Peyto Exploration & Development Corp. ("Peyto” or the
“Company") announces a three year strategic plan to address the
natural gas price crisis currently affecting the entire Alberta
natural gas market and Canadian natural gas producers. The Board of
Directors of Peyto has approved a plan to enhance shareholder value
by; investing in several strategic longer-term initiatives,
protecting the Company’s balance sheet through the near term
natural gas price weakness, continued market diversification
initiatives including additional vertical integration efforts, and
by expanding into new venture opportunities.
The Alberta natural gas price (AECO) has
experienced unprecedented volatility over the past year and a half,
driven primarily by a lack of excess capacity in the Nova Gas
Transmission (NGTL) system and inadequate seasonal access to
storage reservoirs. Despite growing Alberta demand, additional
supply of gas in the Western Canadian Sedimentary Basin (WCSB)
remains restricted from accessing other North American markets
resulting in large discounts to the realized price. This is further
exacerbated by a similar situation with heavy oil which has caused
increased discounts to condensate (diluent) and other natural gas
liquids prices associated with liquid-rich gas production. This is
a temporary situation that should be resolved over the next three
years as TC Energy, formerly TransCanada Corporation, invests over
$9 billion to expand the NGTL system and increases its ability to
move gas volumes from within the basin to export pipelines,
specifically at the eastern Alberta border. Beyond that timeline,
LNG export projects off both the west and east coasts of Canada
will have continued to move forward, enabling Western Canadian
natural gas resources to ultimately access world markets. As a
result, future natural gas price realizations in Alberta are
expected to improve significantly over the next several years. In
order to maximize the returns for shareholders from Peyto’s
resource development opportunities, the business planning cycle
needs to extend to a 3 to 5 year time horizon with the judicious
timing of future capital investments made to coincide with this
commodity price improvement.
Operational Update
Peyto’s fourth quarter drilling activity, which
represented almost half of the total 2018 capital investments
resulted in production growth from approximately 83,000 boe/d in
October to exit the year at 94,000 boe/d. Importantly, condensate
and natural gas liquids production grew from a low of approximately
8,000 bbl/d to exit the year at a record 12,000 bbl/d, a 50%
increase. This increase was primarily driven by activity in Peyto’s
Deep Basin Cardium play, with average liquid yields of 60 bbl/mmcf
to as high as 130 bbl/mmcf, and where an innovative completion
design has improved both productivity and reserve recovery thereby
increasing the rate of return on investment in this play.
Peyto drilled a total of 70 gross (67.25 net)
wells in 2018 which added approximately 23,000 boe/d of new
production at the lowest cost in the Company’s history. Included in
this drilling activity was 48 gross Cardium wells (45.65 net) and
one Montney exploratory well. Completion of the Montney well is
planned for Q2 2019 in order to eliminate certain completion costs
relating to frac water heating and after additional offsetting
information becomes available.
Three Year Development Plan
Peyto’s preliminary 2019 capital budget
announced Nov 7, 2018, ranging from $250-$300 million, has been
reduced to $150 to $200 million. As always, investment will be
directed toward the highest return opportunities within Peyto’s
inventory of drilling locations, with continued focus on the most
liquids rich portions of the Company’s Deep Basin assets. The
Company will reassess the program mid-year for potential expansion
as commodity prices continue to evolve over the balance of the
winter and in response to potential Alberta Government actions.
This capital program involves drilling approximately 50 gross
Cardium wells (greater than 90% working interest), as well as
continuing to advance its Swanson Gas Plant deep-cut process
addition and Montney exploration play. The program is expected to
build approximately 17,000 boe/d of new production, approximately
25% of which will be natural gas liquids, at a cost of
$10,000/boe/d to $11,000/boe/d. This new production is expected to
help offset the Company’s forecast 25% base decline.
In 2020 and 2021 Peyto plans to ramp-up capital
investment with capital programs of approximately $270 and $320
million at a cost similar to 2019. These programs are expected to
offset forecast base declines of 21% and 25%, respectively, with
production exiting 2021 at close to 100,000 boe/d, including 18,000
bbl/d of condensate and NGLs.
Strategic Long Term
Initiatives
Peyto has a substantial, integrated midstream
asset base that was originally built exclusively for Company and
joint interest production. Up until now, available processing
capacity has not been offered to industry on a fee for service use.
Going forward, and while excess capacity exists, Peyto will be
actively marketing midstream processing opportunities for its
excess capacity in order to maximize the return from these
infrastructure investments.
Peyto has recently signed a definitive agreement
to purchase certain mineral rights in the Sundance area that
encompass a depleted, high permeability reservoir suitable for a
proprietary natural gas storage scheme. The pool originally
contained an estimated 110 BCF of gas in place and Peyto expects to
establish a working range of 60 to 80 BCF of storage capability.
Not unlike TransCanada’s “Big Eddy” Edson Gas Storage facility,
Peyto envisions the “Big Sunny” storage facility will enable the
Company to inject gas in summer months when prices are lower and
produce those reserves in winter months when prices are higher. As
an example, there is currently greater than a 40% forecast
improvement in AECO prices from summer 2019 to winter 2019/20.
Peyto added substantial new drilling inventory
during the year through the addition of both Cardium and Montney
lands. A total of 47 sections (60% working interest) of Cardium
lands were added that are expected to yield more than 120 gross
locations, as well as 50 sections (100% working interest) of
Montney lands in a new exploratory area. In the next few years,
Peyto expects that industry land expiries, particularly in the
Montney, will present significant opportunity for the Company to
continue to amass an increasing inventory of undeveloped drilling
locations that can be developed as pricing recovers.
