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Peyto Exploration Second Quarter 2022 Results

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   |    Wednesday,August 10,2022

Peyto Exploration & Development Corp. reported its operating and financial results for the second quarter of the 2022 fiscal year.

Highlights for the quarter included:

• Funds from operations⁵ per share up 142%. Generated record $206 million in Funds from Operations (“FFO”) in Q2 2022 ($1.21/share), up from $82 million in Q2 2021 ($0.50/share) due to higher commodity price realizations combined with higher production, despite a $104 million realized hedging loss in the quarter. FFO in the quarter exceeded capital expenditures by $98 million. This represented a free cashflow ratio⁶ of over 48% of FFO while dividends of $25.5 million in the quarter represented a dividend payout ratio⁷ of 12%, and including capital investments, a total payout ratio⁷ of 65%.
• Production per share up 14%. Second quarter 2022 production of 103,583 boe/d, comprised of 541 MMcf/d of natural gas, 7,958 bbl/d of Condensate and Pentanes, and 5,453 bbl/d of Butane and Propane, was up 17% from 88,738 boe/d in Q2 2021. Total liquid yields of 24.8 bbl/MMcf, or 13% of total production, was down from 26.8 bbl/MMcf in Q2 2021 due to an increased focus on leaner gas production.
• Total cash costs of $1.83/Mcfe (or $0.88/Mcfe ($5.26/boe) excluding royalties). Industry leading low total cash costs included $0.95/Mcfe royalties, $0.39/Mcfe operating costs, $0.27/Mcfe transportation, $0.02/Mcfe G&A and $0.20/Mcfe interest, which combined with a realized revenue of $5.48/Mcfe to result in a $3.65/Mcfe ($21.88/boe) cash netback, up 113% from $1.71/Mcfe ($10.23/boe) in Q2 2021. Operating costs per unit for Q2 2022 were up 11% from $0.35/Mcfe in Q2 2021 due to significantly increased fuel, power and chemical costs derived from higher oil and natural gas prices. Interest charges were down from $0.33/Mcfe in Q2 2021 due to reduced debt levels.
• Net debt down 14%. Net debt was reduced $156 million from Q2 2021 to $991 million in Q2 2022 which reduced interest charges 39% from $0.33/Mcfe in Q2 2021 to $0.20/Mcfe in Q2 2022.
• Capital investment of $108 million in organic activity. A total of 23 gross (18.6 net working interest) wells were drilled in the second quarter, 22 gross (17.6 net) wells were completed, and 26 gross (21.3 net) wells were brought on production. Over the last 12 months new production additions, inclusive of acquisitions and new facilities, accounted for approximately 40,200 boe/d at the end of the quarter, which, when combined with a trailing twelve-month capital investment of $473 million, equates to an annualized capital efficiency of $11,600/boe/d. Peyto anticipates full year 2022 capital efficiency to be approximately $10,500/boe/d, up from $9,000/boe/d in 2021.
• Earnings of $0.56/share, Dividends of $0.15/share. Earnings of $95 million were generated in the quarter while dividends of $25 million were paid to shareholders.

Second Quarter 2022 in Review

Peyto kept all five drilling rigs active in the Edson area throughout the second quarter despite near record June rainfalls which significantly hampered completion and pipeline activity, delaying production additions. Despite the delays, development plans for the Greater Brazeau and Greater Sundance areas continued to move forward with delineation of the Cardium play in Chambers, and Wilrich and Notikewin plays in Sundance. The successful commissioning of the Chambers gas plant and testing of its throughput capabilities has further increased the number and profitability of drilling prospects in this new area. Spot natural gas and crude oil prices climbed throughout the quarter to decade highs reflecting global supply shortages. Peyto’s realized prices and increased production volumes combined for more than a doubling of revenues and over 150% increase in FFO from Q2 2021, despite a substantial hedging loss for the quarter. The Company eagerly looks forward to even further increases in FFO as existing hedges roll off in the near term. Despite continued supply chain challenges and cost inflation, Peyto’s operations team was able to maintain pre-royalty cash costs in line with previous quarters resulting in a 113% increase in cash netback contributing to the 641% increase in earnings from Q2 2021.

Exploration & Development

Second quarter 2022 activity was focused only on the accessible portions of the Sundance and Brazeau areas due to limited spring break-up access. Target formations were also less widespread with only Cardium and Spirit River formations (Notikewin, Falher and Wilrich) targeted, as summarized in the following table:

Drilling costs per meter rose this past quarter as both wet surface conditions and deeper formations in the Brazeau area increased costs from Q1 2022. Inflation in services and materials were responsible for the balance of the cost increase from 2021. Peyto’s strategic alignment with specific service providers ensured services were available in a timely manner and helped to offset the extremely tight materials and labor market. The Company continued to pursue Extended Reach Horizontal (“ERH”) wells in the quarter as evidenced by the increase in average measured depth. As well, increased stage count and frac size, in order to enhance productivity, contributed to higher year over year completion costs.

