Peyto Exploration & Development Corp. (“Peyto” or the
“Company”) is pleased to report operating and financial results for
the fourth quarter and 2019 fiscal year. A 66% operating margin1
and 27% profit margin2 was achieved in 2019, allowing Peyto to
deliver a 4% return on capital employed (“ROCE”) and an 8% return
on equity (“ROE”) in the year.
PROFITABILITY =
SUSTAINABILITY
- Free Cashflow –
Generated $117 million in free cashflow in 2019 and continued to
strengthen the balance sheet with $78 million in net debt
reduction.
- Long Life, Low
Decline – The PDP Reserve life index (“RLI”) increased 8%
year-over-year to 9.4 years and the base production decline for
2020 is forecast in the independent reserve report at 23%.
- Annual Earnings per share
of $0.81 – 2019 was the 20th consecutive year of profits
with annual earnings of $134 million or 27% of revenue. Over the
past 21 years, Peyto has invested $6.2 billion of total capital,
resulting in $6.3 billion in total Funds from Operations and $2.6
billion in cumulative earnings. The Company has never incurred a
write down nor recorded an impairment of its assets.
- Low Cash Costs of
$0.95/Mcfe ($5.69/boe) – Cash costs of $0.87Mcfe, before
royalties of $0.08/Mcfe, included operating costs of $0.34/Mcfe,
transportation of $0.19/Mcfe, G&A of $0.04/Mcfe and interest
expense of $0.30/Mcfe. Total 2019 cash costs continue to be the
lowest in the industry and when combined with a realized price of
$2.78/Mcfe ($16.65/boe), resulted in a cash netback of $1.83/Mcfe
($10.96/boe) or a 66% operating margin.
- Annual capital investments
were 64% of FFO – Of the total of $323 million of FFO
($1.96/share), $206 million was invested in the drilling of 61
gross (53 net) wells. The new wells contributed 75 mmcf/d of
natural gas and 4,700 bbl/d of NGLs (66% pentanes and condensate)
by year end at a cost of $12,000/boe/d. While this cost for new
production was up from $9,800/boe/d in the previous year, it built
a more liquids-rich barrel that captured a 54% higher netback.
- Liquids production up 13%
– Condensate and NGL production averaged 10,922 bbls/d up
13% in 2019 while natural gas production averaged 419 MMcf/d down
15% from 2018. For Q4 2019, natural gas and liquids production was
397 MMcf/d and 11,221 bbls/d. Fourth quarter liquid yields
increased 26% year-over-year to 28 bbl/mmcf. Realized liquids
prices were 3.7 times that of gas when gas is converted to oil on
an energy equivalent basis of 6 mcf equals 1 bbl.
- Lower Emissions –
GHG Emissions Intensity was further reduced in 2019 due to Peyto’s
ongoing installation of zero emissions wellsite controllers and
pumps, and by pre-connecting new wells to existing gathering
systems to eliminate flaring. Since implementation of its
comprehensive emissions reduction program in 2014, the Company has
achieved a methane flaring and venting intensity reduction of 38%
and an overall GHG emissions intensity reduction of 28%.
- Minimal Future
Liabilities – The forecast cost of all Peyto’s future
abandonment and reclamation liability (wells, sites, &
facilities) is $55 million (NPV5), which represents 1.7% of the
$3.3 billion of forecast future value of the total developed
reserves3 (NPV5).
2019 in ReviewThe year 2019
marked Peyto’s 21st year of successful operations with the
advancement of several key plays across the Company’s Deep Basin
lands. Most of the drilling took place in Cardium “sweet-spots”
that exhibited higher condensate yields, particularly in the
Wildhay area, while at the same time the company completed and tied
in its first Montney well. In addition, a prolific Falher channel
was discovered in the Ansell area and the first few development
wells were brought on production. Peyto also continued to evaluate
its South Brazeau acreage and late in the year commenced
construction of a 16 km pipeline to connect this area to the
Company’s Brazeau gas plant. The Company significantly increased
its Deep Basin land position in the year with 130 net sections
(equivalent to 3.6 townships of land) purchased at Crown auctions
and through private acquisition. The 108 net sections of land
purchased at auction was acquired at a record low price of
$37/acre.
The Average AECO daily natural gas price in
Alberta was up 17% from the previous year to $1.67/GJ, while the
NYMEX price in the US fell 19% to $2.56/MMBTU. WTI oil price was
also down year over year by 13% to $57/bbl. While this lower oil
price translated into lower realized natural gas liquids prices,
Peyto’s blend of NGLs still sold for significantly more than gas
which is why drilling was directed to increasing liquids
production. This focus on increasing liquids production and
reserves, with PDP liquid reserves up 23% and liquid production up
13%, came at a higher finding and development cost of $1.55/Mcfe
($9.29/boe). The Company plans to keep innovating with its Cardium
well design to lower this cost in 2020 while continuing to enjoy
the higher netback and value realized from increased liquids
production.
