Peyto Exploration & Development Corp. (TSX: PEY) ("Peyto"
or the "Company") is pleased to report operating and financial
results for the second quarter of 2024.
Q2 2024 Highlights:
- Delivered $154.8 million in funds from operations1,2 ("FFO"),
or $0.79/diluted share, generated earnings of $51.4 million, or
$0.26/diluted share, and returned $64.4 million of dividends to
shareholders.
- Production volumes averaged 122,299 boe/d (642.8 MMcf/d of
natural gas, 15,174 bbls/d of NGLs), a 24% increase year over year,
mainly due to the Repsol Canada Energy Partnership acquisition that
closed in the fourth quarter of 2023 (the "Repsol Acquisition" or
"Repsol Assets").
- The successful drilling program on the Repsol Assets continued
during the quarter with sustained increases to average well
productivity of approximately 30% above Peyto's recent annual
drilling programs.
- The Company's disciplined hedging and diversification program
protected second quarter revenues from the lowest AECO daily
benchmark natural gas prices since 2019. Peyto's realized natural
gas price for the quarter of $2.87/Mcf (or $2.50/GJ) was more than
double the average AECO daily price of $1.12/GJ. The Company exited
the quarter with a strong hedge position, which currently protects
approximately 449 MMcf/d, 455 MMcf/d and 260 MMcf/d of gas
production for the second half of 2024, calendar 2025, and calendar
2026, respectively, at an average gas price near $4/Mcf. The
securing of future revenues supports the sustainability of the
Company's dividends, capital program, and continued strengthening
of the balance sheet.
- Quarterly cash costs3 totaled $1.50/Mcfe, including royalties
of $0.26/Mcfe, operating costs of $0.52/Mcfe, transportation of
$0.30/Mcfe, G&A of $0.06/Mcfe and interest expense of
$0.36/Mcfe. Peyto's operating costs have decreased 5% from the
first quarter of 2024, and are on target to achieve a 10% reduction
by the end of 2024. Peyto continues to have the lowest cash costs
in the Canadian oil and natural gas industry.
- Total capital expenditures were $100.5 million in the
quarter. Peyto drilled 20 wells (18.8 net), completed 19
wells (17.5 net), and brought 13 wells (13.0 net) on production.
- Peyto delivered a 62% operating margin4 and a 19% profit
margin5, resulting in a 9% return on capital employed6 ("ROCE") and
a 11% return on equity8 ("ROE"), on a trailing 12-month
basis.
Second Quarter 2024 in Review
Natural gas prices sunk to near five-year lows
across North America in the second quarter as storage inventories
remain elevated coming out of a warm winter season. The AECO daily
benchmark averaged just $1.12/GJ, while Peyto realized $2.50/GJ on
account of the Company’s disciplined hedging strategy that
delivered $71.4 million of natural gas hedging gains for the
quarter. Peyto's operating costs of $0.52/Mcfe were reduced by 5%
from Q1 2024, partially due to the redirection of natural gas
volumes from a third-party operated, deep-cut facility to Peyto's
owned and operated Edson gas plant, which resulted in a reduction
of approximately 2,000 bbl/d of NGLs that were primarily low value
liquid ethane. The Company remains committed to its goal to reduce
operating costs by 10% from first quarter levels by the end of
2024. Peyto's strong hedge book and low-cost structure combined to
deliver FFO of $154.8 million ($0.79/diluted share) and free funds
flow7 totaling $54.0 million despite the downward pressure on
natural gas prices. Peyto's profit margin of 19% drove quarterly
earnings of $51.4 million ($0.26/diluted share). First half
2024 FFO of $359.5 million and free funds flow of $140.7 million
exceeded dividends of $128.5 million allowing for continued debt
reduction.
__________________________________________________________
1 This press release contains certain non-GAAP
and other financial measures to analyze financial performance,
financial position, and cash flow including, but not limited to
"operating margin", "profit margin", "return on capital", "return
on equity", "netback", "funds from operations", "free funds flow",
"total cash costs", and "net debt". 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. The non-GAAP and other financial
measures should not be considered to be more meaningful than GAAP
measures which are determined in accordance with IFRS, such as
earnings, cash flow from operating activities, and cash flow used
in investing activities, as indicators of Peyto’s performance. See
"Non-GAAP and Other Financial Measures" included at the end of this
press release and in Peyto's most recently filed MD&A for an
explanation of these financial measures and reconciliation to the
most directly comparable financial measure under IFRS.2 Funds from
operations is a non-GAAP financial measure. See "non-GAAP and Other
Financial Measures" in this news release and in the Q2 2024
MD&A.3 Cash costs is a non-GAAP financial measure. See
"non-GAAP and Other Financial Measures" in this news release.4
Operating Margin is a non-GAAP financial ratio. See "non-GAAP and
Other Financial Measures" in this news release.5 Profit Margin is a
non-GAAP financial ratio. See "non-GAAP and Other Financial
Measures" in this news release.6 Return on capital employed and
return on equity are non-GAAP financial ratios. See "non-GAAP and
Other Financial Measures" in this news release and in the Q2 2024
MD&A.7 Free funds flow is a non-GAAP financial measure. See
"non-GAAP and Other Financial Measures" in this news release and in
the Q2 2024 MD&A.
