Peyto Exploration & Development Corp. (“Peyto” or the
“Company”) (TSX: PEY) is pleased to present the results and
in-depth analysis of its independent reserve report effective
December 31, 2019. The evaluation encompassed 100% of Peyto’s
reserves and was conducted by InSite Petroleum Consultants
(“InSite”). The year 2019 marks the Company’s 21st year of
successful reserves development.
SUSTAINABILITY
- Long Life, Low
Decline: Peyto’s base production decline is forecast in
the Insite report at 23% for 2020, while it’s PDP Reserve Life
Index (“RLI”) increased 8% year over year to 9.4 years.
- High Capital
Efficiency: The Company invested 64% of funds from
operations in 2019 to replace over 75% of produced reserves in the
year. Capital Efficiency for the last 3 years has averaged
$10,900/boe/d.
- Strengthening Balance
Sheet: Peyto continued to strengthen its balance sheet in
2019 with $117 million in free cashflow resulting in $78 million in
net debt3 repayment.
- Minimal
Liabilities: The forecast cost of all of Peyto’s future
abandonment and reclamation liability (wells, sites, &
facilities) is $55 million (NPV5), which represents 1.7% of the
total $3.3 billion of forecast future value of the developed
reserves1 (NPV5), illustrating Peyto’s disciplined, organic
approach to finding and developing natural gas that has delivered
one of the highest ratios of producing to non-producing wells in
the industry.
- Low Risk Reserves:
Peyto currently has 1,568 gross (1,370 net) producing wells that
are forecast to remain on production for decades to come. The
lack of mobile water in these low permeability reservoirs combined
with Peyto’s low cost operations and efficient processing
facilities results in very long producing lives for the existing
proven producing wells which are immune to the vulnerabilities of
high cost midstream processing.
- Meeting Canada’s
Needs: With approximately half of the Emissions Intensity
(emissions per unit of production) of the rest of the natural gas
production and processing industry in Canada, Peyto’s reserves are
extracted for far less environmental impact*. When paired with high
efficiency electricity generation, Peyto endeavors to provide
Albertans and Canadians with some of the cleanest, most affordable
and most reliable energy supply possible for their daily
needs.
*Refer to Peyto’s 2019 Sustainability Report at
http://www.peyto.com/Files/Corporate/2019SustainabilityReport.pdf
HISTORICAL TRACK RECORD
- Over the past 21 years, Peyto has explored for and discovered
6.7 TCFe of Alberta Deep Basin natural gas and associated liquids,
of which 56% has now been developed1.
|
|
Peyto 21-year
cumulative production (to Dec. 31/19): |
1.860
TCFe |
|
|
Total Proved +
Probable Additional Developed reserves: |
1.951 TCFe |
|
|
Total developed natural gas and liquids: |
3.811 TCFe |
|
|
Total Proved +
Probable Additional Undeveloped reserves: |
2.937 TCFe |
|
|
Total explored for and discovered: |
6.748 TCFe |
|
|
|
|
|
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 as well as financial benefits for all
Canadians. |
|
- In those 21 years, a total of $6.2
billion was invested in the Canadian economy in the acquisition and
development of 3.8 TCFe of total developed natural gas and
associated liquids at an average cost of $1.62/Mcfe, while a
weighted average field netback3 of $3.67/Mcfe delivered $6.3
billion in FFO and resulted in a cumulative recycle ratio2 of 2.3
times. Royalty payments made during this time period have totaled
over $870 million.
- Based on the December 31, 2019
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 $34/share, comprised of $17/share of
developed reserves and $17/share of undeveloped reserves. This
includes a provision for all abandonment liability for wells, sites
and facilities for which Peyto has ownership and
responsibility.
2019 HIGHLIGHTS
- For the year ended December 31,
2019, Peyto invested $206 million of total capital3 to build 75
mmcf/d of natural gas and 4,700 bbl/d of NGLs (66% pentanes and
condensate) at a cost of $12,000/boe/d, principally from its
liquids rich Cardium resource play.
- The annual liquid yield of this new
2019 production was 71 bbl/mmcf, compared to all previous Cardium
production of 45 bbl/mmcf, and the 2019 corporate average yield of
26 bbl/mmcf.
