Peyto Posts 18th Consecutive Year of Profits, Earnings Per Share Up 55%


CALGARY, Alberta, Feb. 28, 2018 (GLOBE NEWSWIRE) —

Peyto Exploration & Development Corp. (TSX:PEY) (“Peyto” or the “Company”) is pleased to report operating and financial results for the fourth quarter and 2017 fiscal year. Peyto achieved a 75% operating margin1 and a 23% profit margin2 in 2017, while also generating its second highest all-time revenue and funds from operations. Over Peyto’s 19 years, the Company has invested $5.7 billion of capital to profitably grow production and reserves per share while generating over $19/share in earnings and paying over $18/share in distributions and dividends. With average Return on Capital Employed (“ROCE”) of 16% and Return on Equity (“ROE”) of 30%, Peyto has been one of Canada’s most profitable natural gas producers. Highlights for the fourth quarter and full year 2017 included:

  • Production per share up 4% Average annual production increased 6%, or 4% per share, to 616 MMcfe/d (102,614 boe/d) in 2017 up from 582 MMcfe/d (96,975 boe/d) in 2016. Q4 2017 production was up 8%, also 8% per share, from Q4 2016 to 659 MMcfe/d (109,793 boe/d). Production deferrals due to low gas price in Q3 and Q4 reduced 2017 annual production by 950 boe/d.
  • Reserves per share up 9% – Producing reserves increased 11% to 1.6 TCFe (275 mmboes), up 9% per share, while total P+P reserves increased 10% to 4.3 TCFe (722 mmboes), up 9% per share.
  • Total Cash costs $0.83/Mcfe ($4.99/boe) – Cash costs of $0.68Mcfe, before royalties of $0.15/Mcfe, included operating costs of $0.27/Mcfe, transportation of $0.16/Mcfe, G&A of $0.04/Mcfe and interest expense of $0.21/Mcfe. Total cash costs in 2017 were up 8% from 2016 due to higher royalties and interest rates. Total 2017 cash costs combined with a realized price of $3.38/Mcfe ($20.32/boe), resulting in a cash netback of $2.55/Mcfe ($15.32/boe) or a 75% operating margin. Q4 2017 cash costs were $0.83/Mcfe ($4.96/boe), with a realized price of $3.50/Mcfe ($20.97/boe) and cash netback of $2.67/Mcfe ($16.01/boe). 
  • Funds from operations(3) per share of $3.48 – Annual Funds from Operations (“FFO”) of $574 million, or $3.48/share, was up 11% (10% per share) from $515 million in 2016 as a result of a 6% increase in production combined with a 7% increase in realized commodity prices. Q4 2017 FFO was $162 million or $0.98/share compared to $145 million, or $0.88/share, in Q4 2016.
  • Capital investments of $521 million – A total of $521 million was invested in the drilling of 142 gross (138 net) wells that contributed 47,000 boe/d of incremental production at year end for a cost of $11,000/boe/d. This was consistent with 2016 and is inclusive of $78 million of land, seismic, facility costs and $443 million of well-related costs.
  • PDP FD&A lowest since 2003 – All in cost to develop new producing reserves was $1.36/Mcfe ($8.13/boe), down 6% from 2016, while the field netback for 2017 averaged $2.55/Mcfe ($15.32/boe) resulting in a recycle ratio of 1.9 times. The Company replaced 171% of production with new producing reserves at the lowest cost since 2003.
  • Earnings per share of $1.07 – Annual earnings of $177 million in 2017 were up 57% (55% per share) from $112 million in 2016 due to the increase in cashflow combined with reduced finding costs. Q4 2017 earnings of $52 million ($0.31/share) equated to a profit margin of 24% of revenue. Earnings generated in 2017 represent the 18th consecutive year of recorded profits totaling over $2.33 billion, while cumulative dividends/distributions to shareholders have totaled $2.29 billion.

2017 in Review

The year 2017 was a year of even greater gas price volatility than 2016. Daily Alberta natural gas prices swung wildly from highs of over $4/GJ to, at times, less than zero. The price at which gas could be sold into the future fell by as much as 50%. Much of this volatility was due to a surprising change in NGTL’s service priorities in combination with a late surge of WCSB supply without incremental capacity to access export markets. This has created significant near-term uncertainty for the future of gas prices in the WCSB. Peyto’s hedging practice of forward selling large portions of its natural gas in order to smooth out gas price volatility allowed the Company to continue with mostly steady production operations and to conduct its most active year ever, drilling a record 142 horizontal wells in its liquids-rich, gas resource plays. Several large pipeline projects were completed in the year which expanded Peyto’s owned and operated infrastructure including main gas gathering lines in Brazeau and Whitehorse as well as an integrated liquids storage and gathering pipeline which connected four of the six Greater Sundance gas plants. This liquids pipeline resulted in significantly less trucking which reduced emissions, improved NGL price realizations, and contributed to the 18% annual increase in liquids pricing. Peyto added 88 sections of new land in 2017, almost twice that acquired in 2016, for an average of $253/acre. Although, the Company internally identifies numerous locations per new section of land acquired, these locations have yet to be recognized in the annual reserves evaluation. The solid returns generated on the 2017 capital program drove an 8% ROCE, 11% ROE and 55% increase in earnings per share.

