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Perpetual Grows Year-end Reserves and Reports Strong Finding Costs and Recycle Ratio


CALGARYFeb. 6, 2019 /CNW/ – (TSX:PMT) – Perpetual Energy Inc. (“Perpetual”, or the “Company”) is pleased to release a summary of the Company’s year-end 2018 reserves as reported by the independent engineering firm McDaniel and Associates Consultants Ltd. (“McDaniel”). To preserve value during the low natural gas price environment in Alberta in 2018, Perpetual limited capital spending on natural gas assets, executing a capital program funded through 2018 adjusted funds flow with investment weighted to heavy oil drilling and waterflood activities. Strong performance of the base assets resulted in 2% growth in proved and probable reserves year over year. Proved and probable reserves in the Company’s Mannville Heavy Oil property grew 43%, while East Edson natural gas and natural gas liquids (“NGL” or “liquids”) reserves were essentially flat year over year, bringing Perpetual’s year-end reserves to 67.9 MMboe, comprised of 15% oil and NGL (2017 – 66.6 MMboe, 12% oil and NGL). The Company’s market diversification contract which commenced sales in November 2017 contributed approximately $19.5 million to adjusted funds flow in 2018, incremental to AECO Daily Index pricing, and provided support to the value of the Company’s natural gas reserves by shifting the Company’s effective sales points from AECO to five NYMEX-based markets through to November 2022.

The quality of Perpetual’s assets and positive momentum to drive operational and execution excellence in its core operating areas are demonstrated by the highlights below:

  • The Company added proved plus probable reserves of 5.2 MMboe to replace 134% of 2018 production on total net capital spending of $15.0 million. Proved plus probable reserves growth of 2% was achieved with capital spending (net of acquisitions and divestitures) representing approximately 50% of adjusted funds flow.
  • The Company increased its proved developed producing reserves 9% to 17.3 MMboe. Proved plus probable developed producing reserves were 21.8 MMboe at December 31, 2018, 6% higher than year-end 2017.
  • Exploration and development capital spending of $26.5 million in 2018 resulted in finding and development (“F&D”) costs of $5.09/boe on a proved plus probable basis, and finding, development and acquisition costs (“FD&A”) of $2.43/boe, both including changes in future development capital (“FDC”). With a 2018 operating netback of $13.79/boe, the Company achieved a proved plus probable FD&A recycle ratio of 5.7.
  • Based on an equal weighting of three consultant average price (McDaniel, GLJ, Sproule) forecasts (the “Consultant Average Price Forecast”) used by McDaniel, the net present value (“NPV”) of Perpetual’s total proved plus probable reserves (discounted at 10%) before income tax, was $361.3 million (2017 – $409.9 million).The decrease related primarily to a decrease in the independent reserve evaluator’s forecast for natural gas prices at year-end 2018 as compared to the prior year.
  • Based on the Consultant Average Price Forecast, Perpetual’s reserve-based net asset value (“NAV”) (discounted at 10%) at year-end 2018 is estimated at $276.6 million ($4.59 per share).

2018 YEAR-END RESERVES

Year-end 2018 Reserve Highlights5

  • Total proved plus probable reserves were 67.9 MMboe at December 31, 2018, up 1.3 MMboe (2% from year-end 2017) after production of 3.9 MMboe. The increase in proved plus probable reserves was driven by strong well performance at East Edson combined with positive waterflood response, additions from successful heavy oil drilling programs and working interest consolidation at Mannville.
  • Total proved producing reserves were 17.3 MMboe at December 31, 2018, up 9% from year-end 2017 and proved plus probable producing reserves were 21.8 MMboe at December 31, 2018, up 6% from year-end 2017 and represented 32% of total proved plus probable reserves. Proved reserves, represented 63% of the Company’s total proved plus probable reserves.
  • Driven by the decrease in forward forecast natural gas prices in the Consultant Average Price Forecast, the NPV (discounted at 10%) (“NPV10”) of Perpetual’s proved plus probable reserves decreased by 12% at year-end 2018 to $361.3 million despite growth in natural gas, heavy oil and NGL reserves. The decrease in value of the proved plus probable reserves was offset by strong well performance at both East Edsonand Mannville and a 1% reduction to forecast FDC.
  • East Edson represented 90% (2017 – 92%) of total proved plus probable reserves at year-end 2018. The drilling program at East Edson was suspended in the first quarter of 2018 due to low forward natural gas prices at AECO, however, technical reserve additions related to stronger than forecast well performance and improved liquids recovery drove reserve additions offsetting production.
  • Production from heavy oil wells at Mannville of 0.4 MMboe was offset by an increase of 1.8 MMboe to proved plus probable reserves related to the positive impact of waterflood implementation, development drilling and working interest consolidation during 2018. Total proved plus probable reserves were 4.7 MMboe at December 31, 2018, up 1.4 MMboe from year-end 2017. While Mannville heavy oil reserves account for just 7% of the Company’s total proved plus probable reserves, these higher netback reserves at forecast commodity prices represent 19% of the NPV10 value of Perpetual’s proved plus probable reserves.
  • On a commodity basis, oil and NGL represent 15% (12% at year-end 2017) of Perpetual’s total proved plus probable reserves and 15% (11% at year-end 2017) of total proved reserves at December 31, 2018.
  • Proved plus probable reserve additions replaced annual production of 3.9 MMboe by 134%. Positive total proved plus probable reserve technical revisions in both East Edson and Mannville heavy oil assets directly offset 96% of production, highlighting strong operational performance and drilling results from the Company’s core assets.
  • Perpetual’s NAV (discounted at 10%) at year-end 2018 is $276.6 million ($4.59 per share) as compared to $336.5 million ($5.68 per share) at year-end 2017, primarily due to lower forecast natural gas prices. See the detailed NAV calculation under the heading “NET ASSET VALUE”.