- The average liquid yield for all
PDP reserves at year end increased 31% to 29 bbl/mmcf.
- Peyto developed 133 BCFe (22.2
mmboes) of new Proved Developed Producing (“PDP”) reserves at a
Finding, Development and Acquisition (“FD&A”) cost of
$1.55/Mcfe ($9.29/boe) while the average field netback3 was
$2.17/Mcfe ($13.01/boe), resulting in a 1.4 times recycle ratio2.
The PDP FD&A cost was higher than the previous year as Peyto
focused on increasing Cardium liquid reserves which yield a higher
price and ultimately higher field netback. Peyto’s total Cardium
production, which now represents 29% of corporate production,
yielded a 54% higher field netback in 2019 ($2.95/Mcfe) than
non-Cardium production.
- Peyto replaced 137% of annual
production with new Total Proved (“TP”) reserves at a FD&A cost
of $1.41/Mcfe ($8.45/boe) and replaced 140% of annual production
with new Proved plus Probable Additional (“P+P”) reserves at a
FD&A cost of $1.25/Mcfe ($7.48/boe) (including increases in
Future Development Capital (“FDC”) of $136 million and $102 million
for the respective categories). For comparative purposes, FD&A
costs before changes in FDC were $0.85/Mcfe and $0.83/Mcfe,
respectively.
- Total Company reserves were down 3%
on a PDP basis at 1.6 TCFe but up on a TP and P+P basis by 2% and
1% to 3.2 TCFe and 4.9 TCFe, respectively, both in absolute and on
a per share basis. Liquid reserves increased by 23%, 25% and 5% in
the PDP, TP, and P+P categories.
- The Reserve Life Index for the PDP,
TP and P+P reserves increased to 9.4, 18.7 and 28.8 years,
respectively.
- At year end, P+P reserves of 815
mmboes (4.148 TCFe of gas, 63 mmbbls of pentanes and condensate, 25
mmbbls butane, and 35 mmbbls propane, and inclusive of 1,280 future
locations) had been assigned to just 16% of Peyto’s total Deep
Basin rights.
2020 OPERATIONS
UPDATE
- A novel coronavirus outbreak in China and an oversupply of
natural gas in North American have caused commodity prices for WTI
oil, NYMEX gas and AECO gas to all fall sharply, since Peyto
announced it’s 2020 capital budget on December 12, 2019.
- Peyto’s drilling program for 2020 has been adjusted for this
change in commodity prices with activity deferred until later in
the year to account for the forecast commodity price recovery. As
such, Peyto still expects that capital investments for 2020 will
range from $250 to $300 million as previously reported. This
revised schedule includes drilling approximately 80 net 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 marketed natural gas liquids
and pre-sold natural gas production. Peyto has already sold 150
MMcf/d of natural gas and 563 bbl/d of condensate for the year at
an average of $1.94/mcf and $59.62/bbl. See Peyto’s website at
http://www.peyto.com/Files/Operations/Marketing/hedges.pdf for up
to date marketing arrangements.
- The Company continues to seek additional intra-Alberta, direct
sales, supply partnerships with Alberta electricity producers. As
previously announced, Peyto has entered into a gas supply agreement
with Kineticor Resource Corp. for their proposed 900 MW, high
efficiency, combined cycle Cascade Power Plant near Edson, Alberta,
forecast to commence operations in 2023. The Company has agreed to
supply 60,000 GJ/d (approximately 52 MMcf/d) of natural gas for 15
years to this facility via a direct connection that will eliminate
transportation fuel requirements by 50% and will be insulated from
NGTL cost variability. Peyto is proud to be an important part of
Alberta’s clean energy future with these types of
partnerships.
|
1Total Proved
+ Probable Additional Developed Reserves includes Proved Developed
Producing+Probable Additional reserves and Proved Developed
Non-Producing+Probable Additional reserves.2Recycle Ratio is Field
Netback divided by FD&A.3Capital Expenditures, Field Netback
(Revenue less Royalties, Operating costs and Transportation), Net
Debt and Production are estimated and remain unaudited at this
time. |
2019
RESERVES
The following table summarizes Peyto's reserves
and the discounted Net Present Value of future cash flows, before
income tax, using variable pricing, at December 31, 2019.
