Peyto Exploration & Development Corp. (TSX:PEY) ("Peyto” or the
“Company") is pleased to present its operating and financial
results for the first quarter of the 2018 fiscal year. A 74%
operating margin (1) and a 24% profit margin (2) in the quarter
delivered an annualized 11% return on equity (“ROE”) and 8% return
on capital employed (“ROCE”). Additional highlights included:
- Earnings of $0.29/share, dividends of
$0.18/share. Earnings of $47 million were generated in the
quarter while dividends of $30 million were paid to shareholders.
Earnings per share of $0.29 were up 21% from the $0.24 in Q1 2017.
The Company has never incurred a write down or recorded an
impairment in its 19 year history and this quarter represents
Peyto’s 53rd consecutive quarter of earnings which is the best
evidence shareholder’s capital has been invested
profitably.
- Funds from operations (“FFO”) of $0.90/share.
Generated $149 million in FFO in Q1 2018 up 7% from $139 million in
Q1 2017 (up 6%/share). For the quarter, funds from operations
exceeded the combination of capital expenditures and dividends by
$84 million.
- Total cash costs of $0.91/Mcfe (or $0.74/Mcfe,
$4.43/boe, excluding royalties). Total cash costs,
including $0.17/Mcfe royalties, $0.29/Mcfe operating costs,
$0.13/Mcfe transportation, $0.08/Mcfe G&A and $0.24/Mcfe
interest, combined with a realized price of $3.54/Mcfe, resulting
in a $2.63/Mcfe ($15.80/boe) cash netback, or a 74% operating
margin.
- Capital investment of $35 million. A total of
8 gross wells (7.6 net) were drilled in the first quarter, 13 gross
wells (12.6 net) were completed, and 14 gross wells (13.6 net)
brought on production. Over the last 12 months, new wells brought
on production accounted for 34,000 boe/d at the end of the quarter,
which when combined with a trailing twelve month capital investment
of $403 million, equates to an annualized capital efficiency of
$11,900/boe/d.
- Production per share up 4%. First quarter 2018
production of 629 MMcfe/d (104,793 boe/d) was up 4%, on an absolute
and per share basis, from 607 MMcfe/d in Q1 2017, comprised of 569
MMcf/d of natural gas and 10,043 bbls/d of oil and natural gas
liquids.
First Quarter 2018 in Review
Peyto announced early in the quarter a strategic
shift in its 2018 annual plans in response to the significant
volatility in forecast natural gas prices. Those changes included a
deferral of 2018 capital investment to later in the year when AECO
natural gas prices were forecast to recover from summer lows, a
reduction in the monthly dividend, a share buyback program, a term
debt issuance and a market diversification strategy. These were
prudent steps to postpone investment on a portion of Peyto’s lean
gas inventory in order to maximize the returns from these
opportunities over the longer term, while at the same time
strengthening the Company’s financial position in the near term. As
a result of these changes, the Company drilled only 8 wells in the
quarter compared to 45 wells in Q1 2017. Capital investments
combined with the reduced dividend payments represented just 44% of
funds from operations for the quarter, allowing for net debt
reduction of $84 million. Capital that was invested targeted
liquids rich opportunities like the Cardium formation where result
confirmed a significant improvement in type curve and investment
return. Financial performance in the quarter remained strong with
industry leading operating and profit margins delivering solid
return on equity and capital employed. Peyto advanced its market
diversification strategy during the quarter, with both synthetic
and physical transportation agreements, as an initial step towards
a corporate target of having 40% of natural gas production sold at
US pricing hubs.
- Operating Margin is defined as funds from operations divided by
revenue before royalties but including realized hedging
gains/losses.
- Profit Margin is defined as net earnings for the quarter
divided by revenue before royalties but including realized hedging
gains/losses.Natural gas volumes recorded in thousand cubic feet
(mcf) are converted to barrels of oil equivalent (boe) using the
ratio of six (6) thousand cubic feet to one (1) barrel of oil
(bbl). Natural gas liquids and oil volumes in barrel of oil
(bbl) are converted to thousand cubic feet equivalent (Mcfe) using
a ratio of one (1) barrel of oil to six (6) thousand cubic
feet. This could be misleading, particularly if used in
isolation as it is based on an energy equivalency conversion method
primarily applied at the burner tip and does not represent a value
equivalency at the wellhead.
|
|
|
Three Months Ended March 31 |
% |
|
|
|
|
2018 |
2017 |
Change |
Operations |
|
|
|
|
|
|
Production |
|
|
|
|
|
|
Natural gas
(mcf/d) |
|
|
|
568,496 |
549,037 |
4 |
% |
Oil & NGLs
(bbl/d) |
|
|
|
10,043 |
9,586 |
5 |
% |
Thousand cubic
feet equivalent (mcfe/d @ 1:6) |
|
|
|
628,755 |
606,556 |
4 |
% |
Barrels of oil
equivalent (boe/d @ 6:1) |
|
|
|
104,793 |
101,093 |
4 |
% |
Production per million
common shares (boe/d)* |
|
|
|
636 |
613 |
4 |
% |
Product prices |
|
|
|
|
|
|
Natural gas
($/mcf) |
|
|
|
2.86 |
2.96 |
-3 |
% |
Oil & NGLs
($/bbl) |
|
|
|
59.67 |
48.14 |
24 |
% |
Operating expenses
($/mcfe) |
|
|
|
0.29 |
0.29 |
- |
|
Transportation
($/mcfe) |
|
|
|
0.13 |
0.17 |
-24 |
% |
Field netback
($/mcfe) |
|
|
|
2.95 |
2.79 |
6 |
% |
General &
administrative expenses ($/mcfe) |
|
|
|
0.08 |
0.04 |
100 |
% |
Interest expense
($/mcfe) |
|
|
|
0.24 |
0.20 |
20 |
% |
Financial
($000, except per share*) |
|
|
|
|
|
|
Revenue and realized
hedging gains (losses) |
|
|
|
200,397 |
187,849 |
7 |
% |
Royalties |
|
|
|
9,543 |
10,635 |
-10 |
% |
Funds from
operations |
|
|
|
148,986 |
139,305 |
7 |
% |
Funds from operations
per share |
|
|
|
0.90 |
0.85 |
6 |
% |
Total
dividends |
|
|
|
29,677 |
54,387 |
-45 |
% |
Total dividends
per share |
|
|
|
0.18 |
0.33 |
-45 |
% |
Payout
ratio |
|
|
|
20 |
39 |
-49 |
% |
Earnings |
|
|
|
47,749 |
40,255 |
19 |
% |
Earnings per diluted
share |
|
|
|
0.29 |
0.24 |
21 |
% |
Capital
expenditures |
|
|
|
35,454 |
153,874 |
-77 |
% |
Weighted average common
shares outstanding |
|
|
|
164,874,175 |
164,800,637 |
- |
|
As at March
31 |
|
|
|
|
|
|
End of
period shares outstanding (includes shares to be issued) |
|
|
164,874,175 |
164,874,175 |
- |
|
Net debt |
|
|
|
1,243,291 |
1,203,988 |
3 |
% |
Shareholders'
equity |
|
|
|
1,725,131 |
1,632,390 |
6 |
% |
Total assets |
|
|
|
3,762,835 |
3,543,556 |
6 |
% |
*all per
share amounts using weighted average common shares outstanding |
|
|
|
|
|
|
Three Months Ended March 31 |
($000
except per share) |
|
|
2018 |
2017 |
Cash flows from
operating activities |
|
|
143,995 |
121,137 |
Change in
non-cash working capital |
|
|
3,913 |
16,160 |
Change in provision for performance based
compensation |
|
1,078 |
2,008 |
Funds from operations |
|
|
148,986 |
139,305 |
Funds
from operations per share |
|
|
0.90 |
0.85 |
(1) Funds from operations - Management uses
funds from operations to analyze the operating performance of its
energy assets. In order to facilitate comparative analysis,
funds from operations is defined throughout this report as earnings
before performance based compensation, non‑cash and non‑recurring
expenses. Management believes that funds from operations is
an important parameter to measure the value of an asset when
combined with reserve life. Funds from operations is not a
measure recognized by Canadian generally accepted accounting
principles ("GAAP") and does not have a standardized meaning
prescribed by GAAP. Therefore, funds from operations, as
defined by Peyto, may not be comparable to similar measures
presented by other issuers, and investors are cautioned that funds
from operations should not be construed as an alternative to net
earnings, cash flow from operating activities or other measures of
financial performance calculated in accordance with GAAP.
