Quarterly / Earnings Reports | Second Quarter (2Q) Update

Painted Pony Talks Q2 2019; Reduces 2019 Capex 15%

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   |    Wednesday,July 31,2019

Painted Pony Energy Ltd. announces an operations update, an updated 2019 capital budget, executive changes, and second quarter 2019 financial and operating results.

2019 Capex Reduced - Cites Gas Prices

Consistent with Painted Pony's focus on capital discipline, the Corporation has reduced planned capital spending levels for 2019 to ensure Painted Pony maintains its current financial flexibility in the current low commodity price environment.  The low natural gas price environment combined with Painted Pony's commitment to 2019 capital spending within 2019 adjusted funds flow from operations prompted this adjustment. Painted Pony has reduced the 2019 expected capital spending range from $95 to $110 million to $80 to $95 million, a reduction of approximately $15 million or 15% from the midpoint of previous 2019 spending guidance to the midpoint of the updated 2019 spending guidance.

As a result of reduced capital spending and shut in volumes to-date combined with anticipated shut ins during the second half of 2019, daily production volumes for 2019 are now expected to average 294 MMcfe/d (49,000 boe/d) to 306 MMcfe/d (51,000 boe/d) compared to previous 2019 average daily production guidance of between 324 MMcfe/d (54,000 boe/d) and 336 MMcfe/d (56,000 boe/d).  This updated guidance does not include any outages relating to voluntary, pricing related shut ins or unplanned third party facility or pipeline disruptions during the second half of 2019. This change in 2019 production guidance represents a reduction of 9%, using the midpoint of updated 2019 production guidance  compared to the midpoint of the previous 2019 production guidance.

Q2 Highlights:

• Invested $52 million of capital during the first half of 2019 which was $4 million less than first half 2019 adjusted funds flow from operations of $56 million;
  
  
• Delivered over 800 bbls/d of propane during the second quarter of 2019 through the Ridley Island Propane Export Terminal to markets overseas, achieving a 275% premium over the domestic market price;
  
  
• Returned natural gas liquids yield to 9.2% of total production volumes during the second quarter of 2019 from 8.0% during the first quarter of 2019, the result of a resolution of average daily production volume liquids allocation procedures at the Townsend facility;
  
  
• Realized natural gas prices represented a 61% premium over the AECO daily (5A) price during the second quarter of 2019, and a premium of 37% over the AECO daily (5A) price during the first six months of 2019; and
  
  
• Estimated July production, based on field estimates, of 317 MMcfe/d (52,350 boe/d) net of 14 MMcfe/d (2,250 boe/d) of reduced production caused by voluntary, pricing related shut ins and third party pipeline constraints.

Patrick Ward, President and CEO of Painted Pony, in commenting on these highlights said, "As expected, due to ongoing pipeline maintenance in western Canada, the second quarter of this year has delivered low natural gas prices.  Capital discipline remains a key focus for us as we continue to limit net capital investment to adjusted funds flow from operations. Increasing the average lateral length of some of our wells from our standard 1,850 meters to approximately 2,750 meters has resulted in capital efficiencies improving by approximately 15%. Discussions continue with large industrial customers for the delivery of natural gas on long term contracts. We are also contemplating asset dispositions while continuing to build a portfolio of physical and financial marketing contracts to maximize Painted Pony's natural gas price realizations. Despite recent natural gas pricing weakness during the second quarter of 2019, the forward price for natural gas in the coming fall and winter has started to improve. We believe that conditions could be right for natural gas pricing in western Canada to begin improving late in 2019 and into 2020."

Ops Update

Painted Pony's July production volumes, based on field estimates, averaged approximately 314 MMcfe/d (52,350 boe/d).  This field estimate is net of 14 MMcfe/d (2,250 boe/d) of shut in production volumes due to pricing and third party infrastructure related issues. Two wells are awaiting equipping and tie-in before they are brought on as production.

AltaGas has scheduled down time of approximately five days at the Townsend facility during August 2019 which is expected to impact third quarter 2019 average daily production volumes by approximately 12 MMcfe/d (2,000 boe/d). Painted Pony will continue to regulate discretionary production volumes in response to low natural gas prices by shutting in production.

Painted Pony continues to pursue the merits of the 'shake and bake' methodology, a process whereby a delay is imposed before initiating the flow back and testing process on new wells. In addition to lower capital costs associated with reduced water flow back, the 30 and 90 day cumulative recoveries appear to exceed that of wells which commence immediate flow back.  Painted Pony will continue to monitor the longer term performance of these wells while optimizing the process for maximum capital efficiency.

As part of ongoing efforts to reduce greenhouse gas emissions while improving capital efficiencies, Painted Pony recently began using wellhead natural gas to assist in some completion operations. By substituting clean-burning, natural gas for a portion of the diesel fuel required to power completion operations, Painted Pony has reduced the average cost of completions by over $100,000 per well while maintaining well performance.

