Peyto Reports Q2 2015 Results and Drives Costs to New Record Lows
(firmenpresse) - CALGARY, ALBERTA -- (Marketwired) -- 08/12/15 -- Peyto Exploration & Development Corp. ("Peyto" or the "Company") (TSX: PEY) is pleased to present its operating and financial results for the second quarter of the 2015 fiscal year. Continued improvement in operational execution, service cost savings and operating efficiency resulted in a 78% operating margin (1) and a 7% profit margin (2). Additional highlights included:
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, as shown in the following table:
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
Oil prices strengthened in the second quarter 2015, while natural gas prices remained relatively flat from the previous quarter as North American supply growth continued to exceed demand. The average second quarter 2015 Alberta (AECO) daily and monthly natural gas prices were effectively the same, at $2.53/GJ down 43% from $4.43/GJ in Q2 2014. As Peyto had committed 88% of its production to the monthly price, Peyto realized a volume weighted average natural gas price of $2.53/GJ or $2.86/mcf, prior to a $0.64/mcf hedging gain.
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.
Financial Results
Combining realized natural gas and liquids prices, Peyto's unhedged revenues totaled $3.22/mcfe ($3.81/mcfe including hedging gains). Royalties of $0.13/mcfe, operating costs of $0.31/mcfe, transportation costs of $0.15/mcfe, G&A of $0.04/mcfe and interest costs of $0.19/mcfe, all combined for total cash costs of $0.82/mcfe ($4.91/boe). This is a new Company record and the lowest total cash costs in Peyto's 16.5 year history. These industry leading total cash costs, when deducted from realized revenues, resulted in a cash netback of $2.99/mcfe or a 78% operating margin. Operating costs were 14% lower due to lower chemical and maintenance costs, despite significantly higher property taxes and Alberta regulator fees, and Peyto expects to maintain these gains throughout 2015.
Depletion, depreciation and amortization charges of $1.78/mcfe were similar to the $1.73/mcfe charged in Q2 2014. On June 18, 2015, the Alberta NDP government announced a 20% increase to the provincial corporate income tax rate which increased the deferred income tax expense by $27.7 million to $41.1 million. This entire change was accounted for in the second quarter, reducing earnings from $38.9 million to $12.3 million. On a per unit of production basis, the one-time charge reduced earnings of $0.86/mcfe to $0.27/mcfe, or from a 23% profit margin to a 7% profit margin. Peyto expects that earnings will not be as significantly affected by the tax increase, on a go-forward basis, now that it has accounted for this one time charge.
During the quarter, Peyto announced it had closed a bought deal offering of common shares. Pursuant to the offering, the Company issued 5,037,000 common shares (including 657,000 common shares issued pursuant to the exercise in full of the over-allotment option granted to the underwriters) at a price of $34.25 per common share, for total gross proceeds of approximately $172.5 million.
In addition, Peyto announced it had issued CND $100 million of senior unsecured notes pursuant to a note purchase agreement. The notes have a coupon rate of 4.26% and mature on May 1, 2025. As the notes rank equally with Peyto's obligations under its bank facility and existing senior unsecured notes, Peyto's aggregate borrowing capacity increased by $100 million to $1.42 billion. At the end of the quarter, Peyto's net debt to annualized Q2 2015 FFO was 1.7 times.
Marketing
Peyto's practice of layering in future sales in the form of fixed price swaps, and thus smoothing out the volatility in gas prices, continued throughout the quarter. The following table summarizes the remaining hedged volumes and prices for the upcoming years as of August 12, 2015.
The Company targets to have approximately 65% of its natural gas production forward sold at any given time in order to improve the confidence of funding for capital planning purposes.
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.
Conference Call and Webcast
A conference call will be held with the senior management of Peyto to answer questions with respect to the 2015 second quarter financial results on Thursday, August 13th, 2015, at 9:00 a.m. Mountain Daylight Time (MDT), or 11:00 a.m. Eastern Daylight Time (EDT). To participate, please call 1-416-340-2218 (Toronto area) or 1-866-223-7781 for all other participants. Shareholders and interested investors are encouraged to ask questions about Peyto and its most recent results. Alternatively, questions can be submitted to or by calling Jim Grant, Investor Awareness at (403) 451-4102.
