Peyto Exploration & Development Corp. ("Peyto” or the
“Company") (TSX:PEY) is pleased to present its operating and
financial results for the second quarter of the 2018 fiscal year.
An annualized 9% return on equity (ROE) and 8% return on capital
employed (ROCE) was delivered in the quarter by achieving a 72%
operating margin (1) and a 19% profit margin (2), all while
navigating through the lowest Alberta natural gas price environment
in the past 26 years. Additional highlights included:
- Earnings of $0.18/share, dividends of
$0.18/share. Earnings of $30 million were generated in the
quarter while dividends of $30 million were paid to shareholders.
Dividend payments represented a before tax payout ratio of 26% of
Funds from Operations (“FFO”), down from 41% in Q2 2017. The
Company has never incurred a write down nor recorded an impairment
of its assets and this quarter represents Peyto’s 54th consecutive
quarter of earnings.
- Funds from operations of $0.70/share.
Generated $116 million in FFO in Q2 2018 down 13% from $133 million
in Q2 2017 (down 14%/share) as 6% lower production was combined
with 5% lower realized commodity prices. For the first half of
2018, funds from operations exceeded the combination of capital
expenditures and dividend payments by $155 million resulting in
reduced debt levels.
- Total cash costs of $0.89/Mcfe (or $0.79/Mcfe
($4.73/boe) excluding royalties). Industry leading total
cash costs, including $0.10/Mcfe royalties, $0.30/Mcfe operating
costs, $0.18/Mcfe transportation, $0.05/Mcfe G&A and $0.26/Mcfe
interest, combined with a realized price of $3.20/Mcfe, resulting
in a $2.31/Mcfe ($13.87/boe) cash netback, down 8% from $2.51/Mcfe
in Q2 2017. Peyto’s realized Q2 2018 gas price was 184% of the AECO
daily average price.
- Capital investment of $15 million. A total of
7 gross wells (5.8 net) were drilled in the second quarter and 1
gross well (1 net) was completed. No new wells were brought on
production as Peyto deliberately curtailed capital investment due
to extremely low gas prices. Subsequent to the end of the quarter,
Peyto reactivated drilling operations in anticipation of improving
gas prices for the coming winter season.
- Production per share down 6%. Second quarter
2018 production of 549 MMcfe/d (91,547 boe/d) was down 6% from Q2
2017. Peyto deliberately deferred 15 MMcf/d of unhedged dry gas
production in the quarter that would have otherwise been exposed to
an average AECO monthly gas price of $0.97/GJ, the lowest gas price
observed in Company history. As previously communicated, Peyto
plans to actively manage unhedged production levels in response to
commodity prices so as to limit exposing producing reserves to
uneconomic prices.
Second Quarter 2018 in Review
With minimal support from summer storage
injections due to curtailments of interruptible service on the
major intra-Alberta pipeline system, the AECO daily and monthly
natural gas prices sunk to their lowest level since 1992. Peyto’s
strategic plan to defer 2018 capital investments to later in the
year had anticipated this fall in commodity price. As a result,
only minimal drilling activity occurred in the quarter with no new
wells being brought on production. At times, base production was
also curtailed to ensure unhedged dry gas volumes were only sold at
profitable prices. Meanwhile, liquid yields were up 20% from Q2
2017 to 19 bbl/MMcf due to enhanced liquid recoveries from the
Oldman deep cut processing facility. Another quarter of production
history has helped confirm the much improved profitability of
Peyto’s innovative Cardium completion design and its extensive
inventory of future, liquid-rich locations, some offering as high
as 100 bbls/MMcf of NGLs. Exploration initiatives continued to be
pursued in the quarter which culminated in 50 net sections of
Montney land being captured subsequent to quarter end in a new
exploration area. Financial performance in the quarter remained
strong resulting in reduced debt levels and an improved balance
sheet. The Company was also successful furthering its market
diversification strategy by executing an agreement to provide a
long term supply of natural gas to an intra-Alberta power
producer.
