Peyto Exploration & Development Corp. ("Peyto" or the "Company") (TSX:PEY) is pleased to present its operating and financial results for the first quarter of the 2017 fiscal year. A 74% operating margin (1) and a 21% profit margin (2) in the quarter delivered an annualized 10% return on equity (ROE) and 8% return on capital employed (ROCE). Additional highlights included:
First Quarter 2017 in Review
Peyto maintained the same level of drilling activity during the first quarter of 2017 as it had in the last half of 2016, despite a 100% increase in Western Canadian drilling rig count. Company activity was split 70/30 between the Greater Sundance and Brazeau River areas. Peyto's 9 drilling rigs operating in Q1 drilled even more wells than 10 rigs did in Q1 2016, however, the pace of completions was reduced to avoid paying a premium for fracturing services as competition intensified. This prudent decision left Peyto with an unusually high number of drilled but uncompleted (DUC) wells at the end of the quarter. As activity levels moderate, these completions and tie-ins are expected to begin, coinciding with the traditionally lower cost summer months. This deferral also meant incremental cash costs were incurred without a commensurate production increase. It is expected per unit cash costs will return to target levels for the balance of the year as incremental volumes are realized. Average 2016 drilling and completion costs of $2.7 million per horizontal well were up slightly in Q1 2017 to $2.9 million, resulting from completion design changes rather than cost inflation. Peyto added 55 sections (35,072 net acres) of new land in Q1 2017, both at Crown land sales and through private purchases, the vast majority of it in the Brazeau area. Combined with 118 square miles of 3D seismic obtained over the winter, Peyto has already identified over 85 new locations on this land which adds to future drilling inventory and supports Brazeau's continued expansion. The Brazeau gas plant expansion is now expected to occur in the third quarter coinciding with the well completion schedule.
Exploration & Development
First quarter 2017 activity was focused in the Greater Sundance and Brazeau River areas on the Company's traditional, sweet, liquids rich, natural gas resource plays. Four of the nine drilling rigs operated by Peyto were active in the Brazeau area developing Wilrich and Notikewin plays as well as testing Cardium faults that exist throughout the area. The remaining five rigs were spread throughout the Greater Sundance Area working mostly on the Spirit River group of formations including the Notikewin, Falher and Wilrich. In total, 40 horizontal and 5 vertical wells were drilled.
Drilling activity included both infill development drilling and step out drilling in newer areas and along unproven trends. In Brazeau, where well control is sparser, these step out locations first required vertical test delineation to help define some of the more complicated channel trends. This extra step helped overcome the directional drilling challenges experienced on a handful of Brazeau wells in Q4 2016.
The 45 gross wells that were drilled across the land base was the largest Q1 drilling program in Peyto's history.
Horizontal well drilling costs in Q1 2017 were slightly lower than the 2016 average costs despite longer horizontal laterals and the vertical stratigraphic tests required for some wells. Meanwhile completion costs (per meter of horizontal lateral) were up 20% due to changes in completion design including increased stage count, and increased water and nitrogen volumes. Service rates and completion cost per stage, however, remained similar to that of 2016.
During the first quarter of 2017, Peyto spent $67 million on drilling, $36 million on completions, $13 million on wellsite equipment and tie ins, $25 million on facilities and major pipeline projects, $6 million on new Crown lands, $4 million on seismic, and $3 million on acquisitions, for total capital investments of $154 million.
The Brazeau East plant site has been prepared and is ready for installation of the equipment, while fabrication of the first refrigeration train and first 6 compressors, capable of 70 mmcf/d, is effectively complete. Installation is scheduled to commence in the third quarter and will take approximately 10 weeks. Once commissioned, Brazeau will have approximately 210 mmcf/d (38,000 boe/d) of total processing capacity.
A $20 million liquids pipeline project which inter-connects the Oldman, Oldman North, Nosehill and Swanson gas plants was constructed during the quarter. All that remains are the final midstream connections which will allow NGLs from the four plants to be directly connected to a Plains Midstream's transmission system and condensate to be connected to the Pembina pipeline system. Start-up of both systems is expected in May and will significantly reduce truck traffic. Estimated annual financial benefits of over $6.5 million per year will begin to be realized, primarily in the form of increased liquids pricing.
