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Pengrowth Revises Guidance Down, Spending More at Lindbergh

Share Print Bookmark    |    Thursday,May 07,2015

Pengrowth Energy Corporation has announced its financial and operating results for the three months ended March 31, 2015.

Highlights:

• Lindbergh production continued to ramp-up averaging approximately 10,500 barrels (bbl) per day for the five day period ending May 6, 2015. This includes production volumes from the former two well pair pilot project of approximately 1,500 bbl per day.
• Achieved first quarter average production of 69,334 boe per day. This excludes Lindbergh commercial production as commerciality had not been declared until April 1, 2015.
• Realized commodity risk management gains of $85.7 million during the quarter. As at March 31, 2015, the value of Pengrowth's unrealized foreign exchange, power and commodity price hedges were $357.5 million.
• Completed the renewal and extension of Pengrowth's unsecured, revolving $1.0 billion credit facility to 2019.

2015 Full-year average production

• Pengrowth is updating its 2015 full-year guidance to account for the timing of Lindbergh commerciality, the shut-in of certain production and expected disposition volumes. The original full-year guidance reflected commerciality at the initial phase of Lindbergh as of January 1, 2015. With commercial declaration being made on April 1, 2015, certain guidance items are being revised.
• Production volumes from the Lindbergh commercial project are excluded from the first quarter results as commerciality was not declared until April 1, 2015. In the second quarter and beyond, all Lindbergh production, and related revenue and expenses from the project will be included in the Company's financial and operating results, which up to April 1, 2015, had been capitalized. In addition to, and given the current weakness in oil and natural gas prices, Pengrowth has shut-in approximately 950 boe per day of production from certain fields that have been deemed uneconomic in the current commodity price environment. Subsequent to quarter end, Pengrowth signed purchase and sale agreements for minor non-core gas property dispositions producing approximately 1,000 boe per day. The shut-in and disposition volumes are not expected to have a material impact on 2015 funds flow from operations, but contribute to a reduction in Pengrowth's full-year 2015 production forecast.
• Given these events and with Lindbergh commercial production excluded from the first quarter results, Pengrowth now expects full-year average daily production to be within a range of 70,000 to 72,000 boe per day, down from the previous guidance of 73,000 to 75,000 boe per day.
• Full-year 2015 capital expenditures are expected to be between $220 and $240 million to reflect the impact of all expenses net of revenue from the initial commercial phase of Lindbergh being capitalized during the first three months of 2015, an anticipated further investment on the Husky sales pipeline and incremental spending on engineering and development for the subsequent development phase of Lindbergh.
• Pengrowth is also revising royalty rate guidance down slightly as the impact of lower commodity pricing on royalties is expected to continue through the remainder of 2015. Full-year operating costs per boe are expected to be within original guidance due to lower first quarter operating expenses. Cash General and Administrative (G&A) expenses are expected to be $3.50 to $3.60 per boe reflecting the impact of the revised production guidance.
• For full-year 2015, Pengrowth does not expect a material change to funds flow resulting from the revised production guidance. The shut-in and disposition production volumes were low netback volumes and their absence from corporate figures is expected to result in cost savings and higher overall netbacks. Despite the revised production guidance, Pengrowth expects funds flow from operations to exceed its 2015 capital program and dividends. Anticipated excess funds flow from operations is expected to be applied to debt repayment in 2015.

Production

First quarter 2015 average daily production of 69,334 boe per day, decreased three percent compared to fourth quarter 2014 average daily production of 71,802 boe per day. The decrease is mainly due to reduced capital activity in the first quarter of 2015 and shut-in of uneconomic production volumes, partly offset by the continued strength in production performance from the two Groundbirch wells completed in the fourth quarter of 2014. These two wells continue to produce at over 5.5 MMcf per day each.

Adding back the Lindbergh pre-commerciality volumes and shut-in uneconomic production volumes, Pengrowth's first quarter production would have been approximately 71,400 boe per day and represents only a nominal variance from fourth quarter 2014 average daily production of 71,802 boe per day.

Capital Expenditures

Pengrowth has taken a conservative stance for its development plans in 2015 and has constrained its capital budget.

