Peyto Exploration & Development Corp. (“Peyto” or the
“Company”) is pleased to mark 20 years in the Canadian energy
industry with its operating and financial results for the third
quarter of the 2018 fiscal year. By strategically delaying capital
investments and production additions until the fall, Peyto avoided
exposing certain unhedged dry gas production to uneconomic summer
prices. As a result, the Company was able to deliver in the quarter
a 9% return on equity (ROE), on a trailing twelve month basis, and
an 8% return on capital employed (ROCE) while achieving a 71%
operating margin (1) and a 19% profit margin (2). Additional
highlights included:
- Production per share down 16%. Voluntary
production curtailments and delayed capital investments resulted in
third quarter 2018 production of 511 MMcfe/d (85,242 boe/d), down
16% from Q3 2017. As well, completion and pipeline connections were
further hampered in September due to wet ground
conditions.
- Funds from operations of $0.66/share.
Generated $110 million in FFO in Q3 2018 down 21% from $139 million
in Q3 2017 (down 21%/share) due primarily to lower production
levels. Year to date in 2018, funds from operations of $374 million
have exceeded the combination of capital expenditures ($120
million) and dividend payments ($89 million) by $165 million
resulting in reduced debt levels.
- Total cash costs of $0.94/Mcfe (or $0.80/Mcfe
($4.80/boe) excluding royalties). Industry leading total
cash costs, including $0.14/Mcfe royalties, $0.31/Mcfe operating
costs, $0.19/Mcfe transportation, $0.03/Mcfe G&A and $0.27/Mcfe
interest, combined with a realized price of $3.27/Mcfe, resulting
in a $2.33/Mcfe ($13.97/boe) cash netback, down 6% from $2.48/Mcfe
in Q3 2017. Peyto’s realized Q3 2018 natural gas price was 187% of
the Alberta (AECO) daily average price.
- Capital investment of $70 million. A total of
25 gross wells (23.4 net) were drilled in the third quarter, 15
gross wells (13.5 net) were completed, and 17 gross wells (15.5
net) were brought on production. Over the last 12 months the 73
gross (71 net) wells brought on production accounted for 18,000
boe/d at the end of the quarter, which when combined with a
trailing twelve month capital investment of $254 million, equates
to an annualized capital efficiency of $14,000/boe/d. As this
efficiency was dominated by the 42 wells added in Q4 2017, Peyto
anticipates the 2018 annual capital efficiency will be below
$10,000/boe/d.
- 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.
Earnings per share were down 33% from Q3 2017, due to lower
production and lower cash netbacks, while dividends per share were
down 45%. The Company has never incurred a write down nor recorded
an impairment of its assets and this quarter represents Peyto’s
55th consecutive quarter of earnings.
Third Quarter 2018 in ReviewPeyto began the
majority of its 2018 capital program in Q3 with three drilling rigs
in the Greater Sundance core area ramping up to seven by the end of
the quarter. The majority of the capital investment was focused on
the more liquids-rich Cardium play with a specific goal to evaluate
whether increased completion intensity could improve returns.
Extremely wet ground conditions in the later part of the quarter
delayed completion and pipeline activity during the quarter. These
wells and their associated production will be completed and
pipeline connected in the fourth quarter coincident with higher
natural gas prices. AECO daily natural gas prices during Q3 2018
continued to be extremely volatile ranging from a high of $2.41/GJ
to a low of negative $1.31/GJ. Peyto’s lean gas production was at
times curtailed to ensure any unhedged dry gas volumes were
preserved for more profitable winter prices. As the new, more
liquids-rich Cardium production was brought online, Company liquid
yields continued to climb, ending the quarter at 11% of production
or 22 bbl/mmcf, up 25% since the beginning of 2018. Subsequent to
the end of the quarter, Peyto commenced drilling of its first
Montney exploration well which will help evaluate the 50 net
sections of lands purchased during the third quarter. Financial
performance in the quarter remained strong resulting in reduced
debt levels and an improved balance sheet. The Company continued to
advance its market diversification strategy, adding synthetic and
physical transportation arrangements, which will result in
approximately 30% of 2019 gas volumes being exposed to US based
pricing.
