Peyto Exploration & Development Corp. ("Peyto” or the
“Company") is pleased to present its operating and financial
results for the third quarter of the 2017 fiscal year. A 76%
operating margin (1) and a 25% profit margin (2) in the quarter
delivered an annualized 10% return on equity (ROE) and 8% return on
capital employed (ROCE). Additional highlights included:
- Earnings of $0.27/share, dividends of
$0.33/share. Earnings of $45 million were generated in the
quarter bringing year-to-date earnings to $125 million. Earnings
per share of $0.27 were up 93% from the $0.14 in Q3 2016. The
Company has never incurred a write down or recorded an impairment
in its 19 year history and this quarter represents Peyto’s 51st
consecutive quarter of earnings which is the best evidence
shareholder’s capital has been invested profitably.
- Funds from operations of $0.85/share.
Generated $139 million in FFO in Q3 2017 up from $128 million in Q3
2016 (up 9%/share). Year to date in 2017, funds from operations
have totaled $412 million while capital expenditures have totaled
$387.
- Total cash costs of $0.76/Mcfe (or $0.67/Mcfe
($4.03/boe) excluding royalties). Industry leading total
cash costs, including $0.09/Mcfe royalties, $0.26/Mcfe operating
costs, $0.17/Mcfe transportation, $0.03/Mcfe G&A and $0.21/Mcfe
interest, combined with a realized price of $3.24/Mcfe, resulting
in a $2.48/Mcfe ($14.85/boe) cash netback, or a 76% operating
margin.
- Capital investment of $135 million. A total of
44 gross wells (42.5 net) were drilled in the third quarter, 37
gross wells (35.0 net) were completed, and 42 gross wells (39.5
net) brought on production. Over the last 12 months the 138 gross
(128 net) new wells brought on production accounted for 42,000
boe/d at the end of the quarter, which when combined with a
trailing twelve month capital investment of $517 million, equates
to an annualized capital efficiency of $12,300/boe/d.
- Production per share up 6%. Third quarter 2017
production of 612 MMcfe/d (101,951 boe/d) was up 6% (also 6% per
share) from Q3 2016. Peyto elected to temporarily shut in
production during periods of low gas prices in the quarter, which
deferred approximately 3,500 boe/d of production from the
quarter.
Third quarter 2017 in Review
Peyto had an active quarter of drilling and
connecting new gas wells in Q3 2017 with nine drilling rigs
operating in the quarter. Drilling and completion costs remained
stable as execution and efficiency gains offset inflationary
pressures. AECO daily natural gas prices, however, were extremely
volatile, with prices ranging from a high of $2.46/GJ to a low of
negative $2.20/GJ, which required Peyto to remain both nimble and
disciplined in managing its production to ensure that volumes were
only sold when profit could be generated. As a result, on certain
days, up to 36,000 boe/d was shut in when AECO daily prices turned
negative. This translated to a quarterly average volume of 3,500
boe/d being deferred. Despite this deferral, production was still
up over the prior quarter and prior year period. At the same time,
total cash costs and operating margins matched the same level as Q3
2016. These industry leading cash costs and operating margins
allowed Peyto to generate the highest quarterly earnings achieved
in the last three years and contributed to a year-over-year
increase in annualized Return on Capital Employed.
- Operating Margin is defined as funds from operations divided by
revenue before royalties but including realized hedging
gains/losses. 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 Sep 30 |
% |
Nine Months Ended Sep 30 |
% |
|
2017 |
2016 |
Change |
2017 |
2016 |
Change |
Operations |
|
|
|
|
|
|
Production |
|
|
|
|
|
|
Natural gas
(mcf/d) |
557,958 |
534,710 |
4 |
% |
547,456 |
530,441 |
3 |
% |
Oil & NGLs
(bbl/d) |
8,958 |
7,247 |
24 |
% |
8,952 |
6,960 |
29 |
% |
Thousand cubic
feet equivalent (mcfe/d @ 1:6) |
611,703 |
578,189 |
6 |
% |
601,168 |
572,199 |
5 |
% |
Barrels of oil
equivalent (boe/d @ 6:1) |
101,951 |
96,365 |
6 |
% |
100,195 |
95,367 |
5 |
% |
Production per million
common shares (boe/d)* |
618 |
585 |
6 |
% |
608 |
589 |
3 |
% |
Product prices |
|
|
|
|
|
|
Natural gas
($/mcf) |
2.81 |
2.88 |
-2 |
% |
2.90 |
2.86 |
1 |
% |
Oil & NGLs
($/bbl) |
45.92 |
39.76 |
15 |
% |
47.45 |
38.54 |
23 |
% |
Operating expenses
($/mcfe) |
0.26 |
0.25 |
4 |
% |
0.27 |
0.25 |
8 |
% |
Transportation
($/mcfe) |
0.17 |
0.16 |
6 |
% |
0.17 |
0.16 |
6 |
% |
Field netback
($/mcfe) |
2.72 |
2.63 |
3 |
% |
2.76 |
2.59 |
7 |
% |
General &
administrative expenses ($/mcfe) |
0.03 |
0.04 |
-25 |
% |
0.04 |
0.04 |
- |
|
Interest expense
($/mcfe) |
0.21 |
0.19 |
11 |
% |
0.21 |
0.19 |
11 |
% |
Financial
($000, except per share*) |
|
|
|
|
|
|
Revenue |
182,226 |
168,195 |
8 |
% |
549,158 |
488,437 |
12 |
% |
Royalties |
5,165 |
6,382 |
-19 |
% |
24,872 |
18,241 |
36 |
% |
Funds from
operations |
139,257 |
127,915 |
9 |
% |
412,049 |
370,000 |
11 |
% |
Funds from operations
per share |
0.85 |
0.78 |
9 |
% |
2.50 |
2.29 |
9 |
% |
Total
dividends |
54,408 |
54,328 |
- |
|
163,204 |
160,583 |
2 |
% |
Total dividends
per share |
0.33 |
0.33 |
- |
|
0.99 |
0.99 |
- |
|
Payout
ratio |
39 |
42 |
-7 |
% |
40 |
43 |
-7 |
% |
Earnings |
44,818 |
22,814 |
96 |
% |
125,029 |
73,859 |
69 |
% |
Earnings per share |
0.27 |
0.14 |
93 |
% |
0.76 |
0.46 |
65 |
% |
Capital
expenditures |
135,187 |
113,571 |
19 |
% |
386,800 |
339,968 |
14 |
% |
Weighted average common
shares outstanding |
164,874,175 |
164,630,168 |
- |
|
164,849,932 |
161,882,961 |
2 |
% |
As at September
30 |
|
|
|
|
|
|
End of period shares
outstanding (includes shares to be issued |
|
|
|
164,874,175 |
164,630,168 |
- |
|
Net debt |
|
|
|
1,286,268 |
1,060,355 |
21 |
% |
Shareholders'
equity |
|
|
|
1,668,761 |
1,638,860 |
2 |
% |
Total assets |
|
|
|
3,691,803 |
3,443,871 |
7 |
% |
*all per
share amounts using weighted average common shares outstanding |
|
|
|
|
|
Three Months Ended September 30 |
Nine Months Ended September 30 |
($000
except per share) |
2017 |
|
2016 |
|
2017 |
2016 |
|
Cash flows from
operating activities |
142,659 |
|
129,057 |
|
391,776 |
370,299 |
|
Change in
non-cash working capital |
(4,411) |
|
(10,256) |
|
13,938 |
(20,647) |
|
Change in
provision for performance based compensation |
1,009 |
|
9,114 |
|
6,335 |
20,348 |
|
Funds from operations |
139,257 |
|
127,915 |
|
412,049 |
370,000 |
|
Funds
from operations per share |
0.85 |
|
0.78 |
|
2.50 |
2.29 |
|
(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 dvidends may
vary.
Exploration & Development
Third quarter 2017 activity was spread evenly
across the Sundance, Ansell and Brazeau areas focused primarily on
the Spirit River group of formations including the Notikewin,
Falher and Wilrich. In total, 2 vertical Cardium wells in Brazeau
and 42 horizontal wells were drilled as shown in the table below.