1. Operating Margin is defined as funds from
operations divided by revenue before royalties and marketing but
including realized hedging gains/losses.2. Profit Margin is defined
as net earnings for the quarter divided by revenue before royalties
and marketing but including realized hedging gains/losses.3. Total
Developed Reserves includes Proved Developed Producing+Probable
Additional reserves and Proved Developed Non-Producing+Probable
Additional reserves.Natural gas volumes recorded in thousand cubic
feet (mcf) are converted to barrels of oil equivalent (boe) using
the ratio of six (6) thousand cubic feet to one (1) barrel of oil
(bbl). Natural gas liquids and oil volumes in barrel of oil
(bbl) are converted to thousand cubic feet equivalent (Mcfe) using
a ratio of one (1) barrel of oil to six (6) thousand cubic
feet. This could be misleading, particularly if used in
isolation as it is based on an energy equivalency conversion method
primarily applied at the burner tip and does not represent a value
equivalency at the wellhead.
|
Three Months Ended Dec 31 |
% |
Twelve Months Ended Dec 31 |
% |
|
2019 |
2018 |
Change |
2019 |
2018 |
Change |
Operations |
|
|
|
|
|
|
|
|
|
|
Production |
|
|
|
|
|
|
|
|
|
|
Natural gas (mcf/d) |
397,419 |
|
458,792 |
|
-13 |
% |
419,281 |
|
493,921 |
|
-15 |
% |
Oil & NGLs (bbl/d) |
11,221 |
|
10,273 |
|
9 |
% |
10,922 |
|
9,692 |
|
13 |
% |
Thousand cubic feet equivalent (mcfe/d @ 1:6) |
464,745 |
|
520,430 |
|
-11 |
% |
484,810 |
|
552,070 |
|
-12 |
% |
Barrels of oil equivalent (boe/d @ 6:1) |
77,457 |
|
86,738 |
|
-11 |
% |
80,802 |
|
92,012 |
|
-12 |
% |
Production per million common
shares (boe/d) |
470 |
|
526 |
|
-11 |
% |
490 |
|
558 |
|
-12 |
% |
Product prices |
|
|
|
|
|
|
|
|
|
|
Natural gas ($/mcf) |
1.96 |
|
2.43 |
|
-19 |
% |
2.04 |
|
2.54 |
|
-20 |
% |
Oil & NGLs ($/bbl) |
43.85 |
|
44.83 |
|
-2 |
% |
44.61 |
|
56.98 |
|
-22 |
% |
Operating expenses
($/mcfe) |
0.34 |
|
0.33 |
|
3 |
% |
0.34 |
|
0.31 |
|
10 |
% |
Transportation ($/mcfe) |
0.19 |
|
0.19 |
|
- |
|
0.19 |
|
0.17 |
|
12 |
% |
Field netback ($/mcfe) |
2.11 |
|
2.39 |
|
-12 |
% |
2.17 |
|
2.66 |
|
-18 |
% |
General & administrative
expenses ($/mcfe) |
0.02 |
|
0.04 |
|
-50 |
% |
0.04 |
|
0.05 |
|
-20 |
% |
Interest expense ($/mcfe) |
0.31 |
|
0.27 |
|
15 |
% |
0.30 |
|
0.26 |
|
15 |
% |
Financial ($000,
except per share*) |
|
|
|
|
|
|
|
|
|
|
Revenue and realized hedging
gains (losses) 1 |
116,691 |
|
145,109 |
|
-20 |
% |
489,822 |
|
658,906 |
|
-26 |
% |
Royalties |
5,303 |
|
5,801 |
|
-9 |
% |
13,653 |
|
26,622 |
|
-49 |
% |
Funds from operations |
75,974 |
|
99,635 |
|
-24 |
% |
323,131 |
|
473,740 |
|
-32 |
% |
Funds from operations per
share |
0.46 |
|
0.61 |
|
-25 |
% |
1.96 |
|
2.87 |
|
-32 |
% |
Total dividends |
9,892 |
|
29,677 |
|
-67 |
% |
39,570 |
|
118,709 |
|
-67 |
% |
Total dividends per share |
0.06 |
|
0.18 |
|
-67 |
% |
0.24 |
|
0.72 |
|
-67 |
% |
Payout ratio |
13 |
|
30 |
|
-57 |
% |
12 |
|
25 |
|
-52 |
% |
Earnings |
3,492 |
|
21,458 |
|
-84 |
% |
133,495 |
|
129,110 |
|
3 |
% |
Earnings per diluted
share |
0.02 |
|
0.13 |
|
-85 |
% |
0.81 |
|
0.78 |
|
4 |
% |
Capital expenditures |
73,351 |
|
112,215 |
|
-35 |
% |
206,431 |
|
232,363 |
|
-11 |
% |
Weighted average common shares
outstanding |
164,874,175 |
|
164,874,175 |
|
- |
|
164,874,175 |
|
164,874,175 |
|
- |
|
As at December
31 |
|
|
|
|
|
|
|
|
|
|
Net debt |
|
|
|
|
|
1,146,659 |
|
1,224,422 |
|
-6 |
% |
Shareholders' equity |
|
|
|
|
|
1,713,917 |
|
1,680,462 |
|
2 |
% |
Total assets |
|
|
|
|
|
3,597,180 |
|
3,688,852 |
|
-2 |
