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Painted Pony Announces Fourth Quarter and Full Year 2019 Financial and Operating Results, 2019 Year-End Reserves, and Improved Cost Structures


CALGARY, Alberta – Painted Pony Energy Ltd. (“Painted Pony” or the “Corporation”) (TSX: PONY) is pleased to announce fourth quarter and full-year 2019 financial and operating results, year-end 2019 reserves, 2020 first-half capital spending, and anticipated future reductions to transportation, processing, and general and administrative expenses (“G&A“).

HIGHLIGHTS

  • Reduced bank debt at 2019 year end by 26% or $43 million to $120 million when compared to 2018 year-end bank debt of  $163 million;
  • Closed the sale of a 75% working interest on 11,280 gross acres (8,460 net acres) in the South Townsend block during the fourth quarter of 2019 for total cash consideration of $45 million;
  • Drilling began in March 2020 on an eight-well Montney program by joint venture partner and project operator Tourmaline Oil Corp. on the 25% working interest South Townsend block;
  • Amended processing and transportation agreements which, when fully implemented, are expected to save Painted Pony approximately $18 million annually;
  • Delivered a 2019 Proved Developed Producing (“PDP“) recycle ratio of 1.3 times, resulting in a three-year average PDP recycle ratio of 1.5 times;
  • Reduced Total Proved (“1P“) future development capital (“FDC“) by 11% or $172 million;
  • Expect to begin flowing production volumes in March 2020 through the new deep-cut facility at the AltaGas Townsend Facility (“Townsend Facility”) which is expected to add approximately 1,200 bbls/d of natural gas liquids (“NGLs“), increasing Painted Pony’s liquids yields to more than 10%;
  • Forecasting 2020 gross G&A to be approximately 8% or $2 million lower than 2019 gross G&A expenses;
  • Increased production volumes to an estimated daily average of 315 MMcfe/d (53,000 boe/d) for the months December 2019, January 2020, and February 2020, based on actuals and field estimates; and
  • Generated adjusted funds flow from operations of $18 million during the fourth quarter of 2019 bringing full-year 2019, adjusted funds flow from operations to $76 million.

Patrick Ward, President and CEO of Painted Pony, in commenting on these highlights said, “The commodity markets continue to be highly volatile with natural gas prices reaching generational lows during the summer of 2019 before AECO began rebounding in late 2019 only to see NYMEX prices fall in early 2020. Painted Pony’s market diversification strategy and fixed price hedges allowed us to realize a 2019 natural gas price that exceeded the average 2019 AECO 5A daily spot price by 36%. Through the combination of capital discipline and an asset sale, we were able to reduce year-end bank debt by 26% or $43 million. We are entering 2020 with a cautious first half capital budget which forecasts investing $25 to $30 million, including drilling the first eight wells in our new joint venture with Tourmaline Oil Corp. on the South Townsend block. We are continuing to exercise caution in this difficult market which means focusing our efforts on streamlining capital spending, potential asset sales, and the ongoing pursuit of long-term contracts with large end-users of natural gas, and other cost saving initiatives. While it remains a very challenging natural gas price environment, the long-term outlook is improving as evidenced by the ongoing construction of the LNG Canada facility at Kitimat, BC, the anticipated final investment decision on the Woodfibre LNG project in 2020, and the recently announced $4 billion planned expansion to FortisBC’s Tilbury LNG facility.”

COST STRUCTURE IMPROVEMENTS

As part of ongoing cost reductions, Painted Pony is pleased to announce several successful initiatives which are expected to reduce annual operating and transportation expenses.

Townsend Facility Cost Structure Improvements

Effective October 1, 2019 the take-or-pay commitment at the Townsend Facility was reduced by 15 MMcf/d. The take-or-pay commitment will be reduced by an additional 16 MMcf/d on August 1, 2020 with an additional 9 MMcf/d reduction to the take-or-pay commitment on August 1, 2021, for a total reduction of take-or-pay obligation of 15% or 40 MMcf/d. In addition, Painted Pony will realize a reduced capital lease fee at the Townsend Facility, which is expected to lower the per unit cost by approximately 10%. Also, the annual fixed-cost liquids transportation expense has been reduced by approximately 40% from the Townsend Facility to the North Pine Fractionator.