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 MonthsEnded Sep
30 |
% |
Nine MonthsEnded Sep
30 |
% |
|
|
|
|
|
|
|
|
|
|
2018 |
2017 |
Change |
2018 |
2017 |
Change |
|
|
|
|
|
|
|
|
|
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas (mcf/d) |
456,197 |
557,958 |
-18% |
505,760 |
547,456 |
-8% |
|
|
|
|
|
|
|
|
|
Oil & NGLs (bbl/d) |
9,209 |
8,958 |
3% |
9,496 |
8,952 |
6% |
|
|
|
|
|
|
|
|
|
Thousand cubic feet equivalent (mcfe/d @ 1:6) |
511,453 |
611,703 |
-16% |
562,733 |
601,168 |
-6% |
|
|
|
|
|
|
|
|
|
Barrels of oil equivalent (boe/d @ 6:1) |
85,242 |
101,951 |
-16% |
93,789 |
100,195 |
-6% |
|
|
|
|
|
|
|
|
|
Production per million common shares (boe/d)* |
517 |
618 |
-16% |
569 |
608 |
-6% |
|
|
|
|
|
|
|
|
|
Product prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas ($/mcf) |
2.43 |
2.81 |
-14% |
2.57 |
2.90 |
-11% |
|
|
|
|
|
|
|
|
|
Oil & NGLs ($/bbl) |
61.04 |
45.92 |
33% |
61.41 |
47.45 |
29% |
|
|
|
|
|
|
|
|
|
Operating expenses ($/mcfe) |
0.31 |
0.26 |
19% |
0.30 |
0.27 |
11% |
|
|
|
|
|
|
|
|
|
Transportation ($/mcfe) |
0.19 |
0.17 |
12% |
0.17 |
0.17 |
- |
|
|
|
|
|
|
|
|
|
Field netback ($/mcfe) |
2.63 |
2.72 |
-3% |
2.74 |
2.76 |
-1% |
|
|
|
|
|
|
|
|
|
General & administrative expenses ($/mcfe) |
0.03 |
0.03 |
- |
0.05 |
0.04 |
25% |
|
|
|
|
|
|
|
|
|
Interest expense ($/mcfe) |
0.27 |
0.21 |
29% |
0.25 |
0.21 |
19% |
|
|
|
|
|
|
|
|
|
Financial ($000, except per share*) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
153,589 |
182,226 |
-16% |
513,797 |
549,158 |
-6% |
|
|
|
|
|
|
|
|
|
Royalties |
6,399 |
5,165 |
24% |
20,822 |
24,872 |
-16% |
|
|
|
|
|
|
|
|
|
Funds from operations |
109,549 |
139,257 |
-21% |
374,105 |
412,049 |
-9% |
|
|
|
|
|
|
|
|
|
Funds from operations per share |
0.66 |
0.85 |
-21% |
2.27 |
2.50 |
-9% |
|
|
|
|
|
|
|
|
|
Total dividends |
29,677 |
54,408 |
-45% |
89,032 |
163,204 |
-45% |
|
|
|
|
|
|
|
|
|
Total dividends per share |
0.18 |
0.33 |
-45% |
0.54 |
0.99 |
-45% |
|
|
|
|
|
|
|
|
|
Payout ratio (%) |
27 |
39 |
-31% |
24 |
40 |
-40% |
|
|
|
|
|
|
|
|
|
Earnings |
29,506 |
44,818 |
-34% |
107,652 |
125,029 |
-14% |
|
|
|
|
|
|
|
|
|
Earnings per diluted share |
0.18 |
0.27 |
-33% |
0.65 |
0.76 |
-14% |
|
|
|
|
|
|
|
|
|
Capital expenditures |
69,716 |
135,187 |
-48% |
120,148 |
386,800 |
-69% |
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
164,874,175 |
164,874,175 |
- |
164,874,175 |
164,849,932 |
- |
|
|
|
|
|
|
|
|
|
As at September 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period shares outstanding (includes shares to be issued |
|
|
|
164,874,175 |
164,874,175 |
- |
|
|
|
|
|
|
|
|
|
Net debt |
|
|
|
1,167,672 |
1,286,268 |
-9% |
|
|
|
|
|
|
|
|
|
Shareholders' equity |
|
|
|
1,647,059 |
1,668,761 |
-1% |
|
|
|
|
|
|
|
|
|
Total assets |
|
|
|
3,584,530 |
3,691,803 |
-3% |
|
|
|
|
|
|
|
|
|
*all per share amounts using weighted average
common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Sep
