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Peyto Exploration First Quarter 2021 Results

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   |    Wednesday,May 12,2021

Peyto Exploration & Development Corp. reported its Q1 2021 results.

Highlights:

• Production per share up 12%. First quarter 2021 production of 88,070 boe/d, comprised of 456 MMcf/d of natural gas, 7,018 bbl/d of Condensate and Pentanes, and 5,120 bbl/d of Butane and Propane, was up from 78,514 boe/d in Q1 2020. Total liquid yields of 27 bbl/MMcf, or 13.8% of total production, was down from 29 bbl/MMcf in Q1 2020 due to an increased focus on leaner gas Spirit River plays and the acquired Cecilia production (effective January 1, 2021).
• Funds from operations per share up 115%. Generated $117 million in Funds from Operations (“FFO”) in Q1 2021 ($0.71/share), up from $55 million in Q1 2020 ($0.33/share) due to higher commodity price realizations combined with higher production. FFO in the quarter exceeded the combination of capital expenditures ($73 million), acquisitions ($36 million), and dividends ($1.6 million), by $6 million resulting in a total payout ratio of 95%.
• Total cash costs of $1.24/Mcfe (or $0.95/Mcfe ($5.67/boe) excluding royalties). Industry leading low total cash costs included $0.29/Mcfe royalties, $0.36/Mcfe operating costs, $0.17/Mcfe transportation, $0.04/Mcfe G&A and $0.38/Mcfe interest, which combined with a realized price of $3.70/Mcfe and resulted in a $2.46/Mcfe ($14.81/boe) cash netback, up 94% from $1.27/Mcfe ($7.63/boe) in Q1 2020. Operating costs per unit for Q1 2021 were down 8% from Q1 2020 largely due to increased volumes and higher facility utilizations, while royalties were up due to higher commodity prices. Interest charges were also up 31% because of higher stamping fees negotiated as part of the temporary covenant provisions.
• Capital investment of $73 million in organic activity. A total of 27 gross (22.5 net working interest) wells were drilled in the first quarter, 21 gross (17 net) wells were completed, and 20 gross (16.7 net) wells were brought on production. In addition, two acquisitions totaling $35.6 million (effective January 1, 2021) were closed in the quarter. Over the last 12 months new production additions, inclusive of acquisitions, accounted for approximately 34,000 boe/d at the end of the quarter, which, when combined with a trailing twelve-month capital investment of $276 million, equates to an annualized capital efficiency of $8,100/boe/d.
• Earnings of $0.23/share, Dividends of $0.01/share. Earnings of $38.5 million were generated in the quarter while dividends of $1.6 million were paid to shareholders. During the quarter, Peyto earned $0.35 for every dollar of capital invested. Over the Company’s 22 ½ year history, a cumulative $2.6 billion has been earned for a total of $6.5 billion of capital invested, or $0.40 for every dollar invested.

First Quarter 2021 in Review

Peyto enjoyed an active first quarter despite the continued impacts and constraints of the global COVID-19 pandemic. The Company maintained its vigilant focus on safety and successfully conducted a full winter drilling and completions program while also fully integrating two property acquisitions, including taking over operations of its 10^th owned and operated natural gas processing plant. Total Company owned and operated plant processing capacity now stands at approximately 875 MMcf/d making Peyto the 11^th largest Canadian gas processing company. Despite the severe cold weather experienced in February, Peyto was able to grow production 6% from 86,000 boe/d at the start of the year to 91,000 boe/d by the end of the first quarter using 93% of funds from operations. This growth improved facility utilization and helped lower per unit fixed costs. The much-improved commodity prices contributed to a more than doubling of funds from operations over Q1 2020, despite the temporary higher market diversification costs which resulted in an 11% discount to AECO daily natural gas prices. As market diversification costs continue to fall moving forward, Peyto’s realized natural gas prices are expected to once again match or beat AECO spot prices further improving funds from operations. Excess free cashflow in the quarter was used to reduce indebtedness which, combined with higher cashflow, allowed Peyto to achieve its debt to EBITDA target earlier than originally forecast. Strong operational execution combined with industry leading low costs resulted in a 22% profit margin.

Capital Expenditures

During the first quarter of 2021, Peyto invested $33.5 million on drilling, $18.2 million on completions, $4.8 million on wellsite equipment and tie-ins, $15.6 million on facilities and major pipeline projects, and $1.1 million acquiring new lands and seismic, for a total organic capital investment of $73 million. In addition, Peyto closed two acquisitions in the Cecilia area for a total of $35.6 million. Combined total capital expenditures in the quarter were $109 million.

Pipeline looping in the South Brazeau (Chambers) area accounted for approximately $8 million of the major pipeline projects in the quarter. Additional loop lines in the Swanson and Wildhay areas, as well as compressor upgrades in both areas, accounted for the remainder. The initial construction of the South Brazeau (Chambers) pipeline in 2020 and the recent doubling of this gathering system capacity has allowed production from the Chambers area to grow from 1,000 boe/d to 11,000 boe/d over the last 15 months.