Reduced Transportation Obligations

In addition to reduced facility costs, Painted Pony has permanently reduced firm transportation obligations on two major pipelines. Effective August 1, 2020, Painted Pony’s excess firm transportation obligations will be reduced by 30 MMcf/d, consisting of a reduction of 15 MMcf/d on the T-North pipeline and 15 MMcf/d on the North Montney Mainline which when combined and fully implemented, is expected to reduce Painted Pony’s annual transportation expenses by approximately $3.7 million.

Once fully implemented, cost structure improvements at the Townsend Facility combined with reduced transportation obligations on both the T-North and North Montney Mainline pipelines are expected to save Painted Pony approximately $18 million per year.

G&A Cost Reductions

Through a combination of staff attrition, reduced compensation, and various other cost cutting measures, 2019 gross G&A expenses were $1.4 million lower than 2018 gross G&A. Ongoing efficiency initiatives are expected to further reduce forecasted 2020 gross G&A expenses by an incremental $2 million below that of 2019.

2019 FINANCIAL AND OPERATING RESULTS

Capital Expenditures

Net cash capital spending during 2019 totaled approximately $42 million, net of asset sale proceeds, compared to adjusted funds flow of $76 million.

Capital investment activities during 2019 included drilling 13 (13.0 net) wells, the completion of 14 (14.0 net) wells and investments into associated facilities and infrastructure. During the fourth quarter of 2019, Painted Pony completed 2 (2.0 net) wells, and executed a capital program totaling $12 million.

Production

Painted Pony’s 2019 annual average daily production was 294 MMcfe/d (48,979 boe/d), including 9% or 4,198 bbls/d of NGLs and 269 MMcf/d of natural gas compared to 347 MMcfe/d (57,879 boe/d) during 2018. Fourth quarter 2019 daily production volumes averaged 271 MMcfe/d (45,173 boe/d) compared to 315 MMcfe/d (52,453 boe/d) during the fourth quarter of 2018. Average daily production volumes during 2019 were significantly impacted by voluntary pricing-related shut-ins and pipeline restriction shut-ins. The impact of these shut-ins for the full year 2019 was 36.6 MMcfe/d (6,100 boe/d), while the impact during the  fourth quarter of 2019 was 55.8 MMcfe/d (9,300 boe/d).

The low natural gas prices which plagued summer and fall 2019 and which were the cause for material production volume shut-ins improved in mid-November with natural gas prices supporting higher production volumes. December 2019 daily production volumes averaged 319 MMcfe/d (53,158 boe/d); significantly higher than the quarterly average daily production volumes of 271 MMcfe/d (45,173 boe/d) during the fourth quarter of 2019.

Adjusted Funds Flow from Operations

Adjusted funds flow from operations during the fourth quarter of 2019 was $18 million ($0.11 per basic share) with full year 2019 adjusted funds flow totaling $76 million ($0.47 per basic share).

OPERATIONAL UPDATE

Current Production

Due to improved natural gas pricing and strong performance from our most recent wells, average daily production volumes during December 2019, January 2020, and February 2020 averaged greater than 318 MMcfe/d (53,000 boe/d), based on actuals and field estimates.

South Townsend Joint Venture

Tourmaline Oil Corp., Painted Pony’s joint venture partner and operator of the project on the liquids-rich South Townsend block, began drilling an eight-well program in March 2020.

Townsend Facility Deep Cut Access

Painted Pony is expecting to access the new deep cut facility at the Townsend Facility which is expected to be commissioned and operational in late March 2020. Producing gas through the deep cut facility will increase Painted Pony’s liquid yields and increase absolute NGL production by an estimated 1,200 bbls/d, increasing Painted Pony’s liquids yield to greater than 10% of daily production volumes. The majority of this NGL production increase will be propane. Painted Pony’s access to the AltaGas North Pine Fractionator and Ridley Island Propane Export Terminal will attract international pricing for the Corporation’s propane production volumes. These international pricing benchmarks have typically traded at a premium price to North America propane pricing.

2020 CAPITAL DEVELOPMENT PROGRAM

Painted Pony is taking a cautious approach to capital spending in 2020. The Painted Pony Board of Directors has approved first half 2020 capital spending of $25 million to $30 million. The Board of Directors and management have planned a mid-year review to determine appropriate second-half spending.