The Company continues to realize particularly strong results in the
Brazeau Notikewin program after refinements were made to the
geophysical model earlier in the year.
|
|
Total Wells Drilled |
Zone |
Sundance |
Nosehill |
Wildhay |
FieldAnsell |
Berland |
Kisku/Kakwa |
Brazeau |
Belly River |
|
|
|
|
|
|
|
0 |
Cardium |
1 |
|
|
|
|
|
2V |
3 |
Notikewin |
1 |
1 |
|
2 |
|
|
12 |
16 |
Falher |
1 |
2 |
|
1 |
|
|
1 |
5 |
Wilrich |
6 |
2 |
|
11 |
|
|
1 |
20 |
Bluesky |
|
|
|
|
|
|
|
0 |
Total |
9 |
5 |
|
14 |
|
|
16 |
44 |
Horizontal well drilling costs in Q3 2017 were
in line with the last six quarters despite some additional costs
related to stratigraphic testing and increased casing costs.
Completion costs (per meter of horizontal lateral) were up from Q2
2017 due to increased fracturing costs; however, costs per stage
have also been in line with the previous six quarters. The
following table illustrates the progression of cost optimization
designed to contribute to lower overall development costs and
greater returns:
|
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
2015 |
|
2016 |
2017 Q1 |
2017 Q2 |
2017 Q3 |
Gross Hz Spuds |
|
52 |
|
70 |
|
86 |
|
99 |
|
123 |
|
140 |
|
126 |
|
40 |
|
25 |
|
43 |
Measured Depth (m) |
|
3,762 |
|
3,903 |
|
4,017 |
|
4,179 |
|
4,251 |
|
4,309 |
|
4,197 |
|
4,313 |
|
4,143 |
|
4,230 |
|
|
|
|
|
|
|
|
|
|
|
Drilling ($MM/well) |
$2.76 |
$2.82 |
$2.79 |
$2.72 |
$2.66 |
$2.16 |
$1.82 |
$1.82 |
$1.89 |
$1.89 |
$ per meter |
$734 |
$723 |
$694 |
$651 |
$626 |
$501 |
$433 |
$423 |
$457 |
$446 |
|
|
|
|
|
|
|
|
|
|
|
Completion ($MM/well) |
$1.36 |
$1.68 |
$1.67 |
$1.63 |
$1.70 |
$1.21 |
$0.86 |
$1.09 |
$0.96 |
$0.95 |
Hz Length (m) |
|
1,335 |
|
1,303 |
|
1,358 |
|
1,409 |
|
1,460 |
|
1,531 |
|
1,460 |
|
1,547 |
|
1,498 |
|
1,397 |
$ per Hz Length (m) |
$1,017 |
$1,286 |
$1,231 |
$1,153 |
$1,166 |
$792 |
$587 |
$705 |
$641 |
$680 |
$ ‘000 per Stage |
$231 |
$246 |
$257 |
$188 |
$168 |
$115 |
$79 |
$83 |
$76 |
$82 |
Capital Expenditures
During the third quarter of 2017, Peyto spent
$73 million on drilling, $34 million on completions, $15 million on
wellsite equipment and tie-ins, $11 million on facilities and major
pipeline projects, and $2 million on lands and seismic, for total
capital investments of $135 million.
In addition to the 42 gross (40.5 net)
horizontal wells and 2 gross (2 net) vertical wells drilled, 37
gross (35 net) wells were completed and 42 gross (39.5 net) wells
were equipped and tied in. Peyto also completed construction of a
$3 million multi-well group pipeline in Whitehorse that connected
the first three wells in the area and sets up for future drilling
to be connected more quickly. Other facility and pipeline work
included installing a 12th compressor at the West Brazeau gas
plant, taking total capacity to 150 MMcf/d, as well as a pipeline
to connect the Company’s Galloway and Swanson plants, further
enhancing the Greater Sundance plant inter-connectivity and
operating flexibility.
Commodity Prices
Average daily AECO natural gas prices were
$1.38/GJ in Q3 2017, down 48% from $2.64/GJ the quarter before and
down 37% from $2.20/GJ in Q3 2016. This was in contrast to US Henry
Hub spot prices which averaged $2.95/MMBTU for the quarter, similar
to the $2.88/MMBTU the year before. A change in the prioritization
of gas transmission service on the NGTL system, which severely
inhibited the ability for Alberta storage reservoirs to buffer the
supply/demand imbalance, led to daily market instability and
extreme volatility in AECO daily prices during the quarter which
contributed to the dramatic drop in average natural gas price.
On average for Q3 2017, Peyto realized a natural
gas price of $2.45/GJ or $2.81/Mcf. This was the result of a
combination of approximately 16% of natural gas production being
sold in the daily or monthly spot market at an average of $1.93/GJ
($2.21/Mcf) and 84% having been pre-sold at an average hedged price
of $2.54/GJ (prices reported net of TCPL fuel).
In September of 2017, higher realized liquid
propane prices allowed Peyto to restart its Oldman deep cut plant
which resulted in increased NGL recoveries from 15 bbl/mmcf to 18
bbl/mmcf. As a result, Peyto’s Q3 2017 liquid recoveries averaged
16 bbl/mmcf with a blended, realized, oil and natural gas liquids
price of $45.92/bbl, which represented 81% of the $56.65/bbl
average Canadian Light Sweet posted price. Details of realized
commodity prices by component are shown in the following table:
Commodity Prices by Component
|
|
Three Months ended September 30 |
|
|
|
2017 |
|
2016 |
|
AECO monthly |
($/GJ) |
|
1.93 |
|
2.09 |
|
AECO daily |
($/GJ) |
|
1.38 |
|
2.20 |
|
Henry Hub
spot |
($US/MMBTU) |
|
2.95 |
|
2.88 |
|
Natural gas – prior to
hedging |
($/GJ) |
|
1.93 |
|
2.08 |
|
|
($/mcf) |
|
2.21 |
|
2.39 |
|
Natural gas – after
hedging |
($/GJ) |
|
2.45 |
|
2.50 |
|
|
($/mcf) |
|
2.81 |
|
2.88 |
|
Oil and
natural gas liquids ($/bbl) |
|
|
|
|
Condensate ($/bbl) |
|
|
53.77 |
|
47.95 |
|
Propane ($/bbl) |
|
|
23.25 |
|
6.51 |
|
Butane ($/bbl) |
|
|
29.58 |
|
20.25 |
|
Pentane ($/bbl) |
|
|
55.10 |
|
49.15 |
|
Total Oil and natural gas liquids ($/bbl) |
|
|
45.92 |
|
39.76 |
|
Canadian Light Sweet stream ($/bbl) |
|
|
56.65 |
|
54.82 |
|
Peyto realized liquids price/Canadian Light Sweet |
|
|
81% |
|
73 |
|
Liquids prices are Peyto realized prices (F.O.B. plant gate) in
Canadian dollars adjusted for fractionation and transportation.
Financial Results
Approximately 21%, or $0.67/Mcfe, of Peyto’s
revenue came from its liquids sales while 79%, or $2.57/Mcfe, came
from natural gas. This liquids revenue covered all cash costs
excluding royalties. Cash costs of $0.76/Mcfe, included royalties
of $0.09/Mcfe, operating costs of $0.26/Mcfe, transportation costs
of $0.17/Mcfe, G&A of $0.03/Mcfe and interest costs of
$0.21/Mcfe. Cash costs were lower than the previous quarter due to
reductions in royalties, G&A and transportation, partially
offset by increases in operating costs. These total cash costs,
when deducted from realized revenues of $3.24/Mcfe, resulted in a
cash netback of $2.48/Mcfe or a 76% operating margin. Historical
cash costs and operating margins are shown in the following table.
