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Peyto Exploration Lowers Well Cost, Increases Rig Productivity

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Peyto Exploration & Development Corp. has presented its operating and financial results for the second quarter of the 2015 fiscal year.

Highlights:

• Production per share up 11%. Second quarter 2015 production increased 14% from 434 MMcfe/d (72,302 boe/d) in Q2 2014 to 496 MMcfe/d (82,750 boe/d) in Q2 2015. Temporary interruptible and firm service curtailments on TransCanada's (TCPL) Nova Gas Transmission system deferred an average of 27 MMcfe/d (4,500 boe/d) in the second quarter.
• Record low cash costs of $0.82/Mcfe ($0.69/mcfe or $4.14/boe excluding royalties). Total cash costs, including $0.13/mcfe royalties, $0.31/mcfe operating costs, $0.15/mcfe transportation, $0.04/mcfe G&A and $0.19/mcfe interest, were the lowest in Company history. This 30% decrease from $1.17/mcfe in Q2 2014 was primarily due to decreased royalties and operating costs. Lower realized commodity prices, combined with these lower cash costs, resulted in a cash netback of $2.99/Mcfe ($17.95/boe) or a 78% operating margin.
• Capital investment of $117 million. A total of 34 gross wells (31.5 net) were drilled in the second quarter. In total, new wells brought on production over the last 12 months accounted for 40,290 boe/d at the end of the quarter, which, when combined with a trailing twelve month capital investment of $614 million, equates to an annualized capital efficiency of $15,250/boe/d.

Second Quarter 2015 in Review

• Peyto's plan to drill through the traditional spring breakup period, similar to last year, was successfully executed in the second quarter. The Company took advantage of mild spring breakup conditions and continued low service costs to drill 34 gross wells.
• Average Q2 drilling and completion costs of $3.1 million per well were 29% lower than the $4.4 million in 2014.
• In addition, second quarter average drilling times (from spud to rig release) for Greater Sundance Spirit River wells decreased from 22 days in 2014 to 17 days, resulting in a 23% increase in rig productivity for the 9 rigs running at the end of the quarter. These achievements have effectively reduced the cost to add new production in the quarter to less than $12,000/boe/d, resulting in an average trailing twelve month capital efficiency of $15,250/boe/d. Lower realized commodity prices in the second quarter reduced funds from operations but were partially offset by lower operating, royalty and interest costs. Production in the quarter was 4,500 boe/d lower than capability due to continued transportation curtailments and approximately 1,000 boe/d lower as a result of continued propane rejection due to weak propane prices. Transportation curtailments and propane surpluses which are driving weak propane prices are both expected to subside by Q4 2015. Despite the significant drop in commodity prices, the strong financial and operating performance delivered in the quarter resulted in an annualized Return on Capital Employed (ROCE) of 9%. Annualized Return on Equity of 10% in the quarter was reduced to 7% due to the one-time increase in deferred taxes resulting from the announced Alberta NDP government corporate tax rate increase.

Exploration & Development

• Peyto's second quarter 2015 activity was concentrated in the Spirit River group of formations including the Notikewin, Falher and Wilrich formations, and within the Greater Sundance area where both cost savings could be realized and transportation restrictions minimized. A total of 34 wells were drilled across the land base, targeting sweet, liquids rich natural gas resource plays.
• Amongst the 34 wells drilled, step out wells on existing Wilrich and Falher trends provided encouraging results which opened up additional development opportunities while Notikewin infill drilling successfully encountered virgin reservoir pressures and undisturbed sections of existing channels, also proving up additional future locations. Average per well production results in 2015 have significantly surpassed previous year's results with IP30 rates 23% higher for the 55 wells to date.
• Both the average depth and lateral length of Peyto's horizontal wells continues to increase into 2015, as the Company attempts to develop more resource with each wellbore. As illustrated in the following table, second quarter drilling and completion costs per meter were 24% and 39% lower, respectively, as a result of both efficiency gains and service cost reductions.

Capital Expenditures

• Capital expenditures in the second quarter of 2015 totalled $116.6 million, comprised of $59.4 million of drilling, $33.3 million of completions, $10.7 million of wellsite equipment and tie-ins, $11.8 million of facilities and pipelines, and $1.4 million in land and seismic. A total of 34 gross (31.5 net) wells were drilled in the quarter, 29 gross (27.25 net) wells completed and 30 gross (29.25 net) wells equipped and tied in. Drilling times continued to improve in the quarter, despite longer horizontal laterals for 2015, while the combination of frac sand changes and water recycling efforts reduced average completion costs.
• The Swanson gas plant expansion accounted for $10 million of the $11.8 million of facility and pipeline projects completed in the quarter. This expansion will be completed by October 2015 and is expected to increase the existing plant capacity from 65 mmcf/d of sales gas to over 100 mmcf/d. Four sections of Greater Sundance land were purchased at crown sales in the quarter for an average of $164/acre while 95 square kilometers of new 3-D seismic was acquired.
• Daily production at the end of the quarter peaked at over 91,000 boe/d on those days that were unaffected by transportation curtailments.