| |
Three Months Ended June 30 |
% |
Six Months Ended June 30 |
% |
|
|
2024 |
2023 |
Change |
2024 |
2023 |
Change |
| Operations |
|
|
|
|
|
|
| Production |
|
|
|
|
|
|
|
Natural gas (Mcf/d) |
642,754 |
526,732 |
22% |
644,994 |
535,457 |
20% |
|
NGLs (bbl/d) |
15,174 |
10,989 |
38% |
16,159 |
11,593 |
39% |
|
Thousand cubic feet equivalent (Mcfe/d @ 1:6) |
733,796 |
592,665 |
24% |
741,951 |
605,017 |
23% |
|
Barrels of oil equivalent (boe/d @ 6:1) |
122,299 |
98,777 |
24% |
123,658 |
100,836 |
23% |
| Production per million common
shares (boe/d) |
627 |
565 |
11% |
635 |
577 |
10% |
| Product prices |
|
|
|
|
|
|
|
Realized natural gas price – after hedging and diversification
($/Mcf) |
2.87 |
3.13 |
-8% |
3.47 |
3.53 |
-2% |
|
Realized NGL price – after hedging ($/bbl) |
69.44 |
69.28 |
0% |
64.62 |
74.38 |
-13% |
| Net Sales Price ($/Mcfe) |
3.95 |
4.07 |
-3% |
4.42 |
4.55 |
-3% |
| Operating expenses
($/Mcfe) |
0.52 |
0.47 |
11% |
0.53 |
0.49 |
8% |
| Royalties ($/Mcfe) |
0.26 |
0.18 |
44% |
0.25 |
0.36 |
-31% |
| Transportation ($/Mcfe) |
0.30 |
0.29 |
3% |
0.30 |
0.27 |
11% |
| Field netback(1)($/Mcfe) |
2.90 |
3.15 |
-8% |
3.37 |
3.49 |
-3% |
| General & administrative
expenses ($/Mcfe) |
0.06 |
0.05 |
20% |
0.06 |
0.04 |
50% |
| Interest expense ($/Mcfe) |
0.36 |
0.22 |
64% |
0.36 |
0.22 |
64% |
| Financial ($000,
except per share) |
|
|
|
|
|
|
| Natural gas and NGL sales
including realized hedging gains (losses)(2) |
263,832 |
219,409 |
20% |
596,373 |
497,742 |
20% |
| Funds from operations(1) |
154,835 |
142,354 |
9% |
359,461 |
322,171 |
12% |
| Funds from operations per
share - basic(1) |
0.79 |
0.81 |
-2% |
1.85 |
1.84 |
1% |
| Funds from operations per
share - diluted(1) |
0.79 |
0.81 |
-2% |
1.83 |
1.83 |
0% |
| Total dividends |
64,365 |
57,715 |
12% |
128,523 |
115,393 |
11% |
| Total dividends per share |
0.33 |
0.33 |
0% |
0.66 |
0.66 |
0% |
| Earnings |
51,437 |
57,415 |
-10% |
151,313 |
147,396 |
3% |
| Earnings per share –
basic |
0.26 |
0.33 |
-21% |
0.78 |
0.84 |
-7% |
| Earnings per share –
diluted |
0.26 |
0.33 |
-21% |
0.77 |
0.84 |
-8% |
| Total capital
expenditures(1) |
100,451 |
82,319 |
22% |
214,214 |
204,121 |
5% |
| Decommissioning
expenditures |
391 |
- |
- |
4,597 |
- |
- |
| Total payout ratio(1) |
107% |
98% |
9% |
97% |
99% |
-2% |
| Weighted average common shares
outstanding - basic |
195,045,669 |
174,895,215 |
12% |
194,731,189 |
174,836,955 |
11% |
| Weighted average common shares
outstanding - diluted |
196,520,101 |
176,305,942 |
11% |
195,967,653 |
176,460,770 |
11% |
| |
|
|
|
|
|
|
| Net debt(1) |
|
|
|
1,337,577 |
869,550 |
54% |
| Shareholders' equity |
|
|
|
2,691,716 |
2,309,845 |
17% |
| Total
assets |
|
|
|
5,393,524 |
4,093,448 |
32% |
| |
|
|
|
|
|
|
(1) This is a Non-GAAP financial measure or ratio. See "non-GAAP
and Other Financial Measures" in this news release and in the Q2
2024 MD&A(2) Excludes revenue from sale of third-party
volumes
Capital Expenditures
Peyto drilled 20 wells (18.8 net), completed 19
wells (17.5 net) and brought 13 wells (13.0 net) on production for
total drilling, completion, equipping and tie-in costs of $86.6
million in the quarter. Facilities and pipeline projects
totaled $13.3 million in the quarter, which included the first
phase of the Edson gas plant turnaround, continued Repsol gas
gathering system integration, and several pipeline debottlenecking
projects. The Company operated four drilling rigs
during the quarter that were situated on three-well pads to
minimize equipment moves through the wet spring-breakup period and
was prudent with timing of completions and tie-ins to avoid
incremental costs during low natural gas prices. Peyto's drilling
program featured 16 Wilrich, 1 Falher, 2 Notikewin, and 1 Dunvegan
well. Twelve of the 20 wells drilled in the quarter were drilled on
the Repsol Assets, with all twelve wells being drilled to the
deeper Wilrich formation which helps further define many additional
shallower targets. The results from these wells are largely
outperforming previous wells in the area, mostly due to the
application of the Company's current drilling and completion
methodology. Additionally, the drilling program near Edson has been
a key contributor to increasing utilization at the nearby Edson gas
plant as part of Peyto's plan to reduce operating costs where plant
inlet production has increased from 85 MMcf/d to over 125 MMcf/d by
the end of the second quarter. Since the acquisition, Peyto has
brought on production a total of 21 wells drilled on the Repsol
Assets. These wells continue to exhibit a sustained average
productivity increase of approximately 30% as compared to Peyto's
recent annual drilling programs. The Company continues to drill
longer horizontal wells to increase reserves recovery efficiencies
with average horizontal length of wells in the quarter extended to
2,350 meters, or 6% longer than Q1 2024. Peyto improved drilling
and completion costs per meter in the quarter by 8%, as compared to
Q1 2024, summarized in the following table.
