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On average for Q2 2017, Peyto realized a natural gas price of $2.54/GJ or $2.92/Mcf. This was the result of a combination of approximately 17% of natural gas production being sold in the daily or monthly spot market at an average of $2.59/GJ ($2.99/Mcf) and 83% having been pre-sold at an average hedged price of $2.52/GJ (prices reported net of TCPL fuel charges).
In the second quarter of 2017, lower realized liquid propane prices combined with a progressively increasing carbon tax, which was imposed on Peyto's Oldman deep cut plant, resulted in less propane recoveries than in Q1 2017. As a result, Peyto's Q2 2017 blended, realized, oil and natural gas liquids price was $48.33/bbl, which represented 78% of the $61.95/bbl average Canadian Light Sweet posted price. Details of realized commodity prices by component are shown in the following table:
Commodity Prices by Component
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Three Months ended June 30 2017 2016 ---------------------------------------------------------------------------- AECO monthly ($/GJ) 2.63 1.18 AECO daily ($/GJ) 2.64 1.33 Henry Hub spot ($US/MMBTU) 3.08 2.14 ---------------------------------------------------------------------------- Natural gas - prior to hedging ($/GJ) 2.59 1.21 ($/mcf) 2.99 1.38 ---------------------------------------------------------------------------- Natural gas - after hedging ($/GJ) 2.54 2.26 ($/mcf) 2.92 2.60 -------------------------------------------------------------------------------------------------------------------------------------------------------- Oil and natural gas liquids ($/bbl)
Condensate ($/bbl) 57.60 47.83 Propane ($/bbl) 13.39 0.40 Butane ($/bbl) 30.81 19.52 Pentane ($/bbl) 59.93 50.67 ---------------------------------------------------------------------------- Total Oil and natural gas liquids ($/bbl) 48.33 41.46 ---------------------------------------------------------------------------- Cnd Light Sweet stream ($/bbl) 61.95 54.70 ----------------------------------------------------------------------------/T/
Liquids prices are Peyto realized prices in Canadian dollars adjusted for fractionation and transportation.
Financial Results
Approximately 20%, or $0.69/Mcfe, of Peyto's revenue come from its liquids sales while 80%, or $2.67/Mcfe, came from natural gas. This liquids revenue covered all cash costs but royalties. Cash costs of $0.85/Mcfe, included royalties of $0.17/Mcfe, operating costs of $0.24/Mcfe, transportation costs of $0.18/Mcfe, G&A of $0.05/Mcfe and interest costs of $0.21/Mcfe. Cash costs were lower than the previous quarter due to reductions in operating costs and royalties, partially offset by increases in transportation, G&A and interest. These total cash costs, when deducted from realized revenues of $3.36/Mcfe, resulted in a cash netback of $2.51/Mcfe or a 75% operating margin. Historical cash costs and operating margins are shown in the following table. Going forward, Peyto expects per unit cash costs will continue to trend towards $0.80/Mcfe levels for the balance of 2017.
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2015 ($/Mcfe) Q1 Q2 Q3 Q4 --------------------------------------------------- Revenue 4.17 3.81 3.80 3.58 --------------------------------------------------- Royalties 0.18 0.13 0.15 0.13 Operating Costs 0.32 0.31 0.28 0.25 Transportation 0.15 0.15 0.16 0.16 G&A 0.04 0.04 0.02 0.05 Interest 0.20 0.19 0.19 0.16 ------------------------------------ Total Cash Costs 0.89 0.82 0.80 0.75 --------------------------------------------------- Netback 3.28 2.99 3.00 2.83 --------------------------------------------------- Operating Margin 79% 78% 79% 79% ------------------------------------------------------------------------------------------------------------------------
2016 2017 ($/Mcfe) Q1 Q2 Q3 Q4 Q1 Q2 --------------------------------------------------------------------- Revenue 3.24 2.92 3.16 3.38 3.44 3.36 --------------------------------------------------------------------- Royalties 0.13 0.10 0.12 0.18 0.19 0.17 Operating Costs 0.23 0.26 0.25 0.26 0.29 0.24 Transportation 0.16 0.17 0.16 0.16 0.17 0.18 G&A 0.03 0.06 0.04 0.03 0.04 0.05 Interest 0.17 0.21 0.19 0.18 0.20 0.21 ------------------------------------------------------ Total Cash Costs 0.72 0.80 0.76 0.81 0.89 0.85 --------------------------------------------------------------------- Netback 2.52 2.12 2.40 2.57 2.55 2.51 --------------------------------------------------------------------- Operating Margin 78% 73% 76% 76% 74% 75% ---------------------------------------------------------------------/T/
Depletion, depreciation and amortization charges of $1.38/Mcfe, along with a provision for deferred tax and market based bonus payments reduced the cash netback to earnings of $0.75/Mcfe, or a 22% profit margin. Dividends of $1.02/Mcfe were paid to shareholders.
Natural Gas Marketing
Peyto's practice of layering in future sales in the form of fixed price swaps, and thus smoothing out the volatility in natural gas prices, continued throughout the quarter. For the balance of 2017, approximately 68% of gas volumes have been hedged to protect against increased AECO volatility. The following table summarizes the remaining hedged volumes and prices for the upcoming years as of August 9, 2017:
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Future Sales Average Price (CAD) ---------------------------------------------------------------------------- GJ Mcf $/GJ $/Mcf ---------------------------------------------------------------------------- 2017 70,490,000 61,295,652 2.61 3.00 2018 107,630,000 93,591,304 2.55 2.93 2019 13,550,000 11,782,609 2.47 2.85 2020 910,000 791,304 2.47 2.84 ---------------------------------------------------------------------------- Total 192,580,000 167,460,870 2.57 2.95 ----------------------------------------------------------------------------/T/
(i)prices and volumes in mcf use Peyto's historic heat content premium of 1.15.