Capital Expenditures

During the second quarter of 2022, Peyto invested $45 million on drilling (41%), $25 million on completions (23%), $10 million on wellsite equipment and tie-ins (9%), and $21 million on facilities and major pipeline projects (19%). Final construction of the new Chambers gas plant accounted for $6 million, while major pipeline projects in the Chambers and Cecilia areas accounted for $8 million of the total $21 million. An additional $6 million was spent acquiring 24 sections of new crown land, along with $1 million for new seismic, for a total capital investment of $108 million.

Peyto pre-purchased critical equipment and supplies during the quarter to maintain continuous operations and stay ahead of inflation in materials and equipment, as well as current supply chain challenges. The Company has secured 15 km of new pipe, 10 wellsite separators and 40 Scada/electronic control packages for new wellsites and tie ins which added $2 million to capital inventory.

First half 2022 capital investments included a significant acquisition, of $22.2 million, and capital inventory transfer of equipment for the Chambers plant, of $20.6 million, that was not originally in Peyto’s capital budget. Similar such expenditures are not anticipated in the second half of the year. Capital expenditures for the balance of 2022 are anticipated to be predominantly well related investments in drilling, completions, wellsite equipment and tie-ins.

Commodity Prices

Peyto actively marketed all components of its production stream in the quarter including natural gas, condensate, pentane, butane and propane. Natural gas was sold in Q2 2022 at various hubs including AECO, Malin, Ventura, Emerson 2 and Henry Hub using both physical fixed price and basis transactions to access those locations (diversification activities). Natural gas prices were left to float on daily or monthly pricing or locked in using fixed price swaps at those hubs and Peyto’s realized price is benchmarked against those local prices, then adjusted for transportation (either physical or synthetic) to those markets. Peyto expects that the cost of market diversification activities will continue to fall as more expensive basis deals are replaced with current lower cost basis deals.

During Q2 2022, Peyto sold 30% of its natural gas at Henry Hub, 26% at AECO, 34% at Emerson, 7% at Malin, and the remaining 3% at Ventura. Approximately 44% of AECO sales were at Daily prices while 56% were at Monthly prices. Net of diversification activities of CND$0.65/Mcf (US$0.47/MMBTU), Peyto realized a natural gas price of $5.82/Mcf before commodity risk management reduced this price by $1.74/Mcf, to $4.08/Mcf.

The Company’s liquids are 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 and Peyto markets each product separately. Pentanes Plus are sold on a monthly index differential linked to WTI, with some volumes forward sold on fixed differentials to WTI. Butane is sold as a percent of WTI or a fixed differential to Mount Belvieu, Texas markets. Propane is sold on a fixed differential to Conway, Kansas markets. While some products like Butane and Propane require annual term contracts to ensure delivery paths and markets are certain, others can be sold on the daily spot market.

Condensate and Pentane Plus volumes were sold in Q2 2022 for an average price of $134.57/bbl, which is up 75% from $76.92/bbl in Q2 2021, and as compared to Canadian WTI oil price that averaged $138.44/bbl. The $3.87/bbl differential from light oil price was down from $4.18/bbl in Q2 2021. Butane and propane volumes were sold in combination at an average price of $57.03/bbl, or 41% of light oil price, up 121% from the $25.76/bbl in Q2 2021, due to continued demand increases and lower NGL supplies. Liquid hedging losses, reduced the combined realized liquids price of $103.04/bbl by $15.24/bbl.

In general, Peyto’s commodity risk management program is designed to smooth out the short-term fluctuations in the price of natural gas and natural gas liquids through future sales. This smoothing gives greater predictability of cashflows for the purposes of capital planning and dividend payments. The future sales are meant to be methodical and consistent to avoid speculation. In general, this approach will show hedging losses when short term prices climb and hedging gains when short term prices fall.

Peyto’s realized price by product and relative to benchmark prices is shown in the following table.

Benchmark Commodity Prices at Various Markets

Peyto Realized Commodity Price by Market (net of diversification)

Peyto realized natural gas prices are at NIT, prior to fuel. Peyto gas has an average heating value of approx. 1.15GJ/Mcf.
Liquids prices are Peyto realized prices in Canadian dollars adjusted for fractionation, transportation, and market differentials.
Details of Peyto’s ongoing marketing and diversification efforts are available on Peyto’s website at:
http://www.peyto.com/Files/Operations/Marketing/hedges.pdf

Financial Results

The Company’s realized price for natural gas in Q2 2022 was $6.47/Mcf, prior to $0.65/Mcf of market diversification activities and a $1.74/Mcf hedging loss, while its realized liquids price was $103.04/bbl, before a $15.24/bbl hedging loss, which yielded a combined revenue stream of $5.48/Mcfe (including $0.02/Mcfe of net third party sales). This net sales price was 88% higher than the $2.92/Mcfe realized in Q2 2021. Cash costs of $1.83/Mcfe were higher than the $1.21/Mcfe in Q2 2021 due to increased royalties and transportation costs but offset by lower interest costs. Net of royalties, Peyto’s controllable cash costs have remained relatively consistent, averaging $0.88/Mcfe for the past 3.5 years. These same costs are expected to fall going forward as interest cost fall with reduced debt levels.