|
|
|
|
|
Before Tax Net Present Value
($millions) |
|
|
|
|
|
Discounted at |
Reserve Category |
Gas(BCF) |
Oil & NGL (mstb) |
BCFe(6:1) |
mmboe(6:1) |
0% |
5% |
8% |
10% |
|
Proved Developed
Producing |
1,366 |
38,969 |
1,600 |
267 |
$4,173 |
$2,622 |
$2,112 |
$1,866 |
|
Proved Non-producing |
34 |
1,112 |
40 |
7 |
$90 |
$57 |
$45 |
$40 |
|
Proved Undeveloped |
1,256 |
44,637 |
1,524 |
254 |
$3,721 |
$1,836 |
$1,250 |
$977 |
|
Total Proved |
2,655 |
84,718 |
3,164 |
527 |
$7,984 |
$4,514 |
$3,407 |
$2,883 |
|
Probable Additional |
1,492 |
38,600 |
1,724 |
287 |
$5,095 |
$2,304 |
$1,563 |
$1,240 |
|
Proved
+ Probable Additional |
4,148 |
123,318 |
4,888 |
815 |
$13,079 |
$6,818 |
$4,970 |
$4,122 |
|
Note: Based on the InSite report effective
December 31, 2019. 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 2019 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 2019 (the base reserves) were evaluated and adjusted
for 2019 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 1,493 producing entities (zones/wells) were
evaluated. These producing wells and zones represent a total gross
Estimated Ultimate Recoverable or EUR volume of 3.9 TCFe (remaining
PDP+PA reserves plus cumulative production to date), which is down
0.7% from previous estimates and included a slight positive
revision to liquid reserves and a slight negative revision to gas
recoveries. The first-year decline of the base reserves is forecast
to include changing liquid recoveries, resulting in a change in the
shape of the base decline curve from previous years. In aggregate,
however, 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 significantly
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 Developed
Producing reserves, decreased $460 million, or -24%, due to the
difference in commodity price forecasts and Peyto’s realized
historical offsets to posted prices. InSite’s price forecast used
in the variable dollar economics is available on their website at
www.insitepc.com.
For 2020, InSite is now forecasting the total
base production (all wells on production at Dec. 31, 2019) to
decline to approximately 61,800 boe/d (324 MMcf/d of gas and 7,800
bbl/d of NGLs) by December 2020. This decline incorporates the
changing liquid yields for new Cardium wells and implies a total
base decline rate of approximately 23% from December 2019. The 2020
forecast decline rate is lower than the 2019 actual base decline of
29% which also exhibited this liquid yield dynamic in the new
Cardium wells. The historical base decline rates and capital
programs are shown in the following table:
|
2008 |
2009 |
20101 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020F |
Base Decline (%/yr)* |
26% |
20% |
22% |
33% |
35% |
34% |
38% |
40% |
40% |
37% |
35% |
29% |
23% |
Capital Expenditures
($MM) |
$139 |
$73 |
$261 |
$379 |
$618 |
$578 |
$690 |
$594 |
$469 |
$521 |
$232 |
$206 |
$275 |
*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 2019, Peyto invested a total of $206
million in organic activity to buy and evaluate exploration lands,
expand its pipeline gathering network, and drill 61 gross (53 net)
wells. 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 detailed 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 2019, approximately 4% was spent
acquiring lands and seismic, 13% on pipeline and facility projects,
and the remaining 83% was spent drilling, completing and connecting
existing and new reserves. Thirty-nine of the 61 gross wells
drilled, or 64%, were previously identified as undeveloped reserves
in last year’s reserve report (34 Proved, 5 Probable Additional).
The remaining 22 wells were locations developed in the year and
were not recognized in last year’s report. The discovery and
development of a new, higher liquid-rich region of Peyto’s Cardium
play has unveiled a more profitable resource as evident in
increased liquid bookings.
