Peyto Exploration & Development Corp. (“Peyto” or the
“Company”) is pleased to present the results and in-depth analysis
of its independent reserve report effective December 31, 2020. The
evaluation encompassed 100% of Peyto’s reserves and was conducted
by InSite Petroleum Consultants (“InSite”). The year 2020 marks the
Company’s 22nd year of successful reserves development.
2020 HIGHLIGHTS
-
For the year ended December 31, 2020, Peyto invested $235.7 million
of total capital1 to build approximately 137 mmcf/d of natural gas
and 3,700 bbl/d of NGLs (53% pentanes and condensate) at a cost of
$8,900/boe/d, which was the lowest cost in Company history.
-
Peyto developed 222 BCFe (37 mmboes) of new Proved Developed
Producing (“PDP”) reserves at a Finding, Development and
Acquisition (“FD&A”) cost of $1.06/Mcfe ($6.36/boe) while the
average field netback1 was $1.59/Mcfe ($9.56/boe), resulting in a
1.5 times recycle ratio2. The PDP FD&A cost was the lowest in
18 years and is reflective of a continuous decrease in drilling
time, combined with higher reserve recoveries from longer
horizontal laterals and more intensive fracture treatments.
-
Peyto replaced 127%, 132% and 167% of annual production with new
PDP, Total Proved (“TP”), and Proved plus Probable Additional
(“P+P”) reserves. FD&A costs, including the change in Future
Development Capital (“FDC”), for TP and P+P were $0.20/Mcfe
($1.19/boe) and -$0.01/Mcfe (-$0.08/boe), which reflects a
reduction of FDC (combined with increased reserve recoveries) for
future drilling locations of $190 million and $239 million for the
respective categories. For comparative purposes, FD&A costs
before reductions in FDC were $1.02/Mcfe and $0.81/Mcfe,
respectively.
-
Total Company reserve volumes for PDP, TP and P+P were up 3%, 2%,
and 2%, respectively, both in absolute terms and on a per share
basis. Liquid reserves increased by 5% in the PDP category, were
down 2% in the TP category and unchanged in the P+P category.
-
The Reserve Life Index (“RLI”) for the PDP, TP and P+P reserves
fell slightly to 9.0, 17.6 and 27.4 years, respectively, mostly due
to an 8% increase in fourth quarter production used to determine
RLI. By comparison, Peyto’s PDP reserve life is one of the longest
in the North American industry.
- At year end, P+P reserves of 834
mmboes (4.269 TCF of gas, 65 mmbbls of pentanes and condensate, 26
mmbbls butane, and 32 mmbbls propane, and inclusive of 1,230 future
locations) had been assigned to just 11% of Peyto’s total Deep
Basin rights.
1Capital Expenditures, Field Netback (Revenue
less Royalties, Operating costs, and Transportation), Net Debt and
Production are estimated and remain unaudited at this time.2Recycle
Ratio is Field Netback divided by FD&A.
STRATEGIC ACQUISITIONS
-
The Company made two acquisitions effective January 1, 2021, both
directly adjacent to and contiguous with Peyto’s Greater Sundance
core area, and both with infrastructure footprints that can be
interconnected with Peyto’s gathering system and plant network.
Neither acquisition was included in the December 31, 2020 reserve
report.
-
The combined acquisition cost was $35 million and included 114
gross (106 net) producing wells with stable, ultra-low decline
(less than 5%/yr) production of approximately 2,900 boe/d (95%
gas). Also included are 54 gross sections of land (81% interest),
in which the Company has internally identified over 100 future
drilling prospects. The properties contain a combined 11.5 net
inactive wells reflecting a low liability content and carrying an
attractive Alberta LMR above 3.
-
Included in the infrastructure is over 115 km of gathering system
and a 30 MMcf/d, 100% working interest, gas plant (compression and
refrigeration) with approximately 50% excess capacity.
-
The acquisitions were funded from free cashflow and 2021 plans
include filling the excess plant capacity with production from
development drilling over the course of this year. Additional wells
drilled on the new lands beyond 2021 will be processed in existing
spare capacity in Peyto’s Greater Sundance plant complex via the
interconnected gathering system.
-
In addition to exploiting the undeveloped potential, Peyto expects
to realize significant operational synergies in the form of
improved production and reduced operating costs by integrating the
acquired properties with existing Peyto wells and operations in the
adjacent area.