1. 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.2. Natural gas volumes recorded in thousand
cubic feet (mcf) are converted to barrels of oil equivalent (boe)
using the ratio of six (6) thousand cubic feet to one (1) barrel of
oil (bbl). Natural gas liquids and oil volumes in barrel of
oil (bbl) are converted to thousand cubic feet equivalent (Mcfe)
using a ratio of one (1) barrel of oil to six (6) thousand cubic
feet. This could be misleading, particularly if used in
isolation as it is based on an energy equivalency conversion method
primarily applied at the burner tip and does not represent a value
equivalency at the wellhead.
|
|
Three Months Ended June 30 |
% |
Six Months Ended June 30 |
% |
|
|
2018 |
2017 |
Change |
2018 |
2017 |
Change |
Operations |
|
|
|
|
|
|
Production |
|
|
|
|
|
|
Natural gas (mcf/d) |
493,821 |
535,274 |
-8 |
% |
530,952 |
542,118 |
-2 |
% |
Oil
& NGLs (bbl/d) |
9,243 |
8,319 |
11 |
% |
9,641 |
8,949 |
8 |
% |
Thousand cubic feet equivalent (mcfe/d @ 1:6) |
549,281 |
585,187 |
-6 |
% |
549,281 |
595,813 |
-8 |
% |
Barrels of oil equivalent (boe/d @ 6:1) |
91,547 |
97,531 |
-6 |
% |
98,133 |
99,302 |
-1 |
% |
Production
per million common shares (boe/d)* |
555 |
592 |
-6 |
% |
595 |
602 |
-1 |
% |
Product
prices |
|
|
|
|
|
|
Natural gas ($/mcf) |
2.37 |
2.92 |
-19 |
% |
2.63 |
2.94 |
-11 |
% |
Oil
& NGLs ($/bbl) |
63.64 |
48.33 |
32 |
% |
61.58 |
48.23 |
28 |
% |
Operating
expenses ($/mcfe) |
0.30 |
0.24 |
25 |
% |
0.29 |
0.26 |
12 |
% |
Transportation ($/mcfe) |
0.18 |
0.18 |
- |
|
0.16 |
0.18 |
-11 |
% |
Field
netback ($/mcfe) |
2.62 |
2.77 |
-5 |
% |
2.79 |
2.78 |
- |
|
General
& administrative expenses ($/mcfe) |
0.05 |
0.05 |
- |
|
0.06 |
0.05 |
20 |
% |
Interest
expense ($/mcfe) |
0.26 |
0.21 |
24 |
% |
0.25 |
0.20 |
25 |
% |
Financial ($000, except per share*) |
|
|
|
|
|
|
Revenue |
159,811 |
178,982 |
-11 |
% |
360,208 |
366,932 |
-2 |
% |
Royalties |
4,879 |
9,071 |
-46 |
% |
14,422 |
19,707 |
-27 |
% |
Funds from
operations |
115,571 |
133,487 |
-13 |
% |
264,557 |
272,792 |
-3 |
% |
Funds from
operations per share |
0.70 |
0.81 |
-14 |
% |
1.60 |
1.66 |
-4 |
% |
Total
dividends |
29,677 |
54,408 |
-45 |
% |
59,354 |
108,796 |
-45 |
% |
Total
dividends per share |
0.18 |
0.33 |
-45 |
% |
0.36 |
0.66 |
-45 |
% |
Payout ratio |
26 |
41 |
-37 |
% |
22 |
40 |
-45 |
% |
Earnings |
30,397 |
39,957 |
-24 |
% |
78,146 |
80,211 |
-3 |
% |
Earnings
per diluted share |
0.18 |
0.24 |
-25 |
% |
0.47 |
0.49 |
-4 |
% |
Capital
expenditures |
14,978 |
97,738 |
-85 |
% |
50,432 |
251,612 |
-80 |
% |
Weighted
average common shares outstanding |
164,874,175 |
164,874,175 |
- |
|
164,874,175 |
164,837,609 |
- |
|
As
at June 30 |
|
|
|
|
|
|
End of
period shares outstanding (includes shares to be issued |
|
|
|
164,874,175 |
164,874,175 |
- |
|
Net
debt |
|
|
|
1,178,294 |
1,218,879 |
-3 |
% |
Shareholders' equity |
|
|
|
1,671,045 |
1,647,133 |
1 |
% |
Total
assets |
|
|
|
3,626,895 |
3,604,373 |
1 |
% |
*all per
share amounts using weighted average common shares outstanding |
|
|
|
|
|
Three Months Ended June 30 |
Six Months Ended June 30 |
($000
except per share) |
2018 |
|
2017 |
2018 |
2017 |
Cash flows from
operating activities |
116,906 |
|
127,980 |
260,900 |
249,117 |
Change in
non-cash working capital |
(2,429 |
) |
2,191 |
1,485 |
18,351 |
Change in
provision for performance based compensation |
1,094 |
|
