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, 2022. The
evaluation encompassed 100% of Peyto’s reserves and was conducted
by GLJ Ltd. (“GLJ”). The year 2022 marks the Company’s 24th year of
successful reserves development.
2022 HIGHLIGHTS
-
Peyto replaced 165%, 159% and 167% of annual production with new
Proved Developed Producing, (“PDP”), Total Proved (“TP”), and Total
Proved plus Probable (“P+P”) reserves using 64% of Funds from
Operations1,2, (“FFO”) while growing annual production by 14% and
reducing net debt1,2 by approximately $210 million.
-
Peyto developed 374.5 BCFe3 (62.4 million barrels of oil
equivalent, “MMboes”) of new PDP reserves at a Finding, Development
and Acquisition (“FD&A”4) cost of $1.41/Mcfe ($8.48/boe).
Finding and Development costs exclusive of acquisitions were
$1.35/Mcfe for PDP reserves. Peyto’s 3 year average PDP FD&A
cost is $1.15/Mcfe.
-
FD&A costs, including the change in Future Development Capital
(“FDC”), for TP and P+P were $1.75/Mcfe ($10.50/boe) and $2.03/Mcfe
($12.21/boe), which reflects an increase in FDC, due to an increase
in the number of future drilling locations and cost inflation, of
$102 million and $244 million for the respective categories. For
comparative purposes, FD&A costs before increases in FDC were
$1.47/Mcfe and $1.39/Mcfe, respectively.
-
Total Company reserve values (BT NPV5) for PDP, TP, and P+P
reserves increased 59%, 43% and 32% on a debt adjusted per share
basis to $27.18/share, $49.50/share, and $71.17/share.
-
Total Company reserve volumes for PDP, TP and P+P were up 8%, 4%
and 3%, respectively, in absolute terms and increased 5%, 1% and
0%, respectively, on a per share basis.
-
Peyto’s extended reach horizontals (“ERH”) wells have shown a 186%
improvement in reserves assigned and a 31% reduction in inflation
adjusted development cost per mcfe.
-
The Company’s average field netback1,5 was $3.96/Mcfe ($23.78/boe),
resulting in 2.8 times recycle ratio6 (3.9 times on an unhedged
basis). One third of the wells drilled in 2022 have already paid
out their initial capital investment.
-
The Reserve Life Index7 (“RLI”) for the PDP, TP and P+P reserves
remained consistent year over year at 9, 15 and 24 years,
respectively. Peyto’s PDP reserve life is one of the longest in the
industry.
-
At year end, P+P reserves of 929 MMboes (4.8TCF3 of gas, 66 MMbbls
of pentanes and condensate, 27 MMbbls butane, 29 MMbbls propane and
inclusive of 1,295 future locations) had been assigned to just
18.3% of Peyto’s total Deep Basin petroleum and natural gas
rights.
-
For the year ended December 31, 2022, Peyto invested $481 million
of capital1,8 in organic activities to build approximately 38,100
boe/d at a cost of $12,600 boe/d9, which included $42 million in
new plant construction but excluded $48 million in acquisitions
which were purchased primarily for future opportunities and
incremental plant processing capacity.
2023 CAPITAL BUDGET
-
The Board of Directors of Peyto has approved a 2023 capital budget
of $425–$475 million. Peyto, as always, will be nimble with capital
plans and has specifically designed the program to have flexibility
in the back half of the year when natural gas prices are forecasted
to strengthen. Until that time, the Company plans to target the low
end of capital guidance and will react to changes in commodity
prices as they unfold. Peyto's plans for the Whitehorse
development, including associated gas plant and pipeline
infrastructure, have been deferred as project economics have
weakened with the decline in natural gas prices. Instead, capital
previously earmarked for Whitehorse has been reallocated to other
core areas to be focused on lower cost development drilling. Also
included in the capital program is a 23 km large diameter pipeline
to directly connect Peyto’s Swanson gas plant to the Cascade power
plant currently under construction near Edson, AB. This highly
efficient 900 megawatt combined cycle power plant is expected to
start operations in late 2023 and Peyto will supply 60,000 GJ/d
(approximately 10% of current gas production) under a 15 year gas
supply agreement. The 2023 capital program is projected to add
between 35,000 and 40,000 boe/d of new production by year end,
based on current onstream metrics of approximately $12,000/boe/d.