  Three Months Ended Dec 31 % Twelve Months Ended Dec 31 %
  2017 2016 Change 2017 2016 Change
Operations            
Production            
  Natural gas (mcf/d) 595,885 556,975 7 % 559,663 537,111 4 %
  Oil & NGLs (bbl/d) 10,479 8,938 17 % 9,337 7,457 25 %
  Thousand cubic feet equivalent (Mcfe/d @ 1:6) 658,759 610,602 8 % 615,684 581,852 6 %
  Barrels of oil equivalent (boe/d @ 6:1) 109,793 101,767 8 % 102,614 96,975 6 %
Production per million common shares (boe/d)* 666 618 8 % 622 597 4 %
Product prices            
  Natural gas ($/mcf) 2.87 2.98 -4 % 2.89 2.89  
  Oil & NGLs ($/bbl) 56.52 45.09 25 % 50.02 40.30 24 %
Operating expenses ($/Mcfe) 0.28 0.26 8 % 0.27 0.25 8 %
Transportation ($/Mcfe) 0.16 0.16   0.16 0.16  
Field netback ($/Mcfe) 2.91 2.78 5 % 2.80 2.64 6 %
General & administrative expenses ($/Mcfe) 0.03 0.03   0.04 0.04  
Interest expense ($/Mcfe) 0.21 0.18 17 % 0.21 0.18 17 %
Financial ($000, except per share*)            
Revenue 211,799 189,951 12 % 760,956 678,388 12 %
Royalties 9,232 10,089 -8 % 34,104 28,330 20 %
Funds from operations 161,672 144,593 12 % 573,721 514,593 11 %
Funds from operations per share 0.98 0.88 11 % 3.48 3.17 10 %
Total dividends 54,408 54,328   217,612 214,911 1 %
Total dividends per share 0.33 0.33   1.32 1.32  
  Payout ratio (%) 34 38 -11 % 38 42 -10 %
Earnings 51,547 38,489 34 % 176,575 112,348 57 %
Earnings per share 0.31 0.23 34 % 1.07 0.69 55 %
Capital expenditures 134,411 129,407 4 % 521,210 469,375 11 %
Weighted average common shares outstanding 164,874,175 164,630,168   164,856,042 162,573,515 1 %
As at December 31            
End of period shares outstanding (includes shares to be issued)       164,874,175 164,776,923  
Net debt       1,327,440 1,131,052 17 %
Shareholders’ equity       1,722,978 1,540,934 12 %
Total assets       3,844,714 3,463,089 11 %
*all per share amounts using weighted average common shares outstanding        
  Three Months Ended Dec 31 Twelve Months Ended Dec 31
($000 except per share) 2017   2016   2017 2016  
Cash flows from operating activities 143,568   138,329   535,344 508,629  
 Change in non-cash working capital 6,444   (4,012 ) 20,381 (24,661 )
 Change in provision for performance based compensation (4,024 ) (15,494 ) 2,312 4,855  
Performance based compensation 15,684   25,770   15,684 25,770  
Funds from operations 161,672   144,593   573,721 514,593  
Funds from operations per share 0.98   0.88   3.48 3.17  

(1) Operating Margin is defined as Funds from Operations divided by Revenue before Royalties but including realized hedging gains (losses).
(2) Profit Margin is defined as Net Earnings for the year divided by Revenue before Royalties but including realized hedging gains (losses).
Natural gas volumes recorded in thousand cubic feet (Mcf) are converted to barrels of oil equivalent (boe) using the ratio of six (6) thousand cubic feet to one (1) barrel of oil (bbl).  Natural gas liquids and oil volumes in barrel of oil (bbl) are converted to thousand cubic feet equivalent (Mcfe) using a ratio of one (1) barrel of oil to six (6) thousand cubic feet.  This could be misleading if used in isolation as it is based on an energy equivalency conversion method primarily applied at the burner tip and does not represent a value equivalency at the wellhead.
(3) Funds from operations – Management uses funds from operations to analyze the operating performance of its energy assets.  In order to facilitate comparative analysis, funds from operations is defined throughout this report as earnings before performance based compensation, non‑cash and non‑recurring expenses.  Management believes that funds from operations is an important parameter to measure the value of an asset when combined with reserve life.  Funds from operations is not a measure recognized by Canadian generally accepted accounting principles (“GAAP”) and does not have a standardized meaning prescribed by GAAP.  Therefore, funds from operations, as defined by Peyto, may not be comparable to similar measures presented by other issuers, and investors are cautioned that funds from operations should not be construed as an alternative to net earnings, cash flow from operating activities or other measures of financial performance calculated in accordance with GAAP.  Funds from operations cannot be assured and future dividends may vary.

The Peyto Strategy

For the past 19 years, the Peyto strategy has focused on maximizing the returns on shareholders’ capital by deploying that capital into the profitable development of long life, low cost, and low risk natural gas resource plays. This strategy of maximizing returns does not end in the field with just the efficient execution of exploration and production operations but continues on to the head office where the management of corporate costs, including the cost of capital, must be controlled to ensure true returns are ultimately enjoyed. Alignment of goals between what is good for the company and its employees and what is good for all stakeholders is critical to ensuring that the greatest returns are achieved. Evidence of the success Peyto has had deploying this strategy, through the commodity price cycle, is illustrated in the following table.