30 |
Nine Months Ended Sep
30 |
($000 except per share) |
2018 |
|
2017 |
|
2018 |
|
2017 |
Cash flows from operating activities |
123,019 |
|
142,659 |
|
383,920 |
|
391,776 |
Change in non-cash working capital |
(14,658) |
|
(4,411) |
|
(13,176) |
|
13,938 |
Change in provision for performance based
compensation |
1,188 |
|
1,009 |
|
3,361 |
|
6,335 |
Funds from operations |
109,549 |
|
139,257 |
|
374,105 |
|
412,049 |
Funds from operations per share |
0.66 |
|
0.85 |
|
2.27 |
|
2.50 |
(1) Funds from operations (“FFO”) - Management
uses FFO to analyze the operating performance of its energy
assets. In order to facilitate comparative analysis, FFO is
defined throughout this report as earnings before performance based
compensation, non‑cash and non‑recurring expenses. Management
believes that FFO is an important parameter to measure the value of
an asset when combined with reserve life. FFO is not a
measure recognized by Canadian generally accepted accounting
principles ("GAAP") and does not have a standardized meaning
prescribed by GAAP. Therefore, FFO, as defined by Peyto, may
not be comparable to similar measures presented by other issuers,
and investors are cautioned that FFO 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. FFO cannot be assured and future dividends may
vary.
Exploration & Development
Third quarter 2018 activity was primarily
focused in the Greater Sundance area on the Cardium play as shown
in the following table:
|
Field |
Total WellsDrilled |
Zone |
Sundance |
Nosehill |
Wildhay |
Ansell |
Whitehorse |
Kisku/Kakwa |
Brazeau |
Belly River |
- |
- |
- |
- |
- |
- |
- |
- |
Cardium |
15 |
- |
1 |
- |
- |
1 |
- |
17 |
Notikewin |
- |
1 |
- |
1 |
- |
- |
- |
2 |
Falher |
- |
- |
- |
- |
- |
- |
2 |
2 |
Wilrich |
1 |
2 |
- |
1 |
- |
- |
- |
4 |
Bluesky |
- |
- |
- |
- |
- |
- |
- |
- |
Total |
16 |
3 |
1 |
2 |
- |
1 |
2 |
25 |
During the quarter, Peyto evaluated two
additional well completion designs for the Cardium in an attempt to
increase stimulation intensity. While early results indicate lower
initial productivity, these wells continue to cleanup and improve,
requiring additional production time to determine if these designs
yield greater ultimate reserves and rates of return. Their
production performance over the coming months will be analyzed and
compared to the current go-forward well design.
The Company will continue to innovate with
fracture design in an effort to realize maximum return from its
large, liquids-rich, Cardium resource play. As illustrated in the
following table, drilling cost per meter have continued at record
low levels, while completion cost per stage and per meter of
horizontal lateral increased slightly due to the different
technologies used. Excluding the Montney exploratory well, Peyto
expects that drilling and completion costs in the fourth quarter of
2018 should be the lowest so far in the Company’s horizontal
drilling history.