The capital program will more than offset the estimated 29% decline
in base production allowing Peyto to target an exit rate between
110,000 to 115,000 boe/d. Similar to 2022, there may also be
opportunities throughout the year for acquisitions that the Company
chooses to pursue.
-
Peyto’s active hedging program has secured prices for approximately
55–60% of projected gas volumes for 2023, which provides revenue
stability for the Company’s business plan. This level of price
protection is one of the highest in industry. Peyto’s capital
budget along with the current monthly dividend is forecasted to be
funded with a portion of cashflow while the remainder will be used
to reduce debt.
IMPROVED SUSTAINABILITY
-
Low Production and Reserves
Replacement10 Cost: The
Company invested 64% of FFO in 2022 to replace over 165% of
produced reserves in the year and grow PDP reserves by 8% implying
only 39% of FFO would be required to replace produced reserves.
Capital efficiency for 2022 was $12,600/boe/d for the organic
drilling program excluding two separate acquisitions but inclusive
of the construction of a new gas processing facility in Chambers.
Capital efficiency was $13,600/boe/d including the acquisitions
which were purchased primarily for future resource upside and
facility synergies in the Brazeau area. The cost to add new
production increased over last year mainly due to increased service
costs commensurate with higher natural gas prices.
-
Long Life, Low Decline Production: Peyto’s base
production is forecasted by GLJ to fall to 75,000 boe/d in December
of 2023, implying a 29% annual decline from 105,700 boe/d in
December 2022. This annual production decline rate is lower than
2022 despite the 14% year-over-year production growth. Peyto’s PDP
RLI is 9 years, based on Q4 2022 production rate of 104,950 boe/d,
which is one of the longest PDP RLIs in the industry.
-
Low Risk Reserves: At year end, Peyto had 2003
gross (1,773 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 that are
exempt from the vulnerabilities of high-cost, third party midstream
processing.
- Minimal
Liabilities: The forecast cost of Peyto’s future
abandonment and reclamation liability (all wells, pipelines, well
sites, & facilities) is $69.4 million (NPV5), which represents
1% of the total $6.5 billion of forecast future value of the
developed reserves11 (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
Environmental Performance: Peyto produces less than half
of the average GHG emissions intensity of the natural gas
production and processing industry in Canada and is one of the
lowest amongst its peers. Peyto has committed to reducing methane
emissions intensity by 75% from 2016 levels and has active
emissions reducing projects underway which include waste heat
recovery, conversion of pneumatic chemical pumps to solar powered,
installation of zero emissions pumps, and the removal of methane
emitting equipment that is no longer required. The Company has
begun construction of a gas pipeline that will directly supply the
Cascade combined cycle, highly efficient, 900 megawatt power plant.
This direct connection will result in transportation fuel savings
of an estimated 25,000 tonnes of carbon dioxide equivalent per
year. Peyto also uses less water per unit of production than many
of its peers and continues to reduce the surface footprint needed
to extract and develop reserves, annually. Please refer to Peyto’s
2022 ESG Report
at: https://www.peyto.com/Files/Corporate%20Responsibility/ESG%20Committee/Peyto2022ESGReport.pdf
HISTORICAL PERSPECTIVE
-
Over the past 24 years, Peyto has explored for and discovered 8.0
TCFe of Alberta Deep Basin natural gas and associated liquids, of
which 61% has now been developed11.
|
Peyto 24-year
cumulative production (to Dec. 31/ 22): |
|
2.461
TCFe |
|
Total Proved +
Probable Developed reserves: |
|
2.433 TCFe |
|
Total Developed natural gas and liquids: |
|
4.894 TCFe |
|
Total Proved +
Probable Undeveloped reserves: |
|
3.141 TCFe |
|
Total explored for and discovered: |
|
8.035 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.
-
In those 24 years, a total of $7.3 billion was invested in the
Canadian economy in the acquisition and development of 4.9 TCFe of
total developed natural gas and associated liquids at an average
cost of $1.49/Mcfe, while a weighted average field netback3 of
$3.47/Mcfe delivered $7.8 billion in FFO, $2.6 billion in dividends
and distributions to shareholders, and resulted in a cumulative
recycle ratio2 of 2.3 times. Royalty payments made to Alberta
during this time have totaled over $1 billion.
