Peyto Exploration & Development Corp. (“Peyto” or the
“Company”) is pleased to report operating and financial results for
the fourth quarter and 2018 fiscal year. A 72% operating margin1
and 20% profit margin2 was achieved in 2018, despite the 37% drop
in natural gas prices, allowing Peyto to achieve a 6% return on
capital employed (“ROCE”) and an 8% return on equity (“ROE”) in the
year. Highlights for the fourth quarter and full year 2018 include:
- Earnings per share of
$0.78 – 2018 was the 19th consecutive year of profits with
annual earnings of $129 million or 20% of revenue. Q4 2018 earnings
were $21 million ($0.13/share). Over the past 20 years, Peyto has
invested $6 billion of total capital, resulting in $2.5 billion in
total earnings, of which $2.4 billion has been paid to
shareholders, with average ROCE and ROE of 16% and 29%
respectively.
- PDP FD&A lower
again – 2018 was the fifth straight year of reduced
finding cost. All in cost to develop new producing (PDP) reserves
was $1.18/Mcfe ($7.05/boe), down 13% from 2017, while the Proved
plus Probable Additional (P+P) FD&A cost was $1.02/Mcfe
($6.10/boe) down 32%. Based on a 2018 cash netback of $14.11/boe,
this represents a PDP and P+P cash recycle ratio of 2.0 and 2.3
times, respectively. The Company held producing reserves constant
with a reduced capital program while replacing 342% of production
with new P+P reserves.
- Resurgence of Cardium Play
– The Cardium play was revitalized with a proven,
innovative completion design, resulting in a 200% increase in
booked Cardium locations. Proven locations increased by 217% while
Probable Additional locations increased by 175%. Peyto’s internal
inventory of Cardium locations, which is much greater than those
recognized in the reserves report, also grew substantially. An
additional 48 gross sections of Cardium rights were purchased in
2018, adding to this increased inventory.
- Entered the Montney Play
– In the second half of 2018, 50 sections of Montney lands
were purchased, at an average price of $64/acre, in close proximity
to Peyto’s extensive Sundance infrastructure. During Q4, the first
Montney Horizontal exploration well was drilled. Completion
operations for that well are scheduled to commence after breakup in
Q2 2019.
- Low Cash Costs $0.92/Mcfe
($5.51/boe) – Cash costs of $0.79Mcfe, before royalties of
$0.13/Mcfe, included operating costs of $0.31/Mcfe, transportation
of $0.17/Mcfe, G&A of $0.05/Mcfe and interest expense of
$0.26/Mcfe. Total 2018 cash costs were the lowest in the industry
and when combined with a realized price of $3.27/Mcfe ($19.62/boe),
resulted in a cash netback of $2.35/Mcfe ($14.11/boe) or a 72%
operating margin.
- Funds from operations(3)
per share of $2.87 – Annual Funds from Operations (“FFO”)
of $474 million, or $2.87/share, were down 17% (18% per share) as a
result of 10% lower production combined with a 12% drop in realized
natural gas price. Q4 2018 FFO was $100 million or $0.60/share
compared to $162 million, or $0.98/share, in Q4 2017.
- Annual capital investments
were 49% of FFO – A total of $232 million, or 49% of FFO,
was invested in the drilling of 70 gross (67.25 net) wells. The new
wells contributed 114 mmcf/d of natural gas and 4,800 bbl/d of
condensate and NGLs by year end at a cost of $9,800/boe/d, the
lowest cost for new production in the Company’s 20 year
history.
- Liquids production up 4%
– Despite significantly reduced capital investment,
natural gas production averaged 494 MMcf/d in 2018, while
condensate and NGL production averaged 9,692 bbls/d. Natural gas
production was down 12% from 2017 while liquid production increased
4%. For Q4 2018, natural gas and liquids production was 459 MMcf/d
and 10,273 bbls/d. Fourth quarter liquid yields increased 27% year
over year to 22 bbl/mmcf.