3,316 |
2,172 |
5,324 |
Funds from operations |
115,571 |
|
133,487 |
264,557 |
272,792 |
Funds
from operations per share |
0.70 |
|
0.81 |
1.60 |
1.66 |
(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
The limited Second quarter 2018 activity was
largely focused in the Greater Sundance area on the Cardium play
with all wells drilled after breakup in June. In total, 7
horizontal wells were drilled as shown in the following table:
|
Field |
Total Wells Drilled |
Zone |
Sundance |
Nosehill |
Wildhay |
Ansell |
Whitehorse |
Kisku/Kakwa |
Brazeau |
Belly River |
- |
- |
- |
- |
- |
- |
- |
- |
Cardium |
5 |
- |
1 |
- |
- |
- |
- |
6 |
Notikewin |
- |
- |
- |
- |
- |
- |
- |
- |
Falher |
- |
- |
- |
- |
- |
- |
- |
- |
Wilrich |
- |
- |
- |
- |
1 |
- |
- |
1 |
Bluesky |
- |
- |
- |
- |
- |
- |
- |
- |
Total |
5 |
- |
1 |
- |
1 |
- |
- |
7 |
Horizontal well drilling costs in Q2 2018 were
lower than previous quarters due to a focus on the shallower
Cardium formation which has become cheaper to drill with a more
efficient drilling design. Peyto’s innovative completion design in
the Cardium involves significantly more frac stages and 2-3 times
more water which increased total average completion costs but
results in lower cost per frac stage. Going forward, Peyto expects
that total drilling and completion costs per well will be less than
the total in previous years but with completion costs likely
exceeding drilling costs. The following table illustrates the
progression of cost optimization as Peyto works to continuously
lower overall development costs to ultimately generate greater
returns:
|
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 Q1 |
2018 Q2 |
Gross Hz Spuds |
52 |
70 |
86 |
99 |
123 |
140 |
126 |
135 |
8 |
7 |
Measured Depth (m) |
3,762 |
3,903 |
4,017 |
4,179 |
4,251 |
4,309 |
4,197 |
4,229 |
4,091 |
3,814 |
|
|
|
|
|
|
|
|
|
|
|
Drilling ($MM/well) |
$2.76 |
$2.82 |
$2.79 |
$2.72 |
$2.66 |
$2.16 |
$1.82 |
$1.90 |
$1.74 |
$1.54 |
$ per meter |
$734 |
$723 |
$694 |
$651 |
$626 |
$501 |
$433 |
$450 |
$425 |
$403 |
|
|
|
|
|
|
|
|
|
|
|
Completion ($MM/well) |
$1.36 |
$1.68 |
$1.67 |
$1.63 |
$1.70 |
$1.21 |
$0.86 |
$1.00 |
$1.15 |
$1.31 |
Hz Length (m) |
1,335 |
1,303 |
1,358 |
1,409 |
1,460 |
1,531 |
1,460 |
1,241 |
1,415 |
1,605 |
$ per Hz Length (m) |
$1,017 |
$1,286 |
$1,231 |
$1,153 |
$1,166 |
$792 |
$587 |
$803 |
$810 |
$814 |
$ ‘000 per Stage |
$231 |
$246 |
$257 |
$188 |
$168 |
$115 |
$79 |
$81 |
$61 |
$40 |
Capital Expenditures
During the second quarter of 2018, Peyto spent
$7 million on drilling, $1.5 million on completions, $0.7 million
on wellsite equipment and tie-ins, $5 million on facilities and
major pipeline projects, and $0.8 million on new Crown lands and
seismic, for total capital investments of $15 million.
The $5 million invested in facilities and major
pipeline projects included a turn-around at the Oldman Deep Cut
plant, completion of a major pipeline under the Sundance Provincial
Park connecting the Swanson and Galloway gas plants, and
consolidation of wellsite metering equipment at several pad sites
in Sundance. This wellsite equipment consolidation will be an
ongoing effort to help reduce operating costs without an impact to
productivity.
Peyto also purchased 1.25 net sections of new
Crown land at sales in the second quarter, mostly in the Greater
Sundance area, for an average purchase price of $43/acre.
