Peyto Exploration & Development Corp. (“Peyto” or the
“Company”) is pleased to present the results and analysis of its
independent reserve report effective December 31, 2018. The
evaluation encompassed 100% of Peyto’s reserves and was conducted
by InSite Petroleum Consultants (“InSite”). The year 2018 marks the
Company’s 20th year of profitable reserves development.
SUSTAINABILITY
- Peyto’s base production decline continues to decrease, from 35%
in 2018 to a forecast 25% in 2019.
- The Company’s Proved Producing reserves were held constant
using capital equivalent to 50% of cash flow.
- Due to the large resource contained in the tight, water-free
reservoirs, Peyto’s 1,344 net producing wells are forecast to have
very long producing lives with over 1,000 wells forecast to still
be on production in 2049.
- Peyto continues to strengthen its balance sheet with over $100
million in net debt repayment in 2018. The Company plans to
continue to pay down debt in 2019.
- Peyto’s disciplined, organic approach to finding and developing
natural gas has delivered one of the highest ratios of producing to
non-producing wells in the industry.
HISTORICAL TRACK RECORD
- Over the past 20 years, Peyto has explored for and discovered
6.5 TCFe of Alberta Deep Basin natural gas and associated liquids,
of which 58% has now been developed. Each year the Company invests
in the discovery of new reserves and the efficient and profitable
development of existing reserves into high netback natural gas and
NGL production for the purpose of generating the maximum possible
return on capital for its shareholders. At the same time, this
activity delivers significant financial benefits not just to
Albertans but all Canadians.
- In those 20 years, a total of $6.0 billion was invested in the
acquisition and development of 3.8 TCFe of developed reserves at an
average cost of $1.57/MCFe, while a weighted average field netback1
of $3.83/MCFe resulted in a cumulative recycle ratio1 of 2.4 times.
Royalty payments made during this time period have totaled over
$859 million.
- Based on the December 31, 2018 evaluation, the debt adjusted,
Net Present Value of the Company’s remaining Proved plus Probable
Additional reserves (“P+P NPV”, 5% discount, less debt) was
$37/share, comprised of $20/share of developed reserves and
$17/share of undeveloped reserves.
2018 HIGHLIGHTS
- For the year ended December 31, 2018, Peyto invested $232
million of total capital2 to build 114 mmcf/d of natural gas and
4,800 bbl/d of NGLs at a cost of $9,800/boe/d, the lowest cost in
Company history.
- Peyto developed 198 BCFe (33 MMboes) of new Proved Producing
(“PP”) reserves (22% liquid) at a Finding, Development and
Acquisition (“FD&A”) cost of $1.18/MCFe ($7.05/boe) while the
average field netback2 was $2.66/MCFe ($15.95/boe), resulting in a
2.3 times recycle ratio1. The PP FD&A cost has fallen 50% in
the last five years due to ongoing well design optimization and
superior operational execution.
- Peyto replaced 294% of annual production with new Total Proved
(“TP”) reserves (27% liquid) at a FD&A cost of $1.21/MCFe
($7.26/boe) and replaced 342% of annual production with new Proved
plus Probable Additional (“P+P”) reserves (27% liquid) at a
FD&A cost of $1.02/MCFe ($6.10/boe) (including increases in
Future Development Capital (“FDC”) of $483 million and $467 million
for the respective categories). For comparative purposes, FD&A
costs before changes in FDC were $0.39/MCFe ($2.36/boe) and
$0.34/MCFe ($2.03/boe), respectively. P+P FDC includes $137 million
of Deep Cut facility capital that results in greater value
enhancement as opposed to just volume increase.
- Total Company reserves remained constant on a PP basis at
1.6 TCFe while TP and P+P reserves increased by 14% and 11% to 3.1
TCFe and 4.8 TCFe, both on an absolute basis and on a per share
basis, respectively. Liquid reserves increased by 13%, 52% and 31%
in the PP, TP, and P+P categories, respectively. Higher liquids
recovery is reflective of the recognition of the richer Cardium
undeveloped well population as well as the impact of Deep Cut
facility investments. In total, PDP reserves represented 34% of P+P
reserves.
- Peyto’s future Cardium locations recognized in the reserve
report doubled from 187 to 375. The increase in recognized
locations has grown the Cardium share of total reserve volume (P+P)
from 15% to 26% and value (P+P NPV, 5% discount rate) from 16% to
30%, as compared to last
year.
- The Reserve Life Index (“RLI”) for the PP, TP and P+P reserves
increased to 9, 16 and 25 years, respectively.