2018 in Review
The year 2018 marked Peyto’s 20th year of
operations. Over that time the Company has explored for and
discovered 6.5 TCFe of Alberta Deep Basin reserves, developed 3.8
TCFe and produced 1.7 TCFe. Approximately one third of the recovery
to date has been from the Cardium resource play, while two thirds
from the Spirit River group of formations. Both plays will continue
to offer significant future returns for shareholders in the decades
to come. In 2018, Peyto began development of a third resource play
in the Montney formation. While very new, the Company expects this
ongoing effort will also yield substantial future value for
shareholders. Despite the extreme commodity price volatility
experienced in the year, Peyto continued its market diversification
efforts by securing future market access on the NGTL system
expansion, executing an agreement to provide long term supply of
natural gas to an intra-Alberta power producer, and securing both
physical and synthetic gas transportation to Eastern Canadian and
US markets. Peyto revitalized its Cardium resource play by proving
up an innovative completion design which resulted in increased
condensate and NGL production, with liquids contributing 30% of
total revenue for the year. Total supply cost, including cash costs
of $0.92/Mcfe and PDP FD&A costs of $1.18/Mcfe, was again
reduced, yielding 36% profit on average revenues of $3.27/Mcfe.
|
|
|
|
|
|
Three Months Ended Dec 31 |
% |
Twelve Months Ended Dec 31 |
% |
|
2018 |
2017 |
Change |
2018 |
2017 |
Change |
Operations |
|
|
|
|
|
|
Production |
|
|
|
|
|
|
Natural gas (mcf/d) |
458,792 |
595,885 |
-23 |
% |
493,921 |
559,663 |
-12 |
% |
Oil & NGLs (bbl/d) |
10,273 |
10,479 |
-2 |
% |
9,692 |
9,337 |
4 |
% |
Thousand cubic feet equivalent (mcfe/d @
1:6) |
520,430 |
658,759 |
-21 |
% |
552,070 |
615,684 |
-10 |
% |
Barrels of oil equivalent (boe/d @
6:1) |
86,738 |
109,793 |
-21 |
% |
92,012 |
102,614 |
-10 |
% |
Production per million common shares
(boe/d)* |
526 |
666 |
-21 |
% |
558 |
622 |
-10 |
% |
Product prices |
|
|
|
|
|
|
Natural gas ($/mcf) |
2.43 |
2.87 |
-15 |
% |
2.54 |
2.89 |
-12 |
% |
Oil & NGLs ($/bbl) |
44.83 |
56.52 |
-21 |
% |
56.98 |
50.02 |
14 |
% |
Operating expenses ($/mcfe) |
0.33 |
0.28 |
18 |
% |
0.31 |
0.27 |
15 |
% |
Transportation ($/mcfe) |
0.19 |
0.16 |
19 |
% |
0.17 |
0.16 |
6 |
% |
Field netback ($/mcfe) |
2.39 |
2.91 |
-18 |
% |
2.66 |
2.80 |
-5 |
% |
General & administrative expenses
($/mcfe) |
0.04 |
0.03 |
33 |
% |
0.05 |
0.04 |
25 |
% |
Interest expense ($/mcfe) |
0.27 |
0.21 |
29 |
% |
0.26 |
0.21 |
24 |
% |
Financial ($000, except per
share*) |
|
|
|
|
|
|
Revenue |
145,109 |
211,799 |
-31 |
% |
658,906 |
760,956 |
-13 |
% |
Royalties |
5,801 |
9,232 |
-37 |
% |
26,622 |
34,104 |
-22 |
% |
Funds from operations |
99,635 |
161,672 |
-38 |
% |
473,740 |
573,721 |
-17 |
% |
Funds from operations per share |
0.60 |
0.98 |
-38 |
% |
2.87 |
3.48 |
-18 |
% |
Total dividends |
29,677 |
54,408 |
-45 |
% |
118,709 |
217,612 |
-45 |
% |
Total dividends per share |
0.18 |
0.33 |
-45 |
% |
0.72 |
1.32 |
-45 |
% |
Payout ratio |
30 |
34 |
-12 |
% |
25 |
38 |
-34 |
% |
Earnings |
21,458 |
51,547 |
-58 |
% |
129,110 |
176,575 |
-27 |
% |
Earnings per diluted share |
0.13 |
0.31 |
-58 |
% |
0.78 |
1.07 |
-27 |
% |
Capital expenditures |
112,215 |
134,411 |
-17 |
% |
232,363 |
521,210 |
-55 |
% |
Weighted average common shares outstanding |
164,874,175 |
164,874,175 |
- |
|
164,874,175 |
164,856,042 |
- |
|
As at December 31 |
|
|
|
|
|
|
Net debt |
|
|
|
1,224,422 |
1,327,440 |
-8 |
% |
Shareholders' equity |
|
|
|
1,680,462 |
1,722,978 |
-2 |
% |
Total assets |
|
|
|
3,688,852 |
3,844,714 |
-4 |
% |
*all per share amounts using weighted
average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Dec 31 |
Twelve Months Ended Dec 31 |
($000
except per share) |
2018 |
|
2017 |
|
2018 |
|
2017 |
Cash flows from
operating activities |
102,559 |
|
143,568 |
|
486,478 |
|
535,344 |
Change in
non-cash working capital |
(3,955 |
) |
6,444 |
|
(17,131 |
) |
20,381 |
Change in
provision for performance based compensation |
(12,527 |
) |
(4,024 |
) |
(9,165 |
) |
2,312 |
Performance based
compensation |
13,558 |
|
15,684 |
|
13,558 |
|
15,684 |
Funds from operations |
99,635 |
|
161,672 |
|
473,740 |
|
573,721 |
Funds
from operations per share |
0.60 |
|
0.98 |
|
2.87 |
|
3.48 |
|
|
|
|
|
|
|
|
(1) Operating Margin is defined as
Funds from Operations divided by Revenue before Royalties but
including realized hedging gains (losses).(2) Profit
Margin is defined as Net Earnings for the year 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 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.(3) 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 dvidends may
vary.