Peyto’s booked Cardium locations increased again
as a result of the 2019 drilling program which focused on this
extensive, liquids rich resource play. With the increase from 375
to 442 booked locations in 2019 (357 PU and 73 PA), the Cardium
reserve volumes now represent 29% of the Company’s total P+P volume
and 36% of the Company’s total P+P value (NPV discounted at 5%) up
from 26% and 30%, 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 |
2019 |
Opening Inventory |
119 |
144 |
169 |
211 |
200 |
191 |
183 |
182 |
190 |
187 |
375 |
Wells Drilled |
(19) |
(17) |
(17) |
(18) |
(9) |
(8) |
(0) |
(2) |
(7) |
(48) |
(50) |
Locations Added/Removed |
44 |
42 |
59 |
7 |
0 |
0 |
(1) |
10 |
4 |
236 |
117 |
Closing Inventory |
144 |
169 |
211 |
200 |
191 |
183 |
182 |
190 |
187 |
375 |
442 |
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 2018
originally booked to the 39 locations referred to above, totaled
129 BCFe (3.3 BCFe/well) of Proved Undeveloped plus Probable
Additional reserves for a forecast capital investment of $111
million ($0.86/Mcfe). In actuality, $109 million of capital
($0.88/Mcfe) was spent on these 39 wells during 2019, yielding
Proved Developed Producing plus Probable Additional reserves of 124
BCFe (3.2 BCFe/well). The actual reserves developed have a higher
liquid content than originally forecast, however, which generates
higher netbacks.
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% |
2019 |
61 |
39 |
64% |
129 |
$111 |
$0.86 |
123 |
$109 |
$0.88 |
+2% |
Total |
967 |
658 |
68% |
2,001 |
$2,655 |
$1.33 |
2,121 |
$2,517 |
$1.19 |
-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 capital
invested in 2019, 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 can
be 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 2019, Peyto’s estimated net debt had
decreased by 6% or $78 million to $1.147 billion while the number
of shares outstanding remained the same at 164.9 million shares.
The change in debt includes all 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 $363 million of Proved
Developed Producing, $ 1.131 billion of Total Proven, and $1.892
billion of Proved plus Probable Additional undiscounted reserve
value, with $206 million of capital investment, cost reductions,
and marketing arrangements. The ratio of capital expenditures to
value creation is what Peyto refers to as the NPV recycle ratio,
which is simply the undiscounted value addition, resulting from the
capital program, divided by the capital investment. For 2019, the
Proved Developed Producing NPV recycle ratio is 1.8 which means for
each dollar invested, the Peyto team was able to create 1.8 new
dollars of Proved Developed Producing reserve value.
The historic NPV recycle ratios are presented in
the following table.
|
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
Wt. Avg. |
Capital
Investment ($MM) |
$73 |
$261 |
$379 |
$618 |
$578 |
$690 |
$594 |
$469 |
$521 |
$232 |
$206 |
NPV0 Recycle Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
Proved Developed Producing |
5.4 |
3.5 |
2.4 |
1.6 |
1.5 |
1.5 |
2.3 |
2.9 |
2.3 |
4.6 |
1.8 |
2.3 |
Total Proved |
18.9 |
6.1 |
4.7 |
2.2 |
2.0 |
1.7 |
3.3 |
4.2 |
3.2 |
11.7 |
5.5 |
3.8 |
Proved + Probable Additional |
27.1 |
10.3 |
6.6 |
3.2 |
4.0 |
2.6 |
5.0 |
7.3 |
4.0 |
15.1 |
9.2 |
5.8 |
*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 Developed 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. 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 2019, the Company again deployed a
conservative capital program but was successful in effectively
replacing 75% of annual production with new PDP reserves using less
than 64% of funds from operations. Fourth quarter production
decreased by 11%, from 86,738 boe/d (459 MMcf/d gas, 10,273 bbl/d
NGLs) to 77,457 boe/d (397 MMcf/d gas, 11,220 bbl/d NGLs). The
change in both PDP reserves and fourth quarter production resulted
in increasing the Proved Developed Producing reserve life index
from 8.7 years to 9.4 years
For comparative purposes, the Total Proved and
P+P RLI index was 19 and 29 years, respectively. Management
believes that the most meaningful method to evaluate the current
reserve life is by dividing the Proved Developed 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.