Peyto purchased 35 sections of new land at Crown sales in the first quarter, for an average purchase price of $249/acre. In addition, 19.8 net sections were acquired from other operators for an average price of $288/acre.
Average daily AECO natural gas prices were $2.55/GJ in Q1 2017, compared to $2.93/GJ in Q4 2016, while Henry Hub spot prices were $3.02/MMBTU versus $3.04/MMBTU, respectively. Natural gas prices both north and south of the border were significantly improved over Q1 2016 ($1.75/GJ & $1.99/MMBTU) even though the colder than normal winter didn't materialize as expected.
On average for Q1 2017, Peyto realized a natural gas price of $2.58/GJ or $2.96/Mcf. This was the result of a combination of approximately 5% being sold in the daily or monthly spot market at an average of $2.73/GJ ($3.14/Mcf) and 95% having been pre-sold at an average hedged price of $2.57/GJ (prices reported net of TCPL fuel charges).
In the first quarter of 2017, Peyto took advantage of higher liquid propane prices by operating its Oldman deep cut process. As a result, Peyto realized an oil and natural gas liquids price of $48.14/bbl in Q1 2017 for its blend of condensate, pentane, butane and propane, which represented 77% of the $62.19/bbl average Canadian Light Sweet posted price.
Peyto currently has 4 drilling rigs working intermittently through breakup. Early April breakup conditions included significant precipitation in the Edson area which has hampered drilling and completion progress. Activity levels will remain weather dependent though the balance of May and into June. The return of normal conditions, expected in June, will enable Peyto to ramp back up to 9 drilling rigs, and associated completion operations, across the Greater Sundance and Brazeau areas.
Since the end of the first quarter, Peyto has spud 6 wells (4.4 net), completed 6 wells (6 net), and brought 4 wells (4 net) onstream. There remains an inventory of 15 drilled but uncompleted wells with estimated production of at least 6,000 boe/d and 6 completed wells with tested production totaling 4,000 boe/d, all awaiting tie in. Of the 6 tested wells waiting on tie-in, three may be delayed until the end of the year as they are located in a new emerging area for Peyto and require a new infrastructure solution.
At West Brazeau, vertical delineation drilling has extended a prolific Notikewin channel trend that exhibits above average reservoir pressure and above average productivity. Peyto will be following up these recent successes with additional wells as soon as weather conditions allow.
The bullish commodity outlook last fall which drove aggressive drilling programs in Western Canada this past winter has since softened. This should help relieve some of the inflationary pressures on the service industry and allow Peyto to resume its 2017 capital program of $550-600 million at the expected capital efficiency and with maximum return on invested capital. The Company will continue to remain nimble with its capital investments, always putting profitability before growth. That said, results from this year's capital program are expected to deliver significant per share growth in production, cashflow and earnings in the second half of 2017.
Conference Call and Webcast
A conference call will be held with the senior management of Peyto to answer questions with respect to the Q1 2017 financial results on May 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 firstname.lastname@example.org. The conference call can also be accessed through the internet at http://edge.media-server.com/m/p/23i3rryd. 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 first quarter report to shareholders, including the MD&A, audited financial statements and related notes, is available at http://www.peyto.com/Files/Financials/2017/Q12017MDandA.pdf and will be filed at SEDAR, www.sedar.com at a later date.
2017 Annual General Meeting
Peyto's Annual General Meeting of shareholders will be held on Thursday, May 11, 2017 at 3:00 pm in the Glen 206 Ballroom of the Telus Convention Center at 120 9 Ave SE, Calgary, AB T2G 0P3. Shareholders and interested investors are invited to attend.
Peyto is an explorer and producer of unconventional natural gas in Alberta's Deep Basin. Our industry leading cost structure and focus on profitability make us unique in the Canadian Energy Industry
Peyto Exploration & Development is a natural gas weighted E & P that is committed to building value through the exploration and development of high quality gas properties. Peyto Exploration & Development Trades on the Toronto Stock Exchange under the symbol ‘PEY’.
The Toronto Stock Exchange has neither approved nor disapproved the information contained herein.