The conference call will also be available on replay by calling 1-905-694-9451 (Toronto area) or 1-800-408-3053 for all other parties, using passcode 5173650. The replay will be available at 11:00 a.m. MDT, 1:00 p.m. EDT Thursday, August 13th, 2015 until midnight EDT on Thursday, August 20th, 2015. The conference call can also be accessed through the internet at . After this time the conference call will be archived on the Peyto Exploration & Development website at .
Management's Discussion and Analysis
A copy of the second quarter report to shareholders, including the MD&A, audited financial statements and related notes, is available at and will be filed at SEDAR, at a later date.
Shareholders are encouraged to visit the Peyto website at where there is a wealth of information designed to inform and educate investors. A monthly President's Report can also be found on the website which follows the progress of the capital program and the ensuing production growth, along with video and audio commentary from Peyto's senior management.
Darren Gee, President and CEO
August 12, 2015
Certain information set forth in this document and Management's Discussion and Analysis, including management's assessment of Peyto's future plans and operations, capital expenditures and capital efficiencies, contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond these parties' control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the lack of availability of qualified personnel or management, stock market volatility and ability to access sufficient capital from internal and external sources. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. Peyto's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits Peyto will derive there from. In addition, Peyto is providing future oriented financial information set out in this press release for the purposes of providing clarity with respect to Peyto's strategic direction and readers are cautioned that this information may not be appropriate for any othepurpose. Other than is required pursuant to applicable securities law, Peyto does not undertake to update forward looking statements at any particular time.
Peyto Exploration & Development Corp.
Notes to Condensed Financial Statements (unaudited)
As at June 30, 2015 and 2014
(Amount in $ thousands, except as otherwise noted)
1. Nature of operations
Peyto Exploration & Development Corp. ("Peyto" or the "Company") is a Calgary based oil and natural gas company. Peyto conducts exploration, development and production activities in Canada. Peyto is incorporated and domiciled in the Province of Alberta, Canada. The address of its registered office is 1500, 250 - 2nd Street SW, Calgary, Alberta, Canada, T2P 0C1.
These financial statements were approved and authorized for issuance by the Audit Committee of Peyto on August 11, 2015.
2. Basis of presentation
The condensed financial statements have been prepared by management and reported in Canadian dollars in accordance with International Accounting Standard ("IAS") 34, "Interim Financial Reporting". These condensed financial statements do not include all of the information required for full annual financial statements and should be read in conjunction with the Company's consolidated financial statements as at and for the years ended December 31, 2014 and 2013.
Significant Accounting Policies
(a) Significant Accounting Judgments, Estimates and Assumptions
The timely preparation of the condensed financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies, if any, as at the date of the financial statements and the reported amounts of revenue and expenses during the period. By their nature, estimates are subject to measurement uncertainty and changes in such estimates in future years could require a material change in the condensed financial statements.
Except as disclosed below, all accounting policies and methods of computation followed in the preparation of these financial statements are the same as those disclosed in Note 2 of Peyto's financial statements as at and for the years ended December 31, 2014 and 2013.
Standards issued but not yet effective
In July 2014, the IASB completed the final elements of IFRS 9 "Financial Instruments." The Standard supersedes earlier versions of IFRS 9 and completes the IASB's project to replace IAS 39 "Financial Instruments: Recognition and Measurement." IFRS 9, as amended, includes a principle-based approach for classification and measurement of financial assets, a single 'expected loss' impairment model and a substantially-reformed approach to hedge accounting. The Standard will come into effect for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. IFRS 9 will be applied by Peyto on January 1, 2018 and the Company is currently evaluating the impact of the standard on its financial statements.