|
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
2015 |
|
2016 |
|
2017 |
2018Q1 |
2018Q2 |
2018Q3 |
Gross Hz Spuds |
|
52 |
|
70 |
|
86 |
|
99 |
|
123 |
|
140 |
|
126 |
|
135 |
8 |
7 |
25 |
Measured Depth (m) |
|
3,762 |
|
3,903 |
|
4,017 |
|
4,179 |
|
4,251 |
|
4,309 |
|
4,197 |
|
4,229 |
4,091 |
3,814 |
4,057 |
|
|
|
|
|
|
|
|
|
|
|
|
Drilling ($MM/well) |
|
$2.76 |
|
$2.82 |
|
$2.79 |
|
$2.72 |
|
$2.66 |
|
$2.16 |
|
$1.82 |
|
$1.90 |
$1.74 |
$1.54 |
$1.65 |
$ per meter |
|
$734 |
|
$723 |
|
$694 |
|
$651 |
|
$626 |
|
$501 |
|
$433 |
|
$450 |
$425 |
$403 |
$407 |
|
|
|
|
|
|
|
|
|
|
|
|
Completion ($MM/well) |
|
$1.36 |
|
$1.68 |
|
$1.67 |
|
$1.63 |
|
$1.70 |
|
$1.21 |
|
$0.86 |
|
$1.00 |
$1.15 |
$1.31 |
$1.29 |
Hz Length (m) |
|
1,335 |
|
1,303 |
|
1,358 |
|
1,409 |
|
1,460 |
|
1,531 |
|
1,460 |
|
1,241 |
1,415 |
1,605 |
1,436 |
$ per Hz Length (m) |
|
$1,017 |
|
$1,286 |
|
$1,231 |
|
$1,153 |
|
$1,166 |
|
$792 |
|
$587 |
|
$803 |
$810 |
$814 |
$896 |
$ ‘000 per Stage |
|
$231 |
|
$246 |
|
$257 |
|
$188 |
|
$168 |
|
$115 |
|
$79 |
|
$81 |
$61 |
$40 |
$44 |
Capital Expenditures
During the third quarter of 2018, Peyto spent
$37 million on drilling, $17.5 million on completions, $5.6 million
on wellsite equipment and tie-ins, $4.9 million on facilities and
major pipeline projects, and $4.7 million acquiring new Crown lands
and seismic, for total capital investments of $69.7 million.
The $2.5 million in land acquisition included
the purchase of 50.25 net sections of Crown lands containing mostly
Montney rights, for an average purchase price of $64/acre.
Commodity Prices
Average daily AECO natural gas prices were
$1.13/GJ in Q3 2018, up 1% from $1.12/GJ in the previous quarter
but down 18% from the $1.38/GJ in the prior year. US Henry Hub spot
prices were $US 2.93/MMBTU (equivalent to $CND 3.64/GJ) up 2% from
the previous quarter but effectively the same as a year ago. The
inadequacy of the intra-Alberta gas transmission system and the
resultant inability to access Alberta storage reservoirs to buffer
the supply/demand imbalances, particularly during summer months,
continues to create daily market instability and extreme volatility
in AECO daily and monthly prices and is the cause of the
significant difference between Canadian and US natural gas
prices.
On average for Q3 2018, Peyto realized a natural
gas price of $2.43/Mcf ($2.11/GJ) or 187% of the AECO daily average
price. This was the result of a combination of approximately 5% of
natural gas production being sold into the daily or monthly spot
market at an average of $1.27/GJ ($1.46/Mcf) and 95% having been
pre-sold at an average hedged price of $2.15/GJ (prices reported
net of TCPL fuel volume deductions).
In the third quarter of 2018, NGL prices
continued to justify the operation of Peyto’s Oldman deep cut
plant, resulting in a blended, realized, oil and natural gas
liquids price of $61.04/bbl, which represented 67% of the
$90.83/bbl average Canadian WTI price. Details of realized
commodity prices by component are shown in the following table:
Commodity Prices by Component
|
|
Three Months ended Sept 30 |
|
|
|
2018 |
|
2017 |
|
AECO monthly |
($/GJ) |
|
1.28 |
|
1.93 |
|
AECO daily |
($/GJ) |
|
1.13 |
|
1.38 |
|
Henry Hub spot |
($US/MMBTU) |
|
2.93 |
|
2.95 |
|
Peyto natural gas – prior to hedging |
($/GJ) |
|
1.27 |
|
2.60 |
|
|
($/mcf) |
|
1.46 |
|
2.99 |
|
Peyto natural gas – after hedging |
($/GJ) |
|
2.11 |
|
2.45 |
|
|
($/mcf) |
|
2.43 |
|
2.81 |
|
|
|
|
|
|
Condensate ($/bbl) |
|
|
78.12 |
|
53.77 |
|
Propane ($/bbl) |
|
|
22.57 |
|
23.25 |
|
Butane ($/bbl) |
|
|
43.85 |
|
29.58 |
|
Pentane ($/bbl) |
|
|
84.68 |
|
55.10 |
|
Total Oil and natural gas
liquids ($/bbl) |
|
|
61.04 |
|
45.92 |
|
Canadian WTI ($/bbl) |
|
|
90.83 |
|
60.35 |
|
Peyto Realized liquids
price/Canadian WTI |
|
|
|
67% |
|
76% |
|
Liquids prices are Peyto realized prices in Canadian dollars
adjusted for fractionation and transportation.