Going forward, Peyto expects per unit cash costs will continue to
trend towards $0.80/Mcfe levels for the balance of 2017.
|
2014 |
2015 |
|
2016 |
|
2017 |
|
($/Mcfe) |
FY |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
Q3 |
Revenue |
5.04 |
|
4.17 |
|
3.81 |
|
3.80 |
|
3.58 |
|
3.24 |
|
2.92 |
|
3.16 |
|
3.38 |
|
3.44 |
|
3.36 |
|
3.24 |
|
Royalties |
0.38 |
|
0.18 |
|
0.13 |
|
0.15 |
|
0.13 |
|
0.13 |
|
0.10 |
|
0.12 |
|
0.18 |
|
0.19 |
|
0.17 |
|
0.09 |
|
Operating
Costs |
0.34 |
|
0.32 |
|
0.31 |
|
0.28 |
|
0.25 |
|
0.23 |
|
0.26 |
|
0.25 |
|
0.26 |
|
0.29 |
|
0.24 |
|
0.26 |
|
Transportation |
0.13 |
|
0.15 |
|
0.15 |
|
0.16 |
|
0.16 |
|
0.16 |
|
0.17 |
|
0.16 |
|
0.16 |
|
0.17 |
|
0.18 |
|
0.17 |
|
G&A |
0.03 |
|
0.04 |
|
0.04 |
|
0.02 |
|
0.05 |
|
0.03 |
|
0.06 |
|
0.04 |
|
0.03 |
|
0.04 |
|
0.05 |
|
0.03 |
|
Interest |
0.21 |
|
0.20 |
|
0.19 |
|
0.19 |
|
0.16 |
|
0.17 |
|
0.21 |
|
0.19 |
|
0.18 |
|
0.20 |
|
0.21 |
|
0.21 |
|
Total Cash Costs |
1.09 |
|
0.89 |
|
0.82 |
|
0.80 |
|
0.75 |
|
0.72 |
|
0.80 |
|
0.76 |
|
0.81 |
|
0.89 |
|
0.85 |
|
0.76 |
|
Netback |
3.95 |
|
3.28 |
|
2.99 |
|
3.00 |
|
2.83 |
|
2.52 |
|
2.12 |
|
2.40 |
|
2.57 |
|
2.55 |
|
2.51 |
|
2.48 |
|
Operating Margin |
78 |
% |
79 |
% |
78 |
% |
79 |
% |
79 |
% |
78 |
% |
73 |
% |
76 |
% |
76 |
% |
74 |
% |
75 |
% |
76 |
% |
Depletion, depreciation and amortization charges
of $1.33/Mcfe, along with a provision for deferred tax and market
based bonus payments reduced the cash netback to earnings of
$0.80/Mcfe, or a 25% profit margin. Dividends of $0.97/Mcfe were
paid to shareholders.
Subsequent to the end of the third quarter,
Peyto increased and extended its revolving, unsecured credit
facility to $1.3 billion with a stated term date of October 2021.
This new facility has increased Peyto’s total borrowing capacity to
$1.82 billion.
Natural Gas Marketing
The current volatility in natural gas markets in
Alberta remains high, reinforcing the value of Peyto’s hedging
practice of layering in future sales in the form of fixed price
swaps. For the balance of 2017, approximately 78% of forecast gas
volumes have been hedged to protect against this increased AECO
volatility. Peyto’s hedging program aims to achieve a fixed price
on a descending, graduated schedule of up to 85% of gross
production for the immediate summer or winter season and 75%, 65%,
55%, 45% and 30% targets thereafter for the successive following
seasons. These fixed prices, which are settled against the AECO
Monthly price, are achieved through a series of frequent
transactions which is similar to “dollar cost averaging” the future
gas prices in order to smooth out volatility. The following table
summarizes the remaining hedged volumes and prices for the upcoming
years as of November 8, 2017:
|
Future Sales |
Average Price (CAD) |
|
GJ |
Mcf |
$/GJ |
$/Mcf |
2017 |
30,100,000 |
26,173,913 |
$2.64 |
$3.03 |
2018 |
137,255,000 |
119,326,087 |
$2.48 |
$2.85 |
2019 |
18,975,000 |
16,500,000 |
$2.41 |
$2.77 |
2020 |
1,365,000 |
1,186,957 |
$2.39 |
$2.75 |
Total |
185,385,000 |
161,204,348 |
$2.50 |
$2.88 |
*prices and volumes in mcf use Peyto’s historic heat content
premium of 1.15.
In order to deal with restricted access to
take-away capacity, Peyto has secured excess firm transportation on
the NGTL system north of the James River receipt point of
approximately 110% of Peyto’s forecasted natural gas sales for the
remainder of 2017 and 115% for the first quarter of 2018.
Both the firm transportation service and hedging
strategies are designed to remove the uncertainty of system access
and AECO price volatility while at the same time leaving Peyto with
the maximum operating margin and future market optionality.
Activity Update
Peyto currently has 9 drilling rigs running in
the Greater Sundance and Brazeau areas. Since the end of the third
quarter, 13 wells have been drilled, 16 wells completed and 18
wells brought on production. October production averaged
approximately 106,000 boe/d with 3,000 boe/d curtailed due to low
gas price while current production is 115,000 boe/d and year-end
exit production levels are expected to range between 115,000 and
120,000 boe/d. This exit production is expected to be accomplished
for a total 2017 capital investment of approximately $530 million,
less than the original budget of $550 to $600 million. This reduced
capital is due to stronger than expected well results in Peyto’s
Brazeau Notikewin play and increases in the Brazeau West gas plant
capacity that has allowed the construction of the Brazeau East gas
plant to be deferred until 2018. It is now anticipated that a total
of 146 gross (141 net) wells will be drilled in 2017, building
approximately 50,000 boe/d of new production by year end for an
expected capital efficiency of $10,600/boe/d.
Propane prices continue to improve which has
allowed Peyto to modify the operation of its nine gas plants to
recover more natural gas liquids, including continuous operation of
the Company’s Oldman deep cut plant. As a result, the Company’s
total natural gas liquid yields have increased from 15 bbl/mmcf
earlier in the year to 18 bbl/mmcf.
2018 Budget
The current forecast for Alberta realized
natural gas price for the summer of 2018 is less than $2.00/GJ. As
a result, Peyto plans to defer a larger portion of its 2018 capital
investments until the latter part of 2018 when prices are expected
to improve rather than building new volumes throughout the
competitive winter season only to bring them on into a seasonally
low gas price environment. By timing capital investments in this
way, Peyto expects to improve the returns on its capital program
much as it has by being counter cyclical over the longer commodity
price cycles. Therefore, the Board of Directors of Peyto has
approved a preliminary first half 2018 budget which includes a
capital program of approximately $150 million that involves the
drilling of 45 gross wells (average 97% working interest) along
with associated pipeline investments which is expected to build
18,000-20,000 boe/d of new production by mid-year and will
contribute to an average first half production target of
approximately 113,000 boe/d. Funds from operations are currently
forecast to cover this entire capital program, dividend payments
and reduce indebtedness.
For the second half of 2018, pending future
Board approval and assuming the natural gas price forecast
continues to improve, Peyto intends to embark on a larger capital
program of approximately $300 million that involves the drilling of
approximately 75 gross wells, associated pipelines and facility
investments which, combined with the first half capital program,
are designed to build total new production for the year of 50,000
boe/d. A portion of this new production would offset an annual
forecast of 35% base decline, while a portion would grow 2018
production to an exit level of approximately 125,000 boe/d. New
facility investments in Brazeau and Whitehorse are planned to be
part of this larger capital program.
The future strip for Alberta natural gas prices
remains volatile but is currently forecast to average approximately
$2.15/GJ in 2018, along with Canadian Light Sweet oil prices of
approximately $70/bbl. In accordance with Peyto’s historical
hedging practice, the Company has already forward sold
approximately 52% of current gas production levels at an average
price of $2.46/GJ. These prices, when adjusted for Peyto’s historic
NGL and heat content premiums and combined with the Company’s
industry leading cash costs of approximately $0.75 - $0.80/Mcfe
($4.80/boe), are expected to yield cash netbacks of approximately
$14.50/boe.
Outlook
Peyto’s focus on maximizing the return on and
minimizing the risk of future capital investments by controlling
the timing and execution of operations and by focusing on reducing
costs throughout its business continues to remain steadfast.