% |
1excludes revenue from sale of third-party
volumes |
|
|
|
|
|
|
|
Three Months Ended Dec 31 |
Twelve Months Ended Dec 31 |
($000 except per share) |
2019 |
2018 |
2019 |
2018 |
Cash flows from operating activities |
74,943 |
|
102,559 |
|
316,936 |
|
486,478 |
|
Change in non-cash working capital |
1,031 |
|
(3,955 |
) |
3,904 |
|
(17,131 |
) |
Change in provision for performance-based compensation |
- |
|
(12,527 |
) |
- |
|
(9,165 |
) |
Performance based
compensation |
- |
|
13,558 |
|
2,291 |
|
13,558 |
|
Funds from operations |
75,974 |
|
99,635 |
|
323,131 |
|
473,740 |
|
Funds
from operations per share |
0.46 |
|
0.60 |
|
1.96 |
|
2.87 |
|
(1) Funds from operations (“FFO”) - Management
uses FFO to analyze the operating performance of its energy
assets. In order to facilitate comparative analysis, FFO is
defined throughout this report as earnings before performance-based
compensation, non‑cash and non‑recurring expenses. Management
believes that FFO is an important parameter to measure the value of
an asset when combined with reserve life. FFO is not a
measure recognized by Canadian generally accepted accounting
principles ("GAAP") and does not have a standardized meaning
prescribed by GAAP. Therefore, FFO, as defined by Peyto, may
not be comparable to similar measures presented by other issuers,
and investors are cautioned that FFO should not be construed as an
alternative to net earnings, cash flow from operating activities or
other measures of financial performance calculated in accordance
with GAAP. FFO cannot be assured and future dividends may
vary.
The Peyto Strategy
For the past 21 years, the Peyto strategy has
focused on maximizing the returns on shareholders’ capital by
investing 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 realized. Alignment of goals
between what is good for the Company, its shareholders and its
employees and what is good for the environment and 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.
($/Mcfe) |
2009 |
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
2015 |
|
2016 |
|
2017 |
|
2018 |
|
2019 |
|
|
|
21 YearWt. Avg. |
Sales Price |
$6.75 |
|
$6.15 |
|
$5.47 |
|
$4.21 |
|
$4.43 |
|
$5.04 |
|
$3.83 |
|
$3.18 |
|
$3.39 |
|
$3.27 |
|
$2.78 |
|
|
|
$4.59 |
|
All cash costs but
royalties2 |
($1.12 |
) |
($0.99 |
) |
($0.82 |
) |
($0.73 |
) |
($0.75 |
) |
($0.71 |
) |
($0.67 |
) |
($0.63 |
) |
($0.68 |
) |
($0.79 |
) |
($0.87 |
) |
|
|
($0.76 |
) |
Capital costs1 |
($2.26 |
) |
($2.10 |
) |
($2.12 |
) |
($2.22 |
) |
($2.35 |
) |
($2.25 |
) |
($1.64 |
) |
($1.44 |
) |
($1.36 |
) |
($1.18 |
) |
($1.55 |
) |
|
|
($1.77 |
) |
Profits |
$3.37 |
|
$3.06 |
|
$2.53 |
|
$1.26 |
|
$1.33 |
|
$2.08 |
|
$1.52 |
|
$1.12 |
|
$1.35 |
|
$1.30 |
|
$0.35 |
|
|
|
$2.06 |
|
|
50% |
|
50% |
|
46% |
|
30% |
|
30% |
|
41% |
|
40% |
|
35% |
|
40% |
|
40% |
|
13% |
|
|
|
45% |
|
Royalty
Owners |
$0.63 |
|
$0.64 |
|
$0.53 |
|
$0.32 |
|
$0.31 |
|
$0.37 |
|
$0.14 |
|
$0.13 |
|
$0.15 |
|
$0.13 |
|
$0.08 |
|
|
|
$0.47 |
|
Shareholders |
$2.74 |
|
$2.42 |
|
$2.00 |
|
$0.94 |
|
$1.02 |
|
$1.71 |
|
$1.38 |
|
$0.99 |
|
$1.19 |
|
$1.17 |
|
$0.27 |
|
|
|
$1.59 |
|
Div./Dist. paid |
$4.03 |
|
$3.37 |
|
$1.24 |
|
$1.04 |
|
$1.01 |
|
$1.05 |
|
$1.11 |
|
$1.01 |
|
$0.97 |
|
$0.59 |
|
$0.22 |
|
|
|
$1.31 |
|
1. Capital costs to develop new producing
reserves is the PDP FD&A.2. Cash costs not including royalties
but including Operating costs, Transportation, G&A and
Interest.3. Profit above is defined as the Sales Price, less all
cash costs but royalites, less the PDP FD&A.Table may not add
due to rounding.