|
|
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
2023 Q1 |
2023 Q2 |
2023 Q3 |
2023 Q4 |
2024 Q1 |
2024 Q2(1) |
|
Gross Hz Spuds |
135 |
70 |
61 |
64 |
95 |
95 |
72 |
19 |
15 |
19 |
19 |
18 |
20 |
| Measured
Depth (m) |
4,229 |
4,020 |
3,848 |
4,247 |
4,453 |
4,611 |
4,891 |
5,198 |
4,768 |
4,728 |
4,868 |
5,220 |
5,364 |
| Drilling
($MM/well) |
$1.90 |
$1.71 |
$1.62 |
$1.68 |
$1.89 |
$2.56 |
$2.85 |
$3.05 |
$2.74 |
$2.64 |
$2.94 |
$3.05 |
$2.89 |
| $ per
meter |
$450 |
$425 |
$420 |
$396 |
$424 |
$555 |
$582 |
$587 |
$574 |
$559 |
$603 |
$585 |
$539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completion ($MM/well) |
$1.00 |
$1.13 |
$1.01(2) |
$0.94 |
$1.00 |
$1.35 |
$1.54 |
$1.73 |
$1.64 |
$1.38 |
$1.48 |
$1.80 |
$1.75 |
| Hz
Length (m) |
1,241 |
1,348 |
1,484 |
1,682 |
1,612 |
1,661 |
1,969 |
1,947 |
2,140 |
1,853 |
1,949 |
2,223 |
2,350 |
| $ per Hz
Length (m) |
$803 |
$751 |
$679 |
$560 |
$620 |
$813 |
$781 |
$888 |
$776 |
$743 |
$759 |
$809 |
$744 |
|
$ ‘000 per Stage |
$81 |
$51 |
$38 |
$36 |
$37 |
$47 |
$52 |
$59 |
$50 |
$46 |
$53 |
$55 |
$49 |
| |
(1) Based on field estimates and may be subject to minor
adjustments going forward. (2) Peyto’s Montney well is
excluded from drilling and completion cost comparison.
In addition to the capital program, Peyto
incurred $0.4 million on decommissioning expenditures in the
quarter as part of the Company's 2024 responsible asset retirement
plan, bringing the total to $4.6 million for the year to date.
Commodity Prices and
Realizations
In the second quarter, Peyto realized a natural
gas price after hedging and diversification of $2.87/Mcf, or
$2.50/GJ, 123% higher than the average AECO daily benchmark of
$1.12/GJ. Peyto’s natural gas hedging activity resulted in a
realized gain of $1.22/Mcf ($71.4 million) due to the sharp decline
in AECO and Henry Hub natural gas prices over the past year.
Condensate and pentanes averaged $103.97/bbl in
the quarter, up 14% year over year, while Canadian dollar WTI ("WTI
CAD") increased 11% to $110.25/bbl over the same period.
Butane, and propane volumes were sold in combination at an average
price of $35.69/bbl, or 32% of WTI CAD, up 27% from $28.11/bbl in
Q2 2023. Peyto's combined realized NGL price in the quarter
was $71.86/bbl before hedging, and $69.44/bbl including a hedging
loss of $2.42/bbl.
Netbacks
The Company’s realized natural gas and NGL sales
yielded a combined revenue stream of $2.93/Mcfe before hedging
gains of $1.02/Mcfe, resulting in a net sales price of $3.95/Mcfe
in the quarter. Peyto's net sales price was 3% lower than the
$4.07/Mcfe realized in Q2 2023 due to lower natural gas prices,
partially offset by increased realized hedging gains. Total cash
costs of $1.50/Mcfe were consistent with $1.51/Mcfe in Q1 2024, as
the $0.03/Mcfe decrease in operating expenses was partially offset
by higher royalties in the quarter from a gas cost allowance
adjustment, related to the Repsol Assets, totaling
$0.05/Mcfe. Peyto's cash netback (net sales price including
other income, third-party sales net of purchases, realized gain on
foreign exchange, less total cash costs), was $2.47/Mcfe resulting
in a 62% operating margin which allowed the Company to fund the
capital program, and pay dividends to shareholders in the quarter.