Volatile commodity markets are nothing new and Peyto’s 19 year
history of successfully navigating them has rewarded investors over
the long term with industry leading profitability. Those profits
have and will continue to form the basis for dividends to
shareholders.
Conference Call and Webcast
A conference call will be held with the senior
management of Peyto to answer questions with respect to the Q3 2017
financial results on November 9th, 2017 at 9:00 a.m. Mountain
Standard Time (MST), or 11:00 a.m. Eastern Standard Time (EST).
Please see the press release for conference call details. 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
info@peyto.com. The conference call can also be accessed through
the internet at https://edge.media-server.com/m6/p/mookje4i. The
conference call will be archived on the Peyto Exploration &
Development website at www.peyto.com.
Management’s Discussion and Analysis
A copy of the third quarter report to shareholders, including
the MD&A, audited financial statements and related notes, is
available at
http://www.peyto.com/Files/Financials/2017/Q32017MDandA.pdf and
will be filed at SEDAR, www.sedar.com at a later date.
Darren GeePresident and CEONovember 8, 2017
Certain information set forth in this
document and Management’s Discussion and Analysis, including
management's assessment of Peyto’s future plans and operations,
capital expenditures and capital efficiencies, 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 Peyto will derive
there from. In addition, Peyto is providing future oriented
financial information set out in this press release for the
purposes of providing clarity with respect to Peyto’s strategic
direction and readers are cautioned that this information may not
be appropriate for any other purpose. Other than is required
pursuant to applicable securities law, Peyto does not undertake to
update forward looking statements at any particular time. To
provide a single unit of production for analytical purposes,
natural gas production and reserves volumes are converted
mathematically to equivalent barrels of oil (BOE). Peyto uses the
industry-accepted standard conversion of six thousand cubic feet of
natural gas to one barrel of oil (6 Mcf = 1 bbl). The 6:1 BOE
ratio is based on an energy equivalency conversion method primarily
applicable at the burner tip. It does not represent a value
equivalency at the wellhead and is not based on current
prices. While the BOE ratio is useful for comparative measures
and observing trends, it does not accurately reflect individual
product values and might be misleading, particularly if used in
isolation. As well, given that the value ratio, based on the
current price of crude oil to natural gas, is significantly
different from the 6:1 energy equivalency ratio, using a 6:1
conversion ratio may be misleading as an indication of
value.
Peyto Exploration & Development
Corp.Condensed Balance Sheet
(unaudited)(Amount in $ thousands)
|
|
|
September 302017 |
December
31 2016 |
Assets |
|
|
|
|
Current
assets |
|
|
|
|
Cash |
|
|
1,561 |
|
2,102 |
|
Accounts
receivable |
|
|
74,134 |
|
94,813 |
|
Due from private
placement (Note 6) |
|
|
- |
|
4,930 |
|
Derivative financial
instruments (Note 8) |
|
|
67,675 |
|
- |
|
Prepaid
expenses |
|
|
14,817 |
|
13,385 |
|
|
|
|
158,187 |
|
115,230 |
|
|
|
|
|
|
Long-term derivative
financial instruments (Note 8) |
|
|
5,385 |
|
- |
|
Property,
plant and equipment, net (Note 3) |
|
|
3,528,231 |
|
3,347,859 |
|
|
|
|
3,533,616 |
|
3,347,859 |
|
|
|
|
3,691,803 |
|
3,463,089 |
|
|
|
|
|
|
Liabilities |
|
|
|
|
Current
liabilities |
|
|
|
|
Accounts payable and
accrued liabilities |
|
|
123,644 |
|
158,173 |
|
Dividends payable (Note
6) |
|
|
18,136 |
|
18,109 |
|
Derivative financial
instruments (Note 8) |
|
|
- |
|
119,280 |
|
Provision
for future performance based compensation (Note 7) |
|
|
13,189 |
|
6,854 |
|
|
|
|
154,969 |
|
302,416 |
|
|
|
|
|
|
Long-term debt (Note
4) |
|
|
1,235,000 |
|
1,070,000 |
|
Long-term derivative
financial instruments (Note 8) |
|
|
- |
|
31,465 |
|
Provision for future
performance based compensation (Note 7) |
|
|
7,947 |
|
4,499 |
|
Decommissioning
provision (Note 5) |
|
|
132,450 |
|
127,763 |
|
Deferred
income taxes |
|
|
492,676 |
|
386,012 |
|
|
|
|
1,868,073 |
|
1,619,739 |
|
|
|
|
|
|
Equity |
|
|
|
|
Share capital (Note
6) |
|
|
1,649,537 |
|
1,641,982 |
|
Shares to be issued
(Note 6) |
|
|
- |
|
4,930 |
|
Retained earnings
(deficit) |
|
|
(37,399 |
) |
776 |
|
Accumulated other comprehensive income (loss) (Note 6) |
|
|
56,623 |
|
(106,754 |
) |
|
|
|
1,668,761 |
|
1,540,934 |
|
|
|
|
3,691,803 |
|
3,463,089 |
|
See accompanying notes to the financial statements.
Peyto Exploration & Development
Corp.Condensed Income Statement
(unaudited)(Amount in $ thousands except earnings per share
amount)
|
Three months ended
September 30 |
Nine months ended
September 30 |
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
Revenue |
|
|
|
|
Oil and gas sales |
|
151,378 |
|
|
144,301 |
|
|
530,511 |
|
|
366,947 |
|
Realized gain on hedges
(Note 8) |
|
30,848 |
|
|
23,894 |
|
|
18,647 |
|
|
121,490 |
|
Royalties |
|
(5,165 |
) |
|
(6,382 |
) |
|
(24,872 |
) |
|
(18,241 |
) |
Petroleum
and natural gas sales, net |
|
177,061 |
|
|
161,813 |
|
|
524,286 |
|
|
470,196 |
|
|
|
|
|
|
Expenses |
|
|
|
|
Operating |
|
14,844 |
|
|
13,254 |
|
|
43,546 |
|
|
38,526 |
|
Transportation |
|
9,149 |
|
|
8,647 |
|
|
28,358 |
|
|
25,506 |
|
General and
administrative |
|
1,701 |
|
|
2,133 |
|
|
6,659 |
|
|
6,843 |
|
Future performance
based compensation (Note 7) |
|
2,109 |
|
|
13,969 |
|
|
9,783 |
|
|
31,057 |
|
Interest |
|
12,110 |
|
|
9,864 |
|
|
33,674 |
|
|
29,320 |
|
Accretion of
decommissioning provision (Note 5) |
|
847 |
|
|
538 |
|
|
2,312 |
|
|
1,685 |
|
Depletion and
depreciation (Note 3) |
|
74,906 |
|
|
82,157 |
|
|
228,681 |
|
|
248,750 |
|
Gain on disposition of
assets (Note 3) |
|
- |
|
|
- |
|
|
- |
|
|
(12,668 |
) |
|
|
115,666 |
|
|
130,562 |
|
|
353,013 |
|
|
369,019 |
|
Earnings before taxes |
|
61,395 |
|
|
31,251 |
|
|
171,273 |
|
|
101,177 |
|
|
|
|
|
|
Income
tax |
|
|
|
|
Deferred income tax
expense |
|
16,577 |
|
|
8,437 |
|
|
46,244 |
|
|
27,318 |
|
Earnings for the period |
|
44,818 |
|
|
22,814 |
|
|
125,029 |
|
|
73,859 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per
share (Note 6) |
|
|
|
|
Basic and diluted |
$0.27 |
|
$0.14 |
|
$0.76 |
|
$0.46 |
|
See accompanying notes
to the financial statements. |
|
|
|
|
Peyto Exploration & Development
Corp.Condensed Statement of Comprehensive Income
(Loss) (unaudited)(Amount in $ thousands)
|
Three months ended
September 30 |
Nine months ended
September 30 |
|
2017 |
|
2016 |
|
2017 |
|
2016 |
|
Earnings for
the period |
44,818 |
|
22,814 |
|
125,029 |
|
73,859 |
|
Other
comprehensive income (loss) |
|
|
|
|
Change in unrealized
gain on cash flow hedges |
73,612 |
|
42,232 |
|
242,451 |
|
27,053 |
|
Deferred (expense) tax
recovery |
(11,546 |
) |
(4,951 |
) |
(60,427 |
) |
25,498 |
|
Realized
(gain) on cash flow hedges |
(30,848 |
) |
(23,894 |
) |
(18,647 |
) |
(121,490 |
) |
Comprehensive income |