|
2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
Proved
Developed Producing |
12 |
13 |
14 |
14 |
11 |
9 |
9 |
7 |
7 |
7 |
7• |
7 |
9 |
9 |
Total
Proved |
14 |
16 |
17 |
21 |
17 |
16 |
15 |
12 |
11 |
11 |
11• |
11 |
16 |
19 |
Proved + Probable Additional |
20 |
21 |
23 |
29 |
25 |
22 |
22 |
19 |
18 |
17 |
18 |
18 |
25 |
29 |
Future Undeveloped
Opportunities
As at December 31, 2019, Peyto had 881 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 3,247
net sections of rights over Duvernay, Montney and seven Cretaceous
horizons. During Peyto’s 21-year history, the Company has found and
developed 3.8 TCFe of total natural gas and associated liquids
which resides in 348 of these net sections. Effectively, Peyto has
invested $6.2 billion to fully develop 11% of its existing land
base which has also resulted in the generation of $6.3 billion of
cumulative funds from operations and $2.6 billion in cumulative
earnings to date.
Likewise, the remaining undeveloped land base
holds significant future potential. The independent reserve
evaluators have forecast development activity for the next six
years as shown in the following table of future development
capital.
|
Future Development Capital |
|
Proved Reserves |
Proved+ Probable Additional Reserves |
Year |
Undisc., ($Millions) |
Undisc., ($Millions) |
2020 |
$231 |
$261 |
2021 |
$387 |
$524 |
2022 |
$360 |
$593 |
2023 |
$369 |
$614 |
202420252026 |
$408$252$97 |
$647$643$245 |
Thereafter |
$3 |
$21 |
Total |
$2,107 |
$3,547 |
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.
(gross locations) |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
10 yr, Avg. |
Wells Drilled |
29 |
52 |
70 |
86 |
99 |
123 |
140 |
128 |
142 |
70 |
61 |
97 |
Locations Added to Reserves Report |
96 |
149 |
151 |
156 |
220 |
257 |
208 |
245 |
165 |
223 |
118 |
189 |
Inventory Generation Rate |
3.3 |
2.9 |
2.2 |
1.8 |
2.2 |
2.1 |
1.5 |
1.9 |
1.2 |
3.2 |
1.9 |
1.9 |
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
1,201 gross (982 net) locations to 1,280 gross (1,035 net)
locations. Of these future locations, 64%, or 630, are categorized
by the independent reserve evaluators as Proven Undeveloped with
the remaining 36%, or 405, as Probable Undeveloped. In addition,
the PU and PA categories include deep cut facility installations at
two of Peyto’s Greater Sundance gas plants. The net reserves
associated with the undeveloped locations (not including existing
uphole zones) totals 2.9 TCFe (484 mmboes, consisting of 2.44 TCF
of gas and 78 mmbbls of NGLs) while the total capital required to
develop them is estimated at $3.5 billion or $1.21/Mcfe. This is
forecast to create Net Present Value of $3.5 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 TP and P+P reserves over the 7 year future
development capital schedule, as contained in the evaluator’s
report, totals $4.1 billion and $5.7 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 $136 million and $102 million, respectively, which reflects
the increase in future locations combined with the significant
improvement in drilling and completion costs.
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 is the operator of over 99% of
its producing wells and has one of the highest ratios of producing
to non-producing wells in the industry. Approximately 98% of
Peyto’s asset base has been organically developed by Peyto and
contains very few abandonment liabilities. At December 31, 2019,
Peyto owned 1,528.5 net wells of which over 90% are on production
today and most are expected to produce for decades to come. Of the
non-producing wellbores, 21 are considered medium risk, inactive
wells that require downhole suspension over the next several years.
The capital requirement for this work is estimated at $1.5 million.
For perspective, the current existing developed reserves have a
forecast value of $3.3 billion (NPV5 of the PDP + PA and PDNP +
PA), while the cost to abandon and reclaim all wells, sites and
facilities is estimated at $55 million using the same 5% discount
rate for future costs.
These cumulative factors listed above, which
reduce the traditional risk of realizing future cashflows from
Peyto’s reserves, is why, in Management’s opinion, Peyto’s reserves
can be valued at lower discount rates than other, more conventional
asset bases.