SUMMARY OF 2019 RESERVES AS PREPARED BY GLJ PETROLEUM CONSULTANTS

2019 Summary of Reserves

The Corporation retained independent qualified reserves evaluators, GLJ Petroleum Consultants Limited (“GLJ”), to evaluate and review all of the Corporation’s proved and proved plus probable reserves effective December 31, 2019, which is contained in a report dated March 11, 2020 (the “2019 Reserves Report”). The evaluation and review was conducted and prepared in accordance with standards contained in the Canadian Oil and Gas Handbook. The reserves disclosure is presented in accordance with NI 51-101 requirements using forecast prices and costs.

Despite lower capital investment during 2019 due to lower natural gas prices and their impact on Painted Pony’s adjusted funds flow from operations, 1P and 2P reserve volumes remained relatively unchanged from year-end 2018. Strong well performance, including positive results from longer lateral wells, and improved year-over-year capital efficiencies all contributed to relatively minor changes to the 2019 reserve volumes.

Proved Developed Producing

As at December 31, 2019, Painted Pony had PDP reserves of 878 Bcfe (146 MMboe). The 2019 capital program delivered a PDP FD&A cost of $1.26 per Mcfe. NGLs made up approximately 9% of PDP reserves at December 31, 2019.

Total Proved

As at December 31, 2019, Painted Pony’s 1P reserves were approximately 3.0 Tcfe (496 MMboe). Painted Pony realized 1P FDC cost reductions of 11% or $172 million, largely due to the impact of longer laterals on future development plans. The 1P FDC cost reductions of $172 million exceeded total 2019 capital spending of $87 million (prior to asset disposition proceeds).

Total Proved Plus Probable

As at December 31, 2019, Painted Pony’s 2P reserves were approximately 6.8 Tcfe (1,134 MMboe). Painted Pony realized 2P FDC cost reductions of 4% or $133 million, largely due to the impact of longer laterals on future development plans. The 2P FDC cost reductions of $133 million exceeded total 2019 cash capital spending of $87 million (prior to asset disposition proceeds).

Tables below outline GLJ’s estimates of Painted Pony’s reserves at December 31, 2019 and December 31, 2018:

Summary of Company Working Interest Reserves (gross of royalties)

December 31, 2019 December 31, 2018
Natural Gas
(Bcf)
NGLs
(MMbbls)
Natural Gas
Equivalent
(Bcfe)
Oil
Equivalent
(MMboe)
Natural Gas
Equivalent
(Bcfe)
Proved Developed Producing 801.8 12.7 877.7 146.3 951.4
Proved Developed Non-Producing 36.7 0.3 38.4 6.4 8.9
Proved Undeveloped 1,925.2 22.8 2,061.9 343.7 2,107.5
Total Proved 2,763.6 35.7 2,978.0 496.3 3,067.8
Probable 3,562.5 43.8 3,825.0 637.5 3,814.8
Total Proved Plus Probable 6,326.1 79.5 6,803.1 1,133.8 6,882.5

The tables below outline GLJ’s estimates of Painted Pony’s associated net present values of reserves at December 31, 2019:

Net Present Values of Future Net Revenue (1)(2)
(Forecast Prices and Costs) ($Millions)
As at December 31, 2019
Annual Discount Rate (before income taxes) 0 % 5 % 10 % 15 % 20 %
Proved
Developed Producing 1,393 1,000 762 615 517
Developed Non-Producing 76 53 41 33 28
Undeveloped 3,110 1,685 976 587 356
Total Proved 4,579 2,738 1,779 1,235 901
Probable 7,369 2,967 1,424 768 449
Total Proved Plus Probable 11,948 5,704 3,203 2,003 1,350

Numbers in this table may not add due to rounding.

  1. Estimates of future net revenue, whether discounted or not, do not represent fair market value.
  2. Future net revenue is after deduction of estimated costs of abandonment and reclamation of existing and future reserve wells and facilities that were evaluated by GLJ in the 2019 Reserves Report.

