Quarterly / Earnings Reports | Third Quarter (3Q) Update | Capital Markets | Capital Expenditure - 2020 | 2020 Guidance

Peyto Talks 2020 Budget, Plans; Reports Q3 Results

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   |    Wednesday,November 06,2019

Peyto Exploration & Development Corp. reported its Q3 2019 results as well as its preliminary 2020 plans.

2020 Budget

The recent strength in, and significantly improved outlook for, AECO natural gas prices, combined with the success of Peyto’s most recent Cardium drilling program has provided the confidence to continue with Peyto’s strategic three-year plan as announced in January of this year. Consistent with that plan, Peyto’s Board of Directors is reviewing a go forward capital program that invests more free cashflow into resource development opportunities.

While specifics of the 2020 budget are not yet finalized, a capital program of $250 to $300 million, funded entirely from free cashflow, would add 25,000-30,000 boe/d, based on historic on-stream metrics, which would more than offset the annual forecast of 23% base decline on 2019 exit production of 81,000-83,000 boe/d. The exact 2019 exit production and subsequent base decline will depend on year end tie-in timing. As always, Peyto will ensure any capital plans will be nimble with the ability to react to changes in commodity prices and the global economic environment, both of which continue to be volatile and uncertain. Peyto remains committed to pursuing only those investments that can achieve the maximum possible returns regardless of timing or production outcomes. Peyto also expects that with future commodity price strength, the Company will continue to reduce indebtedness. By pursuing a capital program that grows EBITDA rather than just reduce debt, Peyto will strengthen its balance sheet going forward.

Activity Update

During the month of October, Peyto spud 8 gross, (7.1 net) wells and completed and brought onstream 7 gross (5.5 net) Cardium wells. Natural gas prices since the end of the quarter have been strengthening as early winter weather descends on Western Canada. The AECO spot price averaged $2.14/GJ in October, up from $0.51/GJ in September, while November prices are expected to average over $2.40/GJ. As a result, Peyto has started up 2 additional drilling rigs, one in Sundance and one in Brazeau, focused on higher deliverability Spirit River formations. These 2 additional rigs are anticipated to add significant lean gas volumes by December which will take advantage of the current improvement in natural gas prices and the strengthening winter gas price sentiment.

Also, during October a third party midstream fractionation facility in Fort Saskatchewan, Alberta experienced a failure in one of its distillation towers leading to a reduction in available capacity and an apportionment of producers’ LPG supply mix to the facility. The resultant loss in production to Peyto over the month of October was approximately 1,000 boe/d. To mitigate the impact on cash flow, Peyto has shut in its Oldman deep cut plant and warmed up all Company refrigeration plants to put more of the LPG mix into the gas phase which is now benefiting from higher gas prices. The tower is being repaired and it is expected to be back online by the end of November.

Additional highlights included:

• Condensate and C5+ production up 17%. Condensate and Pentanes production increased from 5,175 bbl/d in Q3 2018 to 6,041 bbl/d in Q3 2019 contributing to total liquid production of 10,650 bbl/d. Total NGL yields increased from 20 bbl/mmcf to 27 bbl/mmcf over that same period due to the continued focus on Peyto’s liquids rich Cardium play. Total liquids production in Q3 2019 was up 16% year over year, while natural gas production was down 13% to 396 mmcf/d. Consistent with the second quarter, periods of low or negative AECO natural gas price in the quarter, resulted in lean gas production being curtailed while liquids rich gas production remained on. Total Q3 2019 production of 76,707 boe/d was down 6% from Q2 2019 due to the restricted capital program and lean gas curtailment.
• Funds from operations of $0.41/share. Generated $68 million in Funds from Operations (“FFO”) in Q3 2019 down from $76 million in Q2 2019 and $110 million in Q3 2018 due to lower commodity prices and lower gas production levels. FFO ($68 million) exceeded both capital expenditures ($37 million) and dividend payments ($10 million) in the quarter by $22 million, or $84 million year to date, resulting in reduced debt levels. This is the seventh quarter of reduced capital investment with cumulative free cashflow (FFO-Capex-Dividend) of $207 million during this period. At the same time, Peyto’s producing reserve life, a measure of its sustainability, has increased at a rate of 25% per year while its base production decline rate has fallen.
• Total cash costs of $0.89/Mcfe (or $0.86/Mcfe ($5.17/boe) excluding royalties). Industry leading total cash costs, included $0.03/Mcfe royalties, $0.31/Mcfe operating costs, $0.19/Mcfe transportation, $0.05/Mcfe G&A and $0.31/Mcfe interest, which combined with a realized price of $2.50/Mcfe, resulted in a $1.61/Mcfe ($9.34/boe) cash netback, down 31% from $2.33/Mcfe in Q3 2018.
• Capital investment of $36.6 million. A total of 13 gross wells (10.5 net) were drilled in the third quarter, 10 gross wells (6.5 net) were completed, and 14 gross wells (10.5 net) were brought on production.
• Earnings of $0.04/share, dividends of $0.06/share. Earnings of $6 million were generated in the quarter, while dividends of $10 million were paid to shareholders. The Company has never incurred a write down nor recorded an impairment of its assets and this quarter represents Peyto’s 59^th consecutive quarter of earnings.