-
Based on the December 31, 2022 evaluation, the debt adjusted, Net
Present Value of the Company’s remaining Total Proved plus Probable
reserves (“P+P NPV”, 5% discount, less debt) was $71/share,
comprised of $35/share of developed reserves and $36/share of
undeveloped reserves. This includes a provision for all abandonment
liability for wells, well sites, pipelines, and facilities for
which Peyto has ownership and responsibility.
2022 RESERVES REPORT AND ANALYSIS
The following table summarizes Peyto’s reserves
and the discounted Net Present Value of future cash flows, before
income tax, using the 3 Consultant Average (“3CA”) pricing forecast
(GLJ, McDaniel, and Sproule), at December 31, 2022.
|
|
|
|
Before Tax Net Present Value ($millions) |
|
|
|
|
Discounted at |
Reserve Category |
Gas(BCF) |
Oil & NGL (mstb) |
BCFe(6:1) |
MMboe(6:1) |
0% |
5% |
8% |
10% |
Proved
Developed Producing |
1,703 |
44,631 |
1,971 |
328 |
8,960 |
5,603 |
4,588 |
4,111 |
Proved
Non-producing |
30 |
641 |
34 |
6 |
12 |
11 |
10 |
10 |
Proved Undeveloped |
1,329 |
34,757 |
1,537 |
256 |
6,911 |
3,861 |
2,879 |
2,409 |
Total
Proved |
3,061 |
80,029 |
3,541 |
590 |
15,833 |
9,476 |
7,477 |
6,530 |
Probable |
1,774 |
43,125 |
2,033 |
339 |
8,960 |
3,760 |
2,525 |
2,004 |
Total Proved + Probable |
4,836 |
123,154 |
5,574 |
929 |
24,793 |
13,236 |
10,002 |
8,534 |
Note: Based on the GLJ report effective December
31, 2022. 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 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 2022 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 or allowing for the timely repayment of any
debt used?
-
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 PDP reserves at the start of
2022 (the base reserves) were evaluated and adjusted for 2022
production as well as any technical or economic revisions resulting
from the additional twelve months of production and commodity price
data. As part of GLJ’s independent engineering analysis, all base
1,763 producing reserve entities (zones/wells) were evaluated.
These base producing wells and zones represent a total gross
Estimated Ultimate Recoverable (“EUR”) volume of 4.9 TCF (remaining
PDP+PA reserves plus all cumulative production to date), which is
within 1% from the prior year estimate. As a result, Peyto is
pleased to report that its total base reserves continue to meet
expectations, which provides confidence in the prediction of future
recoveries.
The commodity price forecast used by GLJ in this
year’s evaluation is higher than last year for both natural gas and
natural gas liquids which has had the effect of increasing 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, increased $589 million, or 36%, due to the
difference in commodity price forecasts and Peyto’s realized
historical offsets to posted prices. The 3CA price forecast used in
the evaluation is available on GLJ’s website at www.gljpc.com
For 2023, GLJ is forecasting the total base
production (PDP reserves) to decline to approximately 75,000 boe/d
(395MMcf/d of gas and 9,560 bbl/d of NGLs) by December 2023. This
decline implies a total base decline rate of approximately 29% from
December 2022. The historical base decline rates and capital
programs are shown in the following table:
|
|
2012 |
|
2013 |
|
2014 |
|
2015 |
|
2016 |
|
2017 |
|
2018 |
|
2019 |
|
2020 |
|
2021 |
|
2022 |
|
2023F |
Base Decline (%/yr)* |
|
35% |
|
34% |
|
38% |
|
40% |
|
40% |
|
37% |
|
35% |
|
29% |
|
23% |
|
27% |
|
30% |
|
29% |
Capital
Expenditures ($MM) |
|
$618 |
|
$578 |
|
$690 |
|
$594 |
|
$469 |
|
$521 |
|
$232 |
|
$206 |
|
$236 |
|
$365 |
|
$529 |
|
$450 |
*The base decline represents the aggregate
annual decline of all wells on production at the end of the
previous year.
2. Value
Creation/Reconciliation
During 2022, Peyto invested a total of $481
million in organic activity to evaluate exploration lands, expand
its pipeline gathering network, build a new 65 MMcf/d gas plant in
Chambers, and drill 95 gross (82.4 net) wells. Additionally, the
Company invested $22 million in a corporate acquisition, primarily
for a new gas plant facility and $26 million for underdeveloped
lands within the Brazeau area. 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, but it also helps illustrate
the potential returns that can be generated from similar future
undeveloped opportunities.