76,036 |
|
36,201 |
|
288,406 |
|
4,920 |
|
See accompanying notes
to the financial statements. |
|
|
|
|
Peyto Exploration & Development
Corp.Condensed Statement of Changes in
Equity (unaudited)(Amount in $ thousands)
|
Nine months ended
September 30 |
|
2017 |
|
2016 |
|
Share capital, beginning of period |
1,641,982 |
|
1,467,264 |
|
Common shares issued by
private placement |
7,574 |
|
7,644 |
|
Equity offering |
- |
|
172,500 |
|
Common shares issuance
costs (net of tax) |
(19 |
) |
(5,409 |
) |
Share capital, end of period |
1,649,537 |
|
1,641,999 |
|
|
|
|
|
|
|
|
|
|
Shares to be issued, beginning of period |
4,930 |
|
3,769 |
|
Shares issued |
(4,930 |
) |
(3,769 |
) |
Shares to be issued, end of period |
- |
|
- |
|
|
|
|
|
|
|
|
|
|
Retained earnings, beginning of period |
776 |
|
103,339 |
|
Earnings for the
period |
125,029 |
|
73,859 |
|
Dividends
(Note 6) |
(163,204 |
) |
(160,583 |
) |
Retained (deficit) earnings, end of period |
(37,399 |
) |
16,615 |
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, beginning of
period |
(106,754 |
) |
49,185 |
|
Other
comprehensive income (loss) |
163,377 |
|
(68,939 |
) |
Accumulated other comprehensive (loss) income, end of
period |
56,623 |
|
(19,754 |
) |
|
|
|
|
|
|
|
|
|
Total equity |
1,668,761 |
|
1,638,860 |
|
See accompanying notes
to the financial statements. |
|
|
Peyto Exploration & Development
Corp.Condensed Statement of Cash Flows
(unaudited)(Amount in $ thousands)
|
Three months ended
September 30 |
Nine months ended
September 30 |
|
2017 |
|
2016 |
|
2017 |
|
2016 |
|
Cash provided
by (used in) |
|
|
|
|
operating
activities |
|
|
|
|
Earnings |
44,818 |
|
22,814 |
|
125,029 |
|
73,859 |
|
Items not requiring
cash: |
|
|
|
|
Deferred income
tax |
16,577 |
|
8,437 |
|
46,244 |
|
27,318 |
|
Depletion and
depreciation |
74,906 |
|
82,157 |
|
228,681 |
|
248,750 |
|
Accretion of
decommissioning provision |
847 |
|
538 |
|
2,312 |
|
1,685 |
|
Gain on
disposition of assets |
- |
|
- |
|
- |
|
(12,668 |
) |
Long term
portion of future performance based compensation |
1,010 |
|
4,855 |
|
3,448 |
|
10,708 |
|
Change in
non-cash working capital related to operating activities |
4,411 |
|
10,256 |
|
(13,938 |
) |
20,647 |
|
|
142,569 |
|
129,057 |
|
391,776 |
|
370,299 |
|
Financing
activities |
|
|
|
|
Issuance of common
shares |
- |
|
- |
|
7,574 |
|
180,144 |
|
Issuance costs |
- |
|
(10 |
) |
(26 |
) |
(7,409 |
) |
Cash dividends
paid |
(54,408 |
) |
(54,328 |
) |
(163,178 |
) |
(159,960 |
) |
Increase in bank
debt |
30,000 |
|
- |
|
165,000 |
|
- |
|
Issuance of senior
unsecured notes |
- |
|
- |
|
- |
|
- |
|
|
(24,408 |
) |
(54,338 |
) |
9,370 |
|
12,775 |
|
Investing
activities |
|
|
|
|
Additions to property,
plant and equipment |
(135,187 |
) |
(113,571 |
) |
(386,779 |
) |
(339,968 |
) |
Change in prepaid
capital |
(17,050 |
) |
(1,567 |
) |
(19,879 |
) |
6,166 |
|
Change in non-cash
working capital relating to investing activities |
31,311 |
|
48,059 |
|
4,990 |
|
(16,175 |
) |
|
(120,926 |
) |
(67,079 |
) |
(401,688 |
) |
(349,977 |
) |
Net increase
(decrease) in cash |
(2,675 |
) |
7,640 |
|
(542 |
) |
33,097 |
|
Cash, beginning of period |
4,235 |
|
25,457 |
|
2,102 |
|
- |
|
Cash, end of period |
1,560 |
|
33,097 |
|
1,560 |
|
33,097 |
|
|
|
|
|
|
The
following amounts are included in cash flows from operating
activities: |
|
|
|
|
Cash
interest paid |
7,963 |
|
9,140 |
|
32,991 |
|
28,547 |
|
Cash taxes paid |
- |
|
- |
|
- |
|
- |
|
See accompanying notes to the financial statements
Peyto Exploration & Development
Corp.Notes to Condensed Financial
Statements (unaudited)As at September 30, 2017 and
2016(Amount in $ thousands, except as otherwise noted)
1.
Nature of operations
Peyto Exploration & Development Corp.
(“Peyto” or the “Company”) is a Calgary based oil and natural gas
company. Peyto conducts exploration, development and
production activities in Canada. Peyto is incorporated and
domiciled in the Province of Alberta, Canada. The address of
its registered office is 300, 600 – 3rd Avenue SW,
Calgary, Alberta, Canada, T2P 0G5.
These financial statements were approved and
authorized for issuance by the Audit Committee of Peyto on November
7, 2017.
2.
Basis of presentation
The condensed financial statements have been
prepared by management and reported in Canadian dollars in
accordance with International Accounting Standard (“IAS”) 34,
“Interim Financial Reporting”. These condensed financial statements
do not include all of the information required for full annual
financial statements and should be read in conjunction with the
Company’s financial statements as at and for the years ended
December 31, 2016 and 2015.
Significant Accounting
Policies
(a) Significant Accounting Judgments,
Estimates and AssumptionsThe timely preparation of the
condensed financial statements requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingencies, if any, as
at the date of the financial statements and the reported amounts of
revenue and expenses during the period. By their nature, estimates
are subject to measurement uncertainty and changes in such
estimates in future years could require a material change in the
condensed financial statements.
All accounting policies and methods of
computation followed in the preparation of these financial
statements are the same as those disclosed in Note 2 of Peyto’s
financial statements as at and for the years ended December 31,
2016 and 2015.
(b) Standards issued but not yet
effectiveIn July 2014, the IASB completed the final
elements of IFRS 9 "Financial Instruments." The Standard supersedes
earlier versions of IFRS 9 and completes the IASB’s project to
replace IAS 39 "Financial Instruments: Recognition and
Measurement." IFRS 9, as amended, includes a principle-based
approach for classification and measurement of financial assets, a
single 'expected loss’ impairment model and a
substantially-reformed approach to hedge accounting. The Standard
will come into effect for annual periods beginning on or after
January 1, 2018, with earlier adoption permitted. IFRS 9 will be
applied by Peyto on January 1, 2018. The impact of the
standard has been evaluated and is expected to have no material
impact on the Company’s financial statements.
In May 2014, the IASB issued IFRS 15 "Revenue
from Contracts with Customers," which replaces IAS 18 "Revenue,"
IAS 11 "Construction Contracts," and related interpretations. The
standard is required to be adopted for fiscal years beginning on or
after January 1, 2018, with earlier adoption permitted. IFRS 15
will be applied by Peyto on January 1, 2018. IFRS 15 provides
clarification for recognizing revenue from contracts with customers
and establishes a single revenue recognition and measurement
framework. The impact of the standard has been evaluated and is
expected to have no material impact on the Company’s financial
statements. Additional disclosure may be required upon
implementation of IFRS 15 in order to provide sufficient
information to enable users to understand the nature, amount,
timing, and uncertainty of revenue and cash flows arising from the
contracts with customers.
