Painted Pony Grows Third Quarter Production By 38% and Announces Third Quarter Financial and Operational Results

CALGARY, Nov. 5, 2018 /CNW/ – Painted Pony Energy Ltd. (“Painted Pony” or the “Corporation“) (TSX: PONY) is pleased to report significant production volume growth of 38%, which includes a corresponding increase of 37% in liquids production, over the third quarter of 2017.

HIGHLIGHTS:

• Increased third quarter 2018 average daily production by 38% to 350.0 MMcfe/d (58,330 boe/d) of which 9% was natural gas liquids, compared to 254.1 MMcfe/d (42,353 boe/d) of which 9% was natural gas liquids, during the third quarter of 2017;
• Grew liquids production by 37% to 5,248 bbls/d, of which 45% was condensate, compared to 3,826 bbls/d during the third quarter of 2017;
• Increased revenue from natural gas liquids by 78% to $28.6 million during the third quarter of 2018 compared to $16.1 million during the third quarter of 2017;
• Realized an average price of $2.80/Mcfe including an average natural gas price of $2.10/Mcf, a 76% premium to the AECO (5A) daily spot price of $1.19/Mcf, during the third quarter of 2018;
• Increased adjusted funds flow from operations to $30.3 million ($0.19 per share basic), compared to $29.7 million($0.18 per share basic) during the third quarter of 2017; and
• Reaffirmed syndicated credit facility at $400 million.

Patrick Ward, President and CEO of Painted Pony, in commenting on these highlights said, “We are pleased to report significant production growth of 38%, which includes a corresponding increase of 37% in liquids production, over the third quarter of 2017. Despite a challenging commodity price environment which resulted in lower index prices compared to this time last year, we posted prices significantly above AECO prices and maintained our adjusted funds flow from operations per share results.  Our strong price realizations and resulting adjusted funds flow from operations were due to our diversified transportation strategy and our risk management program which together continue to deliver top line revenue which exceeded western Canadian index pricing at both AECO and Station 2.”

ENBRIDGE T-SOUTH OUTAGE
Due to an incident which occurred on October 9, 2018, Enbridge Inc.’s (“Enbridge“) T-South pipeline system (“T-South“) experienced an interruption in service.  Enbridge determined that one of the two pipelines which comprise T-South had been damaged.  Enbridge returned service to the undamaged pipeline on October 11, 2018 at reduced line pressure while work continued to repair the second pipeline. Enbridge issued a press release on October 31, 2018 indicating pipeline repairs to the damaged T-South line were complete and the process of returning this pipeline to service, albeit at restricted operating pressures, was underway.

As a result of the incident on T-South, Painted Pony natural gas production volumes totaling approximately 60 MMcf/d were impacted due to operational restrictions and voluntary, price-related shut-ins.  As a result of transportation interruptions resulting from the T-South incident, Painted Pony expects forecasted fourth quarter 2018 production volumes to be between 303 MMcfe/d (50,500 boe/d) and 312 MMcfe/d (52,000 boe/d).

Painted Pony’s annual production volume guidance will be impacted by the T-South incident resulting in adjusted 2018 annual production volume guidance of 339 MMcfe/d (56,500 boe/d) and 348 MMcfe/d (58,000 boe/d) from previous guidance of between 348 MMcfe/d (58,000 boe/d) and 360 MMcfe/d (60,000 boe/d). Forecasted capital spending for 2018 will continue to approximately match internally generated adjusted funds flow from operations.

Due to this interruption and the inability for Enbridge to transport full natural gas volumes on T-South, natural gas spot prices at Station 2 have been negatively impacted. However, pricing at the Sumas / Huntingdon sales hub on the border between the province of British Columbia and Washington state has strengthened due to the transportation interruptions on T-South.  Painted Pony has priced Sumas monthly-index sales of approximately 33 MMcf/d at an average price of USD$13.10/Mcf for the month of November and priced 20 MMcf/d for the month of December 2018 at a price of USD$9.24/Mcf. Painted Pony expects the impact from these contracts at Sumas to mitigate the effect on adjusted funds flow from operations caused by reduced volumes and lower Station 2 index prices during the fourth quarter of 2018.

THIRD QUARTER 2018 FINANCIAL & OPERATING RESULTS
Adjusted Funds Flow from Operations
Painted Pony’s market diversification strategy was accomplished through various firm transportation agreements which facilitated access into the Dawn, Sumas, and AECO markets. Index prices at the Dawn market averaged $3.81/Mcf during the third quarter of 2018, compared to the AECO (5A) daily index price of $1.19/Mcf during the same period. During the third quarter of 2018, Painted Pony delivered 73 MMcf/d of natural gas to the Dawn market and starting in November of 2019, Painted Pony expects to increase natural gas volumes sold into the Dawn market to 88 MMcf/d.