Exploration, Development, and
Acquisition Activity
Of the total capital invested in exploration and
development activities (excluding acquisitions) in 2022,
approximately 2% was spent acquiring lands and seismic, 21% on
pipeline and facility projects, and the remaining 77% was spent
drilling, completing, and connecting existing and new reserves. 79
of the gross wells drilled, or 83%, were previously identified as
undeveloped reserves in last year’s reserve report (58 Proved, 21
Probable locations). The remaining 16 wells were locations
developed in the year, on both existing and acquired lands, and
were not recognized in last year’s report. Out of the 95 gross
wells drilled in 2022, 90 wells were brought onstream during the
year and 34 of those wells (36%) fully recovered their capital
investment before the end of 2022.
During the first quarter of 2022, Peyto closed a
strategic corporate acquisition in the Greater Brazeau area which
added a 100% owned, operated, and underutilized 45 MMcf/d sweet
natural gas plant, 850 boe/d of production from 20 net wells, and
73 net sections of land. The Company also closed a property
acquisition in the Brazeau area in the third quarter which added 42
net sections of land and 650 boe/d from 12 net producing wells.
Since that time, the Company has integrated the infrastructure
within the existing Brazeau area complex to allow for efficient
development of both assets and flexibility to maximize production
from the area.
The undeveloped reserves at year end 2021
originally booked to the 79 drilled locations referred to above,
totaled 331 BCFe (4.2 BCFe/well) of Proved plus Probable
Undeveloped reserves for a forecast capital investment of $268
million ($0.81/Mcfe). In actuality, $320 million of capital
($0.96/Mcfe) was spent on these 79 conversions (75 well drilled)
during 2022, yielding Proved plus Probable Developed Producing
reserves of 333 BCFe (4.2 BCFe/well). As in the past, well
assignments met forecasted reserves however, higher than expected
steel and oilfield service costs in 2022 translated to a 19%
increase in cost per unit.
The following table illustrates the Company’s
historical performance in converting predicted future undeveloped
locations into producing wells and demonstrates that, other than
the rapid inflation experienced in 2022, Peyto has typically
converted more reserves at a 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% |
2021 |
95 |
61 |
64% |
221 |
$193 |
$0.87 |
227 |
$192 |
$0.84 |
-3% |
2022 |
95 |
79 |
83% |
331 |
$268 |
$0.81 |
333 |
$320 |
$0.96 |
+19% |
Total |
1,221 |
850 |
70% |
2,725 |
3,274 |
$1.20 |
2,846 |
3,164 |
$1.11 |
-8% |
*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 helps Peyto predict
future reserve recoveries and capital requirements and reduces the
risk associated with valuing future undeveloped locations. While
the Peyto team will do its utmost plans to continue to drive down
costs in 2023, future development capital used in the reserves
report for undeveloped locations reflects the most recent cost
increases seen in 2022.
Value Reconciliation
In order to measure the success of all capital
invested in 2022, it is necessary to quantify the total amount of
value created during the year and compare that to the total amount
of capital invested. Each year, Peyto runs 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 2022, Peyto’s estimated net debt had
decreased by 19% or $210 million while the number of shares
outstanding increased by 3%, due to stock option program exercises,
to 173.5 million shares. In calculating the change in debt the
Company included 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 $1.9 billion of Proved
Developed Producing, $2.1 billion of Total Proven, and $2.0 billion
of Total Proved plus Probable undiscounted reserve value, with $529
million of capital investment. The ratio of capital expenditures to
value creation is what Peyto refers to as the NPV recycle ratio,
which is simply the undiscounted value addition, resulting from the
capital program, divided by the capital investment. For 2022, the
Proved Developed Producing NPV recycle ratio is 3.6 which means for
each dollar invested, the Peyto team was able to create 3.6 new
dollars of Proved Developed Producing reserve value.
