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Peyto Exploration First Quarter 2020 Results

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   |    Tuesday,May 12,2020

Peyto Exploration & Development Corp. reported its Q1 2020 results.

Highlights for the quarter included:

• Funds from operations of $0.33/share. Generated $55 million in Funds from operations (“FFO”) in Q1 2020, down from $103 million in Q1 2019 due to lower commodity prices and lower production levels. Trailing twelve month FFO ($275 million) exceeded both capital expenditures ($213 million) and dividend payments ($40 million) by $22 million resulting in reduced levels of net debt when compared to a year ago.
• Liquids yield increased 24%. Condensate and NGL yields increased from 23 bbl/mmcf in Q1 2019 to 29 bbl/mmcf in Q1 2020, resulting from a focus on development of Peyto’s liquids rich Cardium play. Total liquids production of 11,585 bbl/d in Q1 2020 was the highest in Company history comprised of 6,662 bbls/d of Condensate and Pentanes+, and 4,923 bbls/d of Propane and Butane. Natural gas production was down 13% to 402 mmcf/d as Peyto replaced declining dry gas with significantly higher liquids-rich gas. Total Q1 2020 production of 78,514 boe/d was up slightly from the previous quarter production of 77,457 boe/d but down 10% from 87,703 boe/d recorded in Q1 2019.
• Total cash costs of $1.03/Mcfe (or $0.91/Mcfe ($5.46/boe) excluding royalties). Industry leading total cash costs, included $0.12/Mcfe royalties, $0.39/Mcfe operating costs, $0.19/Mcfe transportation, $0.04/Mcfe G&A and $0.29/Mcfe interest, combined with a realized price of $2.30/Mcfe, resulted in a $1.27/Mcfe ($7.63/boe) cash netback, down 42% from $2.18/Mcfe ($13.06/boe) in Q1 2019. Operating costs per unit for Q1 2020 were up 15% from Q1 2019 largely due increased power costs, and stockpiling of chemicals and equipment in preparation for anticipated COVID-19 supply chain disruptions.
• Capital investment of $69 million. A total of 17 gross wells (14.3 net) were drilled in the first quarter, 19 gross wells (18 net) were completed, and 20 gross wells (18 net) were brought on production. Over the last 12 months the 64 gross (55.9 net) wells brought on production accounted for approximately 18,000 boe/d at the end of the quarter, which, when combined with a trailing twelve month capital investment of $213 million, equates to an annualized capital efficiency of $11,800/boe/d. Peyto anticipates the 2020 full year capital efficiency will be less than $9,500/boe/d.
• Dividends of $0.06/share, Loss of $0.41/share. Dividends of $9.9 million were paid to shareholders during the quarter. This is the first quarterly loss posted since Q4 2004 and is largely due to the confluence of global events occurring in the first quarter of the year resulting in a first ever, non-cash impairment of $80 million.

First Quarter 2020 in Review

Preparation for and reaction to the sweeping global pandemic dominated the first quarter of 2020. As Peyto and its hydrocarbon production was deemed an essential and critical provincial service during this time, to provide reliable heat and fuel for electrical generation, all attention was turned to the Company’s business continuity plans in order to ensure the safety and security of Peyto’s employees and field contractors. Peyto’s Working Remotely and Working Alone policies ensured production operations continued without interruption, while at the same time, strategic alliances with select service providers ensured drilling, completion and pipeline operations continued safely throughout the quarter. Drilling and completion operations were focused primarily in the Greater Sundance and Brazeau River areas, on both the Cardium and Spirit River formations. Peyto completed the construction of a 17 km pipeline project in the quarter, connecting a new area called Chambers to Peyto’s Brazeau gas plant. This enabled the existing production that was being processed in third party facilities to be redirected into the Company’s operated gas plant, as well as the connection of several new wells that were drilled in the quarter. As Peyto now controls over 33 prospective sections of land in the Chambers area, this pipeline will be a strategic piece of infrastructure for future opportunities. A lack of winter heating demand in North American natural gas markets caused natural gas prices to weaken throughout the quarter, which combined with the rapid drop in oil and natural gas liquid prices resulted in the lowest realized revenue per Mcfe in the Company’s 21 year history and despite Peyto’s low cash costs, still translated into the lowest ever cash netback at $1.27/mcfe ($7.63/boe).

Exploration & Development

First quarter 2020 activity was focused exclusively in the Greater Sundance and Brazeau River areas on the Cardium and Spirit River plays as shown in the following table:

Drilling costs for the first quarter of 2020 were slightly higher on a per meter basis due to an increased weighting of deeper formations in the Brazeau area while completion costs continued to fall, despite the longer lateral and increased frac stage count as illustrated in the following table.

*excluding Peyto’s Wildhay Montney well.

Capital Expenditures

During the first quarter of 2020, Peyto invested $27.7 million on drilling, $19.4 million on completions, $7 million on wellsite equipment and tie-ins, $10.2 million on facilities and major pipeline projects, and $4.3 million acquiring new lands and seismic, for total capital investments of $68.6 million.

The $10.2 million invested in new facilities and major pipeline projects in the quarter included the $7 million, 17 km, 8 inch pipeline connecting the Chambers (South Brazeau) area to the Brazeau River gas plant. Other facility capital included wellsite conversions to reduce emissions and reduce operating costs as well as upgrades to wellsite automation and monitoring systems. Only one new section of land was purchased in the quarter and after the quarter end, all new land sales were suspended by the Crown due to the deteriorated Alberta business environment.