Despite the challenging natural gas market over the past six
quarters, Peyto has achieved an average operating margin of 68%
over the period, from its marketing and diversification strategy
and its low-cost assets. Historical cash costs and operating
margins are shown in the following table:
|
|
2021 |
2022 |
2023 |
2024 |
|
($/Mcfe) |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
|
Revenue(1) |
3.70 |
2.92 |
3.33 |
4.42 |
5.25 |
5.48 |
5.01 |
5.74 |
5.10 |
4.07 |
4.32 |
4.83 |
4.92 |
3.97 |
| Royalties |
0.29 |
0.26 |
0.36 |
0.53 |
0.60 |
0.95 |
0.70 |
0.72 |
0.53 |
0.18 |
0.29 |
0.30 |
0.24 |
0.26 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Op Costs |
0.36 |
0.35 |
0.35 |
0.32 |
0.41 |
0.39 |
0.38 |
0.41 |
0.50 |
0.47 |
0.44 |
0.55 |
0.55 |
0.52 |
| Transportation |
0.17 |
0.22 |
0.23 |
0.23 |
0.28 |
0.27 |
0.26 |
0.22 |
0.24 |
0.29 |
0.29 |
0.26 |
0.30 |
0.30 |
| G&A |
0.04 |
0.05 |
0.02 |
0.02 |
0.03 |
0.02 |
0.02 |
0.02 |
0.03 |
0.05 |
0.04 |
0.06 |
0.06 |
0.06 |
| Interest |
0.38 |
0.33 |
0.26 |
0.22 |
0.21 |
0.20 |
0.21 |
0.21 |
0.22 |
0.22 |
0.28 |
0.40 |
0.36 |
0.36 |
| Cash cost
pre-royalty |
0.95 |
0.95 |
0.86 |
0.79 |
0.93 |
0.88 |
0.87 |
0.86 |
0.99 |
1.03 |
1.05 |
1.27 |
1.27 |
1.24 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cash Costs8 |
1.24 |
1.21 |
1.22 |
1.32 |
1.53 |
1.83 |
1.57 |
1.58 |
1.52 |
1.21 |
1.34 |
1.57 |
1.51 |
1.50 |
|
Cash Netback9 |
2.46 |
1.71 |
2.11 |
3.10 |
3.72 |
3.65 |
3.44 |
4.16 |
3.58 |
2.86 |
2.98 |
3.26 |
3.41 |
2.47 |
|
Operating Margin |
67% |
59% |
63% |
70% |
71% |
67% |
69% |
72% |
71% |
70% |
69% |
67% |
69% |
62% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Revenue includes other income, net third party sales
and realized gains on foreign exchange.
Depletion, depreciation, and amortization
charges of $1.38/Mcfe, along with provisions for current tax,
deferred tax and stock-based compensation payments resulted in
earnings of $0.77/Mcfe, or a 19% profit margin. Dividends to
shareholders totaled $0.96/Mcfe.
Hedging and Marketing
The Company has been active in hedging future
production with financial and physical fixed price contracts to
protect a portion of its future revenue from commodity price and
foreign exchange volatility. The following table summarizes Peyto's
hedge position for the second half of 2024, calendar 2025, and
calendar 2026.
|
|
Q3 2024 |
Q4 2024 |
2025 |
2026 |
|
Natural Gas |
|
|
|
|
|
Volume (MMcf/d) |
462 |
436 |
455 |
260 |
|
Average Fixed Price ($/Mcf) |
3.56 |
4.12 |
4.11 |
4.07 |
|
WTI Swaps |
|
|
|
|
|
Volume (bbls/d) |
4,500 |
3,900 |
1,418 |
- |
|
Average Fixed Price ($/bbl) |
102.90 |
101.87 |
99.53 |
- |
|
WTI Collars |
|
|
|
|
|
Volume (bbls/d) |
500 |
500 |
497 |
- |
|
Put–Call ($/bbl) |
85.00–95.00 |
90.00–104.50 |
88.33–104.29 |
- |
|
Propane |
|
|
|
|
|
Volume (bbls/d) |
500 |
500 |
123 |
- |
|
Average Fixed Price (US$/bbl) |
33.86 |
33.86 |
33.86 |
- |
|
USD FX Contracts |
|
|
|
|
|
Amount sold (USD 000s) |
81,000 |
62,000 |
245,000 |
91,500 |
|
Rate (CAD/USD) |
1.3484 |
1.3421 |
1.3509 |
1.3546 |
| |
|
|
|
|
The Company's fixed price contracts combined
with its diversification to the Cascade power plant and other
premium market hubs in North America allow for revenue security and
support continued shareholder returns through dividends and debt
reduction. Details of Peyto’s ongoing marketing and
diversification efforts are available on Peyto’s website at
https://www.peyto.com/Marketing.aspx
Activity Update
Peyto continues to operate four drilling rigs
across all core areas with 8 wells (8 net) drilled, 4 wells (3.8
net) completed, and 8 wells (6.5 net) brought on production since
the start of the third quarter. While spot gas prices remain low,
Peyto plans to continue to build productive capability while
maximizing operational efficiency. For example, additional wells
have been added to drilling pads to increase cost efficiencies
despite delaying initial production timing. Additionally,
several new wells have been brought on at restricted rates to
minimize low natural gas price exposure. The Company will also use
the opportunity to test the capability of gathering systems to
identify optimization projects deemed necessary to coincide with
future improved prices. This may include incremental compression,
additional pipelines, and or wellsite optimizations for improved
production rates later in the year.