Commodity Prices

• As a result of the Company's hedging strategy, approximately 64% of Peyto's natural gas production received a fixed price of $3.41/GJ from hedges that were put in place over the previous 24 months, while the balance received the blended daily and monthly price of $2.53/GJ, resulting in an after-hedge price of $3.06/GJ or $3.50/mcf.
• Peyto realized an oil and natural gas liquids price of $43.54/bbl in Q2 2015 for its blend of condensate, pentane, butane and propane, which represented 64% of the $68.50/bbl average Canadian Light Sweet posted price, as shown in the following table. The blended realized liquids price was impacted by negative propane prices in the quarter. These negative propane prices are expected to improve by Q4 2015 as surplus inventory is consumed, however, in the meantime Peyto is optimizing its plant processes to leave as much propane in the gas stream as possible in order to realize a higher price - otherwise known as propane rejection. 

Activity Update

• The 2015 drilling program is growing new production with record capital efficiency, however, total company production continues to be frustrated by TCPL take-away capacity constraints. TCPL is the primary shipper of natural gas throughout the province of Alberta and across Canada, and Peyto transports all of its natural gas to the final point of sale through their system. Delays in TCPL's integrity verification, ongoing pipeline and compressor maintenance, and the recent failure of two Alberta mainline compressors have all extended the timeline for return to normal take-away capacity levels until October 2015. Peyto's current production is approximately 80,000 boe/d with an additional 11,000 boe/d of production off line due to restrictions. The latest projections from TCPL are for gradual increases in system capacity over August and September with a larger step up in October. Peyto remains optimistic that production will return to full capability for the normally higher gas price winter months of November and December. In addition, Peyto is rejecting approximately 1,200 boe/d of propane into the gas stream due to negative liquid propane prices.
• Drilling and completion costs continue to remain low with realized reductions of approximately 30% as compared to 2014. Aggregate well production results for the new 2015 wells, continue to exceed the per-well average production results of all prior years. These two achievements are combining to preserve Peyto's return expectations in a lower commodity price environment. As a result, the Company increased the drilling activity to 10 active drilling rigs at the start of the third quarter which, when combined with the reduced drilling time, is effectively the same as running 12 rigs a year ago. Six rigs are working throughout the Greater Sundance area, two rigs are working in Brazeau and two rigs are working in the Ansell/Minehead areas. Peyto is currently the 3rd most active gas driller in Alberta with 10 of the 78 gas drilling rigs running. The previous 2015 capital budget between $575 and $625 million remains the same although it is expected that approximately 6 more wells will now be drilled with this same capital investment.
• A 5th compressor at Brazeau was installed and commissioned in July taking the facility capacity up to 50 MMcf/d in preparation for second half growth. An additional compressor is being fabricated and can be installed before year end to increase capacity to 60 MMcf/d.
• The Swanson Gas Plant expansion has been purposely delayed by one month to an October start-up. With the continuation of TCPL system constraints, the construction schedule has been relaxed to save costs while sliding completion out a few weeks. Since the end of June 2015, all equipment has been moved to the plant site and is being connected.
• Additionally, major turnarounds have already occurred at the Kakwa and Galloway plants, coinciding with periods of low TCPL capacity. These plants will not need any extended maintenance outages again until 2020. The finally facility turnaround for 2015 will occur at the Oldman plant, coinciding with a planned TCPL outage in August.

Outlook

• Peyto's track record of superior returns is based on a counter cyclical investment strategy whereby the Company aggressively builds long life, low risk assets at times when the rest of the industry cannot. This is made possible by preserving a low cost structure that ensures profitability even during low commodity prices. Currently, the majority of the industry is reducing capital budgets and cutting drilling programs due to low commodity prices and strained balance sheets. Peyto, however, is taking full advantage of its reduced costs, both capital and operating, to accelerate investment and deliver profitable returns to shareholders. Key to ensuring the future success of this strategy is to remain lean and nimble, allowing Peyto to react quickly as the investment environment changes.
• Peyto's outlook for the balance of 2015 remains positive. The Company is enjoying a lower cost structure than ever before and minimal competition for future opportunities. At the same time, the outlook for natural gas prices and increased revenues has improved from earlier this year.