2021 CAPTIAL BUDGET
-
The Board of Directors of Peyto has approved a 2021 capital budget,
inclusive of acquisitions, of $325-$350 million which, at the high
end, is 48% greater than the $236 million invested in 2020.
-
The budget is expected to be funded entirely from free cashflow and
is projected to add 36,000-38,000 boe/d of new production by year
end, based on current onstream metrics of approximately
$9,000/boe/d. This volume addition would more than offset the
forecast annual 25% base decline on the 2020 exit production of
86,000 boe/d.
-
January 2021 production averaged approximately 89,000 boe/d
inclusive of the recent acquisitions, up 13% over January
2020.
2020 RESERVES REPORT AND ANALYSIS
SUSTAINABILITY
-
Long Life, Low Decline Production: Peyto’s base
production decline is forecast in the Insite report at 25% for
2021, while its PDP RLI is 9 years, based on Q4 2020 production of
83,500 boe/d, which is one of the longest PDP RLIs in the
industry.
-
Low Production/Reserves Replacement Cost: The
Company invested 111% of funds from operations in 2020 to replace
over 127% of produced reserves in the year. Capital efficiency for
2020 was the lowest in Company history at $8,900/boe/d while PDP
FD&A was lowest in 18 years at $1.06/Mcfe.
-
Low Risk Reserves: At year end, Peyto had 1,637
gross (1,442 net) producing wells that are forecast to remain on
production for decades to come. The lack of mobile water in the low
permeability, Deep Basin 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
exempt from the vulnerabilities of high cost midstream
processing.
-
Minimal Liabilities: The forecast cost of Peyto’s
future abandonment and reclamation liability (all wells, sites,
& facilities) is $44 million (NPV5), which represents 1% of the
total $3.27 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.
-
Strong ESG Performance: Methane (particularly
flared and vented) emissions were reduced again in 2020, now down
40% since 2016. 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 with far less environmental impact*. When paired with
high efficiency, low emissions electricity generation like the
Cascade Power Plant (expected online in 2023), Peyto will be
providing Albertans and Canadians with some of the cleanest, most
affordable, and most reliable energy supplies possible for their
daily needs.
*Refer to Peyto’s 2020 Sustainability Report at
http://www.peyto.com/Files/Corporate/2020SustainabilityReport.pdf
HISTORICAL PERFORMANCE
-
Over the past 22 years, Peyto has explored for and discovered 7.0
TCFe of Alberta Deep Basin natural gas and associated liquids, of
which 57% has now been developed1. This is enough natural gas to
heat all the homes in Canada for over 5 years.
Peyto 22-year cumulative production (to Dec. 31/20): |
2.035 TCFe |
Total Proved +
Probable Additional Developed reserves: |
1.979 TCFe |
Total developed natural gas and liquids: |
4.014 TCFe |
Total Proved +
Probable Additional Undeveloped reserves: |
3.027 TCFe |
Total explored for and discovered: |
7.041 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 22 years, a total of $6.4 billion was invested in the
Canadian economy in the acquisition and development of 4.0 TCFe of
total developed natural gas and associated liquids at an average
cost of $1.60/Mcfe, while a weighted average field netback3 of
$3.49/Mcfe delivered $6.5 billion in FFO and resulted in a
cumulative recycle ratio2 of 2.2 times. Royalty payments made to
Alberta during this time period have totaled over $890
million.
-
Based on the December 31, 2020 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
$35/share, comprised of $16/share of developed reserves and
$19/share of undeveloped reserves. This includes a provision for
all abandonment liability for wells, sites and facilities for which
Peyto has ownership and responsibility.
1Total Proved + Probable Additional Developed
Reserves includes Proved Developed Producing+Probable Additional
reserves and Proved Developed Non-Producing+Probable Additional
reserves.
The following table summarizes Peyto's reserves
and the discounted Net Present Value of future cash flows, before
income tax, using variable pricing, at December 31, 2020.