($/Mcfe)   2007     2008     2009     2010     2011     2012     2013     2014     2015     2016     2017       19 Year
Wt.
Avg.
Sales Price $8.93   $9.54   $6.75   $6.15   $5.47   $4.21   $4.43   $5.04   $3.83   $3.18   $3.38       $4.99  
All cash costs but royalties2 ($1.19 ) ($1.19 ) ($1.12 ) ($0.99 ) ($0.82 ) ($0.73 ) ($0.75 ) ($0.71 ) ($0.67 ) ($0.63 ) ($0.68 )     ($0.74 )
Capital costs1 ($2.11 ) ($2.88 ) ($2.26 ) ($2.10 ) ($2.12 ) ($2.22 ) ($2.35 ) ($2.25 ) ($1.64 ) ($1.44 ) ($1.36 )     ($1.83 )
Profits $5.63   $5.47   $3.37   $3.06   $2.53   $1.26   $1.33   $2.08   $1.52   $1.12   $1.34       $2.42  
    63 %   57 %   50 %   50 %   46 %   30 %   30 %   41 %   40 %   35 %   40 %       49 %
Royalty Owners $1.56   $1.82   $0.63   $0.64   $0.53   $0.32   $0.31   $0.37   $0.14   $0.13   $0.15       $0.56  
Shareholders $4.07   $3.65   $2.74   $2.42   $2.00   $0.94   $1.02   $1.71   $1.38   $0.99   $1.19       $1.86  
Div./Dist. paid $3.92   $4.25   $4.03   $3.37   $1.24   $1.04   $1.01   $1.05   $1.11   $1.01   $0.97       $1.55  

1. Capital costs to develop new producing reserves is the PDP FD&A
2. Cash costs not including royalties but including Operating costs, Transportation, G&A and Interest.

The consistency and repeatability of Peyto’s operational execution in the field, combined with strict cost control in all aspects of its business has resulted in nearly 50% of the average sales price being retained in profit. This healthy margin of profit (as defined above), which benefits both royalty owners and shareholders, has been preserved despite a greater than 60% drop in commodity prices from a decade ago. Out of that profit, royalty owners have received approximately 25%, while shareholders, whose capital has been at risk, have received the balance. This margin is what has and will continue to help insulate Peyto and its stakeholders from future volatility in commodity prices.

Capital Expenditures

Peyto drilled 135 gross (131 net) horizontal and 7 gross (7 net) vertical wells in 2017 for a capital investment of $257 million. The Company completed 142 gross (138 net) wells for $134 million and invested $53 million in the wellsite equipment and pipeline connections to bring these wells on production. Both drilling and completion costs on a per-well and per-meter basis were higher than the previous year mostly due to a greater percentage of wells being located in Brazeau, which has less surface infrastructure (roads and existing padsites) already in place. An average of 12.2 frac stages were pumped per well, up from 10.8 stages in 2016, contributing to the higher completion cost per meter.

The table below outlines the past seven years of average horizontal drilling and completion costs.

    2010   2011   2012   2013   2014   2015   2016   2017
Gross Spuds   52   70   86   99   123   140   126   135
Length (m)   3,762   3,903   4,017   4,179   4,251   4,309   4,197   4,229
                 
Drilling ($MM) $ 2.763 $ 2.823 $ 2.789 $ 2.720 $ 2.660 $ 2,159 $ 1,818 $ 1,902
$ per meter $ 734 $ 723 $ 694 $ 651 $ 626 $ 501 $ 433 $ 450
                 
Completion ($MM) $ 1.358 $ 1.676 $ 1.672 $ 1.625 $ 1.693 $ 1,212 $ 857 $ 992
$ per meter $  361 $  429 $  416 $  389 $  398 $ 281 $ 204 $ 235

The Company also invested $57 million into expanding its gas gathering, liquids handling and processing capabilities in the Greater Sundance, Brazeau and the newly established Whitehorse core areas. The most notable was the $23 million, integrated liquids storage and gathering pipeline, which connected four of the six Greater Sundance gas plants and eliminated the need to truck liquids from various plant sites, resulting in greater price realizations going forward for the NGLs produced at those plants. In addition, group pipelines in the Brazeau, Whitehorse and Swanson areas and additional compression at the Brazeau gas plant accounted for the remaining infrastructure investments.

Peyto was successful in acquiring 88 sections of new land in 2017, almost double that of 2016, with 64 sections purchased at Crown sales and 24 purchased through acquisition from other operators. The average cost for both types of land purchases was $253/acre. The majority of lands were purchased in the Brazeau area with some minor lands acquired in the Whitehorse and Sundance areas.

The following table summarizes the capital investments for the fourth quarter and 2017 fiscal year.

  Three Months ended December 31 Twelve months ended December 31
($000) 2017 2016   2017   2016  
Land 3,609 204   10,328   1,207  
Seismic 270 3,595   6,007   8,149  
Drilling 68,909 63,130   256,932   219,784  
Completions 42,124 37,256   133,732   105,344  
Equipping & Tie-ins 15,695 14,212   53,146   41,451  
Facilities & Pipelines 3,610 10,955   57,284   60,159  
Acquisitions 194 386   3,823   33,026  
Dispositions (228 ) (42 ) (255 )
Leasehold Improvements (103 )   510  
Total Capital Expenditures 134,411 129,407   521,210   469,375  

Reserves

Peyto was successful in growing reserves per share in all categories in 2017, despite the year over year reduction in commodity price forecasts used by the independent engineering consultants. The following table illustrates the change in reserve volumes and Net Present Value (“NPV”) of future cash flows, discounted at 5%, before income tax and using forecast pricing.

  As at December 31   % Change, debt
  2017 2016 % Change adjusted per share
Reserves (BCFe)        
Proved Producing   1,647   1,489 11 %  (13 %)
Total Proved   2,708   2,426 12 %   (12 %)
Proved + Probable Additional   4,330   3,929 10 %   (13 %)
         
Net Present Value ($millions) Discounted at 5%        
Proved Producing $ 3,589 $ 3,536  2 % (6 %)
Total Proved $ 5,065 $ 5,032 1 % (4 %)
Proved + Probable Additional $ 7,581 $ 7,755 (2 %) (6 %)

†Per share reserves are adjusted for changes in net debt by converting debt to equity using the Dec 31 share price of $15.03 for 2017 and share price of $33.21 for 2016. Net Present Values are adjusted for debt by subtracting net debt from the value prior to calculating per share amounts.
Note: based on the InSite Petroleum Consultants (“InSite”) report effective December 31, 2017.  The InSite price forecast is available at www.InSitepc.com.  For more information on Peyto’s reserves, refer to the Press Release dated February 14, 2018 announcing the Year End Reserve Report which is available on the website at www.peyto.com.  The complete statement of reserves data and required reporting in compliance with NI 51-101 will be included in Peyto’s Annual Information Form to be released in March 2018.