In order to deal with restricted access to take-away capacity, Peyto has arranged for excess firm transportation on the NGTL system north of the James River receipt point of up to 120% of Peyto's forecasted natural gas sales for the remainder of the year. Specific monthly excess service is projected to offset the outage forecast provided by NGTL and safeguard against potential curtailments due to limited capacity. Beyond 2017, Peyto has secured new firm transportation to accommodate its expected production growth.
Activity Update
Following an unusually wet spring breakup, continuous operations were resumed in late June and have continued through July and into August. The backlog of uncompleted wells accumulated during Q1 and carried through Q2 was effectively eliminated over this period. Consequently, Peyto's has recently reached record daily production levels in excess of 115,000 BOE/d.
Peyto continues to run 9 drilling rigs (4 in Brazeau, 5 in Greater Sundance) and since the end of the second quarter has spud 18 gross (16.5 net) wells, completed 16 gross (16 net) wells, and tied in 22 gross (21.5 net) wells. Peyto now expects to drill and tie-in 80 wells in the second half of 2017. Included in this second half drilling will be step out Wilrich and Notikewin tests on newly acquired lands in south Brazeau, as well as Wilrich step outs in a new emerging area called Whitehorse. The Company has recently tied in 3 wells to a third-party processing facility in Whitehorse and is encouraged by the early results. Infrastructure plans for the Whitehorse area will be finalized in early 2018 and will likely include construction of a Peyto facility to process area volumes.
In addition, the site for the new Brazeau East gas plant is now ready, with the construction timeline aligned with the fall drilling and tie-in schedule. Pending installation of the first 70 mmcf/d of equipment, the Brazeau area will have over 210 mmcf/d of processing capacity.
Summer gas prices have been extremely volatile and although Peyto has an active hedging program, some volumes are still sold on the daily index. Ownership and operatorship of 99% of the production and processing facilities provides the flexibility to actively manage the daily volumes to ensure profit margins are preserved.
Outlook
While natural gas prices have deteriorated of late, Management expects prices will improve entering the fall for the winter heating season. The current and future 5 year strip for AECO natural gas price is below $2.40/GJ and is insufficient to sustain current Canadian gas production levels which would result in a tightening of supply and demand. That said, the Company has reviewed the economic returns of its remaining 2017 capital program in light of the weaker price forecast and is confident the remaining drilling program continues to make the economic return hurdle and deliver full cycle value creation for shareholders.
As always, Peyto's focus will be on maximizing efficiency and minimizing both capital and cash costs throughout its business. This laser like focus on profitability is unwavering and will continue to be used to direct capital to the highest return opportunities within Peyto's portfolio. This portfolio of opportunities is growing, as Peyto adds new Crown lands with identified drilling locations at historically low cost per acre. The Company's operation and financial flexibility, quality asset base and strong balance sheet position Peyto to continue to be opportunistic in this environment.
Conference Call and Webcast
A conference call will be held with the senior management of Peyto to answer questions with respect to the Q2 2017 financial results on August 10th, 2017 at 9:00 a.m. Mountain Daylight Time (MDT), or 11:00 a.m. Eastern Daylight Time (EDT). Please see the press release for conference call details. 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 prior to the call at info@peyto.com. The conference call can also be accessed through the internet at http://edge.media-server.com/m/p/m67ombbn. 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 second quarter report to shareholders, including the MD&A, audited financial statements and related notes, is available at http://www.peyto.com/Files/Financials/2017/Q22017MDandA.pdf and will be filed at SEDAR, www.sedar.com at a later date.
Darren Gee
President and CEO
August 9, 2017
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.
Condensed Balance Sheet (unaudited)
(Amount in $ thousands)
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June 30 December 31 2017 2016 ---------------------------------------------------------------------------- Assets Current assets Cash 4,235 2,102 Accounts receivable 75,145 94,813 Due from private placement (Note 6) - 4,930 Derivative financial instruments (Note 8) 25,265 - Prepaid expenses 32,448 13,385 ---------------------------------------------------------------------------- 137,093 115,230 ----------------------------------------------------------------------------Long-term derivative financial instruments (Note 8) 5,030 - Property, plant and equipment, net (Note 3) 3,462,250 3,347,859 ---------------------------------------------------------------------------- 3,467,280 3,347,859 ---------------------------------------------------------------------------- 3,604,373 3,463,089 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Liabilities Current liabilities Accounts payable and accrued liabilities 107,571 158,173 Dividends payable (Note 6) 18,136 18,109 Derivative financial instruments (Note 8) - 119,280 Provision for future performance based compensation (Note 7) 12,179 6,854 ---------------------------------------------------------------------------- 137,886 302,416 ----------------------------------------------------------------------------
Long-term debt (Note 4) 1,205,000 1,070,000 Long-term derivative financial instruments (Note 8) - 31,465 Provision for future performance based compensation (Note 7) 6,848 4,499 Decommissioning provision (Note 5) 142,953 127,763 Deferred income taxes 464,553 386,012 ---------------------------------------------------------------------------- 1,819,354 1,619,739 ----------------------------------------------------------------------------
Equity Share capital (Note 6) 1,649,537 1,641,982 Shares to be issued (Note 6) - 4,930 Retained earnings (deficit) (27,809) 776 Accumulated other comprehensive (loss) income (Note 6) 25,405 (106,754) ---------------------------------------------------------------------------- 1,647,133 1,540,934 ---------------------------------------------------------------------------- 3,604,373 3,463,089 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
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