Financial Results
Approximately 46%, or $1.10/Mcfe, of Peyto’s
unhedged revenue came from its associated natural gas liquids sales
while 54%, or $1.29/Mcfe, came from natural gas. Natural gas
hedging activity contributed $0.87/Mcfe for total revenue of
$3.27/Mcfe. Liquids production represented 11% of total production
but its revenue contribution more than covered all cash costs. Cash
costs of $0.94/Mcfe, included royalties of $0.14/Mcfe, operating
costs of $0.31/Mcfe, transportation costs of $0.19/Mcfe, G&A of
$0.03/Mcfe and interest costs of $0.27/Mcfe. Cash costs per unit of
production were higher than the previous quarter and previous year
due to increased royalties, related to higher liquids pricing,
higher operating and transportation costs, from reduced production
levels, and increased interest rates. For the balance of the year,
Peyto expects to lower per unit operating, transportation and
interest costs as production volumes begin to increase from the
resumption in drilling activity.
Total cash costs, when deducted from realized
revenues of $3.27/Mcfe, resulted in a cash netback of $2.33/Mcfe or
a 71% operating margin. Historical cash costs and operating margins
are shown in the following table.
|
2015 |
2016 |
2017 |
2018 |
($/Mcfe) |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
Q3 |
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 |
3.27 |
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 |
0.14 |
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 |
0.31 |
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 |
0.19 |
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 |
0.03 |
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 |
0.27 |
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 |
0.94 |
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 |
2.33 |
Operating Margin |
79% |
78% |
79% |
79% |
78% |
73% |
76% |
76% |
74% |
75% |
76% |
76% |
74% |
72% |
71% |
Depletion, depreciation and amortization charges
of $1.43/Mcfe, along with a provision for deferred tax and market
based bonus payments reduced the cash netback to earnings of
$0.63/Mcfe, or a 19% profit margin. Dividends of $0.63/Mcfe were
paid to shareholders.
Natural Gas Marketing
Peyto continues to make meaningful progress on
its market diversification strategy, previously announced in
January of this year. This plan is designed to complement the
Company’s highly successful hedging strategy and endeavors to
achieve a target of 40% of natural gas sales linked to AECO based
pricing, 40% linked to US-based pricing and 20% sold directly to
intra-Alberta industrial markets. As announced last quarter, Peyto
has already begun entering into contracts to supply gas to
intra-Alberta industrial users post 2022. In the interim, the
Company has been actively securing both synthetic and physical
transportation arrangements to link gas sales to US-based markets
as illustrated in the table below which shows US-based exposure as
a percent of Q3 2018 production.