The negative change in reserves per debt adjusted share, was primarily due to the 55% drop in Peyto share price which was used to convert debt to equity, while the negative change in NPV per share was due to the 18% reduction in forecast commodity prices that were used in the reserves evaluation partly offset by the increase in reserve volume.

Value Reconciliation

In order to measure the success of all of the capital invested in 2017, it is necessary to quantify the total amount of value added during the year and compare that to the total amount of capital invested. At Peyto’s request, the independent engineers have run last year’s reserve evaluation with this year’s price forecast to remove the change in value attributable to commodity prices. This approach isolates the value created by the Peyto team from the value created (or lost) by those changes outside of their control (ie. commodity prices).  Since the capital investments in 2017 were funded from a combination of cash flow, debt and equity, it is necessary to know the change in debt and the change in shares outstanding to see if the change in value is truly accretive to shareholders.

At year-end 2017, Peyto’s estimated net debt had increased by 17% or $196 million to $1.327 billion while the number of shares outstanding remained effectively the same at 165 million shares. The change in debt includes all of the capital expenditures, as well as any acquisitions, and the total fixed and performance based compensation paid out for the year.

Based on this reconciliation of changes in BT NPV, the Peyto team was able to create $1.174 billion of Proved Producing, $1.650 billion of Total Proven, and $2.088 billion of Proved plus Probable Additional undiscounted reserve value, with $521 million of capital investment, cost reductions and NGL price enhancements. The ratio of capital expenditures to value creation is what Peyto refers to as the NPV recycle ratio, which is simply the undiscounted value addition, resulting from the capital program, divided by the capital investment. For 2017, the Proved Producing NPV recycle ratio is 2.3 which means for each dollar invested, the Peyto team was able to create 2.3 new dollars of Proved Producing reserve value. The historic NPV recycle ratios are presented in the following table.

    2008   2009   2010   2011   2012   2013   2014   2015   2016   2017 Wt.
Avg.
Capital Investment ($MM) $ 139 $ 73 $ 261 $ 379 $ 618 $ 578 $ 690 $ 594 $ 469 $ 521
NPV0 Recycle Ratio                      
Proved Producing   2.1   5.4   3.5   2.4   1.6   1.5   1.5   2.3   2.9   2.3 2.2
Total Proved   2.5   18.9   6.1   4.7   2.2   2.0   1.7   3.3   4.2   3.2 3.3
Proved + Probable Additional   2.2   27.1   10.3   6.6   3.2   4.0   2.6

 

  5.0   7.3   4.0 5.1

*NPV0 (net present value) recycle ratio is calculated by dividing the undiscounted NPV of reserves added in the year by the total capital cost for the period (eg. 2017 Proved Producing ($1,176/$521) = 2.3).

Performance Ratios

The following table highlights annual performance ratios both before and after the implementation of horizontal wells in late 2009. These can be used for comparative purposes, but it is cautioned that on their own they do not measure investment success.

    2017     2016     2015     2014     2013     2012     2011     2010     2009  
Proved Producing                  
FD&A ($/Mcfe) $ 1.36   $ 1.44   $ 1.64   $ 2.25   $ 2.35   $ 2.22   $ 2.12   $ 2.10   $ 2.26  
RLI (yrs)   7     7     7     7     7     9     9     11     14  
Recycle Ratio   2.1     1.8     2.0     1.9     1.6     1.6     2.1     2.4     2.5  
Reserve Replacement   171 %   153 %   193 %   183 %   190 %   284 %   230 %   239 %   79 %
Total Proved                  
FD&A ($/Mcfe) $ 1.39   $ 1.01   $ 0.72   $ 2.37   $ 2.23   $ 2.04   $ 2.13   $ 2.35   $ 1.73  
RLI (yrs)   11     11     11     11     12     15     16     17     21  
Recycle Ratio   2.0     2.6     4.5     1.8     1.6     1.7     2.1     2.1     3.2  
Reserve Replacement   225 %   183 %   188 %   254 %   230 %   414 %   452 %   456 %   422 %
Future Development Capital ($ millions) $ 1,488   $ 1,305   $ 1,381   $ 1,721   $ 1,406   $ 1,318   $ 1,111   $ 741   $ 446  
Proved plus Probable Additional                  
FD&A ($/Mcfe) $ 1.49   $ 0.62   $ 0.54   $ 2.01   $ 1.86   $ 1.68   $ 1.90   $ 2.19   $ 1.47  
RLI (yrs)   18     18     17     18     19     22     22     25     29  
Recycle Ratio   1.9     4.2     6.1     2.1     2.0     2.1     2.4     2.3     3.8  
Reserve Replacement   279 %   283 %   287 %   328 %   450 %   527 %   585 %   790 %   597 %
Future Development Capital ($millions) $ 2,978   $ 2,563   $ 2,657   $ 2,963   $ 2,550   $ 2,041   $ 1,794   $ 1,310   $ 672  
  • FD&A (finding, development and acquisition) costs are used as a measure of capital efficiency and are calculated by dividing the capital costs for the period, including the change in undiscounted FDC, by the change in the reserves, incorporating revisions and production, for the same period (eg. Total Proved ($521.2+$183.3)/(451.3-404.4+37.5) = $8.35/boe or $1.39/Mcfe).
  • The RLI is calculated by dividing the reserves (in boes) in each category by the annualized Q4 average production rate in boe/year (eg. Proved Producing 274,551/(109.793×365) = 6.9).  Peyto believes that the most accurate way to evaluate the current reserve life is by dividing the proved developed producing reserves by the annualized actual fourth quarter average production.  In Peyto’s opinion, for comparative purposes, the proved developed producing reserve life provides the best measure of sustainability.
  • The Recycle Ratio is calculated by dividing the field netback per boe, by the FD&A costs for the period (eg. Proved Producing (($16.79)/$8.16=2.1). The recycle ratio is comparing the netback from existing reserves to the cost of finding new reserves and may not accurately indicate investment success unless the replacement reserves are of equivalent quality as the produced reserves.
  • The reserve replacement ratio is determined by dividing the yearly change in reserves before production by the actual annual production for the year (eg. Total Proved ((451.3-404.4+37.5)/37.5) = 225%).