In May 2014, the IASB issued IFRS 15 "Revenue from Contracts with Customers," which replaces IAS 18 "Revenue," IAS 11 "Construction Contracts," and related interpretations. The standard is required to be adopted for fiscal years beginning on or after January 1, 2018, with earlier adoption permitted. IFRS 15 will be applied by Peyto on January 1, 2018 and the Company is currently evaluating the impact of the standard on Peyto's financial statements.
3. Property, plant and equipment, net
During the three and six month periods ended June 30, 2014, Peyto capitalized $1.8 million and $3.8 million (2014 - $2.4 million and $4.8 million) of general and administrative expense directly attributable to exploration and development activities.
4. Long-term debt
As at June 30, 2015, The Company has a syndicated $1.0 billion extendible unsecured revolving credit facility with a stated term date of April 26, 2017. The bank facility is made up of a $30 million working capital sub-tranche and a $970 million production line. Borrowings under the facility bear interest at Canadian bank prime or US base rate, or, at Peyto's option, Canadian dollar bankers' acceptances or US dollar LIBOR loan rates, plus applicable margin and stamping fees. The total stamping fees range between 50 basis points and 215 basis points on Canadian bank prime and US base rate borrowings and between 150 basis points and 315 basis points on Canadian dollar bankers' acceptance and US dollar LIBOR borrowings. The undrawn portion of the facility is subject to a standby fee in the range of 30 to 63 basis points.
On May 1, 2015, Peyto issued CDN $100 million senior unsecured notes pursuant to a note purchase agreement. The notes were issued by way of private placement and rank equally with Peyto's obligations under its bank facility. The notes have a coupon rate of 4.26% and mature on May 1, 2025. Interest is paid semi-annually in arrears.
Peyto is subject to the following financial covenants as defined in the credit facility and note purchase agreements:
Peyto is in compliance with all financial covenants at June 30, 2015.
Total interest expense for the three and six month periods ended June 30, 2015 was $8.7 million and $17.6 million (2014 - $8.5 million and $17.3 million) and the average borrowing rate for the period was 3.7% and 3.6% (2014- 4.2% and 4.3%).
5. Decommissioning provision
The following table reconciles the change in decommissioning provision:
Peyto has estimated the net present value of its total decommissioning provision to be $112.6 million as at June 30, 2015 ($100.8 million at December 31, 2014) based on a total future undiscounted liability of $233.72 million ($178.5 million at December 31, 2014). At June 30, 2015 management estimates that these payments are expected to be made over the next 50 years with the majority of payments being made in years 2040 to 2064. The Bank of Canada's long term bond rate of 2.31 per cent (2.33 per cent at December 31, 2014) and an inflation rate of two per cent (two per cent at December 31, 2014) were used to calculate the present value of the decommissioning provision.
6. Share capital
Authorized: Unlimited number of voting common shares
Issued and Outstanding
Earnings per common share has been determined based on the following:
On December 31, 2014, Peyto completed a private placement of 168,920 common shares to employees and consultants for net proceeds of $5.6 million ($33.30 per share). These common shares were issued January 7, 2015.
On March 25, 2015, Peyto completed a private placement of 61,545 common shares to employees and consultants for net proceeds of $2.1 million ($34.25 per common share).
On April 16, 2015, Peyto completed a public offering for 5,037,000 common shares at a price of $34.25 per common share, for net proceeds of $165.2 million.
Dividends
During the three and six month periods ended June 30, 2015, Peyto declared and paid dividends of $0.33 and $0.66 per common share ($0.11 per common share for the months of January to June 2015), totaling $52.0 million and $103.0 million respectively (2014 - $0.28 and $0.52 ($0.08 per common share per month for January to April and $0.10 per common share for the months of May and June), totaling $42.9 million and $79.5 million respectively).
Comprehensive income
Comprehensive income consists of earnings and other comprehensive income ("OCI"). OCI comprises the change in the fair value of the effective portion of the derivatives used as hedging items in a cash flow hedge. "Accumulated other comprehensive income" is an equity category comprised of the cumulative amounts of OCI.