In January 2016, the IASB issued IFRS 16
“Leases”, which replaces IAS 17 “Leases”. For lessees applying IFRS
16,a single recognition and measurement model for leases would
apply, with required recognition of assets and liabilities for most
leases. The standard will come into effect for annual periods
beginning on or after January 1, 2019, with earlier adoption
permitted. The Company is currently evaluating the impact of the
standard on the Company’s financial statements.
3.
Property, plant and equipment, net
Cost |
|
|
At December 31, 2016 |
|
4,901,523 |
|
Additions |
|
386,799 |
|
Decommissioning
provision additions |
|
2,375 |
|
Prepaid
capital |
|
19,879 |
|
At September 30, 2017 |
|
5,310,576 |
|
Accumulated depletion and depreciation |
|
|
At December 31, 2016 |
|
(1,553,664 |
) |
Depletion and
depreciation |
|
(228,681 |
) |
At September 30, 2017 |
|
(1,782,345 |
) |
|
|
|
Carrying
amount at December 31, 2016 |
|
3,347,859 |
|
Carrying amount at September 30, 2017 |
|
3,528,231 |
|
During the three and nine month periods ended
September 30, 2017, Peyto capitalized $2.2 million and $5.7 million
(2016 - $1.6 million and $4.7 million) of general and
administrative expense directly attributable to exploration and
development activities.
4.
Long-term debt
|
September 30, 2017 |
December 31, 2016 |
Bank credit facility |
715,000 |
550,000 |
Senior
unsecured notes |
520,000 |
520,000 |
Balance, end of the period |
1,235,000 |
1,070,000 |
The Company has a syndicated $1.0 billion
extendible unsecured revolving credit facility with a stated term
date of December 4, 2019. An accordion provision has been
added that allows for the pre-approved increase of the facility up
to $1.3 billion, at the Company’s request, subject to additional
commitments by existing facility lenders or by adding new financial
institutions to the syndicate. The bank facility is made up of a
$30 million working capital sub-tranche and a $970 million
production line. The facilities are available on a revolving
basis. Borrowings under the facility bear interest at
Canadian bank prime or US base rate, or, at Peyto’s option,
Canadian dollar bankers’ acceptances or US dollar LIBOR loan rates,
plus applicable margin and stamping fees. The total stamping fees
range between 50 basis points and 215 basis points on Canadian bank
prime and US base rate borrowings and between 150 basis points and
315 basis points on Canadian dollar bankers’ acceptance and US
dollar LIBOR borrowings. The undrawn portion of the facility is
subject to a standby fee in the range of 30 to 63 basis points.
Peyto is subject to the following financial
covenants as defined in the credit facility and note purchase
agreements:
- Long-term debt plus the average working capital deficiency
(surplus) at the end of the two most recently completed fiscal
quarters adjusted for non-cash items not to exceed 3.0 times
trailing twelve month net income before non-cash items, interest
and income taxes;
- Long-term debt and subordinated debt plus the average working
capital deficiency (surplus) at the end of the two most recently
completed fiscal quarters adjusted for non-cash items not to exceed
4.0 times trailing twelve month net income before non-cash items,
interest and income taxes;
- Trailing twelve months net income before non-cash items,
interest and income taxes to exceed 3.0 times trailing twelve
months interest expense;
- Long-term debt and subordinated debt plus the average working
capital deficiency (surplus) at the end of the two most recently
completed fiscal quarters adjusted for non-cash items not to exceed
55 per cent of the book value of shareholders’ equity and long-term
debt and subordinated debt.
Peyto is in compliance with all financial covenants at September
30, 2017.
Outstanding senior notes are as follows:
Senior Unsecured Notes |
Date Issued |
Rate |
Maturity Date |
$100
million |
January 3, 2012 |
4.39 |
% |
January 3, 2019 |
$50
million |
September 6, 2012 |
4.88 |
% |
September 6, 2022 |
$120
million |
December 4, 2013 |
4.50 |
% |
December 4, 2020 |
$50
million |
July
3, 2014 |
3.79 |
% |
July
3, 2022 |
$100
million |
May 1,
2015 |
4.26 |
% |
May 1,
2025 |
$100 million |
October 24, 2016 |
3.70 |
% |
October 24, 2023 |
On April 26, 2016, the amended and restated note
purchase and private shelf agreement dated January 3, 2012 and
restated as of April 26, 2013 was amended to increase the shelf
facility from $150 million to $250 million. $250 million has
been drawn under this shelf facility.
Total interest expense for the three and nine
month periods ended September 30, 2017 was $12.1 million and $33.7
million (2016 - $9.9 million and $29.3 million) and the average
borrowing rate for the period was 3.9% and 3.8% (2016– 3.7% and
3.6%).
5.
Decommissioning provision
Peyto makes provision for the future cost of
decommissioning wells and facilities on a discounted basis based on
the commissioning of these assets.
The decommissioning provision represents the
present value of the decommissioning costs related to the above
infrastructure, which are expected to be incurred over the economic
life of the assets. The provisions have been based on the
Company’s internal estimates on the cost of decommissioning, the
discount rate, the inflation rate and the economic life of the
infrastructure. Assumptions, based on the current economic
environment, have been made which management believes are a
reasonable basis upon which to estimate the future liability.
These estimates are reviewed regularly to take into account any
material changes to the assumptions. However, actual
decommissioning costs will ultimately depend upon the future market
prices for the necessary decommissioning work required which will
reflect market conditions at the relevant time. Furthermore,
the timing of the decommissioning is likely to depend on when
production activities ceases to be economically viable. This
in turn will depend and be directly related to the current and
future commodity prices, which are inherently uncertain
The following table reconciles the change in decommissioning
provision:
Balance, December 31, 2016 |
127,763 |
|
New or increased
provisions |
11,192 |
|
Accretion of
decommissioning provision |
2,312 |
|
Change in
discount rate and estimates |
(8,817 |
) |
Balance, September 30, 2017 |
132,450 |
|
Current |
- |
|
Non-current |
132,450 |
|
Peyto has estimated the net present value of its
total decommissioning provision to be $132.5 million as at
September 30, 2017 ($127.8 million at December 31, 2016) based on a
total future undiscounted liability of $280.9 million ($258.2
million at December 31, 2016). At September 30, 2017 management
estimates that these payments are expected to be made over the next
50 years with the majority of payments being made in years 2047 to
2065. The Bank of Canada’s long term bond rate of 2.47 per cent
(2.31 per cent at December 31, 2016) and an inflation rate of 2.0
per cent (2.0 per cent at December 31, 2016) were used to calculate
the present value of the decommissioning provision.
6.
Share capital
Authorized: Unlimited
number of voting common shares
Issued and Outstanding
Common Shares (no par value) |
Number of Common Shares |
Amount |
Balance, December 31, 2016 |
164,630,168 |
1,641,982 |
|
Common
shares issued by private placement |
244,007 |
7,574 |
|
Common
share issuance costs, (net of tax) |
- |
(19) |
|
Balance, September 30, 2017 |
164,874,175 |
1,649,537 |
|
Earnings per common share has been determined based on the
following:
|
Three Months ended September 30 |
Nine Months ended September 30 |
|
2017 |
2016 |
2017 |
2016 |
Weighted
average common shares basic and diluted |
164,874,175 |
164,630,168 |
164,849,932 |
161,882,961 |
On December 31, 2016, Peyto completed a private
placement of 146,755 common shares to employees and consultants for
net proceeds of $4.9 million ($33.59 per share). These common
shares were issued January 6, 2017.
On March 14, 2017, Peyto completed a private
placement of 97,252 common shares to employees and consultants for
net proceeds of $2.6 million ($27.19 per common share).