Reserves Disclosure

Working interest reserves included herein refer to working interest reserves before royalty deductions. Reserves information is based on an independent reserves evaluation report prepared by McDaniel with an effective date of December 31, 2018 (the “McDaniel Report”), and has been prepared in accordance with National Instrument 51-101 (“NI 51-101”) using the Consultant Average Price Forecast. Complete NI 51-101 reserves disclosure including after-tax reserve values, reserves by major property and abandonment costs will be included in Perpetual’s Annual Information Form (“AIF”), which, when filed, will be available on the Company’s website at www.perpetualenergyinc.com and SEDAR at www.sedar.com. Perpetual’s reserves at December 31, 2018 are summarized below:

Working Interest Reserves at December 31, 2018(1)

Light and
Medium
Crude Oil
(Mbbl)

Heavy
Oil
(Mbbl)

Conventional
Natural Gas
(MMcf)

Natural Gas
Liquids
(Mbbl)

Oil
Equivalent
(Mboe)

Proved Producing

30

2,232

82,695

1,273

17,317

Proved Non-Producing

33

1,883

39

386

Proved Undeveloped

770

131,273

2,109

24,758

Total Proved

30

3,035

215,851

3,421

42,461

Probable Producing

8

619

21,406

327

4,522

Probable Non-Producing

61

7,085

91

1,333

Probable Undeveloped

627

102,889

1,809

19,584

Total Probable

8

1,307

131,380

2,227

25,439

Total Proved plus Probable

38

4,342

347,231

5,648

67,899

(1) 

May not add due to rounding.

Total proved reserves at December 31, 2018 account for 63% (2017 – 64%) of total proved plus probable reserves. Proved producing reserves of 17.3 MMboe comprise 41% (2017 – 37%) of total proved reserves. Proved plus probable producing reserves of 21.8 MMboe represent 32% (2017 – 31%) of total proved plus probable reserves.

Reserves Reconciliation

Working Interest Reserves(1)

Barrels of Oil Equivalent (Mboe)

Proved

Probable

Proved
and Probable

Opening Balance, December 31, 2017

42,791

23,808

66,599

Discoveries

Extensions and Improved Recovery

460

582

1,042

Technical Revisions

2,797

926

3,723

Acquisitions

359

103

462

Dispositions

(33)

(5)

(38)

Production

(3,860)

(3,860)

Economic Factors

(54)

26

(29)

Closing Balance, December 31, 2018

42,461

25,439

67,899

(1)

May not add due to rounding

McDaniel recorded net positive technical revisions of 3.7 MMboe related to performance on a proved plus probable basis in 2018. Positive technical revisions of 2.1 MMboe were attributed to improved performance of existing wells in both West Central and Eastern areas and 1.5 MMboe were related to increases in reserve assignments relating to drilling locations in the East Edson area.

The table below summarizes the FDC estimated by McDaniel by play type to bring non-producing and undeveloped reserves to production.