The Peyto Strategy
For the past 20 years, the Peyto strategy has
focused on maximizing the returns on shareholders’ capital by
deploying that capital into the profitable development of long
life, low cost, and low risk natural gas resource plays. This
strategy of maximizing returns does not end in the field with just
the efficient execution of exploration and production operations
but continues on to the head office where the management of
corporate costs, including the cost of capital, must be controlled
to ensure true returns are ultimately enjoyed. Alignment of goals
between what is good for the Company and its employees and what is
good for all stakeholders is critical to ensuring that the greatest
returns are achieved. Evidence of the success Peyto has had
deploying this strategy, through the years, is illustrated in the
following table.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($/Mcfe) |
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
2016 |
|
|
2017 |
|
|
2018 |
|
|
|
20 Year Wt. Avg. |
Sales Price |
$9.54 |
|
$6.75 |
|
$6.15 |
|
$5.47 |
|
$4.21 |
|
$4.43 |
|
$5.04 |
|
$3.83 |
|
$3.18 |
|
$3.39 |
|
$3.27 |
|
|
|
$4.78 |
|
All cash costs but
royalties2 |
($1.19 |
) |
($1.12 |
) |
($0.99 |
) |
($0.82 |
) |
($0.73 |
) |
($0.75 |
) |
($0.71 |
) |
($0.67 |
) |
($0.63 |
) |
($0.68 |
) |
($0.79 |
) |
|
|
($0.75 |
) |
Capital costs1 |
($2.88 |
) |
($2.26 |
) |
($2.10 |
) |
($2.12 |
) |
($2.22 |
) |
($2.35 |
) |
($2.25 |
) |
($1.64 |
) |
($1.44 |
) |
($1.36 |
) |
($1.18 |
) |
|
|
($1.79 |
) |
Profits |
$5.47 |
|
$3.37 |
|
$3.06 |
|
$2.53 |
|
$1.26 |
|
$1.33 |
|
$2.08 |
|
$1.52 |
|
$1.12 |
|
$1.35 |
|
$1.30 |
|
|
|
$2.24 |
|
|
|
57% |
|
|
50% |
|
|
50% |
|
|
46% |
|
|
30% |
|
|
30% |
|
|
41% |
|
|
40% |
|
|
35% |
|
|
40% |
|
|
40% |
|
|
|
|
47% |
|
Royalty
Owners |
$1.82 |
|
$0.63 |
|
$0.64 |
|
$0.53 |
|
$0.32 |
|
$0.31 |
|
$0.37 |
|
$0.14 |
|
$0.13 |
|
$0.15 |
|
$0.13 |
|
|
|
$0.51 |
|
Shareholders |
$3.65 |
|
$2.74 |
|
$2.42 |
|
$2.00 |
|
$0.94 |
|
$1.02 |
|
$1.71 |
|
$1.38 |
|
$0.99 |
|
$1.19 |
|
$1.17 |
|
|
|
$1.73 |
|
Div./Dist. paid |
$4.25 |
|
$4.03 |
|
$3.37 |
|
$1.24 |
|
$1.04 |
|
$1.01 |
|
$1.05 |
|
$1.11 |
|
$1.01 |
|
$0.97 |
|
$0.59 |
|
|
|
$1.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. Capital costs to develop new producing reserves is the PDP
FD&A2. Cash costs not including royalties but including
Operating costs, Transportation, G&A and Interest.