The combined acquisitions, which closed in the first quarter of 2021 and with an effective date of January 1, 2021, included 114 gross (106 net) producing wells with stable, ultra-low decline (less than 5%/yr) production of approximately 2,900 boe/d (95% natural gas). Also included were 54 gross sections of land (81% working interest) in which the Company has internally identified over 100 future drilling prospects. Approximately 17 square kilometers of 3D and 684 km of 2D seismic were included that cover the acquired lands. Peyto has subsequently purchased 167 square km of additional 3D over the lands to have complete coverage for horizontal development. Acquired infrastructure consisted of 115 km of gathering system and a 30 MMcf/d, 100% working interest, gas plant with approximately 50% available capacity.29dk2902l

Commodity Prices

Peyto actively marketed all components of its production stream in the quarter including natural gas, condens

Financial Results

The Company’s realized price for natural gas in Q1 2021 was $4.52/Mcf, prior to $1.04/Mcf of market diversification activities and a $0.42/Mcf hedging loss, while its realized liquids price was $52.84/bbl, before a $7.21/bbl hedging loss, which yielded a combined revenue stream of $3.70/Mcfe. This net sales price was 61% higher than the $2.30/Mcfe realized in Q1 2020. Cash costs of $1.24/Mcfe, included royalties of $0.29/Mcfe, operating costs of $0.36/Mcfe, transportation costs of $0.17/Mcfe, G&A of $0.04/Mcfe and interest costs of $0.38/Mcfe. Cash costs per unit of production, excluding royalties, were $0.95/Mcfe, up from $0.91/Mcfe in Q1 2020 due to increased interest charges, offset by decreased operating costs and transportation. As Peyto’s trailing twelve-month debt to EBITDA ratio is now below 3.5, the Company expects interest rates for the balance of the year to fall, bringing cash costs back in line with historical averages.

When the total cash costs of $1.24/Mcfe were deducted from realized revenues of $3.70/Mcfe, it resulted in a cash netback of $2.46/Mcfe or a 67% operating margin.

Depletion, depreciation, and amortization charges of $1.37/Mcfe, along with a provision for deferred tax and stock-based compensation payments resulted in earnings of $0.81/Mcfe, or a 22% profit margin. Dividends to shareholders totaled $0.03/Mcfe.

Emission Reductions

The Company continued to execute on its methane emissions reduction program during the first quarter 2021 by removing and retrofitting pressure and level controllers with low-bleed alternatives. In addition, Peyto has ordered its first batch of fully electric measurement skids to be installed on new wells. Peyto expects that all remaining high-bleed controllers will be converted over, or removed, by the end of the third quarter. The first quarter emissions reduction projects are expected to result in annual savings of 17,000 tonnes of CO2eq/yr, or the equivalent of taking 3,700 cars off the road. These types of projects ensure that Peyto will achieve its sustainability target of a 50% reduction in the 2016 vented and flared emissions intensity level by year end 2021 while at the same time, creating go-forward value for shareholders.

Activity Update

Peyto currently has 2 rigs drilling on pad sites that utilize existing Company infrastructure (roads, leases, pipelines, etc.) to limit exposure to third party road bans or restrictions during spring breakup. One rig is drilling ERH wells in Sundance while the other is drilling liquids rich Cardium and ERH Spirit River prospects in Brazeau. The Company continues to work closely with service providers and is taking additional precautions to ensure the health and safety of all workers during this latest wave of the COVID-19 pandemic.

The Peyto technical team has recently conducted an internal evaluation of the Company’s successful 2020 drilling program which yielded above average returns and record capital efficiency. A portion of that success was the result of longer horizontal laterals and improved stimulation intensity. This work has translated into a new ERH well design for 2021 for several of Peyto’s Deep Basin plays. For 2021, approximately 25% of the drilling program will utilize this new design.

Since the end of the quarter, the Company has drilled 6 gross (5.3 net) wells, completed 8 gross (8 net) wells, and brought onstream 8 gross (8 net) new wells. Three gross (2.3 net) wells await completion later in the quarter after breakup. The most recent wells brought onstream include four liquids rich Cardium wells in Brazeau and Wild River, two prolific Notikewin wells in Sundance and Brazeau, and two ERH Wilrich wells in Sundance.

In April, the Company completed and brought on production the first well drilled on lands acquired through the Cecilia acquisition. This well was connected to Peyto’s Oldman plant and along with production optimization efforts, increased production from the acquired assets from 2,900 boe/d to over 4,300 boe/d. Continued drilling on the acquired lands is planned for immediately after breakup which is expected to fill the remaining unutilized plant capacity at Cecilia before the end of the third quarter.

Peyto has continued to diversify its natural gas markets with significantly lower cost basis deals. In Q1 2021, Peyto added a total of 12,490,000 MMBTU of AECO to Henry Hub basis deals, over various periods between April 2021 and December 2023, at an average cost of US$0.70/MMBTU. This compares to Peyto’s Q1 2021 average AECO to Henry Hub basis cost of US$1.31/MMBTU. In addition, in April Peyto added 40,000 MMBTU/d of AECO to Dawn basis deals, for the period November 2022 to October 2024, or 29,240,000 MMBTU, for US$0.63/MMBTU. This compares to the equivalent Long Term Fixed Price (“LTFP”) toll of US$0.87/MMBTU (AECO to Dawn, inclusive of fuel).

Outlook

The outlook for natural gas prices continues to improve for Peyto. The combination of falling market diversification costs and rising North American natural gas prices, driven by reduced supply from tempered industry investment combined with strong global demand, is translating into a forecast of higher realized natural gas prices. This has the effect of improving Peyto’s cashflow and balance sheet as well as increasing the value of its developed reserves. The Company’s long producing reserve life allows for exposure to this improving price environment which should enable Peyto to increase its return of capital to investors in the form of further debt reduction and, when appropriate, increased dividends.

At the same time, Peyto continues to obtain additional Deep Basin opportunities to invest capital and deliver profits for shareholders. Consolidation in the Canadian natural gas industry and in the Alberta Deep Basin has resulted in less competition for opportunities in Peyto’s traditional core areas. With its large infrastructure network of pipelines and gas plants, Peyto can generate superior returns on its remaining undeveloped resources. Peyto’s continuously improving environmental performance will assist it in meeting the stricter standards set by investors and stakeholders while its innovation in resource extraction continues to lower cost and improve profitability. With post pandemic optimism, Peyto looks forward to a bright future of renewed financial strength and growth.