DividendsDuring the three and
nine month periods ended September 30, 2017, Peyto declared and
paid dividends of $0.33 and $0.99 per common share ($0.11 per
common share for the months of January to September 2017, totaling
$56.9 million and $163.2 million respectively (2016 - $0.33 and
$0.99 ($0.11 per common share for the months of January to
September 2016), totaling $54.3 million and $160.6 million
respectively).
Comprehensive
incomeComprehensive income consists of earnings and other
comprehensive income (“OCI”). OCI comprises the change in the fair
value of the effective portion of the derivatives used as hedging
items in a cash flow hedge. “Accumulated other comprehensive
income” is an equity category comprised of the cumulative amounts
of OCI.
Accumulated hedging gainsGains
and losses from cash flow hedges are accumulated until
settled. These outstanding hedging contracts are recognized
in earnings on settlement with gains and losses being recognized as
a component of net revenue. Further information on these contracts
is set out in Note 8.
7.
Future performance based compensation
Peyto awards performance based compensation to
employees annually. The performance based compensation is
comprised of reserve and market value based components.
Reserve based componentThe
reserves value based component is 4% of the incremental increase in
value, if any, as adjusted to reflect changes in debt, equity,
dividends, general and administrative costs and interest, of proved
producing reserves calculated using a constant price at December 31
of the current year and a discount rate of 8%.
Market based componentUnder the
market based component, rights with a three year vesting period are
allocated to employees. The number of rights outstanding at
any time is not to exceed 6% of the total number of common shares
outstanding. At December 31 of each year, all vested rights
are automatically cancelled and, if applicable, paid out in
cash. Compensation is calculated as the number of vested
rights multiplied by the total of the market appreciation (over the
price at the date of grant) and associated dividends of a common
share for that period.
The fair values were calculated using a Black-Scholes valuation
model. The principal inputs to the option valuation model
were:
|
September 30, 2017 |
September 30, 2016 |
Share price |
$20.40-$33.80 |
|
$36.82 |
Exercise price (net of
dividend) |
$22.77- $33.02 |
|
$23.10 |
Expected
volatility |
|
28.9% |
|
36.1% |
Option life |
0.25 years |
0.25 years |
Risk-free
interest rate |
|
1.51% |
|
0.51% |
8.
Financial instruments
Financial instrument classification and
measurementFinancial instruments of the Company carried on
the condensed balance sheet are carried at amortized cost with the
exception of cash and financial derivative instruments,
specifically fixed price contracts, which are carried at fair
value. There are no significant differences between the carrying
amount of financial instruments and their estimated fair values as
at September 30, 2017.
The Company’s areas of financial risk management
and risks related to financial instruments remained unchanged from
December 31, 2016.
The fair value of the Company’s cash and
financial derivative instruments are quoted in active markets. The
Company classifies the fair value of these transactions according
to the following hierarchy.
- Level 1 – quoted prices in active markets for identical
financial instruments.
- Level 2 – quoted prices for similar instruments in active
markets; quoted prices for identical or similar instruments in
markets that are not active; and model-derived valuations in which
all significant inputs and value drivers are observable in active
markets.
- Level 3 – valuations derived from valuation techniques in which
one or more significant inputs or value drivers are
unobservable.
The Company’s cash and financial derivative
instruments have been assessed on the fair value hierarchy
described above and classified as Level 1.
Fair values of financial assets and
liabilitiesThe Company’s financial instruments include
cash, accounts receivable, financial derivative instruments, due
from private placement, current liabilities, provision for future
performance based compensation and long term debt. At September 30,
2017, cash and financial derivative instruments are carried at fair
value. Accounts receivable, due from private placement, current
liabilities and provision for future performance based compensation
approximate their fair value due to their short term nature. The
carrying value of the long term debt approximates its fair value
due to the floating rate of interest charged under the credit
facility.
Commodity price risk
managementPeyto uses derivative instruments to reduce its
exposure to fluctuations in commodity prices. Peyto considers all
of these transactions to be effective economic hedges for
accounting purposes.
Following is a summary of all risk management
contracts in place as at September 30, 2017:
Natural GasPeriod
Hedged – Monthly Index |
Type |
Daily Volume |
Price(CAD) |
January 1, 2016 to March 31, 2018 |
Fixed
Price |
5,000
GJ |
$2.54/GJ |
April
1, 2016 to March 31, 2018 |
Fixed
Price |
60,000
GJ |
$2.42/GJ to $2.75/GJ |
April
1, 2016 to October 31, 2018 |
Fixed
Price |
35,000
GJ |
$2.10/GJ to $2.60/GJ |
May
1, 2016 to October 31, 2017 |
Fixed
Price |
20,000
GJ |
$2.11/GJ to $2.305/GJ |
May
1, 2016 to October 31, 2018 |
Fixed
Price |
20,000
GJ |
$2.20/GJ to $2.35/GJ |
July
1, 2016 to October 31, 2017 |
Fixed
Price |
10,000
GJ |
$2.375/GJ to $2.3775/GJ |
July
1, 2016 to October 31, 2018 |
Fixed
Price |
20,000
GJ |
$2.28/GJ to $2.45/GJ |
August 1, 2016 to October 31, 2017 |
Fixed
Price |
20,000
GJ |
$2.22/GJ to $2.30/GJ |
August 1, 2016 to October 31, 2018 |
Fixed
Price |
25,000
GJ |
$2.3175/GJ to $2.5525/GJ |
November 1, 2016 to March 31, 2018 |
Fixed
Price |
5,000
GJ |
$2.51/GJ |
April
1, 2017 to October 31, 2017 |
Fixed
Price |
160,000 GJ |
$2.23/GJ to $2.86/GJ |
April
1, 2017 to March 31, 2018 |
Fixed
Price |
110,000 GJ |
$2.6050/GJ to $3.1075/GJ |
April
1, 2017 to October 31, 2018 |
Fixed
Price |
10,000
GJ |
$2.585/GJ to $2.745/GJ |
May
1, 2017 to October 31, 2017 |
Fixed
Price |
10,000
GJ |
$2.715GJ to $2.70/GJ |
June
1, 2017 to October 31, 2017 |
Fixed
Price |
10,000
GJ |
$2.725/GJ to $2.94/GJ |
September 1, 2017 to October 31, 2017 |
Fixed
Price |
5,000
GJ |
$1.935/GJ |
October 1, 2017 to March 31, 2018 |
Fixed
Price |
25,000
GJ |
$2.365/GJ- $2.455/GJ |
November 1, 2017 to December 31, 2017 |
Fixed
Price |
20,000
GJ |
$2.240/GJ to $2.430/GJ |
November 1, 2017 to March 31, 2018 |
Fixed
Price |
175,000 GJ |
$2.4075/GJ to $3.27/GJ |
November 1, 2017 to October 31, 2018 |
Fixed
Price |
5,000
GJ |
$2.92/GJ |
April
1, 2018 to October 31, 2018 |
Fixed
Price |
50,000
GJ |
$2.39/GJ to $2.565/GJ |
April
1, 2018 to March 31, 2019 |
Fixed
Price |
150,000 GJ |
$2.25/GJ to $2.625/GJ |
April
1, 2019 to March 31, 2020 |
Fixed
Price |
10,000
GJ |
$2.445/GJ to $2.50/GJ |
Natural GasPeriod
Hedged – Daily Index |
Type |
Daily Volume |
Price(CAD) |
September 1, 2017 – October 31, 2017 |
Fixed Price |
10,000 GJ |
$2.03/GJ |
As at September 30, 2017 Peyto had committed to
the future sale of 188,870,000 gigajoules (GJ) of natural gas at an
average price of $2.55 per GJ or $2.93 per mcf. Had these
contracts been closed on September 30, 2017, Peyto would have
realized a net gain in the amount of $73.1 million. If the AECO gas
price on September 30, 2017 were to decrease by $0.10/GJ, the
financial derivative liability would decrease by approximately
$18.9 million. An opposite change in commodity prices rates
would result in an opposite impact.