The consistency and repeatability of Peyto’s
operational execution in the field, combined with strict cost
control in all aspects of its business has resulted in nearly 50%
of the average sales price being retained in profit over the past
20 years. This healthy margin of profit (as defined above), which
benefits both royalty owners and shareholders, has been preserved
despite a greater than 60% drop in commodity prices from a decade
ago. Out of that profit, royalty owners have received approximately
25%, while shareholders, whose capital has been at risk, have
received the balance. This margin of profit is what has and will
continue to help insulate Peyto and its stakeholders from future
volatility in commodity prices.
Capital Expenditures
Peyto drilled 70 gross (67.25 net) horizontal in
2018 for a capital investment of $115.6 million. The Company
completed 66 gross (63.25 net) wells for $72.3 million and invested
$20.8 million in the wellsite equipment and pipeline connections to
bring these wells on production. Both drilling costs on a per-well
and per-meter basis were lower due to a greater percentage of wells
being located in the Greater Sundance area, which has more surface
infrastructure (roads and existing padsites) already in place, and
due to continued drilling and completion cost optimization. An
average of 22 frac stages were pumped per well, up from 12 stages
in 2017, as result of an innovative Cardium completion design that
yields higher production and reserve recovery. The increased number
of frac stages was the main reason costs on a per stage basis were
down 37% from 2017.
The table below outlines the past nine years of
average horizontal drilling and completion costs.
|
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 Q1 |
2018 Q2 |
2018 Q3 |
2018Q4 |
2018 |
Gross Hz Spuds |
52 |
70 |
86 |
99 |
123 |
140 |
126 |
135 |
8 |
7 |
25 |
30 |
70 |
Measured Depth (m) |
3,762 |
3,903 |
4,017 |
4,179 |
4,251 |
4,309 |
4,197 |
4,229 |
4,091 |
3,814 |
4,057 |
4,018 |
4,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling ($MM/well) |
$2.76 |
$2.82 |
$2.79 |
$2.72 |
$2.66 |
$2.16 |
$1.82 |
$1.90 |
$1.74 |
$1.54 |
$1.65 |
$1.79 |
$1.71 |
$
per meter |
$734 |
$723 |
$694 |
$651 |
$626 |
$501 |
$433 |
$450 |
$425 |
$403 |
$407 |
$447 |
$425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completion ($MM/well) |
$1.36 |
$1.68 |
$1.67 |
$1.63 |
$1.70 |
$1.21 |
$0.86 |
$1.00 |
$1.15 |
$1.31 |
$1.29 |
$1.01 |
$1.13 |
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 |
1,383 |
1,348 |
$
per Hz Length (m) |
$1,017 |
$1,286 |
$1,231 |
$1,153 |
$1,166 |
$792 |
$587 |
$803 |
$810 |
$814 |
$896 |
$728 |
$835 |
$ ‘000 per Stage |
$231 |
$246 |
$257 |
$188 |
$168 |
$115 |
$79 |
$81 |
$61 |
$40 |
$44 |
$48 |
$51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $17 million invested in facilities and major
pipeline projects included turn-arounds at the Oldman North and
Oldman Deep Cut plants, completion of a major pipeline under the
Sundance Provincial Park connecting the Swanson and Galloway gas
plants, consolidation of wellsite metering equipment at several pad
sites in Sundance to save on future operating costs and various
other pipeline expansion projects.
Peyto had a very successful year of acquiring
new Crown lands in 2018 which expanded the Company’s inventory of
drilling locations. In total, over 50 sections of new Montney lands
were acquired at Crown sales as well as 11 sections of Cardium
rights. In addition, 37 gross sections of Cardium rights were
purchased through acquisitions from other operators. The
average cost for both types of land purchases was $96/acre. The
majority of lands were purchased in the Greater Sundance area.
The following table summarizes the capital
investments for the fourth quarter and 2018 fiscal year.
|
|
|
|
Three Months ended December 31 |
Twelve Months ended December 31 |
($000) |
|
2018 |
2017 |
2018 |
|
2017 |
|
Land |
106 |
3,609 |
3,291 |
|
10,328 |
|
Seismic |
2,000 |
270 |
5,216 |
|
6,007 |
|
Drilling |
57,383 |
68,909 |
115,610 |
|
256,932 |
|
Completions |
36,369 |
42,124 |
72,274 |
|
133,732 |
|
Equipping
& Tie-ins |
10,716 |
15,695 |
20,766 |
|
53,146 |
|
Facilities
& Pipelines |
3,691 |
3,610 |
17,293 |
|
57,284 |
|
Acquisitions |
1,950 |
194 |
1,950 |
|
3,823 |
|
Dispositions |
- |
- |
(4,037 |
) |
(42 |
) |
Total Capital Expenditures |
112,215 |
134,411 |
232,363 |
|
521,210 |
|
|
|
|
|
|
|
|
Reserves
Peyto was successful in growing total P+P
reserves per share in 2018, which held reserve value constant,
despite the year over year reduction in commodity price forecasts
used by the independent engineering consultants. The following
table illustrates the change in reserve volumes and Net Present
Value (“NPV”) of future cash flows, discounted at 5%, before income
tax and using forecast pricing. The negative change in reserves per
debt adjusted share, was primarily due to the 53% drop in Peyto
share price which was used to convert debt to equity, while the
negative change in NPV per share was due to the 22% reduction in
forecast commodity prices that were used in the reserves
evaluation, partly offset by the increase in reserve volume.