Depletion, depreciation, and amortization charges of $1.31/Mcfe, along with a provision for deferred tax and stock-based compensation payments resulted in earnings of $1.67/Mcfe, or a 31% profit margin. Dividends to shareholders totaled $0.45/Mcfe.

Activity Update

Surface conditions in Peyto’s core areas are improving since the heavy rains in June, allowing Peyto to begin catching up on completion and tie in activity through July and August. To date in Q3 2022, Peyto has completed 9 gross (7.8 net) wells and tied in 12 gross (9.2 net) wells. Despite clearing some of the backlog, 11 gross (9.6 net) wells remain to be completed and tied in. In addition, Peyto has yet to complete pipeline expansions on several identified gathering system bottlenecks to fully realize new production volumes. The average working interest of wells brought on in the second quarter was 75%, lower than the typical 95%, which reduced the net impact of the five drilling rigs, however the average working interest is expected to increase to the more typical 95-100% throughout the remainder of the year. These lower working interest locations were more proximal to the plant site which helped achieve the initial critical mass to justify construction.

Peyto’s Greater Brazeau area continues to grow with the integration of both the new Chambers gas plant and the Aurora gas plant acquired earlier this year. The Company now expects this entire area to exceed 35,000 boe/d production by year end with significant additional growth potential. The total processing capacity of the three Peyto owned and operated gas plants is approximately 250 MMcf/d which allows for gross production growth to 45,000 boe/d in the future without the need for additional expansion. Peyto plans to keep 2 drilling rigs active in this area for the foreseeable future in support of these growth plans.

Over the past year, Peyto has assembled an additional 21 sections of Spirit River rights in the Minehead area of Alberta to expand previous land holdings in nearby Whitehorse. The total land position in this area now sits at 72 sections of 100% working interest land. The success of the ERH program in the Sundance and Brazeau areas, along with recent long-lateral tests in Whitehorse, gives Peyto the confidence to apply this design to develop the Minehead lands. The Company’s internal estimates suggest over 120 future Wilrich locations on the undeveloped land with additional shallow targets in the Viking, Notikewin, and Falher formations analogous to Peyto’s core areas in Sundance and Brazeau. Pending continued success in the delineation program in Minehead later this year, and into 2023, Peyto anticipates construction of a new sweet gas processing plant capable of handling 50 MMcf/d in the second half of 2023. The plant will be situated immediately adjacent to the NGTL mainline system where an existing meter station of the same capacity already exists. Like the recent Chambers plant commissioned earlier this year, Peyto will utilize surplus compressors and refrigeration equipment already owned by the company and ready to deploy. This will save on new equipment purchases and mitigate delivery delays. Under current pricing scenarios the ERH well design should allow development of this new play with similar high returns and short payout times as in Peyto’s other core areas.

Management Team Addition

Peyto is pleased to announce the addition of Tavis Carlson, as Vice President of Finance, to the Company’s management team. Mr. Carlson was previously the CFO, VP Finance and Corporate Secretary with Altura Energy Inc., and will join current Controller Crissy Rafoss and CFO Kathy Turgeon to further strengthen Peyto’s finance team.

Outlook

The outlook for natural gas prices for the balance of 2022 and beyond remains extremely bullish. NYMEX natural gas prices that rallied throughout Q2 to over $9 USD/MMBTU and fell back in July have again recovered in early August. The futures curve has strengthened similarly. This commodity strength is ensuring Peyto can deliver on its strategy for the year which originally envisioned deploying approximately 50% of funds flow into capital projects while generating approximately 50% as free cashflow. A large portion of Peyto earnings generated this year is still planned to be retained to retire debt and strengthen the Company’s balance sheet, while a smaller portion is to be returned to shareholders in dividends. Then, with the balance sheet much stronger, Peyto can look to shift that allocation going forward to less debt repayment and greater dividends.

The resource opportunities Peyto has in inventory continue to grow. Recent success at land sales has added additional drilling locations and Peyto anticipates, with a significant amount of land expiring in the Deep Basin over the next few years, there will be even more opportunities to pursue organically. The Company looks to expand its drilling inventory in time to allow for material future growth in reserves and production into expanded basin egress.29dk2902l