|
Q42018 |
Q12019 |
Q22019 |
Q32019 |
Q42019 |
Q12020 |
Q22020 |
Q32020 |
Q42020 |
Q12021 |
Q22021 |
Q32021 |
Q42021 |
NYMEX-AECO Basis‘000s MMBTU/d |
26.5 |
40 |
200 |
200 |
150.3 |
125 |
200 |
200 |
150.3 |
125 |
200 |
200 |
85.6 |
NYMEX-AECO Basis$US/MMBTU |
1.01 |
0.97 |
1.45 |
1.45 |
1.33 |
1.23 |
1.45 |
1.45 |
1.33 |
1.23 |
1.45 |
1.45 |
1.35 |
Percentage of Q3 2018 Gas Sales |
5% |
8% |
40% |
40% |
30% |
25% |
40% |
40% |
30% |
25% |
40% |
40% |
17% |
Peyto also continued its practice of layering in
future sales in the form of fixed price swaps for both AECO and
NYMEX markets, thus smoothing out the volatility in natural gas
prices. The following table summarizes the remaining hedged volumes
and prices for the upcoming years as of November 6, 2018:
|
Q42018 |
Q12019 |
Q22019 |
Q32019 |
Q42019 |
Q12020 |
Q22020 |
Q32020 |
Q42020 |
Q12021 |
Q22021 |
Q32021 |
Q42021 |
AECO Fixed Price Swaps ‘000’s GJ/d |
438.6 |
410 |
190 |
190 |
176.7 |
170 |
55 |
55 |
38.4 |
10 |
10 |
10 |
3.4 |
AECO Fixed Price Swaps $/GJ |
2.09 |
2.04 |
1.61 |
1.61 |
1.75 |
1.83 |
1.64 |
1.64 |
1.77 |
1.65 |
1.56 |
1.56 |
1.56 |
NYMEX Fixed Price ‘000’s MMBTU/d |
|
|
40 |
40 |
13.5 |
|
|
|
|
|
|
|
|
NYMEX Fixed Price $/MMBTU |
|
|
2.70 |
2.70 |
2.70 |
|
|
|
|
|
|
|
|
For a real time summary of Peyto’s future hedges see:
http://www.peyto.com/Files/Operations/Marketing/hedges.pdf
Activity Update
As part of Peyto’s strategic capital plan for
2018, the vast majority of the total capital investment was to be
deployed in the third and fourth quarter of the year in order to
bring on new, unhedged, flush production into stronger winter
commodity prices. Since the end of the third quarter, Peyto has
been very active drilling and completing wells in its Deep Basin
core areas with 16 wells spud, 11 wells completed, and 7 wells
brought on stream. Included in this total are 5 Cardium wells in
the Greater Sundance and Kakwa areas, which are contributing to a
current production level of approximately 86,000 boe/d, comprised
of 12% condensate and NGLs. Peyto has 4 more wells to come on
production this week, representing an estimated net 1,500 boe/d and
a current inventory of 15 drilled but uncompleted wells. With 7
drillings rigs active, including one Montney exploration rig, Peyto
expects to drill 28 wells in the fourth quarter and expects 36
wells to be completed and pipeline connected.
New Ventures
As a result of modest propane price strength
during this past quarter, Peyto has committed to $3 million of
detailed engineering and long lead time equipment fabrication for
its Swanson Gas Plant deep-cut process addition. Commensurate with
that step, the Company is undertaking gas gathering pipeline
routing of its South Sundance liquids-rich Cardium well development
to the Swanson facility. The vertical infrastructure integration
will enhance the value of this growing Cardium gas supply. Deep cut
liquid yields on typical Cardium wells average between 60 and 75
bbl/MMcf. Final investment decision on the Swanson deep-cut will
likely occur in the first quarter of 2019 with a plant startup in
early 2020.
The Company will gauge propane market dynamics
until Q1 2019 before making any decisions to proceed with a
companion Swanson LPG fractionation facility. The project is at the
forefront of Peyto’s investment opportunities but optimal timing
will be targeted as the LPG markets continue to evolve. The AltaGas
Ridley Island Propane Export terminal due onstream in Q1 2019, the
Interpipe propane dehydrogenation and polypropylene plant, and
other emerging projects that are awarded government grants under
the second phase of the Alberta Petrochemical Diversification
Program will no doubt have influence on Alberta’s LPG markets.
Peyto will be in a position to capitalize on opportunity outcomes
of these market dynamics.
The Company continues its engagement as a
potential supply source for numerous other projects at varying
stages of development. Close to the Greater Sundance area, certain
petrochemical projects are awaiting potential funding awards from
the Alberta Petrochemical Diversification Program which closed
applications at the beginning of October and from which decisions
are imminent. Further afield, supply relationships are being
fostered for other intra-Alberta petrochemical ventures and
external-Alberta power projects. Lastly, the Company continues
active discussion on LNG export projects on both coasts of the
country, but particularly with an eye towards the strong call for
Asian supply off the coast of British Columbia.
2019 Budget
The current success of Peyto’s liquid-rich
Cardium resource play combined with relatively stronger NGL pricing
in Alberta justifies an increased capital program and Cardium
weighting for 2019, despite the expected weakness and volatility in
AECO natural gas prices. The Company remains ready to accelerate
development of its large, drill-ready inventory of drier gas Spirit
River drilling locations should natural gas prices strengthen.