Funds from operations cannot be assured and future dividends may
vary.
Exploration & Development
First quarter 2018 activity focused on the
Greater Sundance areas, finishing up on the winter drilling program
that began in the fall. In total, three horizontal Cardium wells
were drilled and five Spirit River horizontal wells were drilled as
shown in the table below. The Company continues to focus on the
improved Cardium results coming from optimization of stimulation
design.
|
Field |
Total Wells Drilled |
Zone |
Sundance |
Nosehill |
Wildhay |
Ansell |
Berland |
Kisku/Kakwa |
Brazeau |
Belly River |
|
|
|
|
|
|
|
|
Cardium |
2 |
|
1 |
|
|
|
|
3 |
Notikewin |
|
|
|
1 |
|
|
|
1 |
Falher |
|
|
|
|
|
|
|
|
Wilrich |
|
2 |
|
2 |
|
|
|
4 |
Bluesky |
|
|
|
|
|
|
|
|
Total |
2 |
2 |
1 |
3 |
|
|
|
8 |
Horizontal well drilling costs (per meter
drilled) in Q1 2018 were in line with both 2016 and 2017.
Completion costs (per meter of horizontal lateral) were also
similar to 2017; however, costs per stage have continued to
decrease as reduced spacing, particularly in the Cardium, has
yielded superior results. 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 |
2018 Q1 |
Gross Hz Spuds |
52 |
70 |
86 |
99 |
123 |
140 |
126 |
135 |
8 |
Measured Depth (m) |
3,762 |
3,903 |
4,017 |
4,179 |
4,251 |
4,309 |
4,197 |
4,229 |
4,091 |
|
|
|
|
|
|
|
|
|
|
Drilling ($MM/well) |
$2.76 |
$2.82 |
$2.79 |
$2.72 |
$2.66 |
$2.16 |
$1.82 |
$1.90 |
$1.74 |
$ per meter |
$734 |
$723 |
$694 |
$651 |
$626 |
$501 |
$433 |
$450 |
$425 |
|
|
|
|
|
|
|
|
|
|
Completion ($MM/well) |
$1.36 |
$1.68 |
$1.67 |
$1.63 |
$1.70 |
$1.21 |
$0.86 |
$1.00 |
$1.15 |
Hz Length (m) |
1,335 |
1,303 |
1,358 |
1,409 |
1,460 |
1,531 |
1,460 |
1,241 |
1,415 |
$ per Hz Length (m) |
$1,017 |
$1,286 |
$1,231 |
$1,153 |
$1,166 |
$792 |
$587 |
$803 |
$810 |
$ ‘000 per Stage |
$231 |
$246 |
$257 |
$188 |
$168 |
$115 |
$79 |
$81 |
$61 |
Capital Expenditures
During the first quarter of 2018, Peyto invested
$14 million on drilling, $17 million on completions, $4 million on
wellsite equipment and tie-ins, $4 million on facilities and major
pipeline projects, and $1 million on lands and seismic, for capital
investments of $39.5 million. Peyto also disposed of some minor,
non-producing property in the quarter for $4.0 million, reducing
total capital to $35 million.
In addition to the 8 gross (7.6 net) horizontal
wells, 13 gross (12.6 net) wells were completed and 14 gross (13.6
net) wells were equipped and tied in. Peyto also completed
construction of a $3 million pipeline under the Sundance provincial
park that connects the Swanson and Galloway gas plants.
Commodity Prices
Average daily AECO natural gas prices were
$1.97/GJ in Q1 2018, up 23% from $1.60/GJ in Q4 2017 but down 23%
from $2.55/GJ in Q1 2017. This volatility was in contrast to US
Henry Hub spot prices which averaged $3.08/MMBTU for the quarter,
similar to the $3.01/MMBTU in Q1 2017. A change in the
prioritization of gas transmission service on the NGTL system in
August 2017, which severely inhibited the ability for Alberta
storage reservoirs to buffer the supply/demand imbalances, has led
to daily market instability and extreme volatility in AECO daily
prices, predominantly during summer months. This was further
compounded by a surge of basin production in the fall of 2017
combined with a lack of access to external markets beyond Western
Canada, all of which has contributed to the dramatic drop in
average Alberta natural gas price relative to US pricing.
On average for Q1 2018, Peyto realized a natural
gas price of $2.49/GJ or $2.86/Mcf. This was the result of a
combination of approximately 12% of natural gas production being
sold in the daily or monthly spot market at an average of $1.72/GJ
($1.98/Mcf) and 88% having been pre-sold at an average hedged price
of $2.62/GJ (prices reported net of TCPL fuel).