Fourth Quarter 2017

In response to the deteriorating AECO natural gas price forecast, Peyto began reducing drilling activity in the later part of the fourth quarter 2017. The quarter began with 9 drilling rigs active but ended with only 5 rigs drilling running, prior to the holiday season shutdown. Completion and tie-in activity remained robust throughout the entire fourth quarter to catch up to any drilled but uncompleted wells. A total of $111 million was invested in the drilling of 29 gross (29 net) horizontal wells and the completion of 45 gross (45 net) horizontal wells. In addition, $16 million was invested in wellsite equipment and tie-ins while $4 million was invested in new facilities and pipelines. Seismic and land acquisitions of $4 million brought total capital investment for the quarter to $134 million.

The majority of the drilling was concentrated in the Brazeau Notikewin play while the remaining focused on the Greater Sundance area Spirit River formations. Three wells were drilled in the newly established Whitehorse area where the Company is developing a trend of liquids rich Wilrich resource, while two step out wells were drilled to test a new Southern Brazeau land block. The formations and locations of the fourth quarter drilling is illustrated in the following table.

  Field Total
Wells
Drilled
Zone Sundance Nosehill Wildhay Ansell/
Minehead
Whitehorse Kisku/
Kakwa
Brazeau
Belly River                
Cardium                
Notikewin   1 2       8 11
Falher             2 2
Wilrich 2 3 1 5 3   1 15
Bluesky   1           1
Total 2 5 3 5 3   11 29

Production in the fourth quarter 2017 averaged 109,793 boe/d, up 8% from 101,767 boe/d in Q4 2016, made up of 596 MMcf/d of natural gas and 10,479 bbl/d of natural gas liquids. During October and December, periods of low AECO gas price prompted Peyto to defer production which reduced fourth quarter average production by 800 boe/d.

Gas plant optimization and a focus on more liquids rich formations resulted in higher liquid yields in Q4 2017 of 17.6 bbl/MMcf, up from 16.0 bbl/MMcf in Q4 2016. Total liquids for the quarter were split 62% pentanes plus condensates, 20% butane, and 18% propane. Across Peyto’s nine gas plants in the Deep Basin, propane and butane recoveries averaged only 20% and 55%, respectively, in Q4 2017. This is out of a theoretical 80% and 97% recovery, respectively, under deeper cutting facilities, which would correspond to 7,800 bbls/d of additional propane and butane.

The Company’s realized price for natural gas in Q4 2017 was $2.15/Mcf, prior to a $0.72/Mcf hedging gain, while its realized liquids price was $56.52/bbl, yielding a combined revenue stream of $3.50/Mcfe. This net sales price was 4% higher than the $3.38/Mcfe realized in Q4 2016. Total cash costs in Q4 2017 were $0.83/Mcfe ($4.96/boe) up from $0.81/Mcfe in Q4 2016 due to increased operating costs from higher property taxes and higher interest rates. This total Q4 2017 cash cost included royalties of $0.15/Mcfe, operating costs of $0.28/Mcfe, transportation of $0.16/Mcfe, G&A of $0.03/Mcfe and interest of $0.21/Mcfe.  Peyto generated total funds from operations of $162 million in the quarter, or $2.67/Mcfe, equating to a 76% operating margin. DD&A charges of $1.43/Mcfe, as well as a provision for current and future performance based compensation and income tax, reduced FFO to earnings of $0.85/Mcfe, or a 24% profit margin. Due to Peyto’s low costs, no impairments were recorded in the quarter. Dividends to shareholders totaled $0.90/Mcfe.

Marketing

Alberta (AECO) daily natural gas price suffered some of the worst volatility in its history in 2017, driven primarily by changing operating strategies by TCPL on its NGTL pipeline system. Daily AECO price traded as high as $4.09/GJ and as low as minus $2.20/GJ in the year. Throughout the year, the price deteriorated from a daily average of $2.56/GJ in the first quarter to $1.46/GJ in the fourth quarter. Fortunately, Peyto’s hedging practice of layering in future sales in the form of fixed price swaps and committing the majority of its gas production to the AECO Monthly price protected against much of this volatility. For 2017, Peyto’s total natural gas revenues of $590.5 million, were comprised of $523.3 million of pre-sold or hedged gas production (89% of gas revenues) at an average price of $2.58/GJ ($2.97/mcf) and $67.2 million of unhedged, revenue at an average price of $2.28/GJ ($2.62/mcf), prior to NGTL fuel charges. This resulted in a blended realized natural gas price of $2.51/GJ ($2.89/mcf). Peyto’s realized commodity prices by component are listed in the following table.