|
|
|
|
|
Before Tax Net Present Value ($millions) |
|
|
|
|
|
Discounted at |
Reserve Category |
Gas(BCF) |
Oil & NGL (mstb) |
BCFe(6:1) |
mmboe(6:1) |
0% |
5% |
8% |
10% |
Proved Developed Producing |
1,402 |
40,842 |
1,647 |
275 |
4,309 |
2,778 |
2,264 |
2,015 |
Proved Non-producing |
24 |
693 |
28 |
5 |
51 |
37 |
31 |
27 |
Proved Undeveloped |
1,297 |
41,093 |
1,544 |
257 |
3,888 |
2,042 |
1,448 |
1,166 |
Total Proved |
2,723 |
82,627 |
3,219 |
537 |
8,248 |
4,857 |
3,743 |
3,208 |
Probable Additional |
1,546 |
40,215 |
1,787 |
298 |
4,666 |
2,135 |
1,449 |
1,148 |
Proved + Probable Additional |
4,269 |
122,843 |
5,006 |
834 |
12,914 |
6,992 |
5,192 |
4,356 |
Note: Based on the InSite report effective
December 31, 2020. 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 independent 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 2020 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 2020 (the base reserves) were evaluated and adjusted
for 2020 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 1,526 producing reserve entities (zones/wells) were
evaluated. These base producing wells and zones represent a total
gross Estimated Ultimate Recoverable (EUR) volume of 4.0 TCFe
(remaining PDP+PA reserves plus all cumulative production to date),
which is up 2% from the prior year estimate. As a result, Peyto is
pleased to report that its total base reserves continue to meet
expectation, which provides confidence in the prediction of future
recoveries.
The commodity price forecast used by the
independent engineers in this year’s evaluation is slightly lower
for natural gas and significantly lower for oil and NGLs than last
year which has 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 $317 million, or -20%, due to the difference in
commodity price forecasts and Peyto’s realized historical offsets
to posted prices. InSite’s price forecast used in the variable
dollar economics is available on their website at www.insitepc.com.
Their forecast indicates falling AECO prices for the next two
years, followed thereafter by rising gas prices, while all liquid
product prices are forecast to rise into the future. Of note, the
Insite price forecast is within 1%, on a discounted basis, of the
3-consultant average (GLJ, McDaniel, Sproule).
For 2021, InSite is forecasting the total base
production (all wells on production at Dec. 31, 2020) to decline to
approximately 64,500 boe/d (335 MMcf/d of gas and 8,600 bbl/d of
NGLs) by December 2021. This decline implies a total base decline
rate of approximately 25% from December 2020. The 2021 forecast
decline rate is slightly higher than the 2020 actual base decline
of 23% due to the larger proportion of new production added in
2020. The historical base decline rates and capital programs are
shown in the following table:
|
2009 |
|
20101 |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
2015 |
|
2016 |
|
2017 |
|
2018 |
|
2019 |
|
2020 |
|
2021F |
Base Decline (%/yr)* |
20% |
|
22% |
|
33% |
|
35% |
|
34% |
|
38% |
|
40% |
|
40% |
|
37% |
|
35% |
|
29% |
|
23% |
|
25% |
Capital
Expenditures ($MM) |
$73 |
|
$261 |
|
$379 |
|
$618 |
|
$578 |
|
$690 |
|
$594 |
|
$469 |
|
$521 |
|
$232 |
|
$206 |
|
$236 |
|
$325 |
*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 late 2009.
2. Value
Creation/Reconciliation
During 2020, Peyto invested a total of $236
million in organic activity to evaluate exploration lands, expand
its pipeline gathering network, and drill 64 gross (61 net) wells.
In keeping with Peyto’s strategy of maximizing shareholder returns,
an evaluation of the economic outcome of this investment activity
is necessary 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 2020, approximately 5% was spent
acquiring lands and seismic, 11% on pipeline and facility projects,
and the remaining 84% was spent drilling, completing, and
connecting existing and new reserves. Fifty-two of the 64 gross
wells drilled, or 81%, were previously identified as undeveloped
reserves in last year’s reserve report (45 Proved, 7 Probable
Additional). The remaining 12 wells were locations developed in the
year and were not recognized in last year’s report.
The undeveloped reserves at year end 2019
originally booked to the 52 locations referred to above, totaled
172 BCFe (3.3 BCFe/well) of Proved Undeveloped plus Probable
Additional reserves for a forecast capital investment of $158
million ($0.92/Mcfe). In actuality, $135 million of capital
($0.82/Mcfe) was spent on these 52 wells during 2020, yielding
Proved Developed Producing plus Probable Additional reserves of 165
BCFe (3.2 BCFe/well).