The historic NPV recycle ratios are presented in
the following table.
|
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
10 yr Wt. Avg. |
Capital Investment ($MM) |
$578 |
$690 |
$594 |
$469 |
$521 |
$232 |
$206 |
$236 |
$365 |
$529 |
NPV0Recycle
Ratio |
|
|
|
|
|
|
|
|
|
|
|
Proved
Developed Producing |
1.5 |
1.5 |
2.3 |
2.9 |
2.3 |
4.6 |
1.8 |
3.5 |
5.2 |
3.6 |
2.7 |
Total Proved |
2.0 |
1.7 |
3.3 |
4.2 |
3.2 |
11.7 |
5.5 |
6.9 |
5.5 |
4.0 |
4.0 |
Total Proved + Probable |
4.0 |
2.6 |
5.0 |
7.3 |
4.0 |
15.1 |
9.2 |
6.5 |
11.5 |
3.8 |
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. 2022 Proved
Developed Producing $1,911/$529) =3.6).
3. Growth
and IncomeOver the past 19.5 years, Peyto has paid a total
of $20/share to shareholders in the form of distributions and
dividends. Peyto’s objective, as a dividend paying, growth-oriented
corporation, 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 2022, the Company’s capital program was
successful in replacing 165% of annual production with new PDP
reserves, resulting in 8% growth, using only 64% of FFO. Fourth
quarter production increased 7%, from 98,400 boe/d (522 MMcf/d gas,
11,300 bbl/d NGLs) to 104,950 boe/d (553 MMcf/d gas, 12,840 bbl/d
NGLs). The change in both PDP reserves and fourth quarter
production resulted in a slight increase of the Proved Developed
Producing reserve life index (ratio of the two) from 8.5 years to
8.6 years.
For comparative purposes, the Total Proved and
P+P RLI index was 15 and 24 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.
|
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
Proved
Developed Producing |
13 |
14 |
14 |
11 |
9 |
9 |
7 |
7 |
7 |
7 |
7 |
9 |
9 |
9 |
9 |
9 |
Total
Proved |
16 |
17 |
21 |
17 |
16 |
15 |
12 |
11 |
11 |
11 |
11 |
16 |
19 |
18 |
16 |
15 |
Proved + Probable Additional |
21 |
23 |
29 |
25 |
22 |
22 |
19 |
18 |
17 |
18 |
18 |
25 |
29 |
27 |
25 |
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future Undeveloped
Opportunities
As of December 31, 2022, Peyto had 1,042 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 4,062
net sections of rights over Duvernay, Montney and seven Cretaceous
horizons. During Peyto’s 24-year history, the Company has both
found and developed 4.9 TCFe of total natural gas and associated
liquids which resides in 416 of these net sections. Effectively,
Peyto has invested $7.3 billion to fully develop 10.2% of its
existing land base which has also resulted in the generation of
$7.8 billion of cumulative FFO and $3.1 billion in cumulative
earnings to date.
Peyto’s remaining undeveloped land base still
holds significant future potential. GLJ has modelled a limited
amount of development activity over the next eight years as shown
in the following table of future development capital designed to
ensure Peyto’s existing facilities remain full. This capital
investment is projected to develop an additional 8.1% of Peyto
4,062 net sections of rights listed above.
|
Future Development Capital |
|
Proved Reserves |
Total Proved+Probable Reserves |
Year |
Undisc., ($Millions) |
Undisc., ($Millions) |
2023 |
290 |
432 |
2024 |
401 |
435 |
2025 |
421 |
448 |
2026 |
382 |
450 |
2027 |
327 |
461 |
2028 |
240 |
419 |
2029 |
18 |
364 |
2030 |
2 |
459 |
Thereafter |
0 |
389 |
Total |
2,081 |
3,856 |
Every year Peyto finds and develops new drilling
inventory that GLJ reviews 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 ERH 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 a lower cost per unit of
reserves and less off an environmental footprint. In the Wilrich
specifically, Peyto has been able to extend lateral lengths
consistently over 2,000 m, which has generated an 86% increase in
per well recovery (4.1 Bcfe) over the previous well design (2.2
Bcfe). The increase in length and stimulation intensity costs have
had the effect of lowering per unit development costs by 31% on an
inflation adjusted basis from $1.77/Mcfe to $1.25/Mcfe. Peyto has
also applied the ERH methodology to other formations such as the
Dunvegan and Falher where there is significant opportunity to
optimize development.