Commodity Prices by Component

  Three Months ended December 31 Twelve months ended December 31
    2017   2016   2017   2016
Natural gas – after hedging ($/mcf) 2.87 2.98 2.89 2.89
Natural gas – after hedging ($/GJ) 2.50 2.59 2.51 2.51
AECO monthly ($/GJ) 1.85 2.67 2.30 1.98
AECO daily ($/GJ) 1.55 2.93 2.03 2.05
         
Oil and natural gas liquids ($/bbl)        
  Condensate ($/bbl) 67.54 56.05 60.20 47.32
  Propane ($/bbl) 34.95 14.58 23.16 8.73
  Butane ($/bbl) 34.94 28.02 31.27 21.69
  Pentane ($/bbl) 70.08 59.11 62.48 50.50
Total Oil and natural gas liquids ($/bbl) 56.52 45.09 50.02 40.30
Canadian Light Sweet stream ($/bbl) 69.05 61.58 62.94 52.99

Liquids prices are Peyto realized prices in Canadian dollars adjusted for fractionation and transportation
Gas prices are Peyto realized prices in Canadian dollars net of NGTL fuel charges

Peyto also realized $50.02/bbl for its blend of natural gas liquids in the year, which represented 79% of the Canadian Light Sweet oil price. By the fourth quarter of 2017, as a result of the integrated liquids storage and pipeline project, along with new marketing arrangements for its NGLs, Peyto’s realized liquids pricing improved to 82% of the oil price. As illustrated below, the improved realizations of greater than 80% are expected to continue in the future.

($/bbl) Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017
Peyto realized blended oil and NGL price $ 37.03   $ 43.54   $ 41.69   $ 39.88   $ 33.60   $ 41.46   $ 39.76   $ 45.09   $ 48.14   $ 48.33   $ 45.92   $ 56.52  
Canadian Light Sweet Stream $ 52.72   $ 68.50   $ 54.70   $ 52.02   $ 40.83   $ 54.70   $ 54.82   $ 61.58   $ 62.19   $ 61.95   $ 56.65   $ 69.02  
differential $ (15.69 ) $ (24.96 ) $ (13.01 ) $ (12.14 ) $ (7.23 ) $ (13.24 ) $ (15.06 ) $ (16.49 ) $ (14.05 ) $ (13.62 ) $ (10.73 ) $ (12.50 )
% of   70 %   64 %   76 %   77 %   82 %   76 %   73 %   73 %   77 %   78 %   81 %   82 %

Peyto has continued its hedging strategy to smooth out the short term fluctuations in the price of natural gas through future sales. This is done by selling a small portion of the total natural gas production (inclusive of Crown Royalty volumes) on the daily and monthly spot markets while the balance is pre-sold or hedged. These hedges are meant to be methodical and consistent and 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 generally sells its contracts in either the 7 month summer or the 5 month winter season. Peyto’s hedging program aims to achieve a fixed price on a descending, graduated schedule of up to 85% of gross production for the immediate summer or winter season and 75%, 65%, 55%, 45% and 30% targets thereafter for the successive following seasons. These fixed prices are achieved through a series of frequent transactions which is similar to “dollar cost averaging” the future gas prices in order to smooth out volatility. Peyto’s new marketing strategy will attempt to secure the hedges at either the AECO hub or NYMEX Henry Hub to diversify its sales between markets.

To date, Peyto has secured the following revenues through future sales at the AECO:

  Future Sales Volume and Revenue
  GJ $/GJ $
2018 177,200,000 $ 2.30 $ 406,982,613
2019 61,800,000 $ 1.90 $ 117,690,875
2020 19,630,000 $ 1.79 $ 35,161,850
Total 258,630,000 $ 2.16 $ 559,835,338

In addition to the AECO market, Peyto has begun to secure exposure of future volumes to the NYMEX Henry Hub with the following volume committed for the periods shown:

  Future Sales Volume and Revenue  
  MMBTU $/MMBTU
2019 2,140,000 At Market
2020 2,140,000 At Market
2021 2,140,000 At Market
2022 2,140,000 At Market
Total 8,560,000  

The AECO gas price strip currently reflects an oversupply of gas in Alberta relative to the limited egress to export markets. However, initiatives by NGTL towards increased pipeline egress are being recognized by the market and a contraction in the basis differential appears to be underway. In addition, industry activity levels have been tempered and production volumes in the Western Canada Sedimentary Basin are expected to decline as the year progresses due to natural decline. This is expected to bring the supply/demand picture more into balance. Early progress has been made on several market diversification initiatives to position Peyto for maximum netback price realization. The Company has secured some Empress delivery capacity in conjunction with the latest NGTL open season, and will utilize this egress capacity as part of its plan to diversify approximately 40% of production to export pricing. 

Details of Peyto’s ongoing marketing efforts are available on Peyto’s website at http://www.peyto.com/Files/Marketing/hedges.pdf.

Activity Update

Consistent with Peyto’s revised budget, the Company has limited drilling activity in the first quarter of 2018. So far in 2018, Peyto has spud 8 gross (7 net) wells and rig released 9 gross (8.6 net) wells including 2 wells which were spud in late 2017. Peyto has completed and brought on 7 gross (7 net) wells while 6 gross (5.4 net) are waiting on completion and connection with on lease tie-ins.

Included in the program to date are 3 gross (1.9 net) Sundance Cardium wells that follow-up up on two wells drilled last year which are exhibiting production performance that ranks among the top 10 of Peyto’s 50 Sundance Cardium horizontal wells drilled since 2009.  The recent performance improvement is attributable to continued innovation in Peyto’s completion design which strives to constantly improve returns. While the Company is excited about the improvements this new design brings to the Sundance Cardium resource play, it is still proceeding cautiously, one well at a time, until the repeatability of results of this new design are proven. Peyto’s Cardium resource in the Greater Sundance area contains 40-60 bbls/mmcf of natural gas liquids and is internally estimated to contain 2.4 TCFe of gas in place with only 14% recovered to date on Peyto lands. The Company has plans for a larger 30-40 well Cardium program in the second half of 2018 building on these recent successes.