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 lower 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% |
2020 |
64 |
52 |
81% |
172 |
$158 |
$0.92 |
165 |
$135 |
$0.82 |
-11% |
Total |
1,031 |
710 |
69% |
2,173 |
$2,813 |
$1.29 |
2,286 |
$2,652 |
$1.16 |
-10% |
*Capex represents only well related capital for
drilling, completion, equipping and tie-in
This annual analysis of reserves that are
converted from undeveloped to developed helps to validate the
accuracy of the remaining future undeveloped reserves and the
associated 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 2020, 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 2020, Peyto’s estimated net debt had
increased by 2.6% or $30 million to $1.176 billion while the number
of shares outstanding remained effectively the same at 164.9
million shares. The change in debt includes all capital
expenditures, 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 $829 million of Proved
Developed Producing, $1.623 billion of Total Proven, and $1.532
billion of Proved plus Probable Additional undiscounted reserve
value, with $236 million of capital investment, cost reductions,
and marketing arrangements. The ratio of capital expenditures to
value creation is what Peyto refers to as the NPV recycle ratio,
which is simply the undiscounted value addition, resulting from the
capital program, divided by the capital investment. For 2020, the
Proved Developed Producing NPV recycle ratio is 3.5 which means for
each dollar invested, the Peyto team was able to create 3.5 new
dollars of Proved Developed Producing reserve value.
The historic NPV recycle ratios are presented in
the following table.
|
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
10 yr Wt. Avg. |
Capital Investment ($MM) |
$379 |
$618 |
$578 |
$690 |
$594 |
$469 |
$521 |
$232 |
$206 |
$236 |
NPV0 Recycle
Ratio |
|
|
|
|
|
|
|
|
|
|
|
Proved
Developed Producing |
2.4 |
1.6 |
1.5 |
1.5 |
2.3 |
2.9 |
2.3 |
4.6 |
1.8 |
3.5 |
2.2 |
Total Proved |
4.7 |
2.2 |
2.0 |
1.7 |
3.3 |
4.2 |
3.2 |
11.7 |
5.5 |
6.9 |
3.7 |
Proved + Probable Additional |
6.6 |
3.2 |
4.0 |
2.6 |
5.0 |
7.3 |
4.0 |
15.1 |
9.2 |
6.5 |
5.3 |
*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. 2020 Proved
Developed Producing ($829/$236) = 3.5).
3. Growth and
IncomeAs 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 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 2020, the Company again deployed a
conservative capital program but was successful in effectively
replacing 127% of annual production with new PDP reserves using
111% of funds from operations. Fourth quarter production increased
8%, from 77,457 boe/d (397 MMcf/d gas, 11,220 bbl/d NGLs) to 83,461
boe/d (433 MMcf/d gas, 11,256 bbl/d NGLs). The change in both PDP
reserves and fourth quarter production resulted in a slight
reduction of the Proved Developed Producing reserve life index from
9.4 years to 9.0 years
For comparative purposes, the Total Proved and
P+P RLI index was 18 and 27 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 |
2020 |
Proved Developed Producing |
12 |
13 |
14 |
14 |
11 |
9 |
9 |
7 |
7 |
7 |
7 |
7 |
9 |
9 |
9 |
Total Proved |
14 |
16 |
17 |
21 |
17 |
16 |
15 |
12 |
11 |
11 |
11 |
11 |
16 |
19 |
18 |
Proved + Probable Additional |
20 |
21 |
23 |
29 |
25 |
22 |
22 |
19 |
18 |
17 |
18 |
18 |
25 |
29 |
27 |
Future Undeveloped
Opportunities
As of December 31, 2020, Peyto had 885 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 3,232
net sections of rights over Duvernay, Montney and seven Cretaceous
horizons. During Peyto’s 22-year history, the Company has found and
developed 4.0 TCFe of total natural gas and associated liquids
which resides in 354 of these net sections. Effectively, Peyto has
invested $6.4 billion to fully develop 11% of its existing land
base which has also resulted in the generation of $6.5 billion of
cumulative funds from operations and $2.6 billion in cumulative
earnings to date.
Peyto’s remaining undeveloped land base still
holds significant future potential. The independent reserve
evaluators have modelled a limited amount of development activity
over the next six years as shown in the following table of future
development capital.
|
Future Development Capital |
|
Proved Reserves |
Proved+ Probable Additional Reserves |
Year |
Undisc., ($Millions) |
Undisc., ($Millions) |
2021 |
282.5 |
294.9 |
2022 |
336.4 |
530.1 |
2023 |
376.6 |
600.1 |
2024 |
409.5 |
599.9 |
2025 |
377.2 |
600.2 |
2026 |
126.3 |
600.1 |
Thereafter |
8.3 |
82.6 |
Total |
1,916.8 |
3,307.9 |
|
|
|
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. In
addition to the growth in inventory, Peyto has been evolving its
horizontal well design to employ longer horizontal laterals and
increased stimulation intensity. This design allows more reservoir
to be developed in each wellbore which has the effect of reducing
the total number of wells required to develop a given resource. The
result is lower cost per unit of reserves and less environmental
footprint.