Commodity Prices
Average daily AECO natural gas prices were
$1.12/GJ in Q2 2018, down 43% from $1.97/GJ in Q1 2018 and down 58%
from the $2.64/GJ in Q2 2017. US Henry Hub spot prices were only 7%
lower, on a comparative basis, from both prior periods. The
inadequacy of the intra-Alberta gas transmission system and the
resultant inability to access Alberta storage reservoirs to buffer
the supply/demand imbalances has led to daily market instability
and extreme volatility in AECO daily and monthly prices,
particularly during summer months.
On average for Q2 2018, Peyto realized a natural
gas price of $2.37/Mcf ($2.06/GJ) or 184% of the AECO daily average
price. This was the result of a combination of approximately 12% of
natural gas production being sold into the daily or monthly spot
market at an average of $1.04/GJ ($1.19/Mcf) and 88% having been
pre-sold at an average hedged price of $2.18/GJ (prices reported
net of TCPL fuel volume deductions).
In the second quarter of 2018, higher realized
liquid propane prices allowed Peyto to continuously operate its
Oldman deep cut plant, resulting in greater propane and butane
recoveries than in Q2 2017. Peyto’s Q2 2018 blended, realized, oil
and natural gas liquids price was $63.64/bbl, which represented 79%
of the $80.62/bbl average Canadian Light Sweet posted price.
Details of realized commodity prices by component are shown in the
following table:
Commodity Prices by Component
|
|
Three Months ended June 30 |
|
|
|
2018 |
2017 |
AECO monthly |
($/GJ) |
0.97 |
2.63 |
AECO daily |
($/GJ) |
1.12 |
2.64 |
Henry Hub
spot |
($US/MMBTU) |
2.86 |
3.08 |
Natural gas – prior to
hedging |
($/GJ) |
1.35 |
2.60 |
|
($/mcf) |
1.18 |
2.99 |
Natural gas – after
hedging |
($/GJ) |
2.06 |
2.54 |
|
($/mcf) |
2.37 |
2.92 |
|
|
|
|
|
Condensate ($/bbl) |
|
|
80.98 |
57.60 |
Propane ($/bbl) |
|
|
20.29 |
13.39 |
Butane ($/bbl) |
|
|
44.41 |
30.81 |
Pentane ($/bbl) |
|
|
86.64 |
59.93 |
Total Oil and natural gas liquids ($/bbl) |
|
|
63.64 |
48.33 |
Canadian Light Sweet stream ($/bbl) |
|
|
80.62 |
61.95 |
Peyto Realized liquids price/Canadian Light Sweet |
|
|
79% |
78% |
Liquids prices are Peyto realized prices in Canadian dollars
adjusted for fractionation and transportation.
Financial Results
Approximately 35%, or $1.07/Mcfe, of Peyto’s
revenue came from its liquids sales while 65%, or $2.13/Mcfe, came
from natural gas. This liquids revenue more than covered all cash
costs. Cash costs of $0.89/Mcfe, included royalties of $0.10/Mcfe,
operating costs of $0.30/Mcfe, transportation costs of $0.18/Mcfe,
G&A of $0.05/Mcfe and interest costs of $0.26/Mcfe. Cash costs
were lower than the previous quarter but higher than the previous
year due to increased operating and interest costs, partially
offset by reduced royalties. Fixed operating cost components
including higher municipal taxes, annual AER fees, and other
government fees contributed to the increase, as well as an increase
in power pool prices. Interest costs were up because of higher
interest rates, despite lower debt levels. For the balance of the
year, Peyto expects to lower per unit operating costs as more power
is generated internally and as production volumes begin to increase
from an increase in drilling activity.
Total cash costs, when deducted from realized
revenues of $3.20/Mcfe, resulted in a cash netback of $2.31/Mcfe or
a 72% operating margin. Historical cash costs and operating margins
are shown in the following table. Going forward, Peyto expects per
unit cash costs to decrease as production is forecast to increase
from increased capital investment and drilling activity.
|
2015 |
2016 |
2017 |
2018 |
($/Mcfe) |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
Revenue |
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 |
3.20 |
Royalties |
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 |
0.10 |
Operating Costs |
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 |
0.30 |
Transportation |
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 |
0.18 |
G&A |
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 |
0.05 |
Interest |
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 |
0.26 |
Total
Cash Costs |
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 |
0.89 |
Netback |
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 |
2.31 |
Operating
Margin |
79% |
78% |
79% |
79% |
78% |
73% |
76% |
76% |
74% |
75% |
76% |
76% |
74% |
72% |
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
$0.61/Mcfe, or a 19% profit margin. Dividends of $0.59/Mcfe were
paid to shareholders.