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 45% of the
average sales price being retained in profit over the past 21
years. This healthy margin of profit (as shown above), which
benefits both royalty owners and shareholders, has been preserved
despite a greater than 60% decline in commodity prices from a
decade ago. Out of that profit, royalty owners have received
approximately 23%, 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 61 gross (53 net) horizontal wells
in 2019 and completed 59 gross (52 net) wells for a capital
investment of $151 million. The Company also invested $20.5 million
in the wellsite equipment and pipeline connections to bring these
wells on production. Drilling costs per well and on a per-meter
basis continued to drop, due to ongoing efficiency gains like pad
drilling, while completion costs on a per stage basis were also
lower due to increasing stage count efficiencies. An average of 27
frac stages were pumped per well, up from 22 stages in 2018. The
table below outlines the past ten years of average horizontal
drilling and completion costs.
|
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
Gross Hz Spuds |
52 |
70 |
86 |
99 |
123 |
140 |
126 |
135 |
70 |
61 |
Measured Depth (m) |
3,762 |
3,903 |
4,017 |
4,179 |
4,251 |
4,309 |
4,197 |
4,229 |
4,020 |
3,848 |
|
|
|
|
|
|
|
|
|
|
|
Drilling ($MM/well) |
$2.76 |
$2.82 |
$2.79 |
$2.72 |
$2.66 |
$2.16 |
$1.82 |
$1.90 |
$1.71 |
$1.62 |
$ per meter |
$734 |
$723 |
$694 |
$651 |
$626 |
$501 |
$433 |
$450 |
$425 |
$420 |
|
|
|
|
|
|
|
|
|
|
|
Completion ($MM/well) |
$1.36 |
$1.68 |
$1.67 |
$1.63 |
$1.70 |
$1.21 |
$0.86 |
$1.00 |
$1.13 |
$1.01* |
Hz Length (m) |
1,335 |
1,303 |
1,358 |
1,409 |
1,460 |
1,531 |
1,460 |
1,241 |
1,348 |
1,484 |
$ per Hz Length (m) |
$1,017 |
$1,286 |
$1,231 |
$1,153 |
$1,166 |
$792 |
$587 |
$803 |
$751 |
$679 |
$ ‘000 per Stage |
$231 |
$246 |
$257 |
$188 |
$168 |
$115 |
$79 |
$81 |
$51 |
$38 |
*Peyto’s Montney well is excluded from drilling and completion
cost comparison.
The $26.5 million invested in facilities and
major pipeline projects included $13 million in new pipelines and
liquid handling facilities at Wildhay to accommodate the growing
Cardium liquids-rich production. New condensate stabilization and
storage facilities increased Wildhay’s condensate processing
capacity from 1,400 bbl/d to 4,300 bbl/d and site storage from
2,000 bbl to 4,000 bbl. Other projects included the start of
construction of the South Brazeau pipeline, Oldman North facility
modifications, and pipeline looping projects in the Greater
Sundance Area.
Peyto had a very successful year of acquiring
new lands during 2019 which contributed to the increase in
undeveloped drilling locations in the annual reserve evaluation
from 1,201 to 1,280 gross locations (630 PU and 405 PA locations).