Peyto’s Q1 2018 liquid recoveries averaged 18
bbl/mmcf with a blended, realized, oil and natural gas liquids
price of $59.67/bbl, which represented 83% of the $72.09/bbl
average Canadian Light Sweet posted price. Details of realized
commodity prices by component are shown in the following table:
Commodity Prices by Component
|
|
Three Months ended March 31 |
|
|
|
2018 |
|
2017 |
|
AECO monthly |
($/GJ) |
|
1.76 |
|
2.79 |
|
AECO daily |
($/GJ) |
|
1.97 |
|
2.55 |
|
Henry Hub
spot |
($US/MMBTU) |
|
3.08 |
|
3.01 |
|
Natural gas – prior to
hedging |
($/GJ) |
|
1.72 |
|
2.73 |
|
|
($/mcf) |
|
1.98 |
|
3.14 |
|
Natural gas – after
hedging |
($/GJ) |
|
2.49 |
|
2.58 |
|
|
($/mcf) |
|
2.86 |
|
2.96 |
|
Oil and
natural gas liquids ($/bbl) |
|
|
|
|
Condensate ($/bbl) |
|
|
72.56 |
|
60.91 |
|
Propane ($/bbl) |
|
|
26.04 |
|
15.19 |
|
Butane ($/bbl) |
|
|
40.83 |
|
29.12 |
|
Pentane ($/bbl) |
|
|
79.26 |
|
64.60 |
|
Total Oil and natural gas liquids ($/bbl) |
|
|
59.67 |
|
48.14 |
|
Canadian Light Sweet stream ($/bbl) |
|
|
72.09 |
|
62.19 |
|
Peyto realized liquids price/Canadian Light Sweet |
|
|
83% |
|
77% |
|
Liquids prices are Peyto realized prices (F.O.B. plant gate) in
Canadian dollars adjusted for fractionation and transportation.
Financial Results
Approximately 27%, or $0.95/Mcfe, of Peyto’s
revenue came from its liquids sales while 73%, or $2.59/Mcfe, came
from natural gas and natural gas hedging. This liquids revenue
covered all cash costs. Cash costs of $0.91/Mcfe, included
royalties of $0.17/Mcfe, operating costs of $0.29/Mcfe,
transportation costs of $0.13/Mcfe, G&A of $0.08/Mcfe and
interest costs of $0.24/Mcfe. Cash costs were slightly higher than
Q1 2017 due to increased interest rates and lower capital overhead
recoveries from reduced capital expenditures. These total cash
costs, when deducted from realized revenues of $3.54/Mcfe, resulted
in a cash netback of $2.63/Mcfe or a 74% operating margin.
Historical cash costs and operating margins are shown in the
following table. Going forward, Peyto’s goal is to achieve per unit
cash costs in the $0.80-$0.90/Mcfe levels for the balance of
2018.
|
2014 |
|
2015 |
|
2016 |
|
2017 |
|
2018 |
|
($/Mcfe) |
FY |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
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 |
|
3.50 |
|
3.54 |
|
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 |
|
0.15 |
|
0.17 |
|
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 |
|
0.28 |
|
0.29 |
|
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 |
|
0.16 |
|
0.13 |
|
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 |
|
0.03 |
|
0.08 |
|
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 |
|
0.21 |
|
0.24 |
|
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 |
|
0.83 |
|
0.91 |
|
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 |
|
2.67 |
|
2.63 |
|
Operating
Margin |
78% |
|
79% |
|
78% |
|
79% |
|
79% |
|
78% |
|
73% |
|
76% |
|
76% |
|
74% |
|
75% |
|
76% |
|
76% |
|
74% |
|
Depletion, depreciation and amortization charges
of $1.44/Mcfe, along with a provision for deferred tax and market
based bonus payments reduced the cash netback to earnings of
$0.84/Mcfe, or a 24% profit margin. Dividends of $0.52/Mcfe were
paid to shareholders.
Peyto continued to protect its balance sheet
from rising interest rates with the closing of another private
placement of senior unsecured notes in the first quarter. On
January 2, 2018 Peyto issued CND$100 million of senior unsecured
notes which bear a coupon rate of 3.95% and mature on January 2,
2028. The issuance of senior notes expanded Peyto’s aggregate
borrowing capacity to $1.92 billion, split into a $1.3 billion, 4
year revolver and $0.62 billion of senior unsecured notes.
Market Diversification and Hedging
Strategy
Early in the first quarter Peyto announced that
its Board of Directors had approved a new natural gas market
diversification strategy. This was meant to complement the
Company’s historically successful hedging strategy which to date
has yielded over $530 million in hedging gains. The diversification
strategy is designed to link 40% of Peyto’s natural gas sales to
AECO based pricing, 40% to US based pricing and 20% to
intra-Alberta markets. As has been Company practice, Peyto will
continue to hedge future prices to smooth out the volatility in
both AECO and US natural gas markets. To date, the Company has been
successful initiating this marketing plan, putting in place both
synthetic and physical transportation arrangements for future
natural gas volumes. It is expected the above targets will be
gradually achieved over several quarters through careful
consideration of deal structure, long term transportation cost and
market conditions.
Specifically in the short term, the Company has
focused on the vulnerability of AECO summer prices when reduced
intra-Alberta consumption requires movement of production to
southern Alberta storage, a requirement that can no longer be
satisfied due to insufficient Nova Gas Transmission Ltd. (“NGTL”)
pipeline capacity given the migration of Alberta production to the
northwest corner of the province. The current pipeline deficiencies
are targeted for expansion over the next couple of years and this
work should eventually correct the AECO summer pricing handicap. In
the interim, Peyto has focused on near term summer diversification
as well as longer term, full year diversification. The following
table outlines the approximate percentage of current natural gas
sales that are split by market as of May 1, 2018.
Percentage of current gas volume* |
2018 Summer/ Winter |
2019 Summer |
2019/20 Winter |
2020 Summer |
2020/21 Winter |
2021 Summer |
2021/22 Winter |
2022 Summer |
2022/23 Winter |
AECO Based Pricing |
100 |
% |
89 |
% |
98 |
% |
89 |
% |
98 |
% |
86 |
% |
73 |
% |
63 |
% |
73 |
% |
Non-AECO Based Pricing |
- |
|
11 |
% |
2 |
% |
11 |
% |
2 |
% |
14 |
% |
27 |
% |
37 |
% |
27 |
% |
*Winter period is from November to March, summer
period is April to October
Peyto has additional initiatives in progress
directed towards contracting future production volumes to strong
intra-Alberta markets. There has been much discussion about
Alberta’s economic diversification and the recent government
announcement of two royalty incentive programs designed to
stimulate investment into the development of additional
petrochemical plants requiring natural gas and NGL feedstock.