Commodity Prices

Peyto actively marketed all components of its production stream in the quarter including natural gas, condensate, pentane, butane and propane. Peyto’s market diversification activity resulted in natural gas being sold at various hubs including AECO, Dawn, Ventura, Emerson 2 and Henry Hub using both physical fixed price and temporary basis transactions to access those locations. Natural gas prices were left to float on daily pricing or locked in using fixed price swaps at those hubs and Peyto’s realized price was benchmarked against those local prices, then adjusted for transportation (either physical or short term synthetic) to those markets.

The Company’s liquids were also actively marketed with condensate being sold on a monthly index differential linked to West Texas Intermediate (“WTI”) oil prices. Peyto’s NGLs (a blend of pentanes plus, butane and propane) are fractionated by a third party in Fort Saskatchewan, Alberta but Peyto markets each product separately. Pentanes Plus were sold on a monthly index differential linked to WTI, with some volumes forward sold on fixed differentials to WTI. Butane was sold as a percent of WTI or a fixed differential to the Mount Belvieu, Texas market. Propane was sold on a fixed differential to the Conway, Kansas market. While some products were sold pursuant to annual term contracts to ensure delivery paths remain open, others were marketed on the daily spot market.

During Q1 2020 Peyto sold 63% of its natural gas at AECO, 9% at Emerson, 5% at Ventura, and 23% at Henry Hub. Benchmark prices, Peyto realized prices, and aggregate gas marketing diversification costs are shown below.

Benchmark Commodity Prices

Q1 2020 average CND/USD exchange rate of 1.3449.

Peyto Realized Commodity Prices by Component

Financial Results

Approximately 36%, or $0.84/Mcfe, of Peyto’s unhedged revenue came from its associated natural gas liquids sales while 64%, or $1.46/Mcfe, is attributable to natural gas sales. Natural gas and liquid hedging activity did not contribute to a material change in total revenue of $2.30/Mcfe. Cash costs of $1.03/Mcfe, included royalties of $0.12/Mcfe, operating costs of $0.39/Mcfe, transportation costs of $0.19/Mcfe, G&A of $0.04/Mcfe and interest costs of $0.29/Mcfe. Cash costs per unit of production were similar to Q1 2019 despite the increase in operating costs that resulted from a stockpiling of chemicals and maintenance equipment. For the balance of the year, Peyto expects lower per unit operating costs from optimized road use, lower water disposal costs, lower chemical and lubricating oil prices, optimized power consumption as well as lower municipal tax and AER fees.

When the total cash costs of $1.03/Mcfe were deducted from realized revenues of $2.30/Mcfe, it resulted in a cash netback of $1.27/Mcfe or a 55% operating margin. Historical cash costs and operating margins are shown in the following table.

Depletion, depreciation, amortization and impairment charges of $3.28/Mcfe, along with a provision for deferred tax and stock-based compensation payments reduced the cash netback to a loss of $1.58/Mcfe. Dividends of $0.23/Mcfe were paid to shareholders in the quarter.

Due to a significantly reduced independent reserve engineer price forecast, attributable to the exceptional commodity price volatility experienced in the first quarter, the carrying value of Peyto’s reserve assets was reduced and a non-cash impairment expense of $80 million was recognized. The impairment has no impact on funds from operations and is expected to reverse in the future should commodity futures recover.

Activity Update

Peyto currently has 2 rigs drilling on pad sites that utilize existing Company infrastructure in order to limit exposure to third party road bans or restrictions during spring breakup. Both rigs have quickly shifted their focus to leaner natural gas prospects to take advantage of improving gas prices, with one rig operating in the Brazeau area and the other focused in Greater Sundance. The Company continues to work closely with service providers and is taking additional precautions to ensure the health and safety of all workers during the COVID-19 pandemic.

Since the end of the quarter, the Company has drilled 6 gross (3.9 net) wells, completed 3 gross (3 net) wells, and brought onstream 4 gross (4 net) new wells. The 6 new wells drilled will be completed later in the quarter after breakup. The most recent wells brought onstream include several Notikewin discoveries in the Chambers and Edson areas that have greatly exceeded Management expectations. Peyto is planning to add two additional drilling rigs in the second half of 2020 as natural gas prices improve. These two rigs will continue focus on leaner natural gas prospects within the Company’s portfolio.

At the end of April, the Company installed 80,000 barrels of tank storage capacity in the Sundance and Brazeau areas to serve Peyto’s associated condensate production in the event there are supply disruptions or negative price realizations for this product. This should ensure that Peyto’s natural gas and other associated NGL production will not be shut in if condensate demand is materially impacted by heavy oil curtailments/shut ins.

Outlook

While the 2020 capital program to date has exceeded expectation for results and costs, Peyto anticipates that an additional 10-15% cost savings will be further realized in the balance of the year due to much reduced industry activity. Peyto will continue to be nimble and flexible, as evidenced by the recently reduced capital program and reduced dividend and may adjust its program for changing commodity prices and in order to match the capital program to forecast funds flow.

In order to preserve financial flexibility in the event commodity prices continue to remain weak, Peyto is currently in discussions with its syndicate of lenders and term debt noteholders for temporary relief from its financial covenants as they are defined in its revolving unsecured credit facility and note purchase agreements. Pending results from these discussions, the Company believes it will have sufficient funds from operations and credit capacity to execute the remainder of its revised 2020 capital program of $200 to $250 million. Peyto is also reviewing all government programs which may provide additional relief and liquidity during this highly volatile and challenging period to determine if they may be available to Peyto.

Peyto is encouraged by the recent oil supply response that is taking associated gas out of the market and strengthening current and future natural gas prices at both AECO and Henry Hub. While the Company has over 50% of natural gas sales hedged for the next two quarters, all future natural gas production remains extremely exposed to this increasing natural gas price with less than 5% of all producing reserves currently pre-sold.