• The Company had originally budgeted $200 million of capital in 2015 of which, nearly 50 percent was spent in the first quarter. This is expected to increase to $220 to $240 million for the full year. The Company completed residual drilling from 2014 and curtailed its conventional winter drilling program early in January.
  
• Pengrowth has elected to defer any future capital expenditures on development activities on its conventional assets until a sustained recovery in commodity prices, coupled with reduced costs structures, is evident.
• With the strong initial production results from the first commercial phase of Lindbergh, Pengrowth is increasing Lindbergh capital by $20 million for increased costs and project specification changes associated with the Husky sales line and incremental capital to finalize engineering design work on the next development phase of Lindbergh.

Lindbergh

Lindbergh, Pengrowth's 100 percent owned and operated thermal project, is located in the Cold Lake area of eastern Alberta. The project offers Pengrowth the potential to ultimately develop annual bitumen production of 40,000 to 50,000 bbl per day, starting with the initial 12,500 bbl per day commercial phase coming on-stream in 2015. Lindbergh's robust economics make it a strong, viable project even in the current low commodity price environment, with positive netbacks at prices as low as US $30 WTI.

In the first quarter, $49.2 million of capital was spent at Lindbergh, which included $9.2 million of expenses net of revenue relating to pre-commercial operations at the initial phase of Lindbergh. The remaining $40 million was invested on the sales pipeline connection to Husky, completion of initial phase construction activities and central processing facility optimization.

Progress continues on the Lindbergh commercial project, where steaming operations have been ongoing since mid-December 2014. Installation of the downhole electric submersible pumps in each of the 20 producing wells commenced on March 9, 2015, with 14 pumps installed to date. It is anticipated that the pump installation process will continue through May, allowing for all of the 20 well pairs to be converted to full SAGD (steam assisted gravity drainage) at that time. Production rates from the first commercial phase of Lindbergh continue to increase as wells transition from steam circulation to full SAGD. Average production rates at Lindbergh for the five day period ending May 6, 2015 were approximately 10,500 bbl per day including 1,500 bbl per day from the former pilot facility. As pumps are installed, Pengrowth anticipates a continued ramp-up of production from the project through the rest of 2015, with rates expected to reach 16,000 bbl per day by the end of the year.

Pengrowth will start including commercial volumes from Lindbergh as part of its reported financial and operational results as of April 1, 2015. Included in these volumes will be the pilot volumes, as the pilot facility became part of the main commercial project in early April and will no longer be reported separately.

Conventional Oil and Gas

Pengrowth's significant conventional oil and gas portfolio includes a large, contiguous land base in the Greater Olds/Garrington area, encompassing over 500 gross (250 net) sections of land, with opportunities in the Cardium, Viking and Mannville sands as well as in the Mississippian carbonate section. The existing, extensive gathering and processing infrastructure provides an efficient platform for continued development in this area. Pengrowth also controls large light oil accumulations in the Swan Hills area of northern Alberta with low production decline rates and strong cash flow.

Development capital of $37.8 million was spent in the first quarter on the drilling of seven (4.6 net) wells in the greater Olds/Garrington area targeting the Cardium, Elkton, and Ellerslie formations. Two (2.0 net) wells were drilled in Jenner targeting the Glauconite formation and one (0.25 net) well drilled in Sawn Lake targeting the Slave Point formation. Also during the first quarter nine (7.1 net) wells were completed and brought on production. Initial production rates indicate that all wells are meeting or exceeding expectations.

Financial Flexibility

Pengrowth continues to benefit from its extensive commodity risk management program, generating strong funds flow in spite of the current low commodity price environment. Pengrowth realized $85.7 million in commodity risk management gains through the first three months of 2015. The unrealized market value of the remaining commodity hedges in place at March 31, 2015 was $354.3 million.

For the remainder of 2015, Pengrowth has approximately 26,000 bbl per day of expected crude oil production hedged at Cdn $93.87 per bbl and approximately 20,000 bbl per day of 2016 expected crude oil production hedged at Cdn $89.95 per bbl. For natural gas, Pengrowth has approximately 102 million cubic feet (MMcf) per day of 2015 expected natural gas production hedged at Cdn $3.72 per Mcf and approximately 86 MMcf per day of 2016 expected natural gas production hedged at Cdn $3.44 per Mcf.