The Company has also drilled 2 gross (1.6 net) wells in the Whitehorse area targeting the Wilrich where innovative changes to wellbore design has allowed drilling costs to be reduced to $1.3MM per well. This represents a $600k/well (30%) savings over the average of the 6 prior wells drilled in the area and underlines Peyto’s commitment to continued cost improvement. Peyto’s Whitehorse wells yield 30-40 bbls/mmcf of natural gas liquids which is currently processed at a third party facility while awaiting construction of Peyto’s own plant later in 2018.

New Ventures

Given the current natural gas price environment in Canada, Peyto is actively pursuing opportunities to grow the business both laterally and vertically. The Company is looking to expand its Deep Basin core positions, as well as pursue new opportunities outside of its traditional core properties, to laterally expand its future drilling inventory. As well, Peyto is pursuing opportunities to grow vertically by extracting more value from the existing reserves and infrastructure assets. Early design work is underway for another novel, low cost, mid-cut gas plant process expansion that promises to significantly enhance the recovery of propane and heavier constituents in Peyto’s gas streams. Although still in design phase, the Company anticipates commencement of the first of these newly designed “cheap cut” facility expansions in 2019 and then proceeding sequentially through four or more successive plant instalments into 2020. In all cases, these projects will increase liquid recovery levels by an incremental 10 to 15 bbl/MMcf for the existing plant feed streams.

Peyto has also been in discussion to supply meaningful volumes to intra-Alberta industrial consumers. The Company is excited to be part of what appears to be a very bright future for natural gas producers within Alberta as gas-fired electrical power generation continues to take an ever-increasing role in the province’s power needs. Furthermore, new petrochemical projects which require natural gas feedstock are emerging that promise to supply industrial and agricultural needs both within the province and to export markets. Peyto’s core geographical area is just west of Edmonton, Alberta and proximal to major highway, rail and electrical infrastructure which provides Peyto with an inherent advantage in serving many of these growth industries. 

2018 Outlook

Peyto has now entered its 20th year of operations in the Western Canadian Sedimentary Basin. Over that time, the Company has grown from a tiny junior to the fifth largest natural gas producer in Canada. That growth has come almost exclusively through the drill bit and has generated some of the highest returns on capital in the industry. Throughout that time, Peyto has remained nimble and dynamic, adjusting its business plans to account for the changing market conditions so as to ensure capital was continuing to deliver the highest returns possible. That’s why Peyto’s strategy is called a “returns focused strategy” because it is the maximization of return on capital invested that defines the business. Going forward that will not change. The Company will continue to look for ways to invest capital in the energy business that yields the highest possible returns. At times those investments might be to develop new reserves, at other times, to extract additional value from existing reserves. Delivering maximum return to shareholders on whatever capital is invested will continue to remain front and center.

Conference Call and Webcast

A conference call will be held with the senior management of Peyto to answer questions with respect to the 2017 fourth quarter and full year financial results on Thursday, March 1st, 2018, at 9:00 a.m. Mountain Standard Time (MST), or 11:00 a.m. Eastern Standard Time (EST). To participate, please call 1-844-492-6041 (North America) or 1-478-219-0837 (International). Shareholders and interested investors are encouraged to ask questions about Peyto and its most recent results. Questions can be submitted to info@peyto.com. The conference call can also be accessed through the internet at https://edge.media-server.com/m6/p/6w4b8k4a. The conference call will be archived on the Peyto Exploration & Development website at www.peyto.com.

Management’s Discussion and Analysis

A copy of the fourth quarter report to shareholders, including the MD&A, audited financial statements and related notes, is available at http://www.peyto.com/Files/Financials/2017/2017MDandA.pdf and will be filed at SEDAR, www.sedar.com at a later date.

Annual General Meeting

Peyto’s Annual General Meeting of Shareholders is scheduled for 3:00 p.m. on Thursday, May 10, 2018 at the Eau Claire Tower, +15 level, 600 – 3rd Avenue SW, Calgary, Alberta. Shareholders are encouraged to visit the Peyto website at www.peyto.com 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
February 28, 2018

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 other purpose. Other than is required pursuant to applicable securities law, Peyto does not undertake to update forward looking statements at any particular time. To provide a single unit of production for analytical purposes, natural gas production and reserves volumes are converted mathematically to equivalent barrels of oil (BOE). Peyto uses the industry-accepted standard conversion of six thousand cubic feet of natural gas to one barrel of oil (6 Mcf = 1 bbl). The 6:1 BOE ratio is based on an energy equivalency conversion method primarily applicable at the burner tip. It does not represent a value equivalency at the wellhead and is not based on current prices. While the BOE ratio is useful for comparative measures and observing trends, it does not accurately reflect individual product values and might be misleading, particularly if used in isolation. As well, given that the value ratio, based on the current price of crude oil to natural gas, is significantly different from the 6:1 energy equivalency ratio, using a 6:1 conversion ratio may be misleading as an indication of value.