As of December 31, 2022, the future drilling
locations recognized in the reserve report totaled 1,295 gross
(1,046 net). This is up from the previous year of 1,274 (1,022
net). Of these future locations, 805 (62%) are categorized as
Proven Undeveloped by the independent reserve evaluators, while 490
(38%) are Probable Undeveloped locations. The net reserves
associated with the undeveloped locations (not including existing
uphole zones) totals 3.14 TCFe (3.0 BCFe/well) consisting of 2.72
TCF of natural gas and 69 MMbbls of NGLs, while the capital
required to develop them is estimated at $3.8 billion or
$1.20/Mcfe. This development is forecast to create Before Tax Net
Present Value of $6.7 billion (at 5% discount rate, inclusive of
profit after capital recovery and future abandonment liability) or
$36 per share (debt adjusted) of incremental value at the 3CA
commodity price forecast.
The undiscounted, forecast for Net Operating
Income for the TP and P+P reserves over the future development
capital schedule, as contained in the evaluator’s report, totals
$8.3 billion and $13.2 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 increased from the previous
year by $102 million and $244 million, respectively, reflecting the
increased number of undeveloped locations and the most recent cost
inflation that has come with higher forecast commodity prices.
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 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 98% 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, 2022,
Peyto owned a total of 1929 net wells of which over 92% are on
production today and most are expected to produce for decades to
come. Despite the Company’s very low non-producing well count,
Peyto has an active well retirement program where 12 net wells were
abandoned in 2022. Of the remaining non-producing wellbores, 18.3
net wells are considered medium risk, inactive wells that require
downhole abandonment over the next several years. The estimated
cost to abandon, reclaim and remediate these wells is approximately
$4.6 million. For perspective, the current existing developed
reserves have a forecast value of $6.5 billion (NPV5 of the PDP +
PA and PDNP + PA), while the cost to abandon and reclaim all wells,
well sites, pipelines, and facilities is estimated at $69.4 million
using the same 5% discount rate for future costs.
These cumulative factors listed above, which
reduce the traditional risk of realizing future cashflows from
Peyto’s reserves, is why, in Management’s opinion, Peyto’s reserves
can be valued at lower discount rates than other, more conventional
asset bases and why Management highlights Net Present Values (NPV)
at 5% discount rates.
PERFORMANCE RATIOS
The following table highlights annual
performance ratios for the last decade. These can be used for
comparative purposes, but it is cautioned that on their own they do
not measure investment success.
|
2022 |
2021 |
2020 |
2019 |
2018 |
2017 |
2016 |
2015 |
2014 |
2013 |
Proved Developed Producing |
|
|
|
|
|
|
|
|
|
|
FD&A ($/Mcfe) |
$1.41 |
$0.97 |
$1.06 |
$1.55 |
$1.18 |
$1.36 |
$1.44 |
$1.64 |
$2.25 |
$2.35 |
RLI (yrs) |
8.6 |
9 |
9 |
9 |
9 |
7 |
7 |
7 |
7 |
7 |
Recycle Ratio |
2.8 |
2.8 |
1.5 |
1.4 |
2.3 |
2.1 |
1.8 |
2.0 |
1.9 |
1.6 |
Reserve Replacement |
165% |
188% |
127% |
75% |
98% |
171% |
153% |
193% |
183% |
190% |
Total
Proved |
|
|
|
|
|
|
|
|
|
|
FD&A ($/Mcfe) |
$1.75 |
$1.10 |
$0.20 |
$1.41 |
$1.21 |
$1.39 |
$1.01 |
$0.72 |
$2.37 |
$2.23 |
RLI (yrs) |
15 |
16 |
18 |
19 |
16 |
11 |
11 |
11 |
11 |
12 |
Recycle Ratio |
2.3 |
2.4 |
8.0 |
1.7 |
2.2 |
2.0 |
2.6 |
4.5 |
1.8 |
1.6 |
Reserve Replacement |
159% |
194% |
132% |
137% |
294% |
225% |
183% |
188% |
254% |
230% |
Future Development Capital ($ millions) |
$2,081 |
$1,979 |
$1,917 |
$2,107 |
$1,971 |
$1,488 |
$1,305 |
$1,381 |
$1,721 |
$1,406 |
Total Proved + Probable |
|
|
|
|
|
|
|
|
|
|
FD&A ($/Mcfe) |
$2.03 |
$1.09 |
($0.01) |
$1.25 |
1.02 |
$1.49 |
$0.62 |
$0.54 |
$2.01 |
$1.86 |
RLI (yrs) |
24 |
25 |
27 |
29 |
25 |
18 |
18 |
17 |
18 |
19 |
Recycle Ratio |
1.9 |
2.5 |
N/A |
1.7 |
2.6 |
1.9 |
4.2 |
6.1 |
2.1 |
2.0 |
Reserve Replacement |
167% |
308% |
167% |
140% |
342% |
279% |
283% |
287% |
328% |
450% |
Future Development Capital ($millions) |
$3,855 |
$3,612 |
$3,308 |
$3,547 |
$3,445 |
$2,978 |
$2,563 |
$2,657 |
$2,963 |
$2,550 |
See Non-GAAP Financial Ratios in the Advisories
section of this news release for details on the calculation of the
above metrics.