Subsequent to September 30, 2017 Peyto entered into the
following contracts:
Natural GasPeriod Hedged – Monthly
Index |
Type |
Daily Volume |
Price(CAD) |
November 1, 2017 to December 31, 2017 |
Fixed
Price |
5,000
GJ |
$2.12/GJ |
November 1, 2017 to March 31, 2018 |
Fixed
Price |
10,000
GJ |
$2.285/GJ to $2.32/GJ |
December 1, 2017 to March 31, 2018 |
Fixed
Price |
30,000
GJ |
$2.20/GJ to $2.465/GJ |
April
1, 2018 to March 31, 2019 |
Fixed
Price |
15,000
GJ |
$2.04/GJ to $2.1775/GJ |
April
1, 2018 to October 31, 2018 |
Fixed
Price |
30,000
GJ |
$1.75/GJ to $1.94/GJ |
April
1, 2019 to March 31, 2020 |
Fixed
Price |
5,000
GJ |
$2.2225/GJ |
Natural GasPeriod
Hedged – Daily Index |
Type |
Daily Volume |
Price(CAD) |
November 1, 2017 – November 30, 2017 |
Fixed
Price |
10,000
GJ |
$2.1025/GJ |
November 1, 2017 – November 30, 2017 |
Fixed Price |
20,000 GJ |
$2.1050/GJ |
9.
Related party transactions
Certain directors of Peyto are considered to
have significant influence over other reporting entities that Peyto
engages in transactions with. Such services are provided in
the normal course of business and at market rates. These
directors are not involved in the day to day operational decision
making of the Company. The dollar value of the transactions
between Peyto and the related reporting entities is summarized
below:
Expense |
|
Accounts Payable |
Three Months ended September 30 |
Nine Months ended September 30 |
As at September 30 |
2017 |
2016 |
2017 |
2016 |
2017 |
2016 |
244.7 |
98.6 |
460.4 |
579.1 |
477.1 |
344.3 |
10.
Commitments
In addition to those recorded on the Company’s balance sheet,
the following is a summary of Peyto’s contractual obligations and
commitments as at September 30, 2017:
|
2017 |
2018 |
2019 |
2020 |
2021 |
Thereafter |
Interest payments(1) |
6,680 |
22,085 |
19,890 |
17,695 |
12,295 |
26,645 |
Transportation commitments |
9,859 |
45,422 |
39,506 |
27,681 |
23,586 |
91,174 |
Operating leases |
521 |
2,242 |
2,242 |
2,242 |
2,242 |
11,586 |
Methanol |
- |
2,916 |
- |
- |
- |
- |
Total |
17,060 |
72,665 |
61,638 |
47,618 |
38,123 |
129,405 |
(1) Fixed interest payments on senior unsecured notes
11.
Contingencies
On October 1, 2013, two shareholders (the
"Plaintiffs") of Poseidon Concepts Corp. ("Poseidon") filed an
application to seek leave of the Alberta Court of Queen's Bench
(the "Court") to pursue a class action lawsuit against the Company,
as a successor to new Open Range Energy Corp. ("New Open Range")
(the “Poseidon Shareholder Application”). The proposed action
contains various claims relating to alleged misrepresentations in
disclosure documents of Poseidon (not New Open Range), which claims
are also alleged in class action lawsuits filed in Alberta,
Ontario, and Quebec earlier in 2013 against Poseidon and certain of
its current and former directors and officers, and underwriters
involved in the public offering of common shares of Poseidon
completed in February 2012. The proposed class action
seeks various declarations and damages including compensatory
damages which the Plaintiffs estimate at $651 million and
punitive damages which the Plaintiffs estimate at $10 million,
which damage amounts appear to be duplicative of damage amounts
claimed in the class actions against Poseidon, certain of its
current and former directors and officers, and underwriters.
New Open Range was incorporated on
September 14, 2011 solely for purposes of participating in a
plan of arrangement with Poseidon (formerly named Open Range Energy
Corp. ("Old Open Range")), which was completed on November 1,
2011. Pursuant to such arrangement, Poseidon completed a
corporate reorganization resulting in two separate publicly-traded
companies: Poseidon, which continued to carry on the energy service
and supply business; and New Open Range, which carried on
Poseidon's former oil and gas exploration and production
business. Peyto acquired all of the issued and outstanding
common shares of New Open Range on August 14, 2012. On
April 9, 2013, Poseidon obtained creditor protection under the
Companies' Creditor Protection Act.
On October 31, 2013, Poseidon filed a
lawsuit with the Court naming the Company as a co-defendant along
with the former directors and officers of Poseidon, the former
directors and officers of Old Open Range and the former directors
and officers of New Open Range (the “Poseidon Action”).
Poseidon claims, among other things, that the Company is
vicariously liable for the alleged wrongful acts and breaches of
duty of the directors, officers and employees of New Open
Range.
On September 24, 2014 Poseidon amended its claim
in the Poseidon Action to add Poseidon’s auditor, KPMG LLP
(“KPMG”), as a defendant.
On May 4, 2016, KPMG issued a third party claim
in the Poseidon Action against Poseidon’s former officers and
directors and Peyto for any liability KPMG is determined to have to
Poseidon. Peyto is not required to deliver a defence to this
claim at this time.
On July 3, 2014, the Plaintiffs filed a
lawsuit with the Court against KPMG LLP, Poseidon's and Old Open
Range's former auditors, making allegations substantially similar
to those in the other claims (the “KPMG Poseidon Shareholder KPMG
Action”). On July 29, 2014, KPMG LLP filed a statement
of defence and a third party claim against Poseidon, the Company
and the former directors and officers of Poseidon. The third
party claim seeks, among other things, an indemnity, or
alternatively contribution, from the third party defendants with
respect to any judgment awarded against KPMG LLP.
The allegations against New Open Range contained
in the claims described above are based on factual matters that
pre-existed the Company’s acquisition of New Open Range. The
Company has not yet been required to defend either of the actions.
If it is required to defend the actions, the Company intends to
aggressively protect its interests and the interests of its
Shareholders and will seek all available legal remedies in
defending the actions.
12. Subsequent
Events
On October 13, 2017, The Company increased and
extended its revolving, unsecured credit facility to $1.3 billion
with a stated term date of October 13, 2021. The facility is
comprised of $40 million working capital sub-tranche and a $1.26
billion production line. The facilities are available on a
revolving basis. Borrowings under the facility bear interest at
Canadian bank prime or US base rate, or, at Peyto’s option,
Canadian dollar bankers’ acceptances or US dollar LIBOR loan rates,
plus applicable margin and stamping fees. The total stamping fees
range between 50 basis points and 215 basis points on Canadian bank
prime and US base rate borrowings and between 150 basis points and
315 basis points on Canadian dollar bankers’ acceptance and US
dollar LIBOR borrowings. The undrawn portion of the facility is
subject to a standby fee in the range of 30 to 63 basis points.
Officers
Darren Gee President
and Chief Executive Officer |
Tim LouieVice President, Land |
|
|
Scott Robinson
Executive Vice President and Chief Operating Officer |
David Thomas Vice President, Exploration |
|
|
Kathy Turgeon Vice
President, Finance and Chief Financial Officer |
Jean-Paul Lachance Vice President, Exploitation |
|
|
Lee Curran Vice
President, Drilling and Completions |
Stephen Chetner Corporate Secretary |
|
|
Todd Burdick Vice
President, Production |
|
DirectorsDon Gray, ChairmanStephen ChetnerBrian
DavisMichael MacBean, Lead Independent DirectorDarren GeeGregory
FletcherScott Robinson
AuditorsDeloitte LLP
SolicitorsBurnet, Duckworth & Palmer
LLP
BankersBank of MontrealBank of Tokyo-Mitsubishi
UFJ, Ltd., Canada BranchRoyal Bank of CanadaCanadian Imperial Bank
of CommerceThe Toronto-Dominion Bank
Bank of Nova ScotiaAlberta Treasury BranchesCanadian Western
Bank*National Bank*Wells Fargo
Transfer AgentComputershare
Head Office300, 600 – 3 Avenue SWCalgary, ABT2P
0G5Phone:
403.261.6081Fax:
403.451.4100Web:
www.peyto.comStock Listing Symbol: PEY.TOToronto Stock
Exchange
*Subsequent to September 30, 2017.
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