- At year end, P+P reserves of 803 MMboes (inclusive of 1,201
future locations) had been assigned to just 18% of Peyto’s total
Deep Basin rights.
2019 UPDATE
- Peyto’s drilling program for 2019 will, at this time, remain
the same as previously announced on January 16, 2019, with a
capital budget between $150 and $200 million and plans to drill
approximately 50 wells with a focus on the Cardium liquids-rich
resource play.
- Peyto has protected funding for the capital program with
revenue that is diversified between natural gas liquids and presold
natural gas production. Peyto current has only 12% of projected
revenues exposed to the AECO spot price in 2019.
1Recycle Ratio is Field Netback divided by FD&A.
2Capital Expenditures, Field Netback (Revenue
less Royalties, Operating costs and Transportation), and Production
are estimated and remain unaudited at this time.
2018 RESERVES
The following table summarizes Peyto's reserves
and the discounted Net Present Value of future cash flows, before
income tax, using variable pricing, at December 31, 2018.
|
|
|
|
|
Before Tax Net Present Value
($millions) |
|
|
|
|
|
Discounted at |
|
Gas(BCF) |
Oil & NGL (mstb) |
BCFe(6:1) |
mmboe(6:1) |
0% |
5% |
8% |
10% |
|
Proved
Producing |
1,454 |
31,598 |
1,644 |
274 |
$5,093 |
$3,180 |
$2,569 |
$2,276 |
|
Proved
Non-producing |
34 |
912 |
39 |
7 |
$90 |
$57 |
$45 |
$40 |
|
Proved Undeveloped |
1,203 |
35,447 |
1,415 |
236 |
$3,782 |
$1,793 |
$1,209 |
$943 |
|
Total
Proved |
2,690 |
67,957 |
3,098 |
516 |
$8,965 |
$5,029 |
$3,824 |
$3,258 |
|
Probable Additional |
1,424 |
49,153 |
1,719 |
286 |
$5,369 |
$2,316 |
$1,539 |
$1,204 |
|
Proved + Probable Additional |
4,114 |
117,110 |
4,817 |
803 |
$14,334 |
$7,345 |
$5,363 |
$4,463 |
|
Note:
Based on the InSite report effective December 31, 2018. Tables may
not add due to rounding. |
ANALYSIS FOR PEYTO
SHAREHOLDERS
One of the guiding principles at Peyto is “to
tell you the business facts that we would want to know if our
positions were reversed”. Therefore, each year Peyto provides an
extensive analysis of the reserve evaluation that goes far beyond
industry norms in order to answer the most important questions for
shareholders:
- Base Reserves - How did the “base reserves” that were on
production at the time of the last reserve report perform during
the year, and how did any change in commodity price forecast affect
their value?
- Value Creation - How much value did the 2018 capital
investments create, both in current producing reserves and in
undeveloped potential? Has the Peyto team earned the right to
continue investing shareholders’ capital?
- Growth and Income - Are the projected cash flows capable
of funding the growing number of undeveloped opportunities and a
sustainable dividend stream to shareholders, without sacrificing
Peyto’s financial flexibility?
- Risk Assessment – What are the risks associated with the
assessment of Peyto’s reserves and the risk of recovering future
cashflows from the forecast production streams?
1. Base Reserves
Peyto’s existing Proved Producing reserves at
the start of 2018 (the base reserves) were evaluated and adjusted
for 2018 production as well as any technical or economic revisions
resulting from the additional twelve months of production and
commodity price data. As part of InSite’s independent engineering
analysis, all 1,446 producing entities (zones/wells) were
evaluated. These producing wells and zones represent a total gross
Estimated Ultimate Recoverable (EUR) volume of 3.9 TCFe, which is
up 0.4% from previous estimates and represents a positive revision
due to liquid recovery optimization projects implemented over the
year. In aggregate, Peyto is pleased to report that its total base
reserves continue to meet with expectation, which increases the
confidence in the prediction of future recoveries.
The commodity price forecast used by the
independent engineers in this year’s evaluation is lower than last
year which had the effect of reducing the Net Present Value of all
reserve categories. For example, the debt adjusted NPV, discounted
at 5%, of last year’s Proved Producing reserves, decreased $491
million, or 22%, due to the difference in commodity price forecasts
and Peyto’s realized historical offsets to posted prices. InSite’s
price forecast used in the variable dollar economics is available
on their website at www.insitepc.com.