Peyto’s Greater Sundance asset base is geographically well situated
and the concentrated collection of resource, along with pipeline,
road and rail infrastructure, is a ideal source of supply for many
of these projects which include petrochemical manufacturing, power
generation, and NGL product upgrade. Consequently, Peyto is
involved in active discussions for supply of future natural gas and
NGL volumes to many of these exciting ventures.
The current volatility in natural gas markets in
Alberta remains extremely 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 2018, approximately 77% of Company
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 are similar to “dollar cost averaging” the
future gas prices in order to smooth out volatility. The following
table summarizes the remaining hedged natural gas volumes and
prices for the upcoming years as of May 1, 2018:
|
Future Sales |
Average Price (CAD) |
|
GJ |
Mcf |
$/GJ |
$/Mcf |
2018 |
112,735,000 |
98,030,435 |
$2.16 |
$2.48 |
2019 |
71,980,000 |
62,591,304 |
$1.86 |
$2.13 |
2020 |
11,830,000 |
10,286,957 |
$1.80 |
$2.07 |
2021 |
1,970,000 |
1,713,043 |
$1.64 |
$1.89 |
Total |
196,545,000 |
170,908,696 |
$2.02 |
$2.33 |
*prices and volumes in mcf use Peyto’s historic heat content
premium of 1.15.
Both the market diversification 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
Since the end of the first quarter, drilling and
completion activity has been suspended due to spring break up. In
April, Peyto finished the installation of a strategic pipeline
under the Sundance provincial park which directly connects the
Peyto owned and operated Swanson and Galloway gas plants. This
pipeline will allow for greater operational flexibility resulting
in reduced operating costs as well as increased liquids
recovery.
Peyto has also used this period of reduced
activity to sharpen its drilling and well completion designs, focus
on cost reduction initiatives, and acquire licenses for the post
break up drilling program. The Company expects to be back drilling
in early June once road bans are removed, initially starting with 3
drilling rigs focused on the Cardium resource play in the Greater
Sundance area. Peyto plans to drill and bring on production another
40 to 50 Cardium locations during the remainder of 2018.
Outlook
Despite the outlook for weak AECO spot natural
gas prices for the summer of 2018, Peyto remains bullish on the
prospect for stronger pricing in the following winter season and
has planned the timing of its capital program and subsequent
production additions accordingly. The Company is confident that the
much improved returns in its Cardium play, as a result of
innovation in completion design, will support expanding capital
investment going forward, even at current strip pricing. Longer
term, both market diversification strategies and NGTL system
expansions should help reduce the discount to AECO price further
enhancing returns for shareholders. The quality of Peyto’s resource
base, supported by its strategic midstream assets provides the
springboard for these future opportunities.
Conference Call and Webcast
A conference call will be held with the senior
management of Peyto to answer questions with respect to the Q1 2018
financial results on May 9th, 2018 at 9:00 a.m. Mountain Daylight
Time (MDT), or 11:00 a.m. Eastern Daylight Time (EDT). 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/xvh25whg. The
conference call will be archived on the Peyto Exploration &
Development website at www.peyto.com.
Annual General Meeting
Peyto’s Annual General Meeting of Shareholders
is scheduled for 3:00 p.m. on Thursday, May 10, 2018 at the Eau
Claire Tower, +15 level, 600 – 3rd Avenue SW, Calgary, Alberta. A
video of the presentation shown at the meeting will be available on
the website at a later date. Shareholders are encouraged to visit
the Peyto website at www.peyto.com where there is a wealth of
information designed to inform and educate investors.
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/2018/Q12018MDandA.pdf and
will be filed at SEDAR, www.sedar.com at a later date.
Darren GeePresident and CEOMay 8, 2018
Cautionary Statements
Forward-Looking Statements
This news release contains certain
forward-looking statements or information ("forward-looking
statements") as defined by applicable securities laws that involve
substantial known and unknown risks and uncertainties, many of
which are beyond Peyto's control. These statements relate to future
events or the Company's future performance. All statements other
than statements of historical fact may be forward-looking
statements. The use of any of the words "plan", "expect",
"prospective", "project", "intend", "believe", "should",
"anticipate", "estimate", or other similar words or statements that
certain events "may" or "will" occur are intended to identify
forward-looking statements. The projections, estimates and beliefs
contained in such forward-looking statements are based on
management's estimates, opinions, and assumptions at the time the
statements were made, including assumptions relating to: the impact
of economic conditions in North America and globally; industry
conditions; changes in laws and regulations including, without
limitation, the adoption of new environmental laws and regulations
and changes in how they are interpreted and enforced; increased
competition; the availability of qualified operating or management
personnel; fluctuations in commodity prices, foreign exchange or
interest rates; stock market volatility and fluctuations in market
valuations of companies with respect to announced transactions and
the final valuations thereof; results of exploration and testing
activities; and the ability to obtain required approvals and
extensions from regulatory authorities. Management of the Company
believes the expectations reflected in those forward-looking
statements are reasonable, but no assurances 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 from them. As such, undue reliance should not be
placed on forward-looking statements. Forward-looking statements
contained herein include, but are not limited to, statements
regarding: the implementation of the Company's natural gas
marketing diversification strategy; the progress of the Company's
additional initiatives directed towards contracting future
production volumes; Peyto's hedging program; the benefits of the
new strategic pipeline under the Sundance provincial park; the
expectation to recommencing drilling in early June and the drilling
program for the remainder of 2018; and pricing expectations for the
winter season and the Company's capital expenditure program.
The forward-looking statements contained herein
are subject to numerous known and unknown risks and uncertainties
that may cause Peyto's actual financial results, performance or
achievement in future periods to differ materially from those
expressed in, or implied by, these forward-looking statements,
including but not limited to, risks associated with: imprecision of
reserves estimates; competition from other industry participants;
failure to secure required equipment; changes in general global
economic conditions including, without limitations, the economic
conditions in North America; increased competition; the lack of
availability of qualified operating or management personnel;
fluctuations in commodity prices, foreign exchange or interest
rates; environmental risks; changes in laws and regulations
including, without limitation, the adoption of new environmental
and tax laws and regulations and changes in how they are
interpreted and enforced; the results of exploration and
development drilling and related activities; the ability to access
sufficient capital from internal and external sources; and stock
market volatility. In addition, to the extent that any
forward-looking statements presented herein constitutes
future-oriented financial information or financial outlook, as
defined by applicable securities legislation, such information has
been approved by management of Peyto and has been presented to
provide management's expectations used for budgeting and planning
purposes and for providing clarity with respect to Peyto's
strategic direction based on the assumptions presented herein and
readers are cautioned that this information may not be appropriate
for any other purpose. Readers are encouraged to review the
material risks discussed in Peyto's annual information form for the
year ended December 31, 2017 under the heading "Risk Factors" and
in Peyto's annual management's discussion and analysis under the
heading "Risk Management".