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
Scott Robinson, Vice President of Business
Development, and David Thomas, Vice President of Exploration will
retire at the end of February. Scott and David have been
instrumental both helping to grow the Company to over 100,000 boe/d
in the last several years and responsible for the development and
mentorship of many of Peyto’s employees. Peyto has a proud history
of cultivating future leaders within the organization to ensure
profitable resource development using sound technical judgement
remains a core value of the Company. On behalf of all shareholders
and the Board of Directors, the management team of Peyto would like
to congratulate Scott and David on their retirement and sincerely
thank them for their leadership and commitment to the Company.
Peyto is pleased to announce that Derick Czember
will take over Scott’s responsibilities in the position of Vice
President of Land and Business Development. Derick has been with
the Company for 8 years and has played an integral role in the
acquisition of key properties and new opportunities which have
added to Peyto’s significant land base. Peyto is also pleased to
announce that Mike Rees, Manager of Geoscience, and Blaine Stewart,
Manager of Exploration will share David’s responsibilities moving
forward. Mike has been with Peyto for over 10 years and has played
a vital role in resource characterization, and the development and
execution of the Company’s drilling programs. Blaine, in his role
with the Business Development team, has been fundamental in the
identification and acquisition of multiple resource opportunities
during his 6 years with Peyto and will be play an important role in
the Company’s successful capture of future prospects.
OUTLOOK
Despite the recent drop in price, the outlook
for natural gas remains robust with the recognition that world
demand continues to grow and the need for this critical energy
supply will exist for the foreseeable future. The past warm winter
in North America and Europe has created a false sense of short-term
term supply security but has not solved the longer-term supply
challenge. North America’s ability to access global demand without
an increase in storage capacity has caused an increase in natural
gas price volatility. Peyto’s price protection strategies such as
market diversification and systematic hedging will continue to play
an important role in the Company’s revenue security going forward.
These gas marketing strategies will attempt to ensure steady
funding of future capital programs, profit generation, and
protection of the balance sheet. As the industry’s lowest cost
producer, Peyto will continue to focus on cost control and
improving efficiencies to preserve profit margins.
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 2023. Shareholders are encouraged to actively visit
Peyto’s website located at www.peyto.com. For further information,
please contact Jean-Paul ‘JP’ Lachance, President and Chief
Executive Officer of Peyto at (403) 261-6081.
ADVISORIES
Unaudited Financial
Information
Certain financial and operating information
included in this news release including, without limitation,
exploration and development expenditures, acquisitions, field
netbacks, funds from operations, net debt, FD&A costs, Finding
& Development costs excluding acquisitions, acquisition costs,
and recycle ratio, are based on estimated unaudited financial
results for the year ended December 31, 2022, and are subject to
the same limitations as discussed under Forward Looking Information
set out below. These estimated amounts may change upon the
completion of audited financial statements for the year ended
December 31, 2022 and changes could be material.
Information Regarding Disclosure on Oil
and Gas Reserves
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.
Forward-Looking Information
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 2023 capital expenditure program, 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, the commencement of the Cascade Power
Plant and the development and gas plant construction at Whitehorse
in 2024. 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 2023 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 16, 2023, and such information is included herein
to provide readers with an understanding of the Company's
anticipated capital expenditures for 2023. Readers are cautioned
that the information may not be appropriate for other purposes.
Barrels of Oil EquivalentBoes
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.
Non-GAAP and Other Financial
Measures
Throughout this news release, Peyto employs
certain measures to analyze financial performance, financial
position, and cash flow. These non-GAAP and other financial
measures do not have any standardized meaning prescribed under IFRS
and therefore may not be comparable to similar measures presented
by other entities. 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.