In addition to the 'shake and bake' of wells and the use of natural gas in completion operations, Painted Pony is also utilizing longer lateral technology to maximize capital efficiencies. Two wells in Daiber were drilled during the first half of 2019 with lateral sections of approximately 2,750 meters or 50% longer than Painted Pony's standard lateral well length of 1,850 meters. Total well capital costs combined with expected production volumes are anticipated to deliver a 15% improvement in capital efficiency. During the third quarter of 2019, Painted Pony is drilling a three well pad in Blair with lateral sections which are designed to be over 3,200 meters or 75% longer than Painted Pony's standard 1,850 meters.  These three longer wells are expected to replace five standard length wells that would otherwise be needed for the same volume recovery. The net effect of these longer laterals is expected to deliver total capital savings on this project of approximately $5 million.  Upon further testing and verification, Painted Pony expects to deploy this longer lateral design more broadly across the Corporation's asset base.

Q2 Summary

Production
During the second quarter of 2019, Painted Pony averaged  daily production volumes of 294 MMcfe/d (48,978 boe/d), a decrease of 19% compared to the second quarter of 2018 when production volumes averaged  361 MMcfe/d (60,116 boe/d). Low natural gas prices during the second quarter of 2019 resulted in pricing related, voluntary shut ins of approximately 32 MMcfe/d (5,300 boe/d), combined with third party infrastructure maintenance and expansion related shut ins of approximately 11 MMcfe/d (1,900 boe/d), making total shut in volumes for the second quarter approximately 43 MMcfe/d (7,200 boe/d).

Second quarter 2019 natural gas liquids volumes of 4,508 bbls/d were 9.2% of total average daily production volumes, which was an increase from first quarter 2019 natural gas liquids yield of 8.0% and was consistent with second quarter 2018 natural gas liquids yield of 9.2%.  As announced previously in Painted Pony's first quarter 2019 financial and operating results press release on May 1, 2019, the facility operator at the Townsend facility has amended the liquids allocation procedure which improved liquids production bringing Painted Pony's liquids allocations back to historical levels.

Adjusted Funds Flow from Operations
For the second quarter of 2019, adjusted funds flow from operations was $9 million ($0.06 per share basic) compared to adjusted funds flow from operations of $39 million ($0.24 per share basic) during the second quarter of 2018. Adjusted funds flow from operations for the first half of 2019 was $56 million ($0.35 per share basic) compared to $86 million ($0.53 per share basic) in the  first half of 2018.

The decrease in adjusted funds flow from operations for the second quarter of 2019 compared to the second quarter of 2018 is a result of lower production volumes, and a 13% decrease in realized natural gas prices (including realized gains on physical hedges).

Total operating expenses of $15 million during the second quarter of 2019 were approximately 12% lower than total operating expenses of $17 million during the second quarter of 2018.

Capital Expenditures
Capital spending for the first half of 2019 totaled $52 million and included drilling 8 (8.0 net) Montney natural gas wells and completing 8 (8.0 net) Montney natural gas wells.  First half capital spending of $52 million was approximately $4 million less than adjusted funds flow from operations generated during the first half of 2019 of $56 million, consistent with previous capital spending guidance of limiting capital spending to adjusted funds flow from operations.

Painted Pony invested $15 million of capital during the second quarter of 2019. This spending included drilling and completion costs of $9 million which included the spudding of a well and completion operations on 3 wells, associated facilities and infrastructure spending of $5 million, and other miscellaneous capital items totaling $1 million.

Pricing
During the second quarter of 2019 Painted Pony's realized commodity prices benefited from risk management contracts that delivered an $11 million realized gain ($0.43/Mcfe). Inclusive of this gain, Painted Pony's second quarter 2019 operating netback was $1.26/Mcfe, a decrease of 35% over the operating netback of $1.95/Mcfe during the second quarter of 2018.

Painted Pony currently has access to multiple sales hubs as part of a long term sales point diversification strategy, including the Dawn, Sumas and Nymex markets, to receive a premium over the AECO (5A) benchmark price. These markets continue to provide incremental operating netbacks to Painted Pony. This is evidenced by Painted Pony realizing an average natural gas sales price of $1.66/Mcf during the second quarter of 2019 representing a 61% premium over the AECO daily (5A) price of $1.03/Mcf.

Management Changes

Painted Pony is pleased to announce a key addition to the executive leadership team with the upcoming appointment of Mr. Mike Backus as Vice President, Operations and Development, effective September 1, 2019.

Mr. Backus is a professional engineer with over 22 years of multi-disciplinary experience in the energy industry both domestically and internationally.  A graduate of the University of Saskatchewan with a Bachelor of Science in Engineering (with distinction) and a Bachelor of Commerce (Accounting - with distinction), Mr. Backus most recently held the position of Vice President, Canadian Operations at CNOOC (formerly Nexen) and before that Vice President, Operations where he was responsible for CNOOC's UK North Sea operations portfolio.  Prior to these positions, Mr. Backus held the position of Corporate Treasurer as well as previous roles in corporate planning, investor relations, reservoir engineering and drilling operations.

Mr. Rick Kessy, Chief Operating Officer, has advised Painted Pony's Board of Directors and executive team that he will be leaving the Corporation, effective August 30, 2019. The Corporation and the Board of Directors thank Mr. Kessy for his contributions to Painted Pony and wish him all the best in his future endeavours.