As of December 31, 2020, the future drilling
locations recognized in the reserve report totaled 1,230 gross (983
net). This is down from the previous year of 1,280 (1,035 net) but
due to the change in well design, results in more reserves
developed (497 mmboes vs 484 mmboes). Of these future locations,
773 (63 %) are categorized as Proven Undeveloped by the independent
reserve evaluators, while 457 (37 %) are Probable Undeveloped
locations. Due to the change in relative prices between natural gas
and propane, no deep cut facility installations are forecast at
this time. The net reserves associated with the undeveloped
locations (not including existing uphole zones) totals 3.0 TCFe
(3.0 BCFe/well) consisting of 2.6 TCF of natural gas and 76 mmbbls
of NGLs, while the capital required to develop them is estimated at
$3.3 billion, or $1.10/Mcfe. This development is forecast to create
Net Present Value of $3.77 billion (at 5% discount rate, inclusive
of profit after capital recovery and future abandonment liability)
or $19 per share (debt adjusted) 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 6 year future
development capital schedule, as contained in the evaluator’s
report, totals $3.8 billion and $5.2 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 decreased from the previous
year by $190 million and $239 million, respectively, which reflects
an ongoing improvement in drilling and completion cost combined
with the change in drilling design.
4. Risk
AssessmentEffectively 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
methods, 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 is
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 like “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. As of December 31, 2020,
Peyto owned 1,594.5 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, 29 net wells are considered medium risk,
inactive wells that require downhole suspension over the next
several years. The undiscounted capital requirement for this work
is estimated at $2.1 million. For perspective, the current existing
developed reserves have a forecast value of $3.27 billion (NPV5 of
the PDP + PA and PDNP + PA), while the cost to abandon and reclaim
all wells, sites and facilities is estimated at $44 million using
the same 5% discount rate for future costs.
These cumulative factors listed above, which
reduce the traditional risk of realizing future cashflows from
Peyto’s reserves, is why, in Management’s opinion, Peyto’s reserves
can be valued at lower discount rates than other, more conventional
asset bases.
PERFORMANCE RATIOS
The following table highlights annual
performance ratios after the implementation of horizontal wells in
late 2009. These can be used for comparative purposes, but it is
cautioned that on their own they do not measure investment
success.
|
2020 |
|
2019 |
|
2018 |
|
2017 |
|
2016 |
|
2015 |
|
2014 |
|
2013 |
|
2012 |
|
2011 |
|
Proved Developed Producing |
|
|
|
|
|
|
|
|
|
|
FD&A ($/Mcfe) |
$1.06 |
|
$1.55 |
|
$1.18 |
|
$1.36 |
|
$1.44 |
|
$1.64 |
|
$2.25 |
|
$2.35 |
|
$2.22 |
|
$2.12 |
|
RLI (yrs) |
9 |
|
9 |
|
9 |
|
7 |
|
7 |
|
7 |
|
7 |
|
7 |
|
9 |
|
9 |
|
Recycle Ratio |
1.5 |
|
1.4 |
|
2.3 |
|
2.1 |
|
1.8 |
|
2.0 |
|
1.9 |
|
1.6 |
|
1.6 |
|
2.1 |
|
Reserve Replacement |
127% |
|
75% |
|
98% |
|
171% |
|
153% |
|
193% |
|
183% |
|
190% |
|
284% |
|
230% |
|
Total
Proved |
|
|
|
|
|
|
|
|
|
|
FD&A ($/Mcfe) |
$0.20 |
|
$1.41 |
|
$1.21 |
|
$1.39 |
|
$1.01 |
|
$0.72 |
|
$2.37 |
|
$2.23 |
|
$2.04 |
|
$2.13 |
|
RLI (yrs) |
18 |
|
19 |
|
16 |
|
11 |
|
11 |
|
11 |
|
11 |
|
12 |
|
15 |
|
16 |
|
Recycle Ratio |
8.0 |
|
1.7 |
|
2.2 |
|
2.0 |
|
2.6 |
|
4.5 |
|
1.8 |
|
1.6 |
|
1.7 |
|
2.1 |
|
Reserve Replacement |
132% |
|
137% |
|
294% |
|
225% |
|
183% |
|
188% |
|
254% |
|
230% |
|
414% |
|
452% |
|
Future Development Capital ($ millions) |
$1,917 |
|
$2,107 |
|
$1,971 |
|
$1,488 |
|
$1,305 |
|
$1,381 |
|
$1,721 |
|
$1,406 |
|
$1,318 |
|
$1,111 |
|
Proved + Probable
Additional |
FD&A ($/Mcfe) |
($0.01) |
|
$1.25 |
|
1.02 |
|
$1.49 |
|
$0.62 |
|
$0.54 |
|
$2.01 |
|
$1.86 |
|
$1.68 |
|
$1.90 |
|
RLI (yrs) |
27 |
|
29 |
|