Maximization of the return of all future opportunities has always
been Peyto’s strategy regardless of production outcomes and the
Company will continue to optimize the timing of future investments
to achieve this goal.
The Board of Directors of Peyto has approved a
preliminary 2019 budget which includes a capital program of
approximately $250-$300 million that involves the drilling of 75-90
gross wells (almost exclusively Cardium with an average 90% working
interest), along with associated pipeline and facility investments,
which is expected to build between 22,000-24,000 boe/d of new
production by year-end 2019. Production for 2018 is expected to
exit between 94,000 and 96,000 boe/d, depending on tie-in timing,
and the new volume that will be added in 2019 is expected to
effectively offset the annual forecast of 25% base decline by the
year’s end. Funds from operations, based on current strip commodity
prices, are forecast to cover this entire capital program, dividend
payments and continue to reduce indebtedness.
The future strip for Alberta natural gas prices
remains extremely volatile with winter 2018/2019 trading at
approximately $2.45/GJ followed by summer 2019 at $1.25/GJ. In
contrast for 2019, Canadian WTI, which is a proxy for Cardium
condensate production is trading above $80/bbl or over eight times
the energy equivalent of the natural gas price. This results in
approximately 40% of Peyto’s forecast revenue being derived from
liquids production that represents less than 15% of total forecast
production. Consistent with past years, and in accordance with
Peyto’s historical hedging practice, the Company has already fixed
approximately 38% of expected revenues through AECO, NYMEX and
Canadian WTI fixed price swaps. These strip and hedge prices, when
combined with the Company’s industry leading cash costs of
approximately $0.85 - $0.95/Mcfe ($5.40/boe), are expected to yield
cash netbacks of approximately $13/boe ($2.15/Mcfe).
Outlook
Although Peyto is planning a slightly increased
capital program for 2019, the Company continues to remain focused
on maintaining financial flexibility particularly in light of the
prevailing economic and market conditions. Relatively low levels of
North American natural gas storage have the potential to create
much improved winter prices just in time for increasing production
from Peyto’s strategically timed 2018/2019 capital program. At the
same time, condensate and natural gas liquids like butane and
propane have very recently experienced unprecedented pricing
differentials as the heavy oil industry in Alberta comes under
pressure due to restricted market access.
This short term market volatility aside, Peyto’s
strategy continues to focus on the creation of long term
shareholder value; through new exploration initiatives that extend
the current, deep inventory of profitable drilling locations,
through value enhancing infrastructure investments, and through
continued focus on longer term opportunities for market
diversification.
Conference Call and Webcast
A conference call will be held with the senior
management of Peyto to answer questions with respect to the Q3 2018
financial results on November 8th, 2018 at 9:00 a.m. Mountain
Daylight Time (MDT), or 11:00 a.m. Eastern Daylight Time (EDT). 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/56wzows6. 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 third quarter report to shareholders, including
the MD&A, unaudited financial statements and related notes, is
available at
http://www.peyto.com/Files/Financials/2018/Q32018FS.pdf and at
http://www.peyto.com/Files/Financials/2018/Q32018MDA.pdf and will
be filed at SEDAR, www.sedar.com at a later date.
Darren GeePresident and CEONovember 7, 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 anticipated 2018 annual capital efficiency; the
amount of gas volumes expected to be exposed to US based pricing in
2019; the timing for the Company’s analysis of the production
results from its Cardium evaluation; expectations regarding future
drilling and completion costs; the Company's natural gas marketing
diversification strategy; Peyto's hedging program; the Company’s
drilling and completion program for the remainder of 2018; the
benefits of the new strategic pipeline under the Sundance
provincial park; future resource opportunities for the Company and
expectations for evaluation drilling in the Montney before year end
2018; timing expectations for an investment decision on Peyto’s
Swanson plant deep cut conversion and other deep cut projects;
future supply source opportunities for the Company and potential
LNG export projects the Company may become involved with; Peyto’s
preliminary 2019 budget and new production estimates for year-end
2019, including the Company’s expected increased capital program
for 2019; expectations for exit production for 2018; pricing
expectations for the winter season; and the Company’s overall
strategy 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 nine months ended September 30,
2018.
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