For 2019, InSite is forecasting the total base
production (all wells on production at Dec. 31, 2018) to decline to
approximately 69,000 boe/d by December 2019. This implies a base
decline rate of approximately 25% from December 2018. This forecast
decline rate is significantly lower than the 2018 actual base
decline of 35%. The actual base decline for 2018 was slightly
steeper than expected due to temporary liquid loading in the
gathering system at the end of year which backed out base
production. While rapid production growth had driven the base
decline rate up in past years, the reduced capital program in 2018
combined with a focus on a lower declining Cardium drilling
program, relative to the maturing wells, is expected to result in a
material reduction in total decline. This decline is expected to
continue to decrease in the next year because production additions
will represent a smaller proportion of total production. The
historical base decline rates and capital programs are shown in the
following table:
|
2007 |
2008 |
2009 |
20101 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019F |
Base Decline
(%/yr)* |
23% |
26% |
20% |
22% |
33% |
35% |
34% |
38% |
40% |
40% |
37% |
35% |
25% |
Capital
Expenditures ($MM) |
$122 |
$139 |
$73 |
$261 |
$379 |
$618 |
$578 |
$690 |
$594 |
$469 |
$521 |
$232 |
$175 |
*The base
decline represents the aggregate annual decline of all wells on
production at the end of the previous year. |
1.
Horizontal drilling began in 2010. |
2. Value
Creation/Reconciliation
During 2018, Peyto invested a total of $232
million in organic activity to buy and evaluate exploration lands,
expand its pipeline gathering network, and drill 69 gross (67.3
net) development wells and 1 gross (1 net) Montney exploratory
well. In keeping with Peyto’s strategy of maximizing shareholder
returns, an evaluation of the economic results of this investment
activity is necessary in order to determine, on a go-forward basis,
the best use of shareholders’ capital. Not only does this look back
analysis give shareholders a report card on the capital that was
invested, it also helps illustrate the potential returns that can
be generated from similar future undeveloped opportunities.
Exploration and Development
Activity
Of the total capital invested in exploration and
development activities in 2018, approximately 3% was spent
acquiring lands and seismic, 7% on new facilities, and the
remaining 90% was spent drilling, completing and connecting
existing and new reserves. Thirty-seven of the 70 gross wells
drilled, or 53%, were previously identified as undeveloped reserves
in last year’s reserve report (30 Proved, 7 Probable Additional).
The remaining 33 wells were not recognized in last year’s report
since the majority were Cardium locations and recent changes to
completion design have unlocked significant new Cardium
inventory.
Peyto’s booked Cardium locations increased
substantially as a result of the 2018 drilling program which
focused on this extensive liquids rich resource play. With the
increase from 187 to 375 booked locations in 2018, the Cardium
reserve volumes now represent 26% of the Company’s total P+P volume
and 30% of the Company’s total P+P value (NPV discounted at 5%) up
from 15% and 16%, respectively, last year. The following table
illustrates the history of Peyto’s Cardium drilling and booked P+P
inventory since 2009.
Booked Cardium Locations |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
Opening Inventory |
119 |
144 |
169 |
211 |
200 |
191 |
183 |
182 |
190 |
187 |
Wells Drilled |
(19) |
(17) |
(17) |
(18) |
(9) |
(8) |
(0) |
(2) |
(7) |
(48) |
Locations Added/Removed |
44 |
42 |
59 |
7 |
0 |
0 |
(1) |
10 |
4 |
236 |
Closing Inventory |
144 |
169 |
211 |
200 |
191 |
183 |
182 |
190 |
187 |
375 |
It is noted that horizontal multi-stage fracture
technology began to be widely used after 2010 which changed the
nature of the drilling inventory. Also, the Company’s total
internal drilling inventory is larger and more comprehensive than
that identified in the InSite report.
The undeveloped reserves at year end 2017
originally booked to the 37 locations referred to above totaled
103.9 BCFe (2.8 BCFe/well) of Proved Undeveloped plus Probable
Additional reserves for a forecast capital investment of $114.6
million ($1.10/MCFe). In actuality, $118.3 million of capital
($0.98/MCFe) was spent on these 37 wells during 2018, yielding
Proved Producing plus Probable Additional reserves of 120.2 BCFe
(3.2 BCFe/well). Peyto’s redesign of the Cardium completions
accounts for the improvement of reserve recovery at essentially the
same cost.
The following table illustrates the Company’s
historical performance in converting future undeveloped locations
into producing wells and demonstrates that Peyto has consistently
converted more reserves at better cost than was forecast.