Peyto Exploration & Development Corp.
Balance Sheet
(Amounts in $ thousands)

  December 31
2017 
December 31
2016 
Assets    
Current assets    
Cash 5,652   2,102  
Accounts receivable 90,242   94,813  
Due from private placement (Note 6)   4,930  
Derivative financial instruments (Note 11) 135,017    
Prepaid expenses 12,578   13,385  
  243,489   115,230  
     
Long-term derivative financial instruments (Note 11) 16,233    
Property, plant and equipment, net (Note 3) 3,584,992   3,347,859  
  3,601,225   3,347,859  
  3,844,714   3,463,089  
     
Liabilities    
Current liabilities    
Accounts payable and accrued liabilities 132,776   158,173  
Dividends payable (Note 6) 18,136   18,109  
Provision for future performance based compensation (Note 9) 9,166   6,854  
Derivative financial instruments (Note 11)   119,280  
  160,078   302,416  
     
Long-term debt (Note 4) 1,285,000   1,070,000  
Long-term derivative financial instruments (Note 11)   31,465  
Provision for future performance based compensation (Note 9)   4,499  
Decommissioning provision (Note 5) 143,805   127,763  
Deferred income taxes (Note 10) 532,853   386,012  
  1,961,658   1,619,739  
     
Equity    
Shareholders’ capital (Note 6) 1,649,537   1,641,982  
Shares to be issued (Note 6)   4,930  
Retained earnings (deficit) (40,261 ) 776  
Accumulated other comprehensive income (loss) (Note 6) 113,702   (106,754 )
  1,722,978   1,540,934  
  3,844,714   3,463,089  
     
Approved by the Board of Directors                  
                   
(signed) “Michael MacBean”                 (signed) “Darren Gee”
Director                 Director
                   

Peyto Exploration & Development Corp.
Income Statement
(Amounts in $ thousands)

    Year ended December 31
        2017     2016  
Revenue        
Oil and gas sales       703,013     559,915  
Realized gain on hedges (Note 11)       57,943     118,473  
Royalties       (34,104 )   (28,330 )
Petroleum and natural gas sales, net       726,852     650,058  
Expenses        
Operating (Note 7)       60,423     53,231  
Transportation       37,640     34,550  
General and administrative       8,538     8,304  
Market and reserves based bonus (Note 9)       15,684     25,770  
Provision for future performance based compensation       (2,187 )     9,354  
Interest (Note 8)       46,530     39,380  
Accretion of decommissioning provision (Note 5)       3,105     2,456  
Depletion and depreciation (Note 3)       315,314     330,745  
Net gain on disposition of assets (Note 3)       (79 )   (7,885 )
        484,968     495,905  
Earnings before taxes       241,884     154,153  
         
Income tax        
Deferred income tax expense (Note 10)       65,309     41,805  
Earnings for the year       176,575     112,348  
         
         
Earnings per share (Note 6)        
Basic and diluted     $ 1.07   $ 0.69  
         
Weighted average number of common shares outstanding (Note 6)        
Basic and diluted       164,856,042     162,573,515  
         

Peyto Exploration & Development Corp.
Statement of Comprehensive (Loss) Income 
(Amounts in $ thousands)

    Year ended December 31
      2017   2016  
Earnings for the year     176,575   112,348  
Other comprehensive income        
Change in unrealized gain (loss) on cash flow hedges     359,938   (95,142 )
Deferred tax (expense) recovery     (81,539 )  57,676  
Realized (gain) on cash flow hedges     (57,943 ) (118,473 )
Comprehensive Income (Loss) Income     397,031   (43,591 )
         

Peyto Exploration & Development Corp.
Statement of Changes in Equity 
(Amounts in $ thousands)

  Year ended December 31
  2017   2016  
Shareholders’ capital, Beginning of Year 1,641,982   1,467,264  
Equity offering 7,574   172,500  
Common shares issued by private placement (Note 6)   7,644  
Common shares issuance costs (net of tax) (19 ) (5,426 )
Shareholders’ capital, End of Year 1,649,537   1,641,982  
     
     
     
Common shares to be issued, Beginning of Year 4,930   3,769  
Common shares issued (Note 6)   (4,930 )   (3,769 )
Common shares to be issued (Note 6)   4,930  
Common shares to be issued, End of Year   4,930  
     
     
     
Retained earnings, Beginning of Year 776   103,339  
Earnings for the year 176,575   112,348  
Dividends (Note 6)   (217,612 ) (214,911 )
Retained earnings (deficit), End of Year (40,261 ) 776  
     
     
     
Accumulated other comprehensive (loss) income, Beginning of Year (106,754 ) 49,185  
Other comprehensive income (loss)  220,456     (155,939 )
Accumulated other comprehensive income (loss), End of Year 113,702   (106,754 )
     
     
     
Total Equity 1,722,978   1,540,934  
     

Peyto Exploration & Development Corp.
Statement of Cash Flows
 (Amounts in $ thousands)

    Year ended December 31
      2017   2016  
Cash provided by (used in)        
Operating activities        
Earnings     176,575   112,348  
Items not requiring cash:        
  Deferred income tax     65,309   41,805  
  Depletion and depreciation     315,314   330,745  
  Accretion of decommissioning provision     3,105   2,456  
  Net gain on disposition of assets     (79 ) (7,885 )
  Long term portion of future performance based compensation     (4,499 ) 4,499  
Change in non-cash working capital related to operating activities     (20,381 ) 24,661  
      535,344   508,629  
Financing activities        
Issuance of common shares     7,574   180,144  
Issuance costs     (26 ) (7,432 )
Cash dividends paid     (217,586 ) (214,287 )
Increase (decrease) in bank debt     215,000   (75,000 )
Issuance of long term notes       100,000  
      4,962   (16,575 )
Investing activities        
Additions to property, plant and equipment
Change in prepaid capital
Change in non-cash working capital relating to investing activities
    (521,210)
(18,220)
2,674
  (469,375)
(4,525)
(16,052)
 
      (536,756 ) (489,952 )
         
Net increase in cash     3,550   2,102  
Cash, beginning of year     2,102    
Cash, end of year     5,652   2,102  
 

You can read more of the news on source

Related posts