The Company cautions that the foregoing list of
assumptions, risks and uncertainties is not exhaustive. 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. The forward-looking statements, including any
future-oriented financial information or financial outlook,
contained in this news release speak only as of the date hereof and
Peyto does not assume any obligation to publicly update or revise
them to reflect new information, future events or circumstances or
otherwise, except as may be required pursuant to applicable
securities laws.
Barrels of Oil Equivalent
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.
Non-IFRS Measurements
Within this news release references are made to
terms commonly used in the oil and gas industry. Funds from
operations, funds from operations per share and netbacks do not
have any standardized meaning under IFRS and previous GAAP and are
referred to as non-IFRS measures. Funds from operations are
described in footnote 1 to the first table on page 2 of this news
release. Netbacks are a non-IFRS measure that represents the
profit margin associated with the production and sale of petroleum
and natural gas. Netbacks are per unit of production measures
used to assess Peyto's performance and efficiency. The
primary factors that produce Peyto's strong netbacks and high
margins are a low cost structure and the high heat content of its
natural gas that results in higher commodity prices. The
Company's calculation of the non-IFRS measures included herein may
differ from the calculation of similar measures by other issuers.
Therefore, the Company's non-IFRS measures may not be comparable to
other similar measures used by other issuers. Non-IFRS
measures should only be used in conjunction with the Company's
annual audited and interim financial statements. A reconciliation
of these measures can be found on pages 2 and 9 of Peyto's
management's discussion and analysis for the three months ended
March 31, 2018.
Peyto Exploration & Development
Corp.Condensed Balance Sheet
(unaudited)(Amount in $ thousands)
|
|
March 31 2018 |
December 312017 |
Assets |
|
|
|
Current
assets |
|
|
|
Cash |
|
- |
5,652 |
Accounts receivable
(Note 8) |
|
80,978 |
90,242 |
Derivative financial
instruments (Note 10) |
|
117,577 |
135,017 |
Prepaid expenses |
|
12,606 |
12,578 |
|
|
211,161 |
243,489 |
|
|
|
|
Long-term derivative
financial instruments (Note 10) |
|
11,867 |
16,233 |
Property,
plant and equipment, net (Note 4) |
|
3,539,807 |
3,584,992 |
|
|
3,551,674 |
3,601,225 |
|
|
3,762,835 |
3,844,714 |
|
|
|
|
Liabilities |
|
|
|
Current
liabilities |
|
|
|
Accounts payable and
accrued liabilities |
|
56,983 |
132,776 |
Dividends payable (Note
7) |
|
9,893 |
18,136 |
Provision for future
performance-based compensation (Note 9) |
|
10,243 |
9,166 |
Current portion of
long-term debt (Note 5) |
|
100,000 |
- |
|
|
177,119 |
160,078 |
|
|
|
|
Long-term debt (Note
5) |
|
1,170,000 |
1,285,000 |
Provision for future
performance-based compensation (Note 9) |
|
115 |
- |
Decommissioning
provision (Note 6) |
|
145,844 |
143,805 |
Deferred
income taxes |
|
544,626 |
532,853 |
|
|
1,860,585 |
1,961,658 |
|
|
|
|
Equity |
|
|
|
Share capital (Note
7) |
|
1,649,537 |
1,649,537 |
Retained earnings
(deficit) |
|
(22,189) |
(40,2610 |
Accumulated other comprehensive loss (Note 7) |
|
97,783 |
113,702 |
|
|
1,725,131 |
1,722,978 |
|
|
3,762,835 |
3,844,714 |
See accompanying notes to the financial statements.
Approved by the Board of Directors
(signed) “Michael
MacBean” |
|
(signed) “Darren
Gee” |
Director |
|
Director |
Peyto Exploration & Development
Corp.Condensed Income Statement
(unaudited)(Amount in $ thousands)
|
Three months ended
March 31 |
|
|
2018 |
2017 |
Revenues |
|
|
|
Natural gas and natural
gas liquid sales (Note 8) |
|
155,168 |
197,036 |
Royalties |
|
(9,543) |
(10,635) |
Natural
gas and natural gas liquid sales, net of royalties |
|
145,625 |
186,401 |
Risk management
contracts |
|
|
|
Realized gain (loss) on
risk management contracts (Note 10) |
|
45,229 |
(9,087) |
|
|
190,854 |
177,314 |
|
|
|
Expenses |
|
|
Operating |
|
16,454 |
15,684 |
Transportation |
|
7,686 |
9,467 |
General and
administrative |
|
4,268 |
2,313 |
Future
performance-based compensation (Note 9) |
|
1,193 |
3,370 |
Interest |
|
13,460 |
10,544 |
Accretion of
decommissioning provision (Note 6) |
|
804 |
750 |
Depletion and
depreciation (Note 4) |
|
81,579 |
80,043 |
|
|
125,444 |
122,171 |
Earnings before taxes |
|
65,410 |
55,143 |
|
|
|
Income
tax |
|
|
Deferred income tax
expense |
|
17,661 |
14,888 |
Earnings for the period |
|
47,749 |
40,255 |
|
|
|
|
|
|
Earnings per
share (Note 7) |
|
|
Basic and diluted |
|
$0.29 |
0.24 |
|
|
|
|
|
|
Peyto Exploration & Development
Corp.Condensed Statement of Comprehensive
Income (unaudited)(Amount in $ thousands)
|
|
Three months ended
March 31 |
|
|
|
2018 |
2017 |
Earnings for
the period |
|
|
47,749 |
40,255 |
Other
comprehensive income |
|
|
|
|
Change in unrealized
gain on cash flow hedges |
|
|
23,422 |
131,960 |
Deferred income tax
recovery (expense) |
|
|
5,888 |
(38,083) |
Realized
(gain) loss on cash flow hedges |
|
|
(45,229) |
9,087 |
Comprehensive income |
|
|
31,830 |
143,219 |
|
|
|
|
|
Peyto Exploration & Development
Corp.Condensed Statement of Changes in
Equity (unaudited)(Amount in $ thousands)
|
Three months endedMarch
31 |
|
2018 |
2017 |
Share capital, beginning of period |
1,649,537 |
1,641,982 |
Common shares issued by
private placement |
- |
7,574 |
Common shares issuance
costs (net of tax) |
- |
(19) |
Share capital, end of period |
1,649,537 |
1,649,537 |
|
|
|
|
|
|
|
|
|
Common shares to be issued, beginning of
period |
- |
4,930 |
Common shares
issued |
- |
(4,930) |
Common shares to be issued, end of period |
- |
- |
|
|
|
|
|
|
|
|
|
Retained earnings (deficit), beginning of
period |
(40,261) |
776 |
Earnings for the
period |
47,749 |
40,255 |
Dividends
(Note 7) |
(29,677) |
(54,388) |
Retained earnings (deficit), end of period |
(22,189) |
(13,357) |
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss), beginning of
period |
113,702 |
(106,754) |
Other
comprehensive (income) loss |
(15,919) |
102,964 |
Accumulated other comprehensive income (loss), end of
period |
97,783 |
(3,790) |
|
|
|
|
|
|
|
|
|
Total equity |
1,725,131 |
1,632,390 |
|
|
|
Peyto Exploration & Development