Natural Gas Marketing
Peyto continues to make meaningful progress on
its market diversification strategy, previously announced January
11, 2018. This plan is designed to complement the Company’s highly
successful hedging strategy and endeavors to achieve a target of
40% of natural gas sales linked to AECO based pricing, 40% linked
to US-based pricing and 20% sold directly to intra-Alberta
industrial markets. While this ultimate balance may take some time
to achieve, in the meantime, Peyto is focused on the near term
vulnerability of AECO summer prices relative to the more stable US
markets. As a result, Peyto has put in place AECO-NYMEX basis deals
for approximately one third of current volumes which, over time,
will allow for gas to be sold to US pricing during the summer
season.
The proportion of future natural gas sales that
have been diversified to other markets using both synthetic and
physical transportation arrangements is shown in the table below.
In addition, the Company is pleased to announce it has also reached
an agreement on commercial terms for supplying natural gas directly
to intra-Alberta industrial markets.
Percentage of current gas volume* |
2018/19Winter |
2019Summer |
2019/20Winter |
2020Summer |
2020/21Winter |
2021Summer |
2021/22Winter |
2022Summer |
2022/23Winter |
2023Summer |
AECO Based Pricing |
92 |
% |
65 |
% |
92 |
% |
65 |
% |
92 |
% |
65 |
% |
71 |
% |
61 |
% |
71 |
% |
60 |
% |
Non-AECO Based Pricing |
8 |
% |
35 |
% |
8 |
% |
35 |
% |
8 |
% |
35 |
% |
29 |
% |
39 |
% |
29 |
% |
29 |
% |
Intra-Alberta Industrial |
|
|
|
|
|
|
|
|
|
11 |
% |
*Winter period is from November to March, summer
period is April to October
In July 2018, Peyto reached an agreement with an
Alberta power company which outlines commercial terms to supply
60,000 GJ/d of natural gas for a period of 15 years, beginning in
2023. Peyto will be delivering natural gas to the power plant site
under agreed upon, confidential terms which will link the natural
gas and Alberta power pool prices. For example, at current power
prices, Peyto would realize an equivalent gas price of
approximately $3.00/GJ at its plant gate. Peyto is excited to be a
part of this project and looks forward to supplying Albertans with
clean burning natural gas not only for heat but also for their
electricity needs.
Peyto also continued its practice of layering in
future sales in the form of fixed price swaps, and thus smoothing
out the volatility in natural gas prices. For the balance of 2018,
approximately 78% of gas volumes have been hedged to protect
against AECO volatility. The following table summarizes the
remaining hedged volumes and prices for the upcoming years as of
August 8, 2018:
|
Future Sales |
Average Price (CAD) |
|
GJ |
Mcf |
$/GJ |
$/Mcf |
2018 H2 |
85,895,000 |
74,691,304 |
2.14 |
2.46 |
2019 |
83,960,000 |
73,008,696 |
1.82 |
2.10 |
2020 |
26,340,000 |
22,904,348 |
1.74 |
2.00 |
2021 |
3,040,000 |
2,643,478 |
1.59 |
1.82 |
Total |
199,235,000 |
173,247,826 |
1.94 |
2.24 |
*prices and volumes in mcf use Peyto’s historic heat content
premium of 1.15.
Activity Update
Since the end of the quarter, four drilling rigs
have been actively developing Peyto’s Greater Sundance Cardium play
with 8 wells spud and 7 wells completed. In addition, two
Whitehorse Wilrich wells have been completed and are currently
being connected. Going forward, steady drilling and completion
operations should deliver approximately 7 to 8 wells per month,
however, some tie-ins may be delayed due to pad drilling activity.
The Company expects to drill between 60 and 70 wells in 2018.
Production is expected to grow in the latter
half of Q3 2018 as these new wells are brought on-line. Peyto
expects to report additional results from its Cardium drilling
program this fall as production from these new completions cleans
up and stabilizes. The new Cardium completion design involves 200%
more frac water, requiring longer cleanup times to evacuate the
frac water from the extensive fracture network now being achieved.