Reserve Year |
Total Drills |
Booked Locations Converted |
Booked/Total |
Forecast Outcome |
Forecast Cost per Unit |
Actual Outcome |
Actual Cost per Unit |
Actual/Forecast Cost per Unit |
|
gross wells |
gross wells |
|
BCFe |
Capex* $MM |
$/MCFe |
BCFe |
Capex* $MM |
$/MCFe |
|
2010 |
48 |
30 |
63% |
84 |
$123 |
$1.46 |
102 |
$138 |
$1.35 |
-8% |
2011 |
70 |
51 |
73% |
152 |
$214 |
$1.41 |
151 |
$209 |
$1.38 |
-2% |
2012 |
86 |
60 |
70% |
189 |
$295 |
$1.56 |
196 |
$278 |
$1.42 |
-9% |
2013 |
99 |
69 |
70% |
206 |
$332 |
$1.61 |
218 |
$310 |
$1.42 |
-12% |
2014 |
123 |
90 |
73% |
278 |
$417 |
$1.50 |
288 |
$419 |
$1.45 |
-3% |
2015 |
140 |
103 |
74% |
307 |
$456 |
$1.49 |
348 |
$385 |
$1.11 |
-26% |
2016 |
128 |
82 |
64% |
254 |
$297 |
$1.17 |
254 |
$246 |
$0.97 |
-17% |
2017 |
142 |
97 |
68% |
298 |
$295 |
$0.99 |
321 |
$305 |
$0.95 |
-4% |
2018 |
70 |
37 |
53% |
104 |
$115 |
$1.10 |
120 |
$118 |
$0.98 |
-11% |
Total |
906 |
619 |
68% |
1,872 |
$2,544 |
$1.36 |
1,998 |
$2,408 |
$1.21 |
-11% |
*Capex represents only well related capital for drilling,
completion, equipping and tie-in |
This annual analysis of reserves that are
converted from an undeveloped state to a producing state helps to
validate the accuracy of the remaining future undeveloped reserves
and their capital requirements. This accuracy, by which Peyto can
predict future reserve recoveries and capital requirements, also
helps to reduce the risk associated with valuing future undeveloped
locations.
Value Reconciliation
In order to measure the success of all of the
capital invested in 2018, it is necessary to quantify the total
amount of value added during the year and compare that to the total
amount of capital invested. At Peyto’s request, the independent
engineers have run last year’s reserve evaluation with this year’s
price forecast to remove the change in value attributable to
commodity prices. This approach isolates the value created by the
Peyto team from the value created (or lost) by those changes
outside of their control (ie. commodity prices). Since the
capital investments in 2018 were funded from a combination of cash
flow, debt and equity, it is necessary to know the change in debt
and the change in shares outstanding to see if the change in value
is truly accretive to shareholders.
At year-end 2018, Peyto’s estimated net debt had
decreased by 8% or $103 million to $1.224 billion while the number
of shares outstanding remained the same at 164.9 million shares.
The change in debt includes all of the capital expenditures, as
well as any acquisitions, and the total fixed and performance based
compensation paid out for the year. Although these estimates are
believed to be accurate, they remain unaudited at this time and may
be subject to change.
Based on this reconciliation of changes in BT
NPV, the Peyto team was able to create $1.066 billion of Proved
Producing, $2.728 billion of Total Proven, and $3.505 billion of
Proved plus Probable Additional undiscounted reserve value, with
$232 million of capital investment, cost reductions, and marketing
arrangements. The ratio of capital expenditures to value creation
is what Peyto refers to as the NPV recycle ratio, which is simply
the undiscounted value addition, resulting from the capital
program, divided by the capital investment. For 2018, the Proved
Producing NPV recycle ratio is 4.6 which means for each dollar
invested, the Peyto team was able to create 4.6 new dollars of
Proved Producing reserve value. The significant increase in the NPV
recycle ratio from past years is due to the reduced finding and
development cost and greater liquid additions combined with Peyto’s
market diversification and hedging efforts.
The historic NPV recycle ratios are presented in
the following table.
|
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
Wt. Avg. |
Capital Investment ($MM) |
$139 |
$73 |
$261 |
$379 |
$618 |
$578 |
$690 |
$594 |
$469 |
$521 |
$232 |
NPV0 Recycle Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
Proved
Producing |
2.1 |
5.4 |
3.5 |
2.4 |
1.6 |
1.5 |
1.5 |
2.3 |
2.9 |
2.3 |
4.6 |
2.3 |
Total
Proved |
2.5 |
18.9 |
6.1 |
4.7 |
2.2 |
2.0 |
1.7 |
3.3 |
4.2 |
3.2 |
11.7 |
3.8 |
Proved + Probable Additional |
2.2 |
27.1 |
10.3 |
6.6 |
3.2 |
4.0 |
2.6 |
5.0 |
7.3 |
4.0 |
15.1 |
5.6 |
*NPV0 (net
present value) recycle ratio is calculated by dividing the
undiscounted NPV of reserves added in the year by the total capital
cost for the period (eg. 2018 Proved Producing ($1,066/$232) =
4.6). |
3. Growth and
Income
As a dividend paying, growth oriented
corporation, Peyto’s objective is to profitably grow the resources
which generate sustainable income (dividends) for shareholders. In
order for income to be more sustainable and grow, Peyto must
profitably find and develop more reserves. Simply increasing
production from the existing reserves will not make that income
more sustainable. Reserve Life Index (RLI), or a reserve to
production ratio, provides a measure of this long term
sustainability.