|
|
|
|
|
As at December 31 |
% Change, |
% Change, debt |
|
|
2018 |
|
2017 |
per share |
adjusted per share† |
Reserves
(BCFe) |
|
|
|
|
Proved Producing |
1,644 |
1,647 |
0% |
|
(25%) |
Total Proved |
3,098 |
2,708 |
14% |
|
(14%) |
Proved + Probable
Additional |
4,817 |
4,330 |
11% |
|
(17%) |
|
|
|
|
|
Net Present Value ($millions) Discounted
at 5% |
|
|
|
|
Proved Producing |
$3,180 |
$3,589 |
(11%) |
|
(14%) |
Total Proved |
$5,029 |
$5,065 |
(1%) |
|
2% |
Proved + Probable Additional |
$7,345 |
$7,581 |
(3%) |
|
(2%) |
|
|
|
|
|
|
†Per share reserves are adjusted for changes in
net debt by converting debt to equity using the Dec 31 share price
of $15.03 for 2017 and share price of $7.08 for 2018. Net Present
Values are adjusted for debt by subtracting net debt from the value
prior to calculating per share amounts.Note: based on the InSite
Petroleum Consultants (“InSite”) report effective December 31,
2018. The InSite price forecast is available at
www.InSitepc.com. The complete statement of reserves data and
required reporting in compliance with NI 51-101 will be included in
Peyto's Annual Information Form to be released in March 2019.
For more information on Peyto’s reserves, refer
to the Press Release dated February 14, 2019 announcing the Year
End Reserve Report which is available on the website at
www.peyto.com.
Fourth Quarter 2018
Peyto had planned the majority of its annual
capital expenditures for the fourth quarter of the year to coincide
with stronger winter natural gas prices. During the quarter 6
drilling rigs were active across the Greater Sundance areas of
Ansell, Nosehill, Sundance and Wildhay as illustrated in the table
below. As well, Peyto tested its new Cardium completion design in
Brazeau and took advantage of stronger winter gas prices to drill
several leaner Spirit River wells. Total capital of $93.8 million
was invested in the drilling of 30 gross (30 net) wells and the
completion of 36 gross (35.2 net) wells. In addition, $10.7 million
was invested in wellsite equipment and tie-ins while $3.7 million
was invested in facility upgrades and major pipeline
infrastructure. New seismic accounted for $2 million while Cardium
rights were acquired from a third party for $2 million.
Peyto drilled its first Montney horizontal well
in the Wildhay area in the fourth quarter, following up on the land
purchase in Q3 2018. The well was drilled and cased to 5,415 meters
with approximately 2,000 m of horizontal lateral available for
completion. The completion is planned for the second quarter of
2019, after spring breakup, when costs for frac water heating and
equipment mobilization will be lower.
|
|
Field |
Total Wells Drilled |
Zone |
Sundance |
Nosehill |
Wildhay |
Ansell/Minehead |
Whitehorse |
Kisku/Kakwa |
Brazeau |
Belly River |
|
|
|
|
|
|
|
|
Cardium |
13 |
|
7 |
|
|
|
2 |
22 |
Notikewin |
|
|
|
3 |
|
|
1 |
4 |
Falher |
|
|
|
|
|
|
|
|
Wilrich |
|
2 |
|
1 |
|
|
|
3 |
Bluesky |
|
|
|
|
|
|
|
|
Montney |
|
|
1 |
|
|
|
|
1 |
Total |
13 |
2 |
8 |
4 |
|
|
3 |
30 |
|
|
|
|
|
|
|
|
|
Production in the fourth quarter 2018 grew from
83,000 boe/d in October to exit the year at 94,000 boe/d, averaging
86,738 boe/d, or 459 mmcf/d of gas and 10,273 bbl/d of NGLs (12%
liquid). This was down from Q4 2017 which averaged 109,793 boe/d
(596 mmcf/d and 10,479 bbl/d of NGLs or 9.5% liquid) due to the
reduced capital program. The production additions in the fourth
quarter 2018 were dominated by Cardium wells which drove the
increase in relative liquids production. Of the 10,273 bbls/d of
NGL production, 55% or 5,660 bbl/d was condensate and pentane,
while the remaining was effectively split between propane and
butane. Peyto operated its Oldman deep cut plant during the quarter
as propane and butane prices, relative to gas prices, justified the
extra cost to strip those products out into liquid form.