__________________________________________________________
8 Total Cash costs is a non-GAAP financial ratio. See "non-GAAP
and Other Financial Measures" in this news release.9 Cash netback
is a non-GAAP financial ratio. See "non-GAAP and Other Financial
Measures" in this news release and in the Q2 2024 MD&A.
In early July, Peyto began the orderly shutdown
of the hydrogen sulphide, ("sour gas") processing and sulphur
recovery units at the Edson gas plant. This initiative, initially
planned for later this year, was accelerated due to low summer
natural gas prices. The higher operating cost nature and dependency
on third-party volumes to run the sour gas units was a major factor
in the decision. The shutdown of this portion of the plant is a key
part of Peyto's plan to simplify operations to further reduce
operating costs in 2024 and also serves to increase reliability,
lower emissions, and improve safety risks. The removal of sour
inlet gas also serves to free up the 100% owned, 180 km large
diameter Central Foothills Gas Gathering System, that runs
northwest of the plant, and will allow for greater sweet gas
interconnectivity of Peyto's approximately 1 BCF/d of total owned
processing complex in the Greater Sundance area.
The Edson gas plant will undergo the second and
final phase of the major 2024 turnaround for upgrades and
maintenance in September, focused on the sweet gas processing
units. Efforts will be made to re-direct gas volumes to other
operated gas plants during the turnaround in the area to minimize
production impacts and is timed when gas prices are projected to
remain lower.
Since the start of the third quarter, Peyto has
been consistently supplying natural gas to the Cascade
combined-cycle power plant, for the purposes of testing and
commissioning, through the directly connected pipeline built from
the Company's operated Swanson gas plant. Peyto's 15 year, 60,000
GJ/d supply contract is expected to commence on or before September
1, 2024.
Extreme heat in Alberta during July has caused
some of the Company's natural gas compressors to run less
efficiently, reducing throughput, which has resulted in
approximately 2,000 boe/d to be deferred during the month. The
recent return to normal seasonal weather has alleviated these
issues and allowed operating conditions to return to normal.
Outlook
Peyto expects weaker spot natural gas prices
will continue to prevail during the summer across North America as
storage inventories remain elevated and supply and demand remain
imbalanced. Natural gas future markets have softened recently but
the Company remains well protected with large portions of future
natural gas volumes hedged at prices near $4/Mcf.
The Company remains on track to execute a 2024
capital program targeting the lower end of Peyto's guidance range
between $450 to $500 million but is poised to respond as market
conditions improve. In the meantime, Peyto will continue to drill
and complete wells but will manage production at current levels and
build productive capability in anticipation of a higher winter gas
price market. The Company's low-cost operations and disciplined
hedging program secure cash flows to support future dividends and
continued strengthening of the balance sheet over the balance of
2024 and beyond.
The significant construction of new liquefied
natural gas facilities with an additional 12 BCF/d of capacity
coming online in the next few years in Canada and the USA, along
with the prospects of future natural gas fired power demand to meet
expanding data centre and artificial intelligence requirements are
encouraging for natural gas producers and their
investors.
Conference Call and Webcast
A conference call will be held with senior
management of Peyto to answer questions with respect to the
Company’s Q2 2024 results on Wednesday, August 14, 2024, at 9:00
a.m. Mountain Time (MT), or 11:00 a.m. Eastern Time (ET).
Access to the webcast can be found at:
https://edge.media-server.com/mmc/p/mqjc4gd6.
To participate in the call, please register for the event at:
https://register.vevent.com/register/BId85d42c533b444bbacbd79c521f67842.
Participants will be issued a dial in number and PIN to join the
conference call and ask questions. Alternatively, questions can be
submitted prior to the call at info@peyto.com. The conference call
will be available on the Peyto Exploration & Development
website at www.peyto.com.
Management’s Discussion and Analysis
A copy of the second quarter report to
shareholders, including the MD&A, unaudited consolidated
financial statements and related notes, is available at
http://www.peyto.com/Files/Financials/2024/Q22024FS.pdf and at
http://www.peyto.com/Files/Financials/2024/Q22024MDA.pdf and will
be filed at SEDAR+, www.sedarplus.com at a later date.