So far, actual drilling and completion costs have been lower than
expected and the full-cycle, post-mortem, internal rates of return
are expected to exceed that of the five previous Cardium wells that
were drilled and completed with the new design. Those five wells
had full cycle, internal rates of return that were greater than 40%
at strip prices.
In addition to Peyto's vast Cardium resource
play and land position, the Company’s exploration group continues
to look for new liquids-rich resource opportunities both within and
outside the Alberta Deep Basin, with particular focus on the
Montney and Duvernay plays. Subsequent to Q2, Peyto has advanced a
new Montney exploration area with the initial capture of 50 net
sections of Montney rights. Evaluation drilling is expected to
occur before year end 2018.
New Ventures
Peyto continues to investigate projects that
focus on enhancing the value of existing reserves through lasting
infrastructure investments. Planning has continued on Peyto’s
multiple deep cut plant designs, intended to extract an incremental
10 to 15 bbl/MMcf of NGLs, as well as on a potential liquids
fractionation plant and export terminal in Sundance to take
advantage of its proximity to an existing rail line. These projects
are being prepared in anticipation of strengthening Western
Canadian NGL prices with new market outlets developing over the
next few years.
Domestic propane prices softened during the
first quarter of 2018 but have since strengthened with the
anticipation of Westcoast BC NGL exports beginning in Q1 2019 and
with continued progress on new propane dehydrogenation and
polypropylene facilities on the outskirts of Edmonton. Peyto
anticipates making an investment decision on its Swanson plant deep
cut conversion in late 2018 or early 2019 as the propane market
transformation becomes more established. Additionally, two
other deep cut projects follow closely behind – one at Oldman North
and one at Nosehill – to take advantage of their increasingly rich
NGL feed streams.
Peyto is actively maintaining involvement with
other hydrocarbon feedstock projects being contemplated for the
province. These include other petrochemical projects, power
projects, and LNG export initiatives – all of which hold the
prospect of broadening and strengthening market exposure for the
Company’s future production.
Outlook
Both the Canadian and US natural gas storage
levels are currently at the low end of historical averages for this
time of year, despite record North American production. This should
prove to be constructive for stronger winter prices just in time
for the new, unhedged production Peyto is currently building with
its second half 2018 capital program. Already, the third quarter
2018 AECO monthly gas price is up more than 40% from the second
quarter average price. The timing of this combination of stronger
prices and flush production is designed to enhance the returns on
capital invested for shareholders.
In addition to executing the remaining 2018
capital program, the Company continues to focus on longer term
opportunities for market diversification, value enhancing
infrastructure investments and new exploration opportunities to
extend its current, deep inventory of profitable, liquids-rich
Cardium locations. As natural gas prices strengthen, Peyto’s
substantial lean gas drilling inventory in the Spirit River group
of formations will once again become part of the mix.
Conference Call and Webcast
A conference call will be held with the senior
management of Peyto to answer questions with respect to the Q2 2018
financial results on August 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 https://edge.media-server.com/m6/p/j57apiq5. The
conference call will be archived on the Peyto Exploration &
Development website at www.peyto.com.
Management’s Discussion and Analysis/Financial
Statements
A copy of the second quarter report to shareholders, including
the MD&A, audited financial statements and related notes, is
available at
http://www.peyto.com/Files/Financials/2018/Q22018FS.pdf and at
http://www.peyto.com/Files/Financials/2018/Q22018MDA.pdf and will
be filed at SEDAR, www.sedar.com at a later date.
Darren GeePresident and CEOPhone: (403)
237-8911Fax: (403) 451-4100August 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; expectations regarding
future drilling and completion costs; the benefits of the new
strategic pipeline under the Sundance provincial park; the
Company’s drilling program for the remainder of 2018; expectations
for production in the third quarter of 2018; future resource
opportunities for the Company and expectations for evaluation
drilling in the Montney before year end 2018; pricing expectations
for the winter season; plans for the Company’s infrastructure new
ventures; timing expectations for an investment decision on Peyto’s
Swanson plant deep cut conversion and two other deep cut projects;
and the Company’s remaining 2018 capital expenditure program and
focus.
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 in Peyto's management's discussion
and analysis for the three and six months ended June 30, 2018.
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