Corp.Condensed Statement of Cash Flows
(unaudited)(Amount in $ thousands)
|
|
Three months ended
March 31 |
|
|
|
2018 |
2017 |
Cash provided
by (used in) |
|
|
|
|
operating
activities |
|
|
|
|
Earnings |
|
|
47,749 |
40,255 |
Items not requiring
cash: |
|
|
|
|
Deferred income
tax |
|
|
17,661 |
14,888 |
Depletion and
depreciation |
|
|
81,579 |
80,043 |
Accretion of
decommissioning provision |
|
|
804 |
750 |
Long term
portion of future performance-based compensation |
|
|
115 |
1,361 |
Change in
non-cash working capital related to operating activities |
|
|
(3,913) |
(16,160) |
|
|
|
143,995 |
121,137 |
Financing
activities |
|
|
|
|
Issuance of common
shares |
|
|
- |
7,574 |
Issuance costs |
|
|
- |
(26) |
Cash dividends
paid |
|
|
(37,921) |
(54,361) |
Increase in senior
notes |
|
|
100,000 |
- |
Increase (decrease) in
bank debt |
|
|
(115,000) |
65,000 |
|
|
|
(52,921) |
18,187 |
Investing
activities |
|
|
|
|
Additions to property,
plant and equipment |
|
|
(35,454) |
(153,874) |
Change in prepaid
capital |
|
|
295 |
(6,598) |
Change in non-cash
working capital relating to investing activities |
|
|
(61,567) |
19,046 |
|
|
|
(96,726) |
(141,426) |
Net (decrease)
in cash |
|
|
(5,652) |
(2,102) |
Cash, beginning of period |
|
|
5,652 |
2,102 |
Cash, end of period |
|
|
- |
- |
|
|
|
|
|
|
|
|
|
|
The
following amounts are included in cash flows from operating
activities: |
|
|
|
|
Cash interest
paid |
|
|
11,044 |
9,432 |
Cash taxes paid |
|
|
- |
- |
|
|
|
|
|
|
|
|
|
|
Peyto Exploration & Development
Corp.Notes to Condensed Financial
Statements (unaudited)As at and for the three
months ended March 31, 2018 and 2017(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 May 7,
2018.
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, 2017 and 2016.
Significant Accounting
Policies
(a) Significant Accounting Judgments
Estimates and Assumptions
The 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.
Except for the impact of adoption of new
accounting standards as discussed in note 3 below, 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, 2017 and 2016.
(b) Recent Accounting
Pronouncements
Standards issued but not yet
effective
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.
Changes in Accounting Policies
IFRS 9 "Financial
instruments"
On January 1, 2018, Peyto adopted IFRS 9
"Financial Instruments" as issued by the IASB. IFRS 9 includes a
new classification and measurement approach for financial assets
and a forward-looking 'expected credit loss' model.
Peyto has revised the description of its
accounting policy for financial instruments to reflect the new
classification approach as follows:
Financial instruments
On initial recognition, financial instruments
are measured at fair value. Measurement in subsequent periods
depends on the classification of the financial instrument as
described below:
• Fair value through profit or loss: Financial
instruments under this classification include cash and derivative
assets and liabilities.• Amortized cost: Financial instruments
under this classification include accounts receivable, accounts
payable, accrued liabilities, dividends payable, and long-term
debt.
The standard also provides a simplified approach
to measuring expected credit losses using a lifetime expected loss
allowance for all trade receivables and contract assets. The credit
loss model groups receivables based on similar credit risk
characteristics and days past due in order to estimate bad debts.
The adoption of this approach did not result in a material impact
to the Peyto’s financial statements due to the high credit quality
of Peyto's customers.
IFRS 15 "Revenue from contracts with
customers"
On January 1, 2018, Peyto adopted IFRS 15
"Revenue from Contracts with Customers". IFRS 15 establishes a
comprehensive framework for determining whether, how much, and when
revenue from contracts with customers is recognized. Peyto's
revenue relates to the sale of natural gas and natural gas liquids
to customers at specified delivery points at benchmark prices.
Peyto adopted IFRS 15 using the modified retrospective approach.
Under this transitional provision, the cumulative effect of
initially applying IFRS 15 is recognized on the date of initial
application as an adjustment to retained earnings. As a result of
applying the requirements of IFRS 15, including the application of
certain practical expedients such as the right to invoice method of
measuring the Company’s progress towards complete satisfaction of
its performance obligations, no changes or adjustments to the
comparative financial statements were required. Refer to Note 8 for
more information including additional disclosures required under
IFRS 15.
As a result of this adoption, Peyto has revised
the description of its accounting policy for revenue recognition as
follows:
Revenue associated with the sale of natural gas
and natural gas liquids is measured based on the consideration
specified in contracts with customers. Revenue from contracts with
customers is recognized when Peyto satisfies a performance
obligation by transferring a promised good or service to a
customer. A good or service is transferred when the customer
obtains control of that good or service. The transfer of control of
natural gas and natural gas liquids usually coincides with title
passing to the customer and the customer taking physical
possession.
Peyto principally satisfies its performance
obligations at a point in time. Joint venture partners are not
considered customers and therefore processing and gathering
recoveries related to joint operations are netted against operating
expenses.
4.
Property, plant and equipment, net
Cost |
|
|
At December 31, 2017 |
|
5,453,072 |
|
Additions |
|
35,454 |
|
Decommissioning
provision additions |
|
1,235 |
|
Prepaid
capital |
|
(295) |
|
At March 31, 2018 |
|
5,489,466 |
|
Accumulated depletion and depreciation |
|
|
At
December 31, 2017 |
|
(1,868,080) |
|
Depletion and
depreciation |
|
(81,579) |
|
At March 31, 2018 |
|
(1,949,659) |
|
|
|
|
Carrying
amount at December 31, 2017 |
|
3,584,992 |
|
Carrying amount at March 31, 2018 |
|
3,539,807 |
|
During the period ended March 31, 2018, Peyto
capitalized $0.6 million (2017 - $2.1 million) of general and
administrative expense directly attributable to production and
development activities.
