Peyto Exploration & Development Corp. is pleased to present its operating and financial results for the third quarter of the 2021 fiscal year. A 63% Operating Margin (1) and a 18% Profit Margin (2) in the quarter delivered an 8% Return on Capital and a 9% Return on Equity, on a trailing twelve-month basis. Highlights for the quarter included:
Funds from operations per share up 110%. Funds from Operations (“FFO”) were $105 million after hedging losses of $72 million in the quarter. Per share FFO were $0.63, up from $0.30 in Q3 2020. FFO in the quarter exceeded capital expenditures by $14 million. Over the past 12 months Peyto has generated $380 million in FFO, while allocating $324 million to capital expenditures.
Production per share up 14%. Third quarter 2021 production of 89,998 boe/d, comprised of 473 MMcf/d of natural gas, 6,685 bbl/d of Condensate and Pentanes, and 4,479 bbl/d of Butane and Propane, was up 15% (14% per share) from 78,210 boe/d in Q3 2020. Total liquid yields of 23.6 bbl/MMcf, or 12% of total production, was down from 28.0 bbl/MMcf in Q3 2020 due to an increased focus on leaner Spirit River plays.
Total cash costs of $1.22/Mcfe (or $0.86/Mcfe ($5.14/boe) excluding royalties). Industry leading low total cash costs included $0.36/Mcfe royalties, $0.35/Mcfe operating costs, $0.23/Mcfe transportation, $0.02/Mcfe G&A and $0.26/Mcfe interest, which combined with a realized price of $3.33/Mcfe to result in a $2.11/Mcfe ($12.68/boe) cash netback, up 86% from $1.14/Mcfe ($6.83/boe) in Q3 2020. Operating costs per unit for Q3 2021 were consistent with Q1 and Q2 2021 despite rising power prices, higher chemical costs and maintenance costs associated with 10 plant turnarounds. Interest charges were down 26% from $0.35/Mcfe in Q3 2020 due to lower interest rates and reduced debt levels.
Capital investment of $90 million in organic activity. A total of 24 gross wells (93% Working Interest, “WI”) were drilled in the third quarter, 22 gross wells (93% WI) were completed, and 21 gross wells (94% WI) were brought on production. Over the last 12 months new production additions, inclusive of acquisitions, accounted for approximately 40,100 boe/d at the end of the quarter, which, when combined with a trailing twelve-month capital investment of $324 million, equates to a record annualized capital efficiency of $8,100/boe/d.
Earnings of $0.18/share, Dividends of $0.01/share. Earnings of $29.3 million were generated in the quarter while dividends of $1.7 million were paid to shareholders. The Board of Directors of Peyto is pleased to increase the dividend to $0.05/share on a monthly basis to shareholders of record as of November 30, 2021, paid on December 15, 2021.
Third Quarter 2021 in Review
A steady stream of drilling and completion activity throughout the quarter, utilizing the five drilling rigs active in Peyto’s Deep Basin core areas, resulted in continuous production growth from 86,500 boe/d at the start of July to 94,000 boe/d by the end of September. Superior operational execution, combined with improved well results, delivered record capital efficiency throughout the period. AECO daily natural gas prices, while substantially higher, were extremely volatile with recorded highs of $4.80/GJ and lows of $1.02/GJ. This was the result of insufficient access to EGAT storage reservoirs during periods of NGTL restrictions. Despite the volatility, AECO daily prices averaged $3.41/GJ in Q3 2021, up 161% from $2.12/GJ in Q3 2020. Peyto’s unhedged natural gas price for the quarter was $3.39/GJ, which is evidence of its improving market diversification program. The Company’s methodical hedging program resulted in predictable after-hedge commodity prices that trailed the rapidly rising spot prices. Peyto’s realized revenues were up 77% from Q3 2020, which combined with total cash costs, yielded operating margins of 63%. Lower depletion rates driven by better finding and development costs resulted in improved earnings and a profit margin of 18%. Peyto’s ESG working group was active throughout the quarter advancing several initiatives to improve the Company’s ongoing sustainability and industry leading environmental performance.
Operating Margin is defined as funds from operations divided by revenue before royalties but including realized hedging gains/losses.
Profit Margin is defined as net earnings for the quarter divided by revenue before royalties but including realized hedging gains/losses.
Natural gas volumes recorded in thousand cubic feet (mcf) are converted to barrels of oil equivalent (boe) using the ratio of six (6) thousand cubic feet to one (1) barrel of oil (bbl). Natural gas liquids and oil volumes in barrel of oil (bbl) are converted to thousand cubic feet equivalent (Mcfe) using a ratio of one (1) barrel of oil to six (6) thousand cubic feet. This could be misleading, particularly if used in isolation as it is based on an energy equivalency conversion method primarily applied at the burner tip and does not represent a value equivalency at the wellhead.
Exploration & Development
Peyto continued to drill longer horizontal laterals in the quarter to access greater reservoir volume and develop more reserves per wellbore, which has the combined benefit of minimizing costs and environmental impact. Drilling cost per meter and completion costs per stage so far in 2021 are consistent with that of 2020. Supply chain issues and labor challenges due to the COVID pandemic have pressured service costs which Peyto has successfully offset with improved well results.