In total, 130 net sections of new lands were acquired at Crown
sales and through acquisition. Within the Greater Sundance Area, 58
net sections of new Cardium lands were acquired, helping drive the
18% increase in 2P Cardium inventory to 442 locations. Much of this
new land was subsequently evaluated at year end with a 98 square km
3D seismic acquisition which will help to define additional Cardium
and Spirit River drilling targets.
The following table summarizes the capital
investments for the fourth quarter and 2019 fiscal year.
|
Three Months ended December 31 |
Twelve Months ended December 31 |
($000) |
2019 |
2018 |
2019 |
2018 |
Land |
186 |
|
106 |
|
2,716 |
|
3,291 |
|
Seismic |
1,600 |
|
2,000 |
|
4,588 |
|
5,216 |
|
Drilling |
36,325 |
|
57,383 |
|
86,053 |
|
115,610 |
|
Completions |
21,125 |
|
36,369 |
|
64,973 |
|
72,274 |
|
Equipping & Tie-ins |
9,317 |
|
10,716 |
|
20,505 |
|
20,766 |
|
Facilities & Pipelines |
4,798 |
|
3,691 |
|
26,540 |
|
17,293 |
|
Acquisitions |
- |
|
1,950 |
|
1,071 |
|
1,950 |
|
Dispositions |
- |
|
- |
|
(15 |
) |
(4,037 |
) |
Total Capital Expenditures |
73,351 |
|
112,215 |
|
206,431 |
|
232,363 |
|
Reserves
Using 64% of Funds from Operations, Peyto was
successful in effectively holding reserve volumes flat in all
categories, however, the significant reduction in commodity price
forecasts used by the independent engineering consultants resulted
in a negative change in NPV per share. Volumes on a debt adjusted
share basis were further impacted by the 46% drop in Peyto share
price which was used in the debt adjustment calculation. The
following table illustrates the change in reserve volumes and Net
Present Value (“NPV”) of future cash flows, discounted at 5%,
before income tax and using Insite forecast pricing.
|
As at December 31 |
% Change, |
% Change, per debt |
|
2019 |
2018 |
per share |
adjusted share† |
Reserves (BCFe) |
|
|
|
|
|
|
Proved Producing |
1,600 |
|
1,644 |
|
(3%) |
(30%) |
Total Proved |
3,164 |
|
3,098 |
|
2% |
(26%) |
Proved + Probable
Additional |
4,888 |
|
4,817 |
|
1% |
(27%) |
|
|
|
|
|
|
|
Net Present Value
($millions) Discounted at 5% |
|
|
|
|
|
|
Proved Producing |
$2,622 |
|
$3,180 |
|
(18%) |
(25%) |
Total Proved |
$4,514 |
|
$5,029 |
|
(10%) |
(11%) |
Proved
+ Probable Additional |
$6,818 |
|
$7,345 |
|
(7%) |
(7%) |
†Per share reserves are adjusted for changes in
net debt by converting debt to equity using the Dec 31 share price
of $7.08 for 2018 and share price of $3.80 for 2019. 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,
2019. 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 2020.
For more information on Peyto’s reserves, refer
to the Press Release dated February 19, 2020 announcing the Year
End Reserve Report which is available on the website at
www.peyto.com.
Fourth Quarter 2019
Peyto ramped up capital investments during the
fourth quarter to double that of the previous quarter in order to
bring on additional new production into the winter heating season.
During the quarter, between four and five drilling rigs were active
across the Greater Sundance Area, split between Cardium and Spirit
River formations, as illustrated in the table below. Total capital
of $57 million was invested in the drilling of 25 gross (22 net)
wells and the completion of 26 gross (22 net) wells. In addition,
$9 million was invested in wellsite equipment and tie-ins while $5
million was invested in facility upgrades and major pipeline
infrastructure. New seismic accounted for $2 million in the
quarter, while 5 sections of land were acquired at Crown sales.
|
Field |
TotalWellsDrilled |
Zone |
Sundance |
Nosehill |
Wildhay |
Ansell/Minehead |
Whitehorse |
Kisku/Kakwa |
Brazeau |
Belly River |
|
|
|
|
|
|
|
|
Cardium |
4 |
|
11 |
|
|
|
|
15 |
Notikewin |
|
|
|
1 |
|
|
2 |
3 |
Falher |
|
|
|
2 |
|
|
|
2 |
Wilrich |
3 |
|
|
1 |
|
|
|
4 |
Bluesky |
|
1 |
|
|
|
|
|
1 |
Montney |
|
|
|
|
|
|
|
|
Total |
7 |
1 |
11 |
4 |
|
|
2 |
25 |
Production during the fourth quarter of 2019
grew from 75,000 boe/d in October to exit the year at a peak of
82,000 boe/d, averaging 77,457 boe/d, or 397 mmcf/d of gas and
11,221 bbl/d of NGLs (14.5% liquid). This average Q4 production was
down 11% from Q4 2018 which averaged 86,738 boe/d (459 mmcf/d and
10,273 bbl/d of NGLs or 12% liquid) due to 35% lower capital
investments. The production additions in the fourth quarter 2019
were dominated (60%) by Cardium wells which drove the increase in
relative liquids production. Of the 11,221 bbls/d of NGL
production, approximately 60% or 6,650 bbl/d was condensate and
C5+, while the remaining volume 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 2019 was $3.12/Mcf, prior to $0.92 market diversification
activities and a $0.24/Mcf hedging loss, while its realized liquids
price was $43.85/bbl, including a $0.73/bbl hedging gain, which
yielded a combined revenue stream of $2.76/Mcfe. This net sales
price was 9% lower than the $3.03/Mcfe realized in Q4 2018. Total
cash costs in Q4 2019 were $0.98/Mcfe ($5.88/boe) up from
$0.95/Mcfe in Q4 2018 due to slightly higher per unit interest
charges and operating costs as a result of reduced production
volumes. The total Q4 2019 cash cost included royalties of
$0.12/Mcfe, operating costs of $0.34/Mcfe, transportation of
$0.19/Mcfe, G&A of $0.02/Mcfe and interest of $0.31/Mcfe.
Peyto generated total funds from operations of $76 million in
the quarter, or $1.78/Mcfe, equating to a 65% 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 $0.09/Mcfe, or a 3% profit margin. No
impairments were recorded in the quarter and dividends to
shareholders totaled $0.23/Mcfe.
Marketing
Peyto actively markets all components of its
production stream including natural gas, condensate, pentane,
butane and propane. Natural gas was sold in 2019 at various hubs
including AECO, Dawn, Ventura, Emerson 2 and Henry Hub using both
physical fixed price and basis transactions to access those
locations (diversification activities). Natural gas prices were
left to float on daily pricing or locked in using fixed price swaps
at those hubs and Peyto’s realized price is benchmarked against
those local prices, then adjusted for transportation (either
physical or synthetic) to those markets. The Company’s liquids are
also actively marketed with condensate being sold on a monthly
index differential linked to West Texas Intermediate (“WTI”) oil
prices. Peyto’s NGLs (a blend of pentanes plus, butane and propane)
are fractionated by a third party in Fort Saskatchewan, Alberta and
Peyto markets each product separately. Pentanes Plus are sold on a
monthly index differential linked to WTI, with some volumes forward
sold on fixed differentials to WTI. Butane is sold as a percent of
WTI or a fixed differential to Mount Belvieu, Texas markets.
Propane is sold on a fixed differential to Conway, Kansas markets.
While some products require annual term contracts to ensure
delivery paths remain open, others can be marketed on the daily
spot market.
During 2019 Peyto sold 77% of its natural gas at
AECO, 5% at Dawn, 3% at Emerson, 4% at Ventura, and 11% at Henry
Hub. Net of diversification activities, Peyto realized a before
hedge price of $1.91/mcf. Hedging activity improved this price by
$0.13/mcf, to $2.04/mcf.
Condensate and Pentane Plus volumes were sold
for an average price of $69.22/bbl in 2019, down from $75.46 in
2018, and as compared to Canadian WTI oil price that averaged
$75.68/bbl. The $6.46/bbl differential from light oil price was
down from $8.43/bbl in the previous year. Butane and propane
volumes were sold in combination at an average price of $10.43/bbl,
far below their typical price between 25-50% of light oil price,
due to a significant surplus of supplies overwhelming the local
Alberta market. Much of this surplus has subsequently been cleared
and spot pricing has improved. Peyto will begin to realize these
improved prices as the April 2019 to March 2020 term contract year
ends. Peyto’s realized price by product and relative to benchmark
prices is shown in the following table.