During 2018, the Company deployed a conservative
capital program but was successful in effectively replacing annual
production with new Proved Producing reserves using less than 50%
of funds from operations. Fourth quarter production decreased by
21%, from 109,793 boe/d to 86,738 boe/d, which resulted in
increasing the Proved Producing reserve life index from 6.9 years
to 8.7 years
For comparative purposes, the Total Proved and
P+P RLI index was 16 and 25 years, respectively. Management
believes that the most meaningful method to evaluate the current
reserve life is by dividing the Proved Producing reserves by the
actual fourth quarter annualized production. This way production is
being compared to producing reserves as opposed to producing plus
non-producing reserves.
The following table highlights the Company’s
historical RLI Index.
|
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
Proved Producing |
11 |
12 |
13 |
14 |
14 |
11 |
9 |
9 |
7 |
7 |
7 |
7 |
7 |
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Proved |
14 |
14 |
16 |
17 |
21 |
17 |
16 |
15 |
12 |
11 |
11 |
11 |
11 |
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved + Probable Additional |
19 |
20 |
21 |
23 |
29 |
25 |
22 |
22 |
19 |
18 |
17 |
18 |
18 |
25 |
Future Undeveloped Opportunities
As at December 31, 2018, Peyto had 785 net
sections of Alberta Deep Basin lands. In many of these sections,
mineral rights are held in a number of stacked prospective horizons
expanding this land base by almost four fold to a total of 3,047
net sections of rights over Duvernay, Montney and seven Cretaceous
horizons. During Peyto’s 20 year history, the Company has found and
developed 3.8 TCFe of EUR reserves which resides in 285 of these
net sections. Effectively, Peyto has invested $5.96 billion to
fully develop 9.4% of its existing land base which has also
resulted in the generation of $5.93 billion of cumulative funds
from operations and $2.5 billion in cumulative earnings to
date.
Likewise, the remaining undeveloped land base
holds significant future potential. The independent reserve
evaluators have forecast development activity for the next six
years as shown in the following table of future development
capital.
|
Future Development Capital |
|
Proved
Reserves |
Proved+ Probable Additional Reserves |
Year |
Undisc., ($Millions) |
Undisc., ($Millions) |
2019 |
$158 |
$200 |
2020 |
$165 |
$350 |
2021 |
$319 |
$400 |
2022 |
$431 |
$700 |
2023 |
$403 |
$650 |
2024 |
$334 |
$577 |
2025 |
$140 |
$530 |
Thereafter |
$21 |
$38 |
Total |
$1,971 |
$3,445 |
Every year Peyto finds and develops new drilling
inventory that the independent evaluators review to create a
forecast of future development activity. Their forecast is by no
means a complete assessment of Peyto’s current opportunities, nor
is Peyto content to just sit back and harvest these current
opportunities. Each year the results from the drilling activity
spawn additional offsetting locations both on currently owned lands
and lands Peyto does not yet own but attempts to acquire. The pace
of inventory generation has historically exceeded the pace of
drilling activity at a ratio of 2:1, resulting in a growing number
of future drilling locations recognized in Peyto’s reserve report.
In 2018, Peyto’s innovative Cardium completion design has unlocked
more drilling locations on current lands that were not recognized
in the past and these lands have been further complemented by new
land acquisitions.
(gross locations) |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
Avg. |
Wells Drilled |
48 |
53 |
29 |
52 |
70 |
86 |
99 |
123 |
140 |
128 |
142 |
70 |
87 |
Locations Added To Reserves Report |
73 |
93 |
96 |
149 |
151 |
156 |
220 |
257 |
208 |
245 |
165 |
223 |
170 |
Inventory Generation Rate |
1.5 |
1.8 |
3.3 |
2.9 |
2.2 |
1.8 |
2.2 |
2.1 |
1.5 |
1.9 |
1.2 |
3.2 |
2.0 |
Peyto’s development drilling activity has proved
up additional future drilling locations with the number of future
drilling locations recognized in the reserve report increasing from
1,015 gross (854 net) locations to 1,201 gross (982 net) locations.