Third Quarter 2019 in Review

Operations in the third quarter continued to be plagued by extremely wet surface conditions that hampered drilling rig and frac equipment movement and delayed pipeline installations. Despite these hinderances, Peyto was still able to advance its liquids rich Cardium drilling program. Well results and drilling and completion costs continued to improve throughout the quarter. Most of the activity was concentrated in the Wildhay area where Peyto has the highest condensate yields. The average Cardium well in Wildhay is recovering approximately 25,000 bbls of condensate in its first 6 months of production while costs for the total Cardium drilling program to date are 10% lower than last year, at $2.25 million per well. Natural gas prices in Alberta plunged in the quarter to some of the lowest prices in the past 30 years as restricted access to storage prevented supplies from finding a market. Despite the Company’s market diversification efforts this still resulted in some of the lowest realized natural gas prices in Peyto’s 20 year history. Late in the quarter, however, and with the help of the Alberta government, an industry agreement to revise NGTL service priorities during future summer periods was successfully negotiated. This had an immediate impact on AECO natural gas prices and should help prevent the recurrence of such a disconnected Alberta gas market over the next few years while NGTL continues to build out its capacity to handle basin growth. Despite the commodity price weakness in the quarter, Peyto’s industry leading low costs still delivered a 68% operating margin, strong earnings and returns which reinforced the strength of the Peyto business model.  To the end of Q3 2019, Peyto has accumulated over $2.6 billion in earnings on a $6.1 billion cumulative capital investment, or one of the highest ratios of profit to capital in the industry.

Exploration & Development

Third quarter 2019 activity was again focused almost exclusively on the Company’s liquids-rich Cardium play with 11 wells drilled in the Wildhay area and one in the Sundance area. There was also one Falher well drilled in the Ansell area. The Company continues to drive down costs, as illustrated in the following table.

*Peyto’s Montney well is excluded from drilling and completion cost comparison.

Capital Expenditures

Peyto invested $14.4 million on drilling, $10.0 million on completions, $3.2 million on wellsite equipment and tie-ins, $7.9 million on facilities and major pipeline projects, and $1.1 million acquiring new lands and seismic, for total capital investments of $36.6 million in Q3 2019.

The $7.9 million invested in facilities and major pipeline projects included $4.0 million for final installation of a major pipeline expansion in the Wildhay area as well as $1.3 million for the expansion of liquids stabilization at the Wildhay gas plant to accommodate the additional condensate production from both Cardium and Montney drilling activity.

Commodity Prices

Average Monthly AECO natural gas price was $0.99/GJ in Q3 2019, down from $1.11/GJ in the previous quarter and from $1.28/GJ in the prior year period. Meanwhile, the average Daily AECO gas price was $0.86/GJ in Q3 2019, down from $0.98/GJ in the previous quarter, and down from $1.13/GJ in the prior year period. Historically, monthly prices have outperformed daily prices, and this was also the case in the third quarter. Peyto typically hedges the majority of the AECO exposed production using fixed price swaps settled against the monthly price which is why such a large portion of Peyto’s unhedged gas received the monthly price.