Non-GAAP Financial Measures
Funds from Operations"Funds
from operations" is a non-GAAP measure which represents cash flows
from operating activities before changes in non-cash operating
working capital and provision for future performance-based
compensation. Management considers funds from operations and per
share calculations of funds from operations to be key measures as
they demonstrate the Company’s ability to generate the cash
necessary to pay dividends, repay debt and make capital
investments. Management believes that by excluding the temporary
impact of changes in non-cash operating working capital, funds from
operations provides a useful measure of Peyto’s ability to generate
cash that is not subject to short-term movements in operating
working capital. The most directly comparable GAAP measure is cash
flows from operating activities.
Capital ExpendituresPeyto uses
the term capital expenditures as a measure of capital investment in
exploration and production activity, as well as property
acquisitions and divestitures, and such spending is compared to the
Company's annual budgeted capital expenditures. The most directly
comparable GAAP measure for total capital expenditures is cash flow
used in investing activities.
Net Debt"Net debt" is a
non-GAAP financial measure that is the sum of long-term debt and
working capital excluding the current financial derivative
instruments and current portion of lease obligations. It is used by
management to analyze the financial position and leverage of the
Company. Net debt is reconciled to long-term debt which is the most
directly comparable GAAP measure.
Non-GAAP Financial Ratios
Netback per MCFE"Netback" is a
non-GAAP measure that represents the profit margin associated with
the production and sale of petroleum and natural gas. Peyto
computes "field netback per Mcfe" as commodity sales from
production, plus net third party sales, if any, plus other income,
less royalties, operating, and transportation expense divided by
production.
Finding, Development and Acquisition
CostFD&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. 2022 Total
Proved ($529+$102)/(590.2-567.9+37.8) = $10.50/boe or
$1.75/Mcfe).Reserve Life IndexThe RLI is
calculated by dividing the reserves (in boes) in each category by
the annualized Q4 average production rate in boe/year (eg. 2022
Proved Developed Producing 328,424/(104.9x365) =8.6). 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.
Recycle RatioThe Recycle Ratio
is calculated by dividing the field netback per boe, by the
FD&A costs for the period (eg. 2022 Proved Developed Producing
$23.78/$8.48=2.8). 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.
Reserve Replacement RatioThe
reserve replacement ratio is determined by dividing the yearly
change in reserves before production by the actual annual
production for the year (eg. 2022 Total Proved
(590.2-567.9+37.8)/37.8 =159%).
Capital Efficiency Capital
efficiency is the cost to add new production in the year and is
calculated as capital expenditures divided by total production
added at year end (eg. 2022 Capital efficiency, before acquisitions
($481MM/38.1=$12,600/boe/d).
The Toronto Stock Exchange has neither approved
nor disapproved the information contained herein.
1 See "Unaudited Financial Information" in the
Advisories section of this news release2 Funds from operations and
Net Debt are non-GAAP financial measures. See "non-GAAP and Other
Financial Measures" in this news release 3 BCF and TCF refers to
billions and trillions of cubic feet, respectively4 FD&A is a
non-GAAP financial ratio. See "non-GAAP and Other Financial
Measures" in this news release5 Field netback operations is a
non-GAAP financial ratio. See "non-GAAP and Other Financial
Measures" in this news release 6 Recycle ratio is a non-GAAP
financial ratio. See "non-GAAP and Other Financial Measures" in
this news release7 RLI is a non-GAAP financial ratio. See "non-GAAP
and Other Financial Measures" in this news release8 Capital
expenditures is a non-GAAP financial measure. See "non-GAAP and
Other Financial Measures" in this news release9 Capital efficiency
is a non-GAAP financial ratio. See "non-GAAP and Other Financial
Measures" in this news release10 Reserve replacement is a non-GAAP
financial ratio. See "non-GAAP and Other Financial Measures" in
this news release11 Developed Reserves is Total Proved + Probable
Developed Reserves and includes Proved + Probable Developed
Producing reserves and Proved + Probable Developed Non-Producing
reserves.
Peyto Exploration and De... (TSX:PEY)
Historical Stock Chart
From Jun 2024 to Jul 2024
Peyto Exploration and De... (TSX:PEY)
Historical Stock Chart
From Jul 2023 to Jul 2024