5.
Current and Long-term debt
|
March 31, 2018 |
December 31, 2017 |
Current senior
unsecured notes |
100,000 |
- |
Long-term senior
unsecured notes |
520,000 |
520,000 |
Bank credit
facility |
650,000 |
765,000 |
Balance, end of the period |
1,270,000 |
1,285,000 |
The Company has a syndicated $1.3 billion extendible unsecured
revolving credit facility with a stated term date of October 13,
2021. The bank facility is made up of a $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.
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.
Outstanding senior notes are as follows (includes notes due
within one year):
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 |
$100 million |
January 2, 2018 |
3.95 |
% |
January 2, 2028 |
On
January 2, 2018, the Company closed an issuance of CDN $100 million
of senior unsecured notes. The notes were issued by way of a
private placement, pursuant to a note purchase agreement and a note
purchase and private shelf agreement, and rank equally with Peyto's
obligations under its bank facility and existing note purchase
agreements. The notes have a coupon rate of 3.95% and mature on
January 2, 2028. Interest will be paid semi-annually in
arrears. Proceeds from the notes were used to repay a portion of
Peyto's outstanding bank debt.
Peyto is in compliance with all financial covenants at March 31,
2018.
Total interest expense for the period ended March 31, 2018 was
$13.4 million (2017 - $10.5 million) and the average borrowing rate
for the period was 4.2% (2017 – 3.8%).
6.
Decommissioning provision
The following table reconciles the change in decommissioning
provision:
Balance, December 31, 2017 |
143,805 |
New or
increased provisions |
778 |
Accretion
of decommissioning provision |
804 |
Change in discount rate and estimates |
457 |
Balance, March 31, 2018 |
145,844 |
Current |
- |
Non-current |
145,844 |
Peyto has estimated the net present value of its
total decommissioning provision to be $145.8 million as at March
31, 2018 ($143.8 million at December 31, 2017) based on a total
future undiscounted liability of $291.3 million ($289.7 million at
December 31, 2017). At March 31, 2018 management estimates that
these payments are expected to be made over the next 49 years with
the majority of payments being made in years 2046 to 2067. The Bank
of Canada’s long term bond rate of 2.23 per cent (2.26 per cent at
December 31, 2017) and an inflation rate of 2.0 per cent (2.0 per
cent at December 31, 2017) were used to calculate the present value
of the decommissioning provision.
7.
Share capital
Authorized: Unlimited
number of voting common shares
Issued and Outstanding
Common Shares (no par value) |
Number of Common Shares |
Amount$ |
Balance, December 31, 2017 |
164,874,175 |
1,649,537 |
Common shares issued by private placement |
- |
- |
Common share issuance costs, (net of tax) |
- |
- |
Balance, March 31, 2018 |
164,874,175 |
1,649,537 |
Earnings per common share has been determined
based on the following:
|
Three Months ended March 31, |
|
2018 |
2017 |
Weighted
average common shares basic and diluted |
164,874,175 |
164,800,637 |
DividendsDuring the period
ended March 31, 2018, Peyto declared and paid dividends of $0.18
per common share or $0.06 per common share per month, totaling
$29.7 million (2017 - $0.33 or $0.11 per common share per month,
$54.4 million).
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 gains and
lossesGains and losses from cash flow hedges are
accumulated until settled. These outstanding hedging
contracts are recognized in earnings on settlement. Further
information on these contracts is set out in Note
10.
8.
Revenue and receivables
|
Three Months ended March 31, |
|
2018 |
2017 |
Natural Gas Sales |
101,230 |
155,499 |
Natural
Gas Liquid sales |
53,938 |
41,537 |
Natural gas and natural gas liquid sales |
155,168 |
197,036 |
|
March 31, |
December 31, |
|
2018 |
2017 |
Accounts receivable
from customers |
51,010 |
67,294 |
Accounts receivable
from realized risk management contracts |
19,706 |
10,746 |
Accounts receivable
from joint venture partners and other |
10,262 |
12,202 |
|
80,978 |
90,242 |
A substantial portion of the Company’s accounts
receivable is with petroleum and natural gas marketing entities.
Industry standard dictates that commodity sales are settled on the
25th day of the month following the month of production.
9.
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:
|
March 31, 2018 |
March 31, 2017 |
Share price |
$10.80- $33.80 |
$27.35 - $33.80 |
Exercise price (net of
dividends) |
$14.40- 22.77 |
$22.77 - $33.47 |
Expected
volatility |
37.09% |
27.39% |
Option life |
0.75 year |
0.75 year |
Risk-free
interest rate |
1.8% |
0.8% |
10.
Financial instruments and Capital
management
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 March 31, 2018.
The Company’s areas of financial risk management
and risks related to financial instruments remained unchanged from
December 31, 2017.
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 significant value drivers are observable
in active markets.