The Company’s realized price for natural gas in
Q4 2018 was $2.09/Mcf, prior to a $0.34/Mcf hedging gain, while its
realized liquids price was $44.83/bbl, prior to a $2.60/bbl hedging
gain, yielding a combined revenue stream of $3.03/Mcfe. This net
sales price was 13% lower than the $3.50/Mcfe realized in Q4 2017.
Total cash costs in Q4 2018 were $0.95/Mcfe ($5.70/boe) up from
$0.83/Mcfe in Q4 2017 due to higher per unit interest charges,
transportation charges, and operating costs as a result of reduced
production volumes. This total Q4 2018 cash cost included royalties
of $0.12/Mcfe, operating costs of $0.33/Mcfe, transportation of
$0.19/Mcfe, G&A of $0.04/Mcfe and interest of $0.27/Mcfe.
Peyto generated total funds from operations of $100 million
in the quarter, or $2.08/Mcfe, equating to a 69% operating margin.
DD&A charges of $1.38/Mcfe, as well as a provision for current
and future performance based compensation and income tax, reduced
FFO to earnings of $0.45/Mcfe, or a 15% profit margin. Due to
Peyto’s low costs, no impairments were recorded in the quarter.
Dividends to shareholders totaled $0.62/Mcfe.
Marketing
Alberta (AECO) daily natural gas price continued
to suffer extreme volatility in 2018, driven primarily by a lack of
excess capacity on the Nova Gas Transmission (NGTL) system and
inadequate seasonal access to storage reservoirs. Daily AECO price
traded as high as $3.11/GJ and as low as minus $1.31/GJ in the
year. On average, the daily AECO price (5A) was $1.42/GJ, down 30%
from $2.03/GJ in 2017, while the monthly AECO price (7A) was down
37%. Fortunately, Peyto’s hedging practice of layering in future
sales in the form of fixed price swaps protected against much of
this volatility. For 2018, Peyto’s total natural gas revenues of
$457.4 million, were comprised of $416.0 million of pre-sold or
hedged gas production (91% of gas revenues) and $41.4 million of
unhedged revenue. This resulted in a blended realized natural gas
price of $2.21/GJ ($2.54/Mcf) or a 56% premium over the AECO daily
price. Peyto’s realized commodity prices by component for the year
and fourth quarter are listed in the following table.
Commodity Prices by Component
|
|
|
|
Three Months ended December
31 |
Twelve Months ended December 31 |
|
|
2018 |
|
2017 |
|
2018 |
|
2017 |
|
AECO monthly
($/GJ) |
|
1.80 |
|
1.85 |
|
1.45 |
|
2.31 |
|
AECO daily
($/GJ) |
|
1.48 |
|
1.60 |
|
1.42 |
|
2.03 |
|
Henry Hub spot ($US/MMBTU) |
|
3.74 |
|
2.92 |
|
3.07 |
|
3.03 |
|
Peyto natural gas – pre hedging ($/GJ) |
|
1.82 |
|
1.87 |
|
1.46 |
|
2.27 |
|
($/Mcf) |
|
2.09 |
|
2.15 |
|
1.68 |
|
2.61 |
|
Peyto natural gas – post hedging ($/GJ) |
|
2.12 |
|
2.50 |
|
2.21 |
|
2.51 |
|
($/Mcf) |
|
2.43 |
|
2.87 |
|
2.54 |
|
2.89 |
|
|
|
|
|
|
|
Condensate ($/bbl) |
|
57.76 |
|
67.54 |
|
71.83 |
|
60.20 |
|
Propane
($/bbl) |
|
22.14 |
|
34.95 |
|
22.91 |
|
23.16 |
|
Butane
($/bbl) |
|
27.71 |
|
34.94 |
|
38.77 |
|
31.27 |
|
Pentane ($/bbl) |
|
61.34 |
|
70.08 |
|
78.00 |
|
62.48 |
|
Total Oil and natural gas liquids ($/bbl) |
|
44.83 |
|
56.52 |
|
56.98 |
|
50.02 |
|
Canadian WTI ($/bbl) |
|
77.54 |
|
70.47 |
|
83.89 |
|
66.11 |
|
Peyto Realized liquids price/CND WTI |
|
58 |
% |
80 |
% |
68 |
% |
76 |
% |
|
|
|
|
|
|
|
|
|
|
Liquids prices are Peyto realized prices in Canadian dollars
adjusted for fractionation and transportationGas prices are Peyto
realized prices in Canadian dollars net of NGTL fuel charges
Peyto also realized $56.98/bbl for its blend of
natural gas liquids in the year, which represented 68% of the
Canadian Light Sweet oil price. By the fourth quarter of 2018,
however, liquid realizations had fallen to 58% of Canadian Light