Reconciliation of Company Gross Reserves (Forecast Prices and Costs)

Natural Gas
(Shale Gas)
NGLs Total Total
(Bcf) (MMbbl) (MMboe) (Bcfe)
Total Proved Reserves
Opening Balance December 31, 2018 2,838.5 38.2 511.3 3,067.8
Discoveries 0.0 0.0 0.0 0.0
Extensions and Improved Recovery 0.0 0.0 0.0 0.0
Technical Revisions (2) 48.8 (0.2 ) 7.9 47.4
Economic Factors (7.0 ) (0.1 ) (1.3 ) (7.5 )
Dispositions (18.6 ) (0.6 ) (3.7 ) (22.4 )
Acquisitions 0.0 0.0 0.0 0.0
Production (1) (98.1 ) (1.5 ) (17.9 ) (107.3 )
Closing Balance December 31, 2019 2,763.6 35.7 496.3 2,978.0
Total Proved Plus Probable Reserves
Opening Balance December 31, 2018 6,383.9 83.1 1,147.1 6,882.5
Discoveries 0.0 0.0 0.0 0.0
Extensions and Improved Recovery 0.0 0.0 0.0 0.0
Technical Revisions (2) 93.7 (1.0 ) 14.7 88.0
Economic Factors (31.2 ) (0.4 ) (5.6 ) (33.5 )
Dispositions (22.2 ) (0.8 ) (4.5 ) (26.7 )
Acquisitions 0.0 0.0 0.0
Production (1) (98.1 ) (1.5 ) (17.9 ) (107.3 )
Closing Balance December 31, 2019 6,326.1 79.5 1,133.8 6,803.1

Numbers in this table may not add due to rounding.

  1. Represents the Corporation’s actual production for the year ended December 31, 2019.
  2. Technical revisions are the result of well results and well type design, focusing development on dry gas areas and the inclusion of capital lease expenses in operating costs.

2019 FINDING, DEVELOPMENT & ACQUISITION COSTS (“FD&A”) AND RECYCLE RATIOS

Industry uses recycle ratios as a measure of a Corporation’s ability to grow reserves profitably and invest capital efficiently. The recycle ratio is calculated by dividing the annual operating netback by the annual finding, development and acquisition cost, both on a per unit basis.  The higher the recycle ratio, the more efficient Painted Pony has been in deploying capital to grow reserves and therefore add value for shareholders.  Painted Pony also uses the 3-year weighted average recycle ratio, which smooths out yearly fluctuations by dividing the 3-year weighted average operating netback by the 3-year weighted average finding, development and acquisition cost, both on a per unit basis.

Painted Pony generated a 2019 recycle ratio of 1.3 times on a PDP basis. This is calculated by dividing Painted Pony’s 2019 operating netback (revenue less royalties, operating expenses, transportation costs, and realized hedging gains or losses) of $1.66 per Mcfe by the 2019 FD&A cost, including changes in FDC, of $1.26 per Mcfe on a PDP basis.

Capital Efficiencies

Proved Developed Producing 2019 3-Year Weighted Avg.
Finding, Development & Acquisition Cost ($/Mcfe) 1.26 1.06
Recycle Ratio 1.3x 1.5x
Total Proved
Finding, Development & Acquisition Cost ($/Mcfe) nmf 0.37
Recycle Ratio nmf 4.3x
Total Proved Plus Probable
Finding, Development & Acquisition Cost ($/Mcfe) nmf 0.49
Recycle Ratio nmf 3.3x

See advisories with respect to finding, development & acquisition costs.
Note: FDC reductions exceeded capital spending in 2019, resulting in a ‘not meaningful figure’ (nmf)

Future Development Costs of Reserves
(Forecast Prices and Costs)
Total Proved Undeveloped
As at December 31 2019 2018
Net Total Proved Undeveloped Wells 224 257
Total Proved Future Development Cost ($Millions) (undiscounted) 1,369 1,539
Total Proved Reserves (Bcfe) 2,978 3,068
Total Proved Future Development Cost ($ per Mcfe) 0.46 0.50
(Forecast Prices and Costs) Proved Plus Probable Undeveloped
As at December 31 2019 2018
Net Proved Plus Probable Undeveloped Wells 558 618
Proved Plus Probable Future Development Cost ($Millions) 3,343 3,476
Total Proved Plus Probable Reserves (Bcfe) 6,803 6,883
Proved Plus Probable Future Development Cost ($ per Mcfe) 0.49 0.51

Painted Pony’s strategy continues to focus on the creation of long-term shareholder value through a deep inventory of drilling locations for natural gas and natural gas liquids across more than 290 net sections of Montney rights, continued focus on long-term opportunities for market diversification, and corporate-wide cost structure optimization.