- Level 3 – valuations derived from valuation techniques in which
one or more significant inputs or significant 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 March 31,
2018 cash and financial derivative instruments are carried at fair
value. Accounts receivable, 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 March 31, 2018:
Natural GasPeriod
Hedged – Monthly Index |
Type |
Daily Volume |
Price(CAD) |
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, 2018 |
Fixed
Price |
20,000
GJ |
$2.20/GJ to $2.35/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, 2018 |
Fixed
Price |
25,000
GJ |
$2.3175/GJ to $2.5525/GJ |
April
1, 2017 to October 31, 2018 |
Fixed
Price |
10,000
GJ |
$2.585/GJ to $2.745/GJ |
November 1, 2017 to October 31, 2018 |
Fixed
Price |
5,000
GJ |
$2.92/GJ |
January 1, 2018 to December 31, 2020 |
Fixed
Price |
20,000
GJ |
$2.00/GJ to $2.040/GJ |
April
1, 2018 to October 31, 2018 |
Fixed
Price |
105,000 GJ |
$1.30/GJ to $2.565/GJ |
April
1, 2018 to March 31, 2019 |
Fixed
Price |
180,000 GJ |
$1.54/GJ to $2.625/GJ |
April
1, 2018 to October 31, 2019 |
Fixed
Price |
5,000
GJ |
$1.90/GJ |
April
1, 2018 to March 31, 2020 |
Fixed
Price |
10,000
GJ |
$1.43/GJ to $1.44/GJ |
November 1, 2018 to March 31, 2019 |
Fixed
Price |
70,000
GJ |
$1.75/GJ to $1.9525/GJ |
November 1, 2018 to March 31, 2020 |
Fixed
Price |
5,000
GJ |
$1.5725/GJ |
April
1, 2019 to October 31, 2019 |
Fixed
Price |
15,000
GJ |
$1.30/GJ |
April
1, 2019 to March 31, 2020 |
Fixed
Price |
75,000
GJ |
$1.45/GJ to $2.50/GJ |
November 1, 2019 to March 31, 2020 |
Fixed
Price |
15,000
GJ |
$2.02/GJ to $2.05/GJ |
April
1, 2020 to October 31, 2020 |
Fixed
Price |
15,000
GJ |
$1.30/GJ |
April 1, 2020 to March 31, 2021 |
Fixed Price |
5,000 GJ |
1.64/GJ |
Natural GasPeriod
Hedged – Daily Index |
Type |
Daily Volume |
Price(CAD) |
April
1, 2018 to October 31, 2018 |
Fixed
Price |
15,000
GJ |
$1.54/GJ to $1.63/GJ |
April 1, 2018 to March 31, 2019 |
Fixed Price |
40,000 GJ |
$1.40/GJ to $1.67/GJ |
As at March 31, 2018, Peyto had committed to the
future sale of 217,525,000, gigajoules (GJ) of natural gas at an
average price of $2.03 per GJ or $2.33 per mcf. Had these
contracts been closed on March 31, 2018, Peyto would have realized
a gain in the amount of $129.4 million. If the AECO gas price on
March 31, 2018 were to increase by $0.10/GJ, the unrealized loss
would increase by approximately $21.6 million. An opposite
change in commodity prices rates would result in an opposite impact
on other comprehensive income.
Subsequent to March 31, 2018 Peyto
entered into the following contracts:
Natural GasPeriod Hedged |
Type |
Daily Volume |
Price(CAD) |
November 1, 2018 to March 31, 2019 |
Fixed
Price |
20,000
GJ |
$1.91/GJ to $1.99/GJ |
April
1, 2019 to October 31, 2019 |
Fixed
Price |
15,000
GJ |
$1.285/ to $1.32/GJ |
April 1, 2021 to October 31, 2021 |
Fixed Price |
5,000 GJ |
$1.64/GJ |
Crude Oil Period Hedged |
Type |
Daily Volume |
Price(CAD) |
July
31, 2018 to December 31, 2018 |
Fixed
Price |
100
bbl |
$84.03/bbl |
July 1, 2018 to June 30, 2019 |
Fixed Price |
100 bbl |
$85.34/bbl |
11.
Related party transactions
Certain directors of Peyto are considered to
have significant influence over other reporting entities that Peyto
engages in commercial 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 each of the related reporting
entities is summarized below:
Expense |
Accounts Payable |
Three Months ended March 31 |
As at March 31 |
2018 |
2017 |
2018 |
2017 |
118.0 |
82.4 |
118.0 |
78.4 |
12.
Commitments
Following is a summary of Peyto’s contractual
obligations and commitments as at March 31, 2018.
|
2018 |
2019 |
2020 |
2021 |
2022 |
Thereafter |
Interest payments (1) |
18,710 |
23,840 |
21,645 |
16,245 |
16,245 |
36,075 |
Transportation commitments |
27,420 |
30,702 |
19,475 |
18,655 |
26,265 |
245,944 |
Operating leases |
1,682 |
2,242 |
2,242 |
2,242 |
2,317 |
9,269 |
Total |
47,812 |
56,784 |
43,362 |
37,142 |
44,827 |
291,288 |
(1)
Fixed interest payments on senior unsecured notes
13.
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
contained various claims relating to alleged misrepresentations in
disclosure documents of Poseidon (not New Open Range), which claims
were 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
sought 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.
An application seeking leave to commence a class action
lawsuit against the Company making the same allegations was also
made by two Poseidon shareholders in Ontario (the “Ontario Poseidon
Shareholder Action”). No steps were taken to advance these actions
against the Company.
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 claimed, 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. No
steps were taken to advance these actions against the Company.
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 the Company for any liability KPMG is determined to
have to Poseidon. The Company was not required to defend
KPMG’s third party claim.
On July 3, 2014, the Plaintiffs filed a
lawsuit with the Court against KPMG, 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 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 sought, among other things, an indemnity, or
alternatively contribution, from the third party defendants with
respect to any judgment awarded against KPMG LLP. The Company was
not required to defend KPMG’s third party claim.
The allegations against New Open Range contained
in the claims described above were based on factual matters that
pre-existed the Company’s acquisition of New Open Range.
On April 6, 2018, the Company entered a global
settlement with all parties involved in the Poseidon related
litigation. The settlement was presented to the Alberta Court
of Queens Bench on May 4, 2018 for approval as part of a plan of
compromise and arrangement under the Companies’ Creditor
Arrangement Act. The Alberta Court approved the settlement
and Plan and issued Orders dismissing Alberta actions involving
Poseidon including the Poseidon Shareholder Application and the
Poseidon Action against the Company. The Ontario, Quebec and
United States Courts will now be asked to recognize the Alberta
Court’s Orders and to dismiss the actions before them (including
the Ontario Poseidon Shareholder Action against the Company).
Assuming the Alberta Court Orders are recognized, the settlement
will be effective and all of the actions involving Poseidon
including the Poseidon Shareholder Application, the Ontario
Poseidon Shareholder Action and the Poseidon Action against the
Company will be dismissed. Although the contributions being
made by the different defendants are confidential, Peyto’s
contribution is immaterial and reflects its belief there was no
merit to the claims.
Officers
Darren
Gee President and Chief Executive Officer |
Tim
LouieVice President, Land |
|
|
Scott
Robinson Executive Vice President New Ventures & Director
|
David
Thomas Vice President, Exploration |
|
|
Kathy
Turgeon Vice President, Finance and Chief Financial Officer
|
Jean-Paul Lachance Vice President, Engineering & COO
|
|
|
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 MontrealMUFG
Bank, Ltd., Canada BranchRoyal Bank of CanadaCanadian Imperial Bank
of CommerceThe Toronto-Dominion Bank
Bank of Nova
ScotiaAlberta Treasury BranchesCanadian Western BankNational
BankWells Fargo
Transfer
AgentComputershare
Head Office300, 600 – 3 Avenue
SWCalgary, ABT2P 0G5Phone:
403.261.6081Fax:
403.451.4100Web:
www.peyto.comStock Listing Symbol: PEY.TO
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