Of these future locations, 62% are categorized by the independent
reserve evaluators as Proven Undeveloped with the remaining 38% as
Probable Undeveloped. In addition, the Probable Additional category
includes deep cut facility installations at three of Peyto’s
Greater Sundance gas plants. The net reserves associated with the
undeveloped locations and facility installations (not including
existing uphole zones) totals 2.7 TCFe (450 mmboes) while the total
capital required to develop them is estimated at $3.4 billion or
$1.26/MCFe. This is forecast to create Net Present Value of $3.4
billion (5% discount rate, post capital recovery) or $21 per share
of incremental value at the Insite commodity price forecast.
The undiscounted, forecast for Net Operating
Income for the Total Proved and P+P reserves over the future
development capital schedule, as contained in the evaluator’s
report, totals $4.2 billion and $5.8 billion, respectively, more
than sufficient to fund the future development capital shown in the
table above, ensuring those reserve additions are accretive to
shareholders.
The total estimated Future Development Capital
for both Total Proved and P+P reserves increased from the previous
year by $483 million and $467 million, respectively, which reflects
the increase in Cardium undeveloped locations and the addition of
deep cut facilities to capture incremental liquids from the gas
stream.
4. Risk Assessment
Effectively 100% of Peyto’s natural gas and
natural gas liquid reserves exist in low permeability (tight),
sandstone reservoirs in the Alberta Deep Basin. In almost all
cases, the volumetric capacity of these sandstone reservoirs can be
determined using traditional geological and reservoir engineering
techniques, which, when complimented by production performance
data, increases the certainty of the reserve estimates. In the
majority of Peyto’s core areas, continuous drilling activity has
further refined the geologic and geometric definition of these
reservoirs to a higher level of certainty.
In addition, these Deep Basin sandstone
reservoirs do not contain mobile water nor are they supported by
active aquifers. Mobile water traditionally increases the risk
associated with reservoir recovery by impeding the flow of
hydrocarbons through the reservoir and up the wellbore. Water
production, separation and disposal processes also increase
operating costs which shortens the economic life of producing
wells, further contributing to reduced recovery. As many of these
traditional reserves determination and recovery risks are not
present in Peyto’s Deep Basin reservoirs, Management has a higher
level of confidence in its reserves and their ultimate
recovery.
Peyto’s high operating margins have meant that
forecasts of net operating income are less affected by commodity
price volatility than in most traditional reserve evaluations. As a
result, the predicted economic life of Peyto’s producing wells are
less sensitive to changes in commodity prices. These high operating
margins are achieved through the Company’s high level of ownership
and control of all levels of production operations, through a
concentrated geographic asset base, and by striving to be the
lowest cost producer in the industry.
Peyto attempts to further reduce the risk of
predicted operating incomes with an active market diversification
and hedging program that 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
always, Peyto will continue to hedge future prices to smooth out
the volatility in both Alberta and US natural gas markets through a
series of frequent transactions which is similar to “dollar cost
averaging” the future gas price.
Finally, Peyto’s entire asset base has been
organically developed by Peyto and contains very few abandonment
liabilities. At December 31, 2018, Peyto owned 1,475 net wells of
which 91% are on production today and are expected to produce for
decades to come. Of the 131 net non-producing wellbores, 23 are
considered medium risk, inactive wells that require downhole
suspension over the next several years. Peyto is the operator of
over 96% of its producing wells and has one of the highest ratios
of producing to non-producing wells in the industry.
These cumulative factors listed above, which
reduce the traditional risk of realizing future cashflows from
Peyto’s reserves, is why, in Management’s opinion, Peyto’s reserves
can be valued at lower discount rates than other, more conventional
asset bases.
PERFORMANCE RATIOS
The following table highlights annual
performance ratios both before and after the implementation of
horizontal wells in late 2009. These can be used for comparative
purposes, but it is cautioned that on their own they do not measure
investment success.