DIRECTOR RESIGNATION
Painted Pony announces the resignation of Paul Beitel as a Director of the Corporation. Mr. Beitel was a key contributor to Painted Pony since he joined the Board of Directors in May of 2017. The Board of Directors and the Corporation thank Mr. Beitel for his service to Painted Pony and wish him every success in his future endeavours.

FINANCIAL AND OPERATIONAL HIGHLIGHTS

Years ended
December 31, 
($ millions, except per share and shares outstanding) 2019 2018 Change
Financial
Natural gas and natural gas liquids revenue(1) 302.8  404.4 (25 )%
Cash flows from operating activities 88.6  169.0 (48 )%
Per share – basic(3)(8) 0.55  1.05 (48 )%
Per share – diluted(4)(8) 0.52  0.99 (48 )%
Adjusted funds flow from operations(2) 76.4  174.6 (56 )%
Per share – basic(3) 0.47  1.08 (56 )%
Per share – diluted(4) 0.45  1.03 (56 )%
Net income (loss) and comprehensive income (loss) – basic and diluted (232.9 ) 7.1  %
Per share – basic and diluted(3)(4) (1.45 ) 0.04  %
Cash capital expenditures (net) 42.3  154.4 (73 )%
Working capital (deficiency)(5) (31.9 ) 32.9  %
Bank debt 119.9  163.1 (26 )%
Senior notes 144.8  143.1 1  %
Convertible debentures – liability 47.5  46.1 3  %
Net debt(6) 320.2  348.5 (8 )%
Total assets 1,803.4  2,055.4 (12 )%
Shares outstanding (millions) 161.0  161.0  %
Basic weighted-average shares (millions) 161.0  161.0  %
Fully diluted weighted-average shares (millions) 169.9  169.9  %
Operational
Daily production volumes
Natural gas (MMcf/d) 268.7  316.5 (15 )%
Natural gas liquids (bbls/d) 4,198  5,128 (18 )%
Total (MMcfe/d) 293.9  347.3 (15 )%
Total (boe/d) 48,979  57,879 (15 )%
Realized commodity prices before financial risk management contracts
Natural gas ($/Mcf) 2.40  2.54 (6 )%
Natural gas liquids ($/bbl) 44.05  59.43 (26 )%
Total ($/Mcfe) 2.82  3.19 (12 )%
Operating netbacks ($/Mcfe)(7) 1.66  2.16 (23 )%
Corporate netbacks ($/Mcfe)(7) 1.12  1.71 (35 )%
  1. Before royalties.
  2. Adjusted funds flow from operations and adjusted funds flow from operations per share (basic and diluted) are non-GAAP measures used to represent cash flow from operating activities before the effects of changes in non-cash working capital and decommissioning expenditures. Adjusted funds flow from operations per share is calculated by dividing adjusted funds flow from operations by the weighted average number of basic or diluted shares outstanding in the period. See “Non-GAAP Measures”.
  3. Basic per share information is calculated on the basis of the weighted average number of shares outstanding in the period.
  4. Diluted per share information reflects the potential dilutive effect of stock options and convertible debentures.
  5. Working capital (deficiency) is a non-GAAP measure calculated as current assets less current liabilities. See “Non-GAAP Measures”.
  6. Net debt is a non-GAAP measure calculated as bank debt, senior notes, liability portion of convertible debentures, and working capital deficiency, adjusted for the net current portion of fair value of risk management contracts and current portion of finance lease obligation. See “Non-GAAP Measures”.
  7. Operating netbacks and corporate netbacks are non-GAAP measures. Operating netbacks are calculated on a per unit basis as natural gas and natural gas liquids revenues, adjusted for realized gains or losses on risk management contracts, less royalties, operating expenses and transportation expenses. Corporate netbacks are calculated as operating netback less finance lease expense per unit. See “Non-GAAP Measures” and “Operating and Corporate Netbacks”.
  8. Cash flows from operating activities per share – basic and diluted are non-GAAP measures calculated by dividing cash flows from operating activities by the weighted average of basic or diluted shares outstanding in the period. See “Non-GAAP Measures”.


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