Realized Commodity Prices by Component
|
Three Months ended December 31 |
Twelve Months ended December 31 |
|
2019 |
2018 |
2019 |
2018 |
Natural gas ($/mcf) |
3.12 |
|
2.18 |
|
2.63 |
|
1.70 |
|
Diversification activities
($/mcf) |
(0.92 |
) |
(0.09 |
) |
(0.72 |
) |
(0.02 |
) |
Gas
hedging ($/mcf) |
(0.24 |
) |
0.34 |
|
0.13 |
|
0.86 |
|
Realized total natural gas ($/mcf) |
1.96 |
|
2.43 |
|
2.04 |
|
2.54 |
|
Oil, condensate and C5+
($/bbl) |
65.13 |
|
54.86 |
|
65.76 |
|
74.49 |
|
Oil
hedging ($/bbl) |
1.26 |
|
4.54 |
|
3.46 |
|
0.97 |
|
Realized oil, condy and C5+ ($/bbl) |
66.39 |
|
59.40 |
|
69.22 |
|
75.46 |
|
Realized butane and propane ($/bbl) |
12.45 |
|
31.43 |
|
10.43 |
|
31.43 |
|
liquids prices are Peyto realized prices in
Canadian dollars adjusted for fractionation, transportation and
market differentials.Peyto natural gas has an average heating value
of approximately 1.15 GJ/mcf
Benchmark Commodity Prices
|
Three Months ended December 31 |
Twelve Months ended December 31 |
|
2019 |
2018 |
2019 |
2018 |
AECO 7A monthly ($/GJ) |
2.21 |
|
1.80 |
|
1.54 |
|
1.45 |
|
AECO 5A daily ($/GJ) |
2.35 |
|
1.48 |
|
1.67 |
|
1.42 |
|
Empress daily ($GJ) |
2.59 |
|
4.06 |
|
2.43 |
|
2.93 |
|
NYMEX (US$/MMbtu) |
2.41 |
|
3.74 |
|
2.53 |
|
3.07 |
|
Ventura daily (US$/MMbtu) |
2.64 |
|
4.18 |
|
2.47 |
|
3.06 |
|
Dawn daily (US$/MMbtu) |
2.42 |
|
3.91 |
|
2.44 |
|
3.10 |
|
Conway Propane (US$/bbl) |
19.73 |
|
28.96 |
|
19.91 |
|
30.31 |
|
Canadian WTI ($/bbl) |
75.18 |
|
77.54 |
|
75.68 |
|
83.89 |
|
2019 average CND/USD exchange rate of
1.3269.
Details of Peyto’s ongoing marketing and
diversification efforts are available on Peyto’s website
athttp://www.peyto.com/Files/Operations/Marketing/hedges.pdf.
Activity Update
Peyto began 2020 with 5 drilling rigs running
and has spud 12 gross (10 net) wells, completed 15 gross (13 net)
wells and connected 9 gross (8 net) wells to the end of February.
There are 5 gross (4 net) additional wells which came onstream at
the beginning of March. The Q1 2020 drilling program has been
focused on both Cardium and Spirit River formations that exhibit
high liquid yields. Operations were delayed by the extreme cold
weather experienced in mid-January as scheduled frac service was
disrupted. This disruption delayed the timing of new well
production additions. Cardium well results in this first quarter
continue to provide impressive initial liquid yields of over 100
bbls/mmcf of high value condensate and pentanes.
During the first 2 months of 2020, Peyto also
finished construction of a strategic 16 km, 8-inch pipeline in
South Brazeau linking the Chambers area to Peyto’s existing Brazeau
gas gathering system. This pipeline re-directed existing volumes
that were flowing to a third-party plant to the Peyto operated
Brazeau plant and will support the future development of a large
inventory of liquids-rich Spirit River and Cardium locations in the
Chambers area. The Company currently has one drilling rig operating
in this area.
In January, the Company completed a 98 square km
3D seismic shoot in the Ansell area over a large portion of lands
that were purchased in 2019. This proprietary data will be used in
the identification of Cardium and Spirit River targets later this
year.
The recent COVID-19 virus outbreak and resultant
reduced energy demand outlook combined with a lack of winter
heating demand in North American has weakened both oil and natural
gas prices significantly since Peyto announced its capital budget
in December. As a result, the Company has deferred approximately
$26 million of the Q1 drilling program to later in the year when
commodity prices are expected to recover. The remaining 2
drilling rigs currently operating for Peyto are focused on high
quality Cardium targets and Peyto intends to continue to drill
through breakup before ramping up activity in the second half of
the year.
Business Development and New Ventures
While the current financial difficulties of the
natural gas sector have brought challenges, they have also brought
forward tremendous opportunities. New technologies and resource
plays have been proven over the past decade and stand ready for
development as producer behaviour and the marketplace restore
economic order. Peyto views the next couple of years as a clear
window to capitalize on these opportunities through a number of
strategies and has created a new internal team to pursue these
opportunities. This team will focus on a spectrum of ideas ranging
from the establishment of new core areas, either organically or
through acquisition, a strengthening of Peyto’s existing core areas
through large scale multi-company joint venture aggregation,
expansion of direct product sales markets such as additional power
generation, and other ideas and projects across the hydrocarbon
value chain. Peyto has a well-seasoned operations team capable of
taking its time-proven, low capital and operating cost results, to
other geographical areas and other play types.