Jean-Paul
Lachance
President & Chief Executive OfficerPresident and Chief
Executive OfficerPhone: (403) 261-6081Fax:
(403) 451-4100info@peyto.com
August 13, 2024
Cautionary Statements
Forward-Looking Statements
This news release contains certain
forward-looking statements or information ("forward-looking
statements") as defined by applicable securities laws that involve
substantial known and unknown risks and uncertainties, many of
which are beyond Peyto's control. These statements relate to future
events or the Company's future performance. All statements other
than statements of historical fact may be forward-looking
statements. The use of any of the words "plan", "expect",
"prospective", "project", "intend", "believe", "should",
"anticipate", "estimate", or other similar words or statements that
certain events "may" or "will" occur are intended to identify
forward-looking statements. The projections, estimates and beliefs
contained in such forward-looking statements are based on
management's estimates, opinions, and assumptions at the time the
statements were made, including assumptions relating to:
macro-economic conditions, including public health concerns and
other geopolitical risks, the condition of the global economy and,
specifically, the condition of the crude oil and natural gas
industry, and the ongoing significant volatility in world markets;
other industry conditions; changes in laws and regulations
including, without limitation, the adoption of new environmental
laws and regulations and changes in how they are interpreted and
enforced; increased competition; the availability of qualified
operating or management personnel; fluctuations in other commodity
prices, foreign exchange or interest rates; stock market volatility
and fluctuations in market valuations of companies with respect to
announced transactions and the final valuations thereof; results of
exploration and testing activities; and the ability to obtain
required approvals and extensions from regulatory authorities.
Management of the Company believes the expectations reflected in
those forward-looking statements are reasonable, but no assurances
can be given that any of the events anticipated by the
forward-looking statements will transpire or occur, or if any of
them do so, what benefits that Peyto will derive from them. As
such, undue reliance should not be placed on forward-looking
statements. Forward-looking statements contained herein include,
but are not limited to, statements regarding: management's
assessment of Peyto's future plans and operations, including the
2024 capital expenditure program; the commencement date of the
Cascade Power Plant; the sustainability of the Company's dividend;
expectations regarding cost reductions with continued optimization
and increased utilization of the acquired gas processing plants;
the Company's target of at least a 10% reduction in per unit
operating costs by the end of 2024; Peyto's outlook on North
American natural gas prices and supply/demand fundamentals; and the
Company's overall strategy and focus.
The forward-looking statements contained herein
are subject to numerous known and unknown risks and uncertainties
that may cause Peyto's actual financial results, performance or
achievement in future periods to differ materially from those
expressed in, or implied by, these forward-looking statements,
including but not limited to, risks associated with: continued
changes and volatility in general global economic conditions
including, without limitations, the economic conditions in North
America and public health concerns; continued fluctuations and
volatility in commodity prices, foreign exchange or interest rates;
continued stock market volatility; imprecision of reserves
estimates; competition from other industry participants; failure to
secure required equipment; increased competition; the lack of
availability of qualified operating or management personnel;
environmental risks; changes in laws and regulations including,
without limitation, the adoption of new environmental and tax laws
and regulations and changes in how they are interpreted and
enforced; the results of exploration and development drilling and
related activities; and the ability to access sufficient capital
from internal and external sources. In addition, to the
extent that any forward-looking statements presented herein
constitutes future-oriented financial information or financial
outlook, as defined by applicable securities legislation, such
information has been approved by management of Peyto and has been
presented to provide management's expectations used for budgeting
and planning purposes and for providing clarity with respect to
Peyto's strategic direction based on the assumptions presented
herein and readers are cautioned that this information may not be
appropriate for any other purpose. Readers are encouraged to
review the material risks discussed in Peyto's latest annual
information form under the heading "Risk Factors" and in Peyto's
annual management's discussion and analysis under the heading "Risk
Management".
The Company cautions that the foregoing list of
assumptions, risks and uncertainties is not exhaustive. Readers are
cautioned that the assumptions used in the preparation of such
information, although considered reasonable at the time of
preparation, may prove to be imprecise and, as such, undue reliance
should not be placed on forward-looking statements. Peyto's actual
results, performance or achievement could differ materially from
those expressed in, or implied by, these forward-looking statements
and, accordingly, no assurance can be given that any of the events
anticipated by the forward-looking statements will transpire or
occur, or if any of them do so, what benefits Peyto will derive
there from. The forward-looking statements, including any
future-oriented financial information or financial outlook,
contained in this news release speak only as of the date hereof and
Peyto does not assume any obligation to publicly update or revise
them to reflect new information, future events or circumstances or
otherwise, except as may be required pursuant to applicable
securities laws.
Barrels of Oil Equivalent
To provide a single unit of production for
analytical purposes, natural gas production and reserves volumes
are converted mathematically to equivalent barrels of oil (BOE).
Peyto uses the industry-accepted standard conversion of six
thousand cubic feet of natural gas to one barrel of oil (6 Mcf = 1
bbl). The 6:1 BOE ratio is based on an energy equivalency
conversion method primarily applicable at the burner tip. It does
not represent a value equivalency at the wellhead and is not based
on current prices. While the BOE ratio is useful for comparative
measures and observing trends, it does not accurately reflect
individual product values and might be misleading, particularly if
used in isolation. As well, given that the value ratio, based on
the current price of crude oil to natural gas, is significantly
different from the 6:1 energy equivalency ratio, using a 6:1
conversion ratio may be misleading as an indication of value.