|
2018 |
2017 |
2016 |
2015 |
2014 |
2013 |
2012 |
2011 |
2010 |
2009 |
|
Proved Producing |
|
|
|
|
|
|
|
|
|
|
FD&A ($/MCFe) |
1.18 |
$1.36 |
$1.44 |
$1.64 |
$2.25 |
$2.35 |
$2.22 |
$2.12 |
$2.10 |
$2.26 |
|
RLI (yrs) |
9 |
7 |
7 |
7 |
7 |
7 |
9 |
9 |
11 |
14 |
|
Recycle Ratio |
2.3 |
2.1 |
1.8 |
2.0 |
1.9 |
1.6 |
1.6 |
2.1 |
2.4 |
2.5 |
|
Reserve Replacement |
98% |
171% |
153% |
193% |
183% |
190% |
284% |
230% |
239% |
79% |
|
Total Proved |
|
|
|
|
|
|
|
|
|
|
FD&A ($/MCFe) |
1.21 |
$1.39 |
$1.01 |
$0.72 |
$2.37 |
$2.23 |
$2.04 |
$2.13 |
$2.35 |
$1.73 |
|
RLI (yrs) |
16 |
11 |
11 |
11 |
11 |
12 |
15 |
16 |
17 |
21 |
|
Recycle Ratio |
2.2 |
2.0 |
2.6 |
4.5 |
1.8 |
1.6 |
1.7 |
2.1 |
2.1 |
3.2 |
|
Reserve Replacement |
294% |
225% |
183% |
188% |
254% |
230% |
414% |
452% |
456% |
422% |
|
Future Development Capital ($
millions) |
$1,971 |
$1,488 |
$1,305 |
$1,381 |
$1,721 |
$1,406 |
$1,318 |
$1,111 |
$741 |
$446 |
|
FD&A ($/MCFe) |
1.02 |
$1.49 |
$0.62 |
$0.54 |
$2.01 |
$1.86 |
$1.68 |
$1.90 |
$2.19 |
$1.47 |
|
RLI (yrs) |
25 |
18 |
18 |
17 |
18 |
19 |
22 |
22 |
25 |
29 |
|
Recycle Ratio |
2.6 |
1.9 |
4.2 |
6.1 |
2.1 |
2.0 |
2.1 |
2.4 |
2.3 |
3.8 |
|
Reserve Replacement |
342% |
279% |
283% |
287% |
328% |
450% |
527% |
585% |
790% |
597% |
|
Future Development Capital
($millions) |
$3,445 |
$2,978 |
$2,563 |
$2,657 |
$2,963 |
$2,550 |
$2,041 |
$1,794 |
$1,310 |
$672 |
|
- FD&A (finding, development and acquisition) costs are used
as a measure of capital efficiency and are calculated by dividing
the capital costs for the period, including the change in
undiscounted FDC, by the change in the reserves, incorporating
revisions and production, for the same period (eg. Total Proved
($232.4+$482.7)/(516.3-451.3+33.6) = $7.25/boe or $1.21/MCFe).
- The RLI is calculated by dividing the reserves (in boes) in
each category by the annualized Q4 average production rate in
boe/year (eg. Proved Producing 273,921/(86.738x365) = 8.7).
Peyto believes that the most accurate way to evaluate the current
reserve life is by dividing the proved developed producing reserves
by the annualized actual fourth quarter average production.
In Peyto’s opinion, for comparative purposes, the proved developed
producing reserve life provides the best measure of
sustainability.
- The Recycle Ratio is calculated by dividing the field netback
per boe, by the FD&A costs for the period (eg. Proved Producing
(($15.95)/$7.08=2.3). The recycle ratio is comparing the netback
from existing reserves to the cost of finding new reserves and may
not accurately indicate investment success unless the replacement
reserves are of equivalent quality as the produced reserves.
- The reserve replacement ratio is determined by dividing the
yearly change in reserves before production by the actual annual
production for the year (eg. Total Proved
((516.33-451.27+33.58)/33.58) = 294%).
RESERVES COMMITTEE
Peyto has a reserves committee, comprised of
independent board members, that reviews the qualifications and
appointment of the independent reserve evaluators. The committee
also reviews the procedures for providing information to the
evaluators. All booked reserves are based upon annual evaluations
by the independent qualified reserve evaluators conducted in
accordance with the COGE (Canadian Oil and Gas Evaluation) Handbook
and National Instrument 51-101. The evaluations are conducted using
all available geological and engineering data. The reserves
committee has reviewed the reserves information and approved the
reserve report.
MANAGEMENT UPDATE
Scott Robinson, Executive Vice President of New
Ventures, recently retired as an officer of Peyto. Scott joined
Peyto in 2004 when the Company was producing 15,000 boe/d and led
the dramatic expansion of Peyto for the next 15 years into one of
Alberta’s largest natural gas producers. Scott’s dedication to
Peyto, passion for the business, and commitment to the industry
remains, and he plans to continue to contribute as both a
consultant to Peyto and an active member of many industry groups
involved in the repair and revitalization of Alberta’s Natural Gas
Industry. On behalf of all shareholders and the Board of Directors,
the management team of Peyto would like to congratulate and
sincerely thank Scott for his commitment and leadership of
Peyto.