Adjusted funds flow from operations increased to $30.3 million ($0.19 per share basic) during the third quarter of 2018 despite weak index prices at AECO and Station 2, compared to adjusted funds flow from operations of $29.7 million($0.18 per share basic) during the third quarter of 2017.

Operating costs for the third quarter of 2018 were $0.56/Mcfe, a decrease of $0.03/Mcfe when compared to the third quarter of 2017. Operating cost reduction initiatives combined with increased production volumes led to this year-over-year cost reduction.

Net general and administrative expenses were $0.11/Mcfe for the third quarter of 2018, a decrease of 45%, compared to $0.20/Mcfe during the third quarter of 2017.

Painted Pony’s transportation costs increased to $0.75/Mcfe during the third quarter of 2018 compared to $0.37/Mcfe during the third quarter of 2017.  The increased transportation costs were due to an increase in volumes accessing diversified pricing hubs to receive stronger pricing.  In addition to sales hub diversification, the 37% increase in liquids production volumes resulted in higher pipeline costs during the third quarter of 2018 compared to the third quarter of 2017. Painted Pony has realized incremental revenues, net of applicable transportation, of approximately $9.0 and $20.0 million for the three and nine months ended September 30, 2018, respectively, as a result of this market diversification strategy.

Production
Painted Pony increased third quarter 2018 production volumes by 38% to 350.0 MMcfe/d (58,330 boe/d) compared to the same period of 2017 when production volumes totaled 254.1 MMcfe/d (42,353 boe/d). Natural gas liquids volumes during the third quarter of 2018 increased by 37% to 5,248 bbls/d, of which 45% was high-value condensate, compared to 3,826 bbls/d during the third quarter of 2017.

Capital Expenditures
Painted Pony invested $39.4 million of capital during the third quarter of 2018, which included drilling 7.0 net wells and completing 6.0 net wells for a combined cost of $34.3 million.  Other capital expenditures, the majority of which was related to facilities and equipment, totaled $5.1 million for the third quarter of 2018.

Capital spending for the nine months ending September 30, 2018 has totaled $135.2 million, on-track with Painted Pony’s 2018 capital budget guidance of $145 million – $165 million, which is based on matching capital spending approximately with adjusted funds flow from operations.

Pricing
Painted Pony’s realized average commodity price of $2.80/Mcfe during the third quarter of 2018 includes an average realized natural gas price of $2.10/Mcf, a 76% premium to the AECO (5A) third quarter 2018 average daily spot price of $1.19/Mcf, compared to a 10% premium during the third quarter of 2017 when AECO (5A) prices were $1.45/Mcf.

During the third quarter of 2018, approximately 45% of Painted Pony’s natural gas liquids volumes were condensate, which received an average price of $84.63/bbl, representing a premium of 11% to the Edmonton Par light oil price of $76.03/bbl. Natural gas liquids (butane and propane, excluding condensate) received an average price of $39.69/bbl during the third quarter of 2018.

Risk Management
Painted Pony actively mitigates commodity price volatility through financial hedging contracts, direct-to-customer physical sales, and sales market diversification.  As at September 30, 2018, Painted Pony executed fixed-price risk management contracts on an additional 164 MMcf/d of natural gas and 4,400 bbl/d of NGL production for the remainder of 2018.

Since 2016, Painted Pony proactively expanded into new markets as part of a long-term sales point diversification strategy. This strategy included contracting new and expanded firm transportation into the markets of AECO, Dawn, Sumas and Nymex as well as direct-to-customer sales in Alberta and BC with the goal of accessing premium prices which would surpass index pricing at Station 2.  These markets continue to provide incremental adjusted funds flow from operations despite higher transportation costs. During the third quarter of 2018, Painted Pony realized an increase of 32% in natural gas prices compared to the third quarter of 2017, despite AECO (5A) benchmark prices being 18% lower when compared to the third quarter of 2017.

$400 MILLION CREDIT FACILITIES REAFFIRMED
In conjunction with the semi-annual borrowing base review, on November 2, 2018, Painted Pony received confirmation that the Corporation’s syndicated credit facilities have been maintained at $400 million.  This syndicated credit facility includes a $350 million extendable revolving facility and a $50 million operating facility.  There are no financial covenants applicable on this $400 million facility. As at September 30, 2018, Painted Pony had $172.9 million in bank debt.

FINANCIAL AND OPERATIONAL HIGHLIGHTS