Thousand Cubic Feet Equivalent
(Mcfe)
Natural gas volumes recorded in thousand cubic
feet (mcf) are converted to barrels of oil equivalent (boe) using
the ratio of six (6) thousand cubic feet to one (1) barrel of oil
(bbl). Natural gas liquids and oil volumes in barrel of oil
(bbl) are converted to thousand cubic feet equivalent (Mcfe) using
a ratio of one (1) barrel of oil to six (6) thousand cubic
feet. This could be misleading, particularly if used in
isolation as it is based on an energy equivalency conversion method
primarily applied at the burner tip and does not represent a value
equivalency at the wellhead.
Non-GAAP and Other Financial
Measures
Throughout this press 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. The non-GAAP and other financial measures should
not be considered to be more meaningful than GAAP measures which
are determined in accordance with IFRS, such as net income (loss),
cash flow from operating activities, and cash flow used in
investing activities, as indicators of Peyto’s performance.
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, decommissioning expenditure, provision for future
performance-based compensation and transaction costs.
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.
| |
Three Months Ended June 30 |
Six Months Ended June 30 |
|
($000) |
2024 |
2023 |
2024 |
2023 |
| Cash flows from
operating activities |
141,934 |
148,608 |
338,765 |
332,214 |
| Change in non-cash
working capital |
10,010 |
(6,254) |
13,599 |
(10,043) |
| Decommissioning
expenditures |
391 |
- |
4,597 |
- |
|
Performance based compensation |
2,500 |
- |
2,500 |
- |
| Funds
from operations |
154,835 |
142,354 |
359,461 |
322,171 |
| |
|
|
|
|
Free Funds FlowPeyto uses "free
funds flow" as an indicator of the efficiency and liquidity of
Peyto’s business, measuring its funds after capital investment
available to manage debt levels, pay dividends, and return capital
to shareholders through activities such as share repurchases. In
reporting for prior periods, decommissioning expenditures incurred
were excluded from the Company's free funds flow non-GAAP financial
measure as they were insignificant. Peyto has changed the reporting
of free funds flow to no longer exclude decommissioning
expenditures in the non-GAAP financial measure as the Company
expects an increase in abandonment and reclamation projects going
forward associated with the Repsol Assets. Peyto calculates
free funds flow as cash flows from operating activities before
changes in non-cash operating working capital less total capital
expenditures, allowing Management to monitor its free funds flow to
inform its capital allocation decisions. The most directly
comparable GAAP measure to free funds flow is cash from operating
activities. The following table details the calculation of free
funds flow and the reconciliation from cash flow from operating
activities to free funds flow.
|
|
Three Months Ended June 30 |
Six Months Ended June 30 |
|
($000) |
2024 |
2023 |
2024 |
2023 |
| Cash flows from
operating activities |
141,934 |
148,608 |
338,765 |
332,214 |
| Change in non-cash
working capital |
10,010 |
(6,254) |
13,599 |
(10,043) |
| Performance based
compensation |
2,500 |
- |
2,500 |
- |
| Total
capital expenditures |
(100,451) |
(82,319) |
(214,214) |
(204,121) |
| Free
funds flow |
53,993 |
60,035 |
140,650 |
118,050 |
| |
|
|
|
|
Total Capital Expenditures
Peyto uses the term "total 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. The
following table details the calculation of cash flow used in
investing activities to total capital expenditures.
|
|
Three Months Ended June 30 |
Six Months Ended June 30 |
|
($000) |
2024 |
2023 |
2024 |
2023 |
| Cash flows used in
investing activities |
80,901 |
102,071 |
178,535 |
228,321 |
| Change in prepaid
capital |
5,512 |
3,549 |
857 |
3,387 |
| Change
in non-cash working capital relating to investing activities |
14,038 |
(23,301) |
34,822 |
(27,587) |
| Total
capital expenditures |
100,451 |
82,319 |
214,214 |
204,121 |
| |
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, current portion of lease obligations and current
portion of decommissioning provision. 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.
|
($000) |
As atJune 30, 2024 |
As atDecember 31, 2023 |
As atJune 30, 2023 |
|
Long-term debt |
1,214,633 |
1,340,881 |
747,960 |
|
Current assets |
(396,588) |
(490,936) |
(225,642) |
|
Current liabilities |
345,875 |
279,903 |
235,103 |
|
Financial derivative instruments - current |
180,769 |
238,865 |
114,938 |
|
Current portion of lease obligation |
(1,334) |
(1,310) |
(1,288) |
|
Decommissioning provision - current |
(5,778) |
(4,626) |
(1,521) |
|
Net debt |
1,337,577 |
1,362,777 |
869,550 |
| |
|
|
|
Third-Party Sales Net of
PurchasesPeyto uses the term "third-party sales net of
purchases" to evaluate the profitability of natural gas and NGLs
purchased from third parties. Third-party sales net of purchases is
calculated as sales of natural gas and NGLs from third parties less
natural gas and NGLs purchased from third parties.
|
|
Three Months Ended June 30 |
Six Months Ended June 30 |
|
($000) |
2024 |
2023 |
2024 |
2023 |
| Sales of natural
gas and NGLs from third parties |
8,404 |
- |
34,255 |
- |
| Natural gas and
NGLs purchased from third parties |
(7,854) |
- |
(34,091) |
- |
|
Third-party sales net of purchases |
550 |
- |
164 |
- |
| |
|
|
|
|
Third party sales net of purchases per
Mcfe"Third party sales net of purchases per Mcfe" is
comprised of sales of natural gas from third parties less natural
gas purchased from third parties, as determined in accordance with
IFRS, divided by the Company's total production.