PERFORMANCE RATIOS
The following table highlights annual
performance ratios both before and after the implementation of
horizontal wells in late 2009. These can be used for comparative
purposes, but it is cautioned that on their own they do not measure
investment success.
|
2019 |
2018 |
2017 |
2016 |
2015 |
2014 |
2013 |
2012 |
2011 |
2010 |
Proved Developed
Producing |
|
|
|
|
|
|
|
|
|
|
FD&A ($/Mcfe) |
$1.55 |
$1.18 |
$1.36 |
$1.44 |
$1.64 |
$2.25 |
$2.35 |
$2.22 |
$2.12 |
$2.10 |
RLI (yrs) |
9 |
9 |
7 |
7 |
7 |
7 |
7 |
9 |
9 |
11 |
Recycle Ratio |
1.4 |
2.3 |
2.1 |
1.8 |
2.0 |
1.9 |
1.6 |
1.6 |
2.1 |
2.4 |
Reserve Replacement |
75% |
98% |
171% |
153% |
193% |
183% |
190% |
284% |
230% |
239% |
Total
Proved |
|
|
|
|
|
|
|
|
|
|
FD&A ($/Mcfe) |
$1.41 |
$1.21 |
$1.39 |
$1.01 |
$0.72 |
$2.37 |
$2.23 |
$2.04 |
$2.13 |
$2.35 |
RLI (yrs) |
19 |
16 |
11 |
11 |
11 |
11 |
12 |
15 |
16 |
17 |
Recycle Ratio |
1.7 |
2.2 |
2.0 |
2.6 |
4.5 |
1.8 |
1.6 |
1.7 |
2.1 |
2.1 |
Reserve Replacement |
137% |
294% |
225% |
183% |
188% |
254% |
230% |
414% |
452% |
456% |
Future Development Capital ($ millions) |
$2,107 |
$1,971 |
$1,488 |
$1,305 |
$1,381 |
$1,721 |
$1,406 |
$1,318 |
$1,111 |
$741 |
Proved + Probable Additional |
|
|
|
|
|
|
|
|
|
|
FD&A ($/Mcfe) |
$1.25 |
1.02 |
$1.49 |
$0.62 |
$0.54 |
$2.01 |
$1.86 |
$1.68 |
$1.90 |
$2.19 |
RLI (yrs) |
29 |
25 |
18 |
18 |
17 |
18 |
19 |
22 |
22 |
25 |
Recycle Ratio |
1.7 |
2.6 |
1.9 |
4.2 |
6.1 |
2.1 |
2.0 |
2.1 |
2.4 |
2.3 |
Reserve Replacement |
140% |
342% |
279% |
283% |
287% |
328% |
450% |
527% |
585% |
790% |
Future Development Capital ($millions) |
$3,547 |
$3,445 |
$2,978 |
$2,563 |
$2,657 |
$2,963 |
$2,550 |
$2,041 |
$1,794 |
$1,310 |
- 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. 2018 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. 2018 Proved Developed
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. 2018 Proved Developed 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. 2018
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.
LONG TERM DEBT
On October 25, 2019, the Company voluntarily
repaid $120 million of senior unsecured notes due December 4, 2020.
Further, on December 18, 2019 the Company voluntarily repaid $50
million of senior unsecured notes due July 3, 2022, and $35 million
of senior unsecured notes due May 1, 2025. The funds were repaid,
without make-whole, from the unsecured revolving credit facility.
The next note maturity is September 6, 2022 while the stated term
date of the revolving credit facility is October 13, 2022. In
addition, Peyto’s senior debt to EBITDA covenant was amended
effective December 31, 2019 to 3.5 times. This covenant is
scheduled to revert to 3.25 for the first fiscal quarter ending
December 31, 2021. In light of the current commodity prices, Peyto
will be monitoring its capital spending and balance sheet to ensure
Peyto remains compliant with all financial covenants.
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 2020. Shareholders are encouraged to actively visit
Peyto’s website located at www.peyto.com. For further information,
please contact Darren Gee, President and Chief Executive Officer of
Peyto at (403) 261-6081.
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 2020 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 December 12, 2019, and such information is
included herein to provide readers with an understanding of the
Company's anticipated capital expenditures for 2020. 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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