GENERAL
A complete filing of the Statement of Reserves
(form 51-101F1), Report on Reserves (form 51-101F2), and Report of
Management and Directors on Oil and Gas Disclosure (form 51-101F3)
will be available in the Annual Information Form to be filed by the
end of March 2019. Shareholders are encouraged to actively visit
Peyto’s website located at www.peyto.com. For further information,
please contact:
Darren GeePresident and Chief Executive OfficerPhone: (403)
261-6081Fax: (403) 451-4100
This news release contains certain
forward–looking information and statements within the meaning of
applicable securities laws. The use of any of the words "expect",
"anticipate", "continue", "estimate", "may", "will", "project",
"should", "believe", "plans", "intends" and similar expressions are
intended to identify forward-looking information or statements. In
particular, but without limiting the foregoing, this news release
contains forward-looking information and statements pertaining to
the following: management's assessment of Peyto's future plans and
operations, including the 2019 program, capital expenditures, the
volumes and estimated value of Peyto's reserves, the life of
Peyto's reserves, production estimates, project economics including
NPV, netback and recycle ratio, the ability to enhance value of
reserves for shareholders and ensure the reserves generate the
maximum possible return. Forward-looking statements or
information are based on a number of material factors, expectations
or assumptions of Peyto which have been used to develop such
statements and information but which may prove to be incorrect.
Although Peyto believes that the expectations reflected in such
forward-looking statements or information are reasonable, undue
reliance should not be placed on forward-looking information and
statements because Peyto can give no assurance that such
expectations will prove to be correct. In addition to other
factors and assumptions which may be identified herein, assumptions
have been made regarding, the impact of increasing competition, the
timely receipt of any required regulatory approvals, the ability of
Peyto to obtain qualified staff, equipment and services in a timely
and cost efficient manner, drilling results, field production rates
and decline rates, the ability to replace and expand reserves
through development and exploration, future commodity prices,
currency, exchange and interest rates, regulatory framework
regarding royalties, taxes and environmental matters and the
ability of Peyto to successfully market its oil and natural gas
products. By their nature, forward-looking information and
statements are subject to numerous risks and uncertainties, some of
which are beyond these parties' control, including the impact of
general economic conditions, industry conditions, volatility of
commodity prices, currency fluctuations, imprecision of reserve
estimates, environmental risks, competition from other industry
participants, the lack of availability of qualified personnel or
management, stock market volatility and ability to access
sufficient capital from internal and external sources. 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 information and
statements will transpire or occur, or if any of them do so, what
benefits that Peyto will derive therefrom. The
forward-looking information and statements contained in this news
release speak only as of the date of this news release, and Peyto
does not assume any obligation to publicly update or revise any of
the included forward-looking statements or information, whether as
a result of new information, future events or otherwise, except as
may be required by applicable securities laws.
This news release contains information,
including in respect of Peyto's 2019 capital program, which may
constitute future oriented financial information or a financial
outlook. Such information was approved by the Board of
Directors of Peyto on January 16, 2019, and such information is
included herein to provide readers with an understanding of the
Company's anticipated capital expenditures for 2019. Readers
are cautioned that the information may not be appropriate for other
purposes.
Boes may be misleading, particularly if used in
isolation. A boe conversion ratio of 6 Mcf:1 bbl is based on
an energy equivalency conversion method primarily applicable at the
burner tip and does not represent a value equivalency at the
wellhead. Given that the value ratio based on the current price of
crude oil as compared to natural gas is significantly different
from the energy equivalency of 6:1, utilizing a conversion on a 6:1
basis may be misleading as an indication of value.
Finding, development and acquisition
costs, reserves replacement and netbacks do not have
standardized meanings or standard methods of calculation and
therefore such measures may not be comparable to similar measures
used by other companies and should not be used to make comparisons.
Such metrics have been included by Peyto to give readers additional
measures to evaluate the Peyto's performance; however, such
measures are not reliable indicators of the future performance of
Peyto and future performance may not compare to the performance in
previous periods and therefore such metrics should not be unduly
relied upon.
Some values set forth in the tables above may
not add due to rounding. It should not be assumed that the
estimates of future net revenues presented in the tables above
represent the fair market value of the reserves. There is no
assurance that the forecast prices and costs assumptions will be
attained and variances could be material. The aggregate of the
exploration and development costs incurred in the most recent
financial year and the change during that year in estimated future
development costs generally will not reflect total finding and
development costs related to reserves additions for that year.
The Toronto Stock Exchange has neither approved
nor disapproved the information contained herein.
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