Future Development Capital(1)

($ millions)

2019

2020

2021

2022

2023

Remainder

Total

Eastern Alberta Shallow Gas

0.7

0.5

1.2

Mannville Heavy Oil

6.7

6.0

2.7

15.4

East Edson Wilrich

12.5

49.5

44.9

38.4

42.2

141.9

329.4

Total

19.2

56.3

48.0

38.4

42.2

141.9

346.0

(1)

May not add due to rounding

McDaniel estimates the FDC required to convert proved plus probable non-producing and undeveloped reserves to proved producing reserves, to be $346.0 million at December 31, 2018, down $2.4 million from year-end 2017. On a proved plus probable basis, FDC decreased by $7.9 million related to the future development of reserves at East Edson and increased $5.5 million in the Mannville heavy oil area. The East Edson development plan has 66 (63.3 net) undeveloped locations (2017 – 63.3 net locations) in the total proved plus probable eight-year development plan.  The Mannville Heavy Oil area has 16 (16.0 net) undeveloped locations in the total proved plus probable category, an increase of five from year-end 2017. The projects are forecast by McDaniel to generate annual operating cash flow in excess of the annual FDC, making the projects self-funding.

RESERVE LIFE INDEX

Perpetual’s proved plus probable reserves to production ratio, also referred to as reserve life index (“RLI”), was 19.9 years at year-end 2018, while the proved RLI was 13.1 years, based upon the 2019 production estimates in the McDaniel Report. The following table summarizes Perpetual’s historical calculated RLI.

Reserve Life Index(1)

Year-end

2018

2017

2016

2015

2014

Total Proved

13.1

9.1

9.3

7.3

7.3

Total Proved plus Probable

19.9

13.2

15.1

11.9

11.9

(1)    Calculated as year-end reserves divided by year one production estimate from the McDaniel Report

NET PRESENT VALUE OF RESERVES SUMMARY

Perpetual’s oil, natural gas and NGL reserves were evaluated by McDaniel using the Consultant Average Price Forecast effective January 1, 2019 and include the forecast impact of the Company’s market diversification contract, but prior to provision for financial oil and natural gas price hedges, foreign exchange contracts, income taxes, interest, debt service charges and general and administrative expenses. The following table summarizes the NPV of future revenue from reserves at January 1, 2019, assuming various discount rates:

NPV of Reserves, before income tax(1)(2)

($ millions except as noted)

Undiscounted

5%

10%

15%

Discounted
at
20%

Unit Value
Discounted
at 10%/Year
($/boe)(3)

Proved Producing

159.9

139.3

123.0

110.4

100.6

7.08

Proved Non-Producing

4.3

3.7

3.1

2.6

2.3

8.05

Proved Undeveloped

273.3

169.0

109.5

73.3

50.0

4.42

Total Proved

437.4

312.0

235.6

186.4

152.8

5.54

Probable Producing

88.6

56.8

39.5

29.4

23.1

8.73

Probable Non-Producing

13.4

8.3

5.6

4.1

3.1

4.23

Probable Undeveloped

272.8

142.3

80.6

48.9

31.4

4.11

Total Probable

374.9

207.4

125.7

82.4

57.5

4.94

Total Proved plus probable

812.3

519.4

361.3

268.7

210.4

5.32

(1)

January 1, 2019 Consultant Average price forecast and including market diversification contract

(2)

May not add due to rounding

(3)

The unit values are based on net reserve volumes

McDaniel’s NPV10 estimate of Perpetual’s total proved plus probable reserves at year-end 2018 was $361.3 million, down 12% from $409.9 million at year-end 2017. The decrease in NPV10 reflected the impact of lower forecast commodity prices, offset by an increase in weighting to higher netback heavy oil reserves. At a 10% discount factor, total proved reserves account for 65% (2017 – 66%) of the proved plus probable value. Proved plus probable producing reserves represent 45% (2017 – 41%) of the total proved plus probable value (discounted at 10%).

FAIR MARKET VALUE OF UNDEVELOPED LAND

Perpetual’s independent third-party estimate of the fair market value of its undeveloped acreage by region for purposes of the NAV calculation is based on past Crown land sale activity, adjusted for tenure and other considerations. In West Central Alberta, no undeveloped land value was assigned where proved and/or probable undeveloped reserves have been booked.

Fair Market Value of Undeveloped Land

Net Acres

Value ($ millions)

$/Acre

Eastern and other

113,495

4.9

43.21

West Central

33,734

17.4

515.06

Oil Sands

172,960

17.1

98.85

Total

320,189

39.4

122.98

The fair market value of Perpetual’s undeveloped land at year-end 2018, adjusted to remove the value of undeveloped lands with reserves assigned in West Central Alberta, is estimated by an external land consultant at $39.4 million, a decrease of 16% from $46.7 million relative to year-end 2017. The fair market value of undeveloped oil sands leases incorporates the absolute investment to date in the ongoing bitumen extraction pilot project at Panny, with the remaining undeveloped land valued by historical land sale activity, adjusted for tenure.