Sweet price as Condensate differentials were affected by heavy oil
demand and Butane prices deteriorated due to high inventory levels
from a surge of supply combined with refinery turnarounds that
impacted demand. While condensate differentials and prices have
since corrected back to more normal levels, the high Butane storage
levels are expect to persist through much of 2019 resulting in
higher than normal differential to oil price. Peyto’s blended
liquid price differential as a percentage of Canadian Light Sweet
oil price is illustrated in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
($/bbl) |
Q1 2016 |
Q2 2016 |
Q3 2016 |
Q4 2016 |
Q1 2017 |
Q2 2017 |
Q3 2017 |
Q4 2017 |
Q1 2018 |
Q2 2018 |
Q3 2018 |
Q4 2018 |
Peyto realized blended oil and NGL price |
$33.60 |
|
$41.46 |
|
$39.76 |
|
$45.09 |
|
$48.14 |
|
$48.33 |
|
$45.92 |
|
$56.52 |
|
$59.67 |
|
$63.64 |
|
$61.04 |
|
$44.83 |
|
Canadian Light Sweet Stream |
$40.83 |
|
$54.70 |
|
$54.82 |
|
$61.58 |
|
$62.19 |
|
$61.95 |
|
$56.65 |
|
$69.02 |
|
$72.09 |
|
$80.62 |
|
$90.83 |
|
$77.54 |
|
Differential |
$(7.23) |
|
$(13.24) |
|
$(15.06) |
|
$(16.49) |
|
$(14.05) |
|
$(13.62) |
|
$(10.73) |
|
$(12.50) |
|
($12.42) |
|
($16.98) |
|
($29.79) |
|
($32.71) |
|
% of |
|
82% |
|
|
76% |
|
|
73% |
|
|
73% |
|
|
77% |
|
|
78% |
|
|
81% |
|
|
82% |
|
|
83% |
|
|
79% |
|
|
67% |
|
|
58% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Early in 2018, Peyto implemented a market
diversification strategy which is designed, over time, to expose
approximately 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 in these various markets to smooth out the price volatility.
Peyto has made significant strides advancing this diversification
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. For 2020, natural
gas sales are split 8% to Dawn, 44% Henry Hub and 48% to AECO,
respectively.
In 2019, at each of the markets, approximately
13%, 79% and 75% respectively, or 71% of aggregate volume, has
already been pre-sold to achieve price certainty.
In addition, and 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
($1.42/GJ). 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.
Details of Peyto’s ongoing marketing efforts are
available on Peyto’s website at
http://www.peyto.com/Files/Marketing/hedges.pdf.
Activity Update
Consistent with Peyto’s revised budget as
announced January 16, 2019, the Company has limited drilling
activity to 3 Cardium focused rigs running in 2019. Since the start
of the year, Peyto has spud 10 gross (8.5 net) wells, while
completing and bringing on stream 11 gross (10 net) wells. Ongoing
pipeline debottlenecking in the Greater Sundance area have
continued in an effort to reduce the impact of increased Cardium
condensate and NGL production. As well, minor plant modifications
are being completed to accommodate the additional liquids
production.
Peyto was successful acquiring 49 net sections
of Cardium lands at Crown sales in early 2019, for an average of
$50/acre, which continued to expand the Company’s future inventory
of Cardium locations. Peyto identified over 80 new locations on
these 49 sections which should more than replace this year’s
Cardium drilling program without touching the hundreds of locations
Peyto already has in inventory.
Currently, Propane and Butane prices, relative
to natural gas prices do not justify the extra cost to strip these
products out into liquid form. As a result, Peyto has temporarily
shut in the deep cut portion of its Oldman gas plant, as well as
modified the operating conditions at its other gas plants, to leave
these products in the gas stream where they capture a higher price.
