Quarterly / Earnings Reports | Second Quarter (2Q) Update | Financial Results | Capital Markets | Drilling Activity

Perpetual Energy Second Quarter 2020 Results

Share Print Bookmark    |    Friday,July 31,2020

East Edson Transaction

On April 1, 2020, the Company sold a 50% working interest in its East Edson property in West Central Alberta to a third-party purchaser for consideration including a cash payment of $35 million and the carried interest funding of the drill, complete and tie-in costs for an eight-well drilling program (the “East Edson Transaction”). A minimum of two horizontal wells targeting development of the Wilrich formation are required to be drilled, completed and tied-in during the third quarter of 2020. The purchaser is required to complete the eight-well horizontal drilling program by April 1, 2022. The cash proceeds from the East Edson Transaction were used to repay bank debt. The eight-well development capital carry at East Edson is anticipated to restore gross production levels to more fully utilize the existing processing capacity, improve operating netbacks given the largely fixed operating cost base, and result in improved capital spending efficiency.

Second Quarter 2020 Highlights

• In response to the significant decline in global oil prices which began in early-March, all capital investment for the second quarter of 2020 was deferred, resulting in nominal exploration and development capital spending. Expenditures on decommissioning obligations were also suspended, enabled by the Alberta Energy Regulator’s (“AER”) cancellation of area-based closure expenditure requirements for 2020.
• Second quarter production averaged 3,662 boe/d, down 61% from 9,370 boe/d in the comparative period of 2019, due primarily to the temporary suspension of heavy oil production in response to low oil prices, and the sale of a 50% working interest in the East Edson property in West Central Alberta, effective April 1, 2020. Compared to the first quarter of 2020, production declined by 51% or 3,817 boe/d. The closing of the East Edson Transaction on April 1, 2020, combined with natural declines at East Edson of 6%, reduced West Central production by 3,062 boe/d or 80% of the total production decline from the first quarter. The shut-in of Eastern Alberta heavy oil production due to low oil prices contributed the remaining 755 boe/d decrease. As Western Canadian Select prices improved materially from their April lows, the Company began reactivating certain low-cost heavy oil production in mid-May 2020 and has continued to ramp up production as oil prices recover. By mid-July, Perpetual had restarted all heavy oil production with the exception of approximately 250 bbl/d of higher cost production in certain pools at Mannville.
• Total production and operating expenses were down 5% on a unit-of-production basis to $5.50/boe for the second quarter of 2020, compared to $5.76/boe for the comparable period of 2019. On an absolute dollar basis, production and operating costs were down by $3.1 million (63%) due to the temporary shut-in of heavy oil production, the East Edson Transaction and cost mitigation initiatives.