NET ASSET VALUE

The following NAV table shows what is normally referred to as a “produce-out” NAV calculation under which the Company’s reserves would be produced at forecast future prices and costs. The value is a snapshot in time and is based on various assumptions including commodity prices and foreign exchange rates that vary over time. It should not be assumed that the NAV represents the fair market value of Perpetual’s shares. The calculations below do not reflect the value of the Company’s prospect inventory to the extent that the prospects are not recognized within the NI 51-101 compliant reserve assessment, except as they are valued through the estimate of the fair market value of undeveloped land.

Pre-tax NAV at December 31, 2018(1)

Discounted at

($ millions, except as noted)

Undiscounted

5%

10%

15%

Total Proved plus Probable Reserves(2)

812.3

519.4

361.3

268.7

TOU share investment(3)

28.1

28.1

28.1

28.1

Fair market value of undeveloped land(4)

39.4

39.4

39.4

39.4

Bank debt, net of working capital(1)

(49.1)

(49.1)

(49.1)

(49.1)

TOU share margin loan(1)(3)(5)

(14.1)

(14.1)

(14.1)

(14.1)

Term loan(5)

(45.0)

(45.0)

(45.0)

(45.0)

Senior notes(5)

(32.5)

(32.5)

(32.5)

(32.5)

Estimate of Additional Future Abandonment and Reclamation Costs(6)

(21.0)

(15.2)

(8.3)

(4.4)

Derivatives(7)

(3.2)

(3.2)

(3.2)

(3.2)

NAV

714.9

427.8

276.6

187.9

Common shares outstanding (million)

60.24

60.24

60.24

60.24

NAV per share ($/share)

11.87

7.10

4.59

3.12

(1)

Financial information is per Perpetual’s 2018 preliminary unaudited consolidated financial statements

(2)

Reserve values per McDaniel Report as at December 31, 2018

(3)

Tourmaline Oil Corp. (“TOU”) share value based on 1.66 million shares at December 31, 2018 closing price ($16.98 per share)

(4)

Independent third-party estimate; excludes undeveloped land in West Central Alberta with reserves assigned

(5)

Measured at principal amount

(6)

Additional future abandonment and reclamation costs for pipelines and facilities and non-reserve wells, net of estimated salvage recoveries, that
are not included in the McDaniel Report

(7)

Value as at December 31, 2018, relative to the Consultant Average Price Forecast. Excludes market diversification contract which is included in
total proved plus probable reserves

The above evaluation includes FDC expectations required to bring undeveloped reserves on production, as recognized by McDaniel, that meet the criteria for booking under NI 51-101. The fair market value of undeveloped land does not reflect the value of the Company’s extensive prospect inventory which is anticipated to be converted into reserves and production over time through future capital investment.

FINDING AND DEVELOPMENT COSTS

Under NI 51-101, the methodology to be used to calculate F&D costs includes incorporating changes in FDC required to bring the proved and probable undeveloped reserves to production. Changes in forecast FDC occur annually as a result of development activities, acquisitions and disposition activities, undeveloped reserve revisions and capital cost estimates that reflect the independent evaluator’s best estimate of what it will cost to bring the proved plus probable undeveloped reserves on production.

2018 F&D Costs(1)

($ millions except as noted)

Proved

Proved & Probable

F&D Costs, including FDC

Exploration and development capital expenditures(2)

$

26.54

$

26.54

Total change in FDC

$

(3.24)

$

(2.43)

Total F&D capital, including change in FDC

$

23.30

$

24.11

Reserve additions, including revisions – MMboe

3.20

4.74

F&D Costs, including FDC – $/boe

$

7.28

$

5.09

FD&A Costs, including FDC

Exploration and development capital expenditures(2)

$

26.54

$

26.54

Proceeds on dispositions, net of acquisitions

$

(11.57)

$

(11.57)

Total change in FDC

$

(3.24)

$

(2.43)

Total FD&A capital, including change in FDC

$

11.73

$

12.54

Reserve additions, including net acquisitions – MMboe

3.53

5.16

FD&A Costs, including FDC – $/boe

$

3.32

$

2.43

(1)

Financial information is per Perpetual’s 2018 preliminary unaudited consolidated financial statements.

(2)

Excludes corporate assets and expenditures on decommissioning obligations.

ADDITIONAL INFORMATION

Perpetual expects to release its 2018 annual audited financial statements and management’s discussion and analysis (“MD&A”) on or about February 27, 2019.



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