This has reduced corporate production but results in increased
revenue and cashflow as compared to the previous operating
conditions. Future Deep Cut installations are currently on hold
until NGL market prices improve. Peyto continues to remain very
nimble with the ability to turn on the Oldman deep cut process and
increase corporate liquid recoveries through modified operations of
its entire gas plant infrastructure, if prices justify, or
conversely, shut off the deep cut and reject liquids across its gas
plants, depending on which mode of operation drives greater
cashflow. This value maximization would not be possible if Peyto
did not own and operate all of its gas processing plants and
instead used midstream alternatives.
With the successful testing of the new Cardium
completion design across the majority of Peyto’s Deep Basin lands
now complete, attention was turned to integrating all of the
Company’s “big data” that had been amassed over the past 20 years
of Cardium and deeper Spirit River exploration and development.
This data integration and feature analysis was completed in early
2019 and the most recent Cardium completion results are confirming
the success using this new technique to target superior reservoir
quality. This technique is being combined with the identification
of certain areas of higher liquid-yield Cardium resource to enhance
the economic return. As well, further cost optimization of drilling
and completion practices is expected to yield tangible gains which
will deliver meaningful returns for shareholders as the next future
growth phase occurs.
New Ventures
Peyto continues to pursue new ventures to
vertically integrate its energy business and extract maximum value
from both existing reserves and infrastructure assets as well as
new opportunities. The recent addition of a depleted, high
permeability reservoir, suitable for a proprietary natural gas
storage scheme in the Greater Sundance area is one example.
Evaluation, design and planning work will be conducted in 2019 to
bring this scheme into operation. In addition, Peyto will be
evaluating additional facility installations for the extraction,
refinement and marketing of the natural gas liquid components in
its production. Despite near term commodity price dislocation,
basin export opportunities exist for NGL products including
propane, butane and pentanes as well as developing supply for
increased intra-Alberta petrochemical demand.
2019 Outlook
Looking out over the next three to five years,
Peyto anticipates a substantial increase in natural gas market
access for the Western Canadian Sedimentary Basin. This will allow
for commensurate growth by natural gas industry players like Peyto
who have maintained an abundance of resource opportunities, the
ability to efficiently and profitably develop those resources, and
the vertically integrated business model to retain and enhance the
value from the various product streams.
The Company’s current three year plan will
ensure Peyto is well positioned for this next period of profitable
growth with the recent annual dividend reduction of $80 million
providing additional flexibility to capitalize on unique
opportunities in this environment. In the short term, lower
production declines and lower cost to add new production means less
investment is required to hold at this level while preparing to
take advantage of this longer term recovery. The reduced capital
budget and dividend reduction for 2019 should result in another
year of material debt reduction, even greater than that of 2018,
further strengthening the Company’s balance sheet.
The attributes that have defined Peyto for the
past 20 years, which include a steadfast focus on maximizing
returns, a relentless effort to drive down cost, a brave and
entrepreneurial spirit, the nimbleness to react, and the resilience
to persevere will be the same qualities that will ensure, going
forward, 20 more years of profitable business success.
Conference Call and
Webcast
A conference call will be held with the senior
management of Peyto to answer questions with respect to the 2018
fourth quarter and full year financial results on Thursday, March
7th, 2019, at 9:00 a.m. Mountain Standard Time (MST), or 11:00 a.m.
Eastern Standard Time (EST). 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/v2o5cqgm. The conference call
will be archived on the Peyto Exploration & Development website
at www.peyto.com.
Management’s Discussion and
Analysis
A copy of the fourth quarter report to shareholders, including
the MD&A, unaudited financial statements and related notes, is
available at
http://www.peyto.com/Files/Financials/2018/Q42018FS.pdf and at
http://www.peyto.com/Files/Financials/2018/Q42018MDA.pdf and will
be filed at SEDAR, www.sedar.com at a later date.
Annual General Meeting
Peyto’s Annual General Meeting of Shareholders
is scheduled for 3:00 p.m. on Thursday, May 9, 2019 at the Eau
Claire Tower, +15 level, 600 – 3rd Avenue SW, Calgary, Alberta.
Shareholders are encouraged to visit the Peyto website at
www.peyto.com where there is a wealth of information designed to
inform and educate investors. A monthly President’s Report can also
be found on the website which follows the progress of the capital
program and the ensuing production growth, along with video and
audio commentary from Peyto’s senior management.
Darren GeePresident and CEOMarch 6, 2019
Certain information set forth in this
document and Management’s Discussion and Analysis, 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 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.
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. 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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