Balance Sheet Protection
During 2018, Peyto generated cashflow in excess
of both capital investments and dividends to shareholders. This
free cashflow was used to reduce indebtedness and strengthen
Peyto’s balance sheet. As announced on January 3, 2019, Peyto has
also continued to protect its balance sheet from rising interest
rates with the closing of another private placement of senior
unsecured notes. On that date, Peyto issued CND$100 million of
senior unsecured notes which bear a coupon rate of 4.39% and mature
on January 3, 2026. Proceeds from the notes were used to repay the
$100 million of senior notes of Peyto which matured on January 3,
2019. The issuance of the senior notes maintained Peyto's
aggregate borrowing capacity at $1.92 billion.
Starting with the January dividend, for
shareholders of record on January 31, 2019 and to be paid on
February 15, 2019, the monthly dividend will be temporarily reduced
from the current $0.06/share to $0.02/share. While this dividend
level is expected to be below the earnings forecast for 2019, the
Board of Directors feels that greater shareholder returns can be
generated by investing in strategic longer term initiatives at this
time. The strategy at Peyto continues to focus on a total
shareholder return model that at times includes substantial
reinvestment in the business and at other times includes profit
sharing with shareholders through dividend payments.
The combination of a reduced capital program and
temporary dividend reduction will allow Peyto to continue to
materially reduce indebtedness. This will ultimately allow for an
even greater investment in opportunities in the future that are
expected to achieve above average returns for shareholders.
Market Diversification
Efforts
As announced in early 2018, Peyto has adopted a
market diversification strategy which is designed, over time, to
expose 40% of its natural gas sales to AECO based pricing, link 40%
to US pricing and sell 20% directly to intra-Alberta industrial
markets. As before, Peyto will continue to hedge future prices to
smooth out the volatility in both Alberta and US natural gas
markets.
Peyto has made significant strides advancing
this strategy. For the forecast 2019 natural gas production volume,
8% is currently exposed to the Dawn market, 24% to the Henry Hub
market, and the remaining 68% to the AECO market. In each of these
markets, 13%, 62% and 73% respectively, or 65% of aggregate volume,
has already been pre-sold to achieve price certainty. For 2020 and
2021 respectively, 46% and 45% of forecast volumes have been
exposed to markets outside of the AECO market.
As previously announced, Peyto has entered into
a gas supply agreement with a gas-fired power generation company
with an expected first delivery in 2022. The current
contracted supply is approximately 52 mmcf/d, which at the 2018
average power pool price would yield Peyto a $3.00/mcf price
relative to the average 2018 AECO daily price of $1.64/mcf.
Peyto is committed to be an important part of Alberta’s clean
energy future and is determined to further increase this
intra-Alberta supply commitment through either an enlargement of
this project or through other like projects.
Peyto’s future revenue is further diversified by
a natural gas liquids stream which includes condensate, pentane,
butane and propane that collectively account for approximately 13%
of current production growing to 18% over the next three years.
These liquids components are expected to represent between 35% and
50% of the total annual revenue and substantially increase dry gas
netbacks.
Outlook
Peyto’s asset base encompasses a concentrated
collection of lands, resources and infrastructure that continues to
deliver an industry leading cost structure and operating margin
while offering vertical integration along the value chain. Although
accelerated development and growth of this asset is being partially
deferred for the short term, over the medium to longer term, as
market access is expanded and improved, this asset base will
continue to deliver solid returns for shareholders.
The Company’s three year plan, provides for a
strategic path forward through a period of significant commodity
price volatility and immense opportunity. Peyto will continue to
remain poised to capitalize on these opportunities while at the
same time will be nimble to changing market dynamics with both the
financial and operational flexibility to ramp up activity quickly
and take advantage of attractive investment opportunities that may
arise. Already Peyto has advanced its Montney exploration
initiative, diversified its gas markets, integrated supply with
inter-Alberta industrial users, advanced seasonal storage
capability and is working to maximize revenues through innovative
liquids extraction. While these elements are all individually
accretive to shareholder value, collectively they enhance the
intrinsic value of Peyto’s entire asset base in the greater Edson
area and enable shareholder returns to be further compounded over
time.
In the near term, shareholders can remain
confident that a continued attention to financial flexibility and a
disciplined, returns focused approach to all future capital
investments will preserve and enhance total shareholder
value.
Darren GeePresident and CEOPhone: (403)
261-6081 Fax: (403) 451-4100
Certain information set forth in this
document, including management's assessment of Peyto’s future plans
and operations, capital expenditures and capital efficiencies,
contains forward-looking statements. By their nature,
forward-looking statements are subject to numerous risks and
uncertainties, some of which are beyond Peyto’s control, including
the impact of general economic conditions, industry conditions,
volatility of commodity prices, currency fluctuations, imprecision
of reserve estimates, environmental risks, competition from other
industry participants, the lack of availability of qualified
personnel or management, stock market volatility and ability to
access sufficient capital from internal and external sources.
Readers are cautioned that the assumptions used in the preparation
of such information, although considered reasonable at the time of
preparation, may prove to be imprecise and, as such, undue reliance
should not be placed on forward-looking statements. Peyto's actual
results, performance or achievement could differ materially from
those expressed in, or implied by, these forward-looking statements
and, accordingly, no assurance can be given that any of the events
anticipated by the forward-looking statements will transpire or
occur, or if any of them do so, what benefits Peyto will derive
there from. In addition, Peyto is providing future oriented
financial information set out in this press release for the
purposes of providing clarity with respect to Peyto’s strategic
direction and readers are cautioned that this information may not
be appropriate for any other purpose. Other than is required
pursuant to applicable securities law, Peyto does not undertake to
update forward looking statements at any particular time, except as
required by applicable laws. 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.
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