Accumulated hedging gains
Gains and losses from cash flow hedges are accumulated until settled. These outstanding hedging contracts are recognized in earnings on settlement with gains and losses being recognized as a component of net revenue. Further information on these contracts is set out in Note 8.
7. Future performance based compensation
Peyto awards performance based compensation to employees annually. The performance based compensation is comprised of reserve and market value based components.
Reserve based component
The reserves value based component is 4% of the incremental increase in value, if any, as adjusted to reflect changes in debt, equity, dividends, general and administrative costs and interest, of proved producing reserves calculated using a constant price at December 31 of the current year and a discount rate of 8%.
Market based component
Under the market based component, rights with a three year vesting period are allocated to employees. The number of rights outstanding at any time is not to exceed 6% of the total number of common shares outstanding. At December 31 of each year, all vested rights are automatically cancelled and, if applicable, paid out in cash. Compensation is calculated as the number of vested rights multiplied by the total of the market appreciation (over the price at the date of grant) and associated dividends of a common share for that period.
The fair values were calculated using a Black-Scholes valuation model. The principal inputs to the option valuation model were:
8. Financial instruments
Financial instrument classification and measurement
Financial instruments of the Company carried on the condensed balance sheet are carried at amortized cost with the exception of cash and financial derivative instruments, specifically fixed price contracts, which are carried at fair value. There are no significant differences between the carrying amount of financial instruments and their estimated fair values as at June 30, 2015.
The Company's areas of financial risk management and risks related to financial instruments remained unchanged from December 31, 2014.
The fair value of the Company's cash and financial derivative instruments are quoted in active markets. The Company classifies the fair value of these transactions according to the following hierarchy.
The Company's cash and financial derivative instruments have been assessed on the fair value hierarchy described above and classified as Level 1.
Fair values of financial assets and liabilities
The Company's financial instruments include cash, accounts receivable, financial derivative instruments, due from private placement, current liabilities, provision for future performance based compensation and long term debt. At June 30, 2015, cash and financial derivative instruments are carried at fair value. Accounts receivable, due from private placement, current liabilities and provision for future performance based compensation approximate their fair value due to their short term nature. The carrying value of the long term debt approximates its fair value due to the floating rate of interest charged under the credit facility.
Commodity price risk management
Peyto uses derivative instruments to reduce its exposure to fluctuations in commodity prices. Peyto considers all of these transactions to be effective economic hedges for accounting purposes.
Following is a summary of all risk management contracts in place as at June 30, 2015:
As at June 30, 2015, Peyto had committed to the future sale of 136,435,000 gigajoules (GJ) of natural gas at an average price of $3.22 per GJ or $3.70 per mcf. Had these contracts been closed on June 30, 2015, Peyto would have realized a net gain in the amount of $58.3 million. If the AECO gas price on June 30, 2015 were to increase by $1/GJ, the unrealized gain would decrease by approximately $136.4 million. An opposite change in commodity prices rates would result in an opposite impact on other comprehensive income.
Subsequent to June 30, 2015 Peyto entered into the following contracts:
9. Related party transactions
Certain directors of Peyto are considered to have significant influence over other reporting entities that Peyto engages in transactions with. Such services are provided in the normal course of business and at market rates. These directors are not involved in the day to day operational decision making of the Company. The dollar value of the transactions between Peyto and each of the related reporting entities is summarized below:
10. Commitments
In addition to those recorded on the Company's balance sheet, the following is a summary of Peyto's contractual obligations and commitments as at June 30, 2015:
11. Contingencies
On October 31, 2013, Peyto was named as a party to a statement of claim received with respect to transactions between Poseidon Concepts Corp. and Open Range Energy Corp. The allegations against New Open Range contained in the claim described above are based on factual matters that pre-existed the Company's acquisition of New Open Range. The Company has not yet been required to defend this action. If it is required to defend the action, the Company intends to aggressively protect its interests and the interests of its Shareholders and will seek all available legal remedies in defending the actions
Officers
Contacts:
Peyto Exploration & Development Corp.
403.261.6081
403.451.4100 (FAX)
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Datum: 12.08.2015 - 20:37 Uhr
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