Environment, Social and Governance
(“ESG”)
Peyto improved its ESG standing in 2019 with
strong environmental performance, increased social factors and
improved corporate governance. On the environmental front, Peyto
continued to reduce its GHG emissions intensity while capturing
more methane emissions across its operations. The ongoing
installation of low bleed controllers and zero emissions pumps at
well sites continued throughout the year with 304 controllers and
62 pumps installed in 2019, bringing the total to 448 controllers
and 233 pumps installed over the past 5 years. Peyto is also
testing the design of a new, zero emissions controller which it
expects to start installing this year. In addition, almost all new
wells drilled in the year were pre-connected to existing gas
gathering systems which eliminated the need to flare gas during
completion cleanup flows which further reduced GHG emissions. Since
implementation of its comprehensive emissions reduction program in
2014, the Company has achieved an overall GHG emissions intensity
reduction of 28% and methane flaring and venting intensity
reduction of 38% and is well on its way to the stated goal of 50%
reduction. The Company also continued its industry leading practice
of using less water per BOE of reserves developed with an active
water management program and efficient completion design.
From a social perspective, the health and
welfare of Peyto’s employees and contractors remained the highest
priority for the company. A strong core training program and
progression plan for operations personnel is at the heart of the
Company’s safety culture and provides a solid foundation of
organizational competence. This safety culture is further
strengthened and propagated throughout the organization through a
multi-faceted, active and ongoing plan that involves regular
audits, educational sessions, emergency practice drills and
information dissemination to all personnel working within the
organization. Two primary focuses, personnel safety and equipment
maintenance, protect not only Peyto’s employees and contractors but
also the public at large and natural surroundings. In addition, the
Company closely monitors any injury accidents and near misses
within a culture of continuous improvement in an effort to
implement initiatives to increase the safety of all workers. For
2019, total recordable injury frequency (TRIF) and lost time injury
frequency (LTIF), including employees, consultants, field
operators, and all third-party service company personnel, was 0.68
and 0, respectively. This is down from the previous year at 0.94
and 0.13. For Peyto employees, consultants and field operators
only, the TRIF and LTIF was zero in 2019.
From a corporate governance perspective, Peyto
increased its board independence with the addition of Mr. John
Rossall to Peyto’s board, as well as the adoption and strengthening
of board mandates, corporate by-laws and policies. New policy
adoption included say-on-pay, share ownership guidelines,
compensation clawback, board renewal, enhanced diversity and
shareholder engagement. In addition, Peyto further enhanced
disclosure surrounding CEO compensation, anti-hedging policy,
nomination process, director qualifications and annual general
meeting materials.
Please refer to Peyto’s 2019 Sustainability
Report and policies under Corporate Responsibility at
www.peyto.com.
2020 Outlook
As this new decade begins, Peyto is preparing to
embark on a new chapter for the company. Once a tiny junior, the
company has grown over the past two decades into a leading Canadian
producer, well known for its efficiency, profitability and
sustainability. With strong foundational support from its existing
resource base, extensive infrastructure assets and strong technical
skillset, Peyto is well positioned to capitalize on future
opportunities.
The Company’s current three-year plan remains
intact with a focus on maximizing returns, strengthening its
balance sheet and focusing on its core competencies. As production
declines continue to shallow and producing reserve life grows,
Peyto’s base cashflows will continue to strengthen requiring less
future capital to offset declines. With the current commodity price
outlook driving reduced activity, the domestic natural gas market
looks to become less supply driven and more demand driven which
should be constructive for natural gas prices and ultimately reward
Canadian natural gas producers. Capital guidance for the year
remains between $250 and $300 million. As always, Peyto will remain
nimble to the volatile market conditions while staying focused on
maximizing full cycle returns.
Conference Call and Webcast
A conference call will be held with the senior
management of Peyto to answer questions with respect to the 2019
fourth quarter and full year financial results on Thursday, March
5th, 2020, 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/mmc/p/bpckqhxv.
The conference call will be archived on the Peyto Exploration &
Development website at www.peyto.com.
Annual General Meeting
Peyto’s Annual General Meeting of Shareholders
is scheduled for 3:00 p.m. on Thursday, May 7, 2020 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.
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/2019/Q42019FS.pdf and at
http://www.peyto.com/Files/Financials/2019/Q42019MDA.pdf and will
be filed at SEDAR, www.sedar.com at a later date.
Darren GeePresident and CEOPhone: (403)
261-6081Fax: (403) 451-4100
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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