• Realized revenue was $13.15/boe in the second quarter of 2020, 38% lower than the comparative period of 2019 ($21.26/boe). The decrease was due largely to the 88% decrease in Perpetual’s realized natural gas price to $0.28/Mcf driven by hedging losses, combined with a 66% decline in realized NGL prices.
  • Perpetual’s realized natural gas price, including derivatives, decreased 88% to $0.28/Mcf for the second quarter of 2020 from $2.25/Mcf in the comparative period of 2019, and represented only 14% of the AECO Daily Index price compared to 218% in the prior year period. Lower realized natural gas prices were the result of AECO-NYMEX basis hedging losses which have occurred as NYMEX prices weakened relative to AECO prices during the second quarter. During the second quarter of 2020, the remaining AECO-NYMEX basis hedge positions were closed out by entering into offsetting hedge arrangements for the remainder of 2020 ($5.1 million unrealized loss) and 2021 ($3.4 million unrealized loss).
  • Perpetual’s realized oil price of $67.56/bbl was 35% higher than the second quarter of 2019, and included realized hedging gains on crude oil derivative contracts of $2.3 million or $44.32/bbl (Q2 2019 – realized hedging losses of $1.2 million or $11.30/bbl) on second quarter production. Excluding realized hedging gains and losses, Perpetual’s realized oil price was $23.24/bbl in the second quarter of 2020, down 62% from $61.31/bbl in the prior year period. During the second quarter of 2020, WTI and WCS hedge positions for the remainder of 2020 were substantially offset by similar arrangements, resulting in a $6.5 million unrealized gain as at June 30, 2020. WTI-WCS differential hedges remain in place for the remainder of 2020 on an average of 567 bbl/d at a fixed differential of US$19.50/bbl.
  • Perpetual’s realized NGL price for the second quarter of 2020 was $17.35/bbl, down 66% from the second quarter of 2019, reflecting a decrease in all NGL component prices which moved lower in concert with lower WTI light oil prices. Realized prices in the second quarter of 2020 were also impacted by realized hedging losses of $1.15/bbl (Q2 2019 – realized losses of $0.15/bbl) on Perpetual’s 350 bbl/d basis differential hedge between WTI and Edmonton condensate pricing that expired on June 30, 2020.
• Cash costs were down 49% to $7.3 million (Q2 2019 – $14.4 million), but up 30% on a unit-of-production basis to $21.93/boe (Q2 2019 – $16.93/boe) due to the impact of the 61% decrease in production. Cash costs decreased by $7.1 million from the prior year period and $5.3 million from the first quarter of 2020 due to the temporary shut-in of heavy oil production from late-March to mid-May, the closing of the East Edson Transaction on April 1, 2020, the reduction in employee compensation and work hours to 80% effective April 1, 2020, and payments received from the Canada Emergency Wage Subsidy (“CEWS”) program. Managing through the COVID-19 pandemic saw Perpetual’s corporate staff working remotely in the second quarter before transitioning back to a hybrid office protocol in late June. Field employees have continued to work on site, following strict social distancing and other health and safety measures.
• Net loss for the second quarter of 2020 was $8.8 million ($0.15/share), compared to a net loss of $36.3 million ($0.60/share) in the comparative period of 2019. The decrease in net loss from the prior year period was due primarily to an impairment charge of $22.6 million and the $6.6 million decrease in the fair value of the TOU share investment recognized during the second quarter of 2019.
• Cash flow used in operating activities in the second quarter of 2020 was $2.8 million ($0.05/share), down $7.1 million from the prior year period (Q2 2019 – cash flow from operating activities of $4.3 million and $0.07/share) due to the combined impact of the 38% decrease in realized revenue per boe and the 61% decrease in production caused by heavy oil shut-ins and the sale of East Edson production.
• Adjusted funds flow in the second quarter of 2020 was negative $3.3 million ($0.05/share), down $7.0 million (191%) from the prior year period of $3.6 million ($0.06/share) due primarily to lower commodity prices and hedging losses, as well as reduced production as a result of the East Edson Transaction and heavy oil shut-ins. Compared to the first quarter of 2020, adjusted funds flow improved by $0.3 million or 8% (Q1 2020 – negative adjusted funds flow of $3.6 million).
• At June 30, 2020, Perpetual had total net debt of $98.5 million, down $30.1 million (23%) from March 31, 2020 and $19.5 million (17%) from December 31, 2019. The decrease in net debt was attributable to the closing of the East Edson Transaction on April 1, 2020 for consideration including a cash payment of $35 million. The cash proceeds from the East Edson Transaction were used to repay bank debt.

• Perpetual has a first lien, reserve-based credit facility (the “Credit Facility”). Perpetual had available liquidity at June 30, 2020 of $6.6 million, comprised of the Credit Facility’s $20 million Borrowing Limit, less current borrowings and letters of credit of $11.1 million and $2.3 million, respectively. Subsequent to quarter end, Perpetual has reduced its outstanding letters of credit to $1.3 million. The next Borrowing Limit redetermination has been extended from July 31, 2020 to August 10, 2020 to provide the lenders additional time to complete their review. If not extended, the Credit Facility will cease to revolve, and all outstanding advances will be repayable on November 30, 2020.

