 21 17 16
Proved + Probable Additional 19 17 19 20 21 23 29 25 22
Future Undeveloped Opportunities
With the expansion of Peyto's capital program from $261 million in 2010 to $379
million in 2011, the company has been able to increase the pace that undeveloped
opportunities are both recognized and developed. As a result, the number of
future drilling locations in the reserve report has increased to 437 gross (333
net). Of these locations, 63% are categorized by the independent reserve
evaluators as Proven Undeveloped with the remaining 37% as Probable Undeveloped.
The net reserves associated with the undeveloped locations total 971 BCFe (161.8
mmboes) or 1.2 BOEs per share. The total capital required to develop them is
estimated at $1.793 Billion or $1.85/MCFe, in order to create an associated net
present value of $2.215 Billion (5% discount) or $16.01 per share. The
development schedule for the undeveloped reserves is shown in the following
table of forecasted capital.
Forecast Capital
------------------------------------------------
Proved+ Probable
Proved Reserves Additional Reserves
Year Undisc., ($Millions) Undisc., ($Millions)
----------------------------------------------------------------------------
2012 $ 284 $ 426
2013 $ 335 $ 419
2014 $ 249 $ 418
2015 $ 184 $ 398
2016 $ 56 $ 110
----------------------------------------------------------------------------
Thereafter $ 4 $ 23
----------------------------------------------------------------------------
Total $ 1,111 $ 1,794
The existing producing reserves (PP) are forecast to generate over $4.8 billion
in undiscounted cash flow which should be more than sufficient to fund the $1.8
billion in future development capital, ensuring those reserve additions are
accretive to shareholders.
In addition to undeveloped drilling locations, the reserve report also reflects
additions to several of Peyto's 100% owned and operated gas plants that will
enhance the natural gas liquids recovery. These projects, at the Oldman,
Nosehill and Wildhay gas plants located in the Greater Sundance complex, are
forecast to occur in 2012 and 2013 for a combined capital investment of $60
million. Up to 15 bbls/mmcf of increased NGL recovery is forecast to occur which
results in an increase in the value of the P+P reserves of $206 million (Before
Tax, NPV5).
Performance Ratios
The following table outlines the 2011 performance ratios for all three reserve
categories.
----------------------------------------------------------------------------
Proved +
Proved Probable
Producing Total Proved Additional
----------------------------------------------------------------------------
2011 FD&A Cost ($/boe)
(including DRC and
change in FDC) $ 12.73 $ 12.80 $ 11.49
3 yr ave. FD&A Cost
incl. FDC ($/boe) $ 12.77 $ 12.66 $ 11.48
Reserve Life Index
(years)
Q4 2011 average
production(+) -
39,399 boe/d 9 16 22
Reserve Replacement
Ratio
2011 production(+) -
12.945 million boes 2.3 4.5 5.9
----------------------------------------------------------------------------
(+) Q4 and 2011 production are estimated and remain unaudited at this time.
-- FD&A (finding, development and acquisition) costs are used as a measure
of capital efficiency and are calculated by dividing the capital costs
for the period, including the change in undiscounted future development
capital ("FDC"), by the change in the reserves, incorporating revisions
and production, for the same period (eg. Total Proved
($379.1+$370.4)/(225.3-179.7+12.945) = $12.80).
-- The reserve life index is calculated by dividing the reserves (in boes)
in each category by the annualized average production rate in boe/year
(eg. Proved Producing 127,457/(39.399x365) = 8.9 yrs). Peyto believes
that the most accurate way to evaluate the current reserve life is by
dividing the proved developed producing reserves by the actual fourth
quarter average production. In Peyto's opinion, for comparative
purposes, the proved developed producing reserve life provides the best
measure of sustainability.
-- The reserve replacement ratio is determined by dividing the yearly
change in reserves before production by the actual annual production for
the year (eg. Total Proved ((225.3-179.7+12.945)/12.945) = 4.5).
Reserves Committee
Peyto has a reserves committee, comprised of independent board members, that
reviews the qualifications and appointment of the independent reserve
evaluators. The committee also reviews the procedures for providing information
to the evaluators. All booked reserves are based upon annual evaluations by the
independent qualified reserve evaluators conducted in accordance with the COGE
(Canadian Oil and Gas Evaluation) Handbook and National Instrument 51-101. The
evaluations are conducted using all available geological and engineering data.
The reserves committee has reviewed the reserves information and approved the
reserve report.
2012 UPDATE
Excess supply of natural gas in North America coupled with a warmer than normal
winter is expected to leave natural gas storage levels higher than usual. This
has pushed current and future natural gas prices down to decade lows. Peyto's
quick response has been to redirect more of its capital program to liquids rich
gas plays like the Cardium and Falher where revenues are enhanced by natural gas
liquids production. As well, Peyto will be installing additional facilities at
its Oldman and Nosehill gas plants to extract more natural gas liquids from
existing and future reserves. It is anticipated that these changes will improve
Peyto's netbacks and preserve the returns originally expected from the 2012
capital program.
As the lowest cost producer in Canada, with a large and growing portfolio of
proven drilling locations, Peyto remains well positioned to continue to deliver
superior returns to shareholders over the long term, despite the volatility in
natural gas prices. By maintaining a strong balance sheet and financial
flexibility, Peyto will look to capitalize on additional opportunities that
arise from slower natural gas activity created by weak prices.
General
For more in depth discussion of the 2011 reserve report, an interview with the
management will be available on Peyto's website by Friday, February 24, 2012. A
complete filing of the Statement of Reserves (form 51-101F1), Report on Reserves
(form 51-101F2), and Report of Management and Directors on Oil and Gas
Disclosure (form 51-101F3) will be available in the Annual Information Form to
be filed by the end of March 2012. Shareholders are encouraged to actively visit
Peyto's website located at www.peyto.com.
Certain information set forth in this document, including management's
assessment of Peyto's future plans and operations, contains forward-looking
statements. By their nature, forward-looking statements are subject to numerous
risks and uncertainties, some of which are beyond these parties' control,
including the impact of general economic conditions, industry conditions,
volatility of commodity prices, currency fluctuations, imprecision of reserve
estimates, environmental risks, competition from other industry participants,
the lack of availability of qualified personnel or management, stock market
volatility and ability to access sufficient capital from internal and external
sources. Readers are cautioned that the assumptions used in the preparation of
such information, although considered reasonable at the time of preparation, may
prove to be imprecise and, as such, undue reliance should not be placed on
forward-looking statements. Peyto's actual results, performance or achievement
could differ materially from those expressed in, or implied by, these
forward-looking statements and, accordingly, no assurance can be given that any
of the events anticipated by the forward-looking statements will transpire or
occur, or if any of them do so, what benefits that Peyto will derive therefrom.
BOEs may be misleading, particularly if used in isolation. A BOE conversion
ratio of 6 Mcf:1 bbl is based on an energy equivalency conversion method
primarily applicable at the burner tip and does not represent a value
equivalency at the wellhead. Some values set forth in the tables above may not
add due to rounding. It should not be assumed that the estimates of future net
revenues presented in the tables above represent the fair market value of the
reserves. There is no assurance that the forecast prices and costs assumptions
will be attained and variances could be material. The aggregate of the
exploration and development costs incurred in the most recent financial year and
the change during that year in estimated future development costs generally will
not reflect total finding and development costs related to reserves additions
for that year.
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