Non-GAAP Financial Ratios
Funds from Operations per
SharePeyto presents funds from operations per share by
dividing funds from operations by the Company's diluted or basic
weighted average common shares outstanding. "Funds from operations"
is a non-GAAP financial measure. Management believes that funds
from operations per share provides investors an indicator of funds
generated from the business that could be allocated to each
shareholder's equity position.
Netback per MCFE and
BOE"Netback" is a non-GAAP measure that represents the
profit margin associated with the production and sale of petroleum
and natural gas. Peyto computes "field netback per Mcfe" as
commodity sales from production, plus third party sales net of
purchases, if any, plus other income, less royalties, operating,
and transportation expense divided by production. "Cash
netback" is calculated as "field netback" less interest, less
general and administration expense and plus or minus realized gain
on foreign exchange, divided by production. Netbacks are
before tax, per unit of production measures used to assess Peyto’s
performance and efficiency. The primary factors that produce
Peyto’s strong netbacks and high margins are a low-cost structure
and the high heat content of its natural gas that results in higher
commodity prices.
|
|
Three Months Ended June 30 |
Six Months Ended June 30 |
|
($/Mcfe) |
2024 |
2023 |
2024 |
2023 |
| Gross Sale Price |
2.93 |
3.18 |
3.22 |
4.73 |
|
Realized hedging gain (loss) |
1.02 |
0.89 |
1.20 |
(0.18) |
| Net Sale Price |
3.95 |
4.07 |
4.42 |
4.55 |
| Third party sales net of
purchases |
0.01 |
- |
- |
- |
| Other income |
0.02 |
0.02 |
0.03 |
0.06 |
| Royalties |
(0.26) |
(0.18) |
(0.25) |
(0.36) |
| Operating costs |
(0.52) |
(0.47) |
(0.53) |
(0.49) |
|
Transportation |
(0.30) |
(0.29) |
(0.30) |
(0.27) |
| Field netback(1) |
2.90 |
3.15 |
3.37 |
3.49 |
| Net general and
administrative |
(0.06) |
(0.05) |
(0.06) |
(0.04) |
|
Interest on long-term debt |
(0.36) |
(0.22) |
(0.36) |
(0.22) |
|
Realized loss on foreign exchange |
(0.01) |
(0.02) |
- |
(0.01) |
| Cash netback(1)($/Mcfe) |
2.47 |
2.86 |
2.95 |
3.22 |
| Cash
netback(1)($/boe) |
14.84 |
17.13 |
17.70 |
19.34 |
| |
|
|
|
|
Total Payout Ratio"Total payout
ratio" is a non-GAAP measure which is calculated as the sum of
dividends declared plus total capital expenditures and
decommissioning expenditures, divided by funds from
operations. In reporting for prior periods, decommissioning
expenditures incurred were excluded from the Company's total payout
ratio as they were insignificant. Peyto has changed the reporting
of total payout ratio to no longer exclude decommissioning
expenditures in the non-GAAP financial ratio as the Company expects
an increase in abandonment and reclamation projects going forward
associated with the Repsol Assets. This ratio represents the
percentage of the capital expenditures, decommissioning
expenditures and dividends that is funded by cashflow.
Management uses this measure, among others, to assess the
sustainability of Peyto’s dividend and capital program.
|
|
Three Months Ended June 30 |
Six Months Ended June 30 |
|
($000, except total payout ratio) |
2024 |
2023 |
2024 |
2023 |
| Total dividends declared |
64,365 |
57,715 |
128,523 |
115,393 |
| Total capital
expenditures |
100,451 |
82,319 |
214,214 |
204,121 |
| Decommissioning
expenditures |
391 |
- |
4,597 |
- |
|
Total payout |
165,207 |
140,034 |
347,334 |
319,514 |
| Funds
from operations |
154,835 |
142,354 |
359,461 |
322,171 |
| Total
payout ratio (%) |
107% |
98% |
97% |
99% |
| |
|
|
|
|
Operating Margin Operating
Margin is a non-GAAP financial ratio defined as funds from
operations, before current tax, divided by revenue before royalties
but including realized hedging gains/losses and third-party sales
net of purchases.
Profit Margin Profit Margin is
a non-GAAP financial ratio defined as net earnings divided by
revenue before royalties but including realized hedging
gains/losses and third-party sales net of purchases.
Cash CostsCash costs is a
non-GAAP financial ratio defined as the sum of royalties, operating
expenses, transportation expenses, G&A and interest, on a per
Mcfe basis. Peyto uses total cash costs to assess operating
margin and profit margin.
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