25 |
|
18 |
|
18 |
|
17 |
|
18 |
|
19 |
|
22 |
|
22 |
|
Recycle Ratio |
N/A |
|
1.7 |
|
2.6 |
|
1.9 |
|
4.2 |
|
6.1 |
|
2.1 |
|
2.0 |
|
2.1 |
|
2.4 |
|
Reserve Replacement |
167% |
|
140% |
|
342% |
|
279% |
|
283% |
|
287% |
|
328% |
|
450% |
|
527% |
|
585% |
|
Future Development Capital ($millions) |
$3,308 |
|
$3,547 |
|
$3,445 |
|
$2,978 |
|
$2,563 |
|
$2,657 |
|
$2,963 |
|
$2,550 |
|
$2,041 |
|
$1,794 |
|
- 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. 2020 Total Proved
($235.7-$190)/(536.5-527.3+29.1) = $1.19/boe or $0.20/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. 2020
Proved Developed Producing 274.6/(83.461x366) = 9.0). 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. 2020 Proved Developed Producing (($9.56)/$6.36=1.5).
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. 2020
Total Proved ((536.5-527.3+29.1)/29.1) = 132%).
RESERVES COMMITTEE
Peyto has a reserves committee, comprised of
independent board members, that reviews the qualifications and
appointment of the independent reserve evaluators. The committee
also reviews the procedures for providing information to the
evaluators. All booked reserves are based upon annual evaluations
by the independent qualified reserve evaluators conducted in
accordance with the COGE (Canadian Oil and Gas Evaluation) Handbook
and National Instrument 51-101. The evaluations are conducted using
all available geological and engineering data. The reserves
committee has reviewed the reserves information and approved the
reserve report.
MANAGEMENT CHANGES
Peyto is pleased to announce the promotion of
Derick Czember to Vice President of Land. Derick joined Peyto in
2015 and has spent the last six years as the manager of Peyto’s
mineral land group. Derick has worked in various land roles since
entering the industry in 2002 and is a member of the Canadian
Association of Petroleum Landmen.
OUTLOOK
Peyto’s commitment to the people of Alberta and
to Alberta’s energy industry is evidenced by the significantly
larger capital program planned for 2021. This investment will have
a trickle-down effect through Alberta’s economy creating much
needed, high quality employment opportunities that extend right
across Canada. By working to provide Albertans with some of the
cleanest, most affordable, most reliable, and most responsibly
developed energy possible, while at the same time delivering the
maximum return to its shareholders, Peyto is committed to exceeding
the high standard demanded of it in today’s society. Always
striving to exceed this standard will ensure Peyto’s success for
decades to come.
The outlook for commodity prices in 2021 has
significantly improved over the last six months which drives higher
forecast cashflows, beyond the required funding for Peyto’s capital
program. In addition, there have been extreme natural gas prices
being realized at certain trading hubs over the last week due to
record cold temperatures across much of the United States. As an
example, Peyto was fortunate to have 20,000 MMBTU/d of unhedged gas
sales exposed to the Ventura hub that averaged over $160/MMBTU for
the last 5 days. As these superior commodity prices are realized,
Peyto will look to use the free cashflow to reduce indebtedness and
strengthen its balance sheet, while evaluating the ability to
increase dividends to shareholders. Based on strip pricing, Peyto
currently projects it will exit debt covenant relief during the
second quarter of this year. While the 2021 drilling program is
budgeted to be greater than 2020, Peyto currently has the team and
resources to do much more and eagerly looks forward to 2022 and
beyond.
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 2021. 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 2021 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 2021 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 February 17, 2021, and such information is included herein
to provide readers with an understanding of the Company's
anticipated capital expenditures for 2021. 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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