Peyto’s natural gas sales for the quarter were split approximately 37% to Henry Hub, 14% to Eastern Canadian/US markets, 41% to AECO Monthly and 7% to AECO Daily prices. These marketing efforts resulted in AECO equivalent prices of $1.93/mcf, $1.46/mcf, $1.13/mcf and $1.08/mcf respectively after adjusting for heat content, and physical or synthetic transportation charges. Combined, these prices resulted in an average price of $1.47/mcf before hedging gains of $0.37/mcf.

In the third quarter of 2019, NGL prices, relative to natural gas prices, continued to justify the operation of Peyto’s Oldman deep cut plant which extracts more propane and butane from the raw gas stream. As a result, Peyto realized a blended oil and natural gas liquids price of $39.65/bbl, which represented 53% of the $74.55/bbl average Canadian WTI price. This results from the combination of 57% of liquids comprised of condensate and pentanes and 43% comprised of propane and butane, each realizing a blended price of $67.76/bbl and $2.79/bbl, respectively.

Financial Results

Approximately 41%, or $0.87/Mcfe, of Peyto’s unhedged revenue came from its associated natural gas liquids sales while 59%, or $1.26/Mcfe, came from natural gas. Natural gas and oil hedging activity contributed $0.37/Mcfe for total revenue of $2.50/Mcfe. Liquids production represented 14% of total production but 37% of unhedged revenue. Revenue from the liquids production covered all cash costs. Total cash costs, when deducted from realized revenues of $2.50/Mcfe, resulted in a cash netback of $1.61/Mcfe or a 64% operating margin. Depletion, depreciation and amortization charges of $1.37/Mcfe, along with a provision for the market-based bonus resulted in earnings of $0.15/Mcfe, or an 6% profit margin. Dividends of $0.23/Mcfe were paid to shareholders.

Management Addition

Peyto is very pleased to announce that Mr. Scott Robinson, will be re-joining the Peyto management team in the role of Vice President, Business Development. Scott was previously Peyto’s Chief Operating Officer before embarking on a brief period of semi-retirement. During that period Scott continued to help advance many of Peyto’s new ventures including the Big Sunny storage scheme, participation in the Rockies LNG consortium, in-field fractionation and LPG export opportunities, deep cut facility projects, and natural gas power generation markets. In this new role, Scott will be leading a technical team looking at new resource development opportunities within and beyond Peyto’s traditional Deep Basin core areas.

Outlook

The Canadian natural gas market has changed throughout 2019 from one of over supply and lack of take away capacity to one of undersupply and increasing take away capacity. Based on industry projections for reduced drilling activity, Peyto expects this trend will continue in 2020. When combined with a new temporary supply management program that allows gas storage to once again function effectively, the result is a domestic natural gas market that is better connected to the greater North American market. All of this has translated into higher natural gas prices going forward for Canadian natural gas producers.

While a higher commodity price has traditionally resulted in increased capital investment and greater production, there remains a liquidity issue in the industry which has reduced access to external capital, meaning capital investments will generally continue to be limited to internally generated cashflows. This discipline should prevent the industry from overwhelming demand with growth in new supply and negatively impacting the commodity price recovery.

The Canadian energy industry today has been changing its focus from one of growth to a pursuit of profit. For Peyto, no change is needed as this has been the sole focus of the Company over the past 20 years. A disciplined, counter-cyclical, profit driven strategy has motivated Peyto from day one and remains the focus today.

Peyto continues to execute on its three-year strategic plan as announced earlier this year. The reduced capital programs in 2018 and 2019 have preserved drilling inventory and reserves for the price recovery that is now underway. The plan to ramp up capital investment in 2020 and 2021 as commodity prices improve is continuing to solidify. As expected, Peyto’s proved producing reserve life has continued to increase and is expected to approach 10 years by the end of 2019 as annual base production declines have fallen to almost 20% from 40% three years ago. This will provide a solid platform for growth in the future as less capital will be required to offset base declines. As always, Peyto will only invest shareholder capital if sufficient full cycle returns can be achieved.