Sequoia Litigation Update

On January 13, 2020, the Court of Queen’s Bench (the “Court”) issued its written decision related to the Statement of Claim filed on August 3, 2018 against Perpetual and its President and Chief Executive Officer (“CEO”) with respect to the Company’s disposition of shallow gas assets in Eastern Alberta to an unrelated third party on October 1, 2016 (the “Sequoia Litigation”). The decision dismissed and struck all claims against the Company’s CEO and all but one of the claims filed by PricewaterhouseCoopers Inc. LIT in its capacity as trustee in bankruptcy (the “Trustee”) against Perpetual. The Court did not find that the test for summary dismissal relating to whether the transaction was an arm’s length transfer for purposes of section 96(1) of the Bankruptcy and Insolvency Act (the “BIA”) was met, on the balance of probabilities. Accordingly, the BIA claim was not dismissed or struck and only that part of the claim can continue against Perpetual. The Trustee filed a notice of appeal with the Court of Appeal of Alberta, challenging the entire decision, and Perpetual and its CEO filed a similar notice of appeal contesting the BIA claim portion of the decision. The appeal proceedings are scheduled to be heard in December 2020.

On September 24, 2019, Perpetual filed an application for security for costs of the appeal. On January 28, 2020, the Court of Appeal issued its decision with respect to Perpetual’s security for costs application, requiring the Trustee to post security with the Court of Appeal in the amount of $0.2 million. Applications filed by the Trustee to appeal the security for costs decision and alter the reasons for the decision were dismissed at a hearing held on June 18, 2020. Costs of $0.1 million were awarded by the Court of Appeal on July 1, 2020.

On February 25, 2020, Perpetual filed a second application to strike and summarily dismiss the BIA claim on the basis that there was no transfer at undervalue, and Sequoia was not insolvent at the time of the transaction nor caused to be insolvent by the transaction. Applications for security for costs for future litigation were also filed at that time. In July 2020, the Orphan Well Association (“OWA”), certain oil and gas companies, and six municipalities applied to intervene in the second BIA dismissal application proceedings. The OWA and certain oil and gas companies will be permitted to intervene in the proceedings which will take place on October 1 and 2, 2020.

Management expects that the Company is more likely than not to be completely successful in defending against the Sequoia Litigation such that no damages will be awarded against it, and therefore, no amounts have been accrued as a liability in Perpetual’s financial statements.

Outlook

Perpetual currently anticipates that five wells of the eight-well carried interest drilling program at the 50% owned East Edson property will be drilled in the second half of 2020, with two wells tied-in to production late in the third quarter followed by three wells commencing production early in the first quarter of 2021. While oil prices have recovered from their second quarter lows, capital expenditures for the remainder of 2020 in Eastern Alberta at Ukalta have been deferred, pending a sustained recovery of WTI oil prices to the US$45.00/bbl level.

With the reactivation of shut-in heavy oil production and the contribution from the first two carried interest wells at East Edson in late-September, production is forecast to increase in the third quarter to 4,500 to 4,700 boe/d (32% liquids). Fourth quarter production is anticipated to increase to 5,200 to 5,400 boe/d (28% liquids) with the full impact of the two East Edson wells. An additional 250 bbl/d of heavy oil production could be re-started if WTI oil prices increase above the US$45.00/bbl level.

Abandonment and reclamation expenditures will also remain suspended for the second half of the year, enabled by the AER’s cancellation of area-based closure expenditure requirements for 2020. We are optimistic that funding from the Alberta Site Rehabilitation program may facilitate the advancement of abandonment and reclamation projects previously planned for 2020, with $0.3 million of applications approved to date.

Minimization of operating and corporate costs will remain a priority, as will ensuring employees remain safe and healthy amid the COVID-19 pandemic.