During the third quarter of 2021, Peyto invested $43 million on drilling, $26 million on completions, $7 million on wellsite equipment and tie-ins, $12 million on facilities and major pipeline projects, and $2 million acquiring new lands and seismic, for a total organic capital investment of $90 million. Pipeline projects in the Cecilia, Wildhay, Sundance and Brazeau areas accounted for $5 million of the $12 million of major pipeline and facility investments, while new condensate stabilization facilities at Brazeau and compressor equipment upgrades at the various plant turnarounds accounted for $6 million.
Environment, Social, Governance
Peyto’s ESG working group was active in the third quarter, advancing scientific studies across the Company’s business and operations in search of opportunities to enhance Peyto’s environmental performance.
The Company recently completed an inhouse study of the porous saline reservoirs in and around its Greater Sundance Area for potential Carbon Capture and Underground Storage (“CCUS”) of CO2 emissions from Peyto’s operations. Preliminary results from this study concluded that, based on Peyto’s existing and future forecasted emissions, the Company expects to have access to enough storage capacity for all future CO2 disposal requirements. Facility requirements to enable such capture and injection include compressor exhaust gas CO2 extraction, CO2 purification, CO2 compression and pipeline transport, and the drilling and completion of suitable injection wells. While current government policy, taxation levels, carbon credit systems, and facility designs and technologies are rapidly evolving, Peyto envisions a future whereby a large proportion of its CO2 emissions are captured and injected. The Company is actively contributing to and participating in the Government of Alberta’s ongoing input solicitation for ideas and suggestions on policy as well as expressions of interest in instituting specific CCUS schemes.
Peyto’s ESG working group has also been active in the design and testing of an inline pipeline turbine generator to provide emissions-free power at remote Peyto wellsites. The first field trials of this new equipment began in September 2021 and while no final conclusions have been reached, Peyto is encouraged this type of research and development will lead to further reductions in vented Methane emissions.
As a result of Peyto’s Methane emissions reduction program so far, 2016 total Methane emissions of 378,275 tCO2e/yr will have been reduced by over 50% to approximately 175,000 tCO2e/yr by the end of 2021. The Company has set a further target to reduce the vented and flared methane emissions intensity by 75% from 2016 levels by 2023.
Peyto actively marketed all components of its production stream in the quarter including natural gas, condensate, pentane, butane and propane. Natural gas was sold in Q3 2021 at various hubs including Henry Hub (51%), AECO (29%), Malin (8%), Emerson (8%), and Ventura (4%), using both physical fixed price and basis transactions (diversification activities) to access those locations. Natural gas prices were left to float on daily or monthly pricing or locked in using fixed price swaps at those hubs and Peyto’s realized price is benchmarked against those local prices, then adjusted for transportation (either physical or synthetic) to those markets. Going forward, Peyto expects that the cost of market diversification activities will begin to yield superior gas prices to that of a disconnected AECO market.
Peyto employs a methodical commodity risk management program that is designed to smooth out the short-term fluctuations in the price of natural gas and natural gas liquids through future sales. This smoothing gives greater predictability of cashflows for the purposes of capital planning and dividend payments. The future sales are meant to be orderly and consistent to avoid speculation, much like “dollar cost averaging” the future prices. In general, this approach will show hedging losses when short term prices climb and hedging gains when short term prices fall. For Q3 2021, approximately 81% of Peyto’s gas was locked in at a fixed price of $2.04/Mcf. Most of those contracts were established several quarters prior at then market prices that were lower than the eventual spot prices. For Q4 2021, approximately 73% of Peyto’s gas is locked in at a fixed price of $3.16/Mcf, and for Q1 2022, approximately 71% of Peyto’s gas is locked in at a fixed price of $3.71/Mcf. This dramatic rise in fixed prices mirrors that of the spot price rise which occurred earlier.
The Company’s liquids are also actively marketed with condensate being sold on a monthly index differential linked to West Texas Intermediate (“WTI”) oil prices. Peyto’s NGLs (a blend of pentanes plus, butane and propane) are fractionated by a third party in Fort Saskatchewan, Alberta and Peyto markets each product separately. Pentanes Plus are sold on a monthly index differential linked to WTI, with some volumes forward sold on fixed differentials to WTI. Butane is sold as a percent of WTI or a fixed differential to Mount Belvieu, Texas markets. Propane is sold on a fixed differential to Conway, Kansas markets. While some products like Butane and Propane require annual term contracts to ensure delivery paths and markets are certain, others can be sold on the daily spot market.
Condensate and Pentane Plus volumes were sold in Q3 2021 for an unhedged average price of $83.60/bbl, which is almost double the $42.09/bbl in Q3 2020, and as compared to Canadian WTI light oil price that averaged $88.92/bbl. The $5.32/bbl differential from light oil price was similar to the $5.41/bbl in the previous year. Butane and propane volumes were sold in combination at an average price of $37.97/bbl, or 43% of light oil price, up 141% from the $15.76/bbl in Q3 2020, due to post-COVID demand increase.
The Company’s realized price for natural gas in Q3 2021 was $5.20/Mcf, prior to $1.30/Mcf of market diversification activities and a $1.42/Mcf hedging loss, while its realized liquids price was $65.29/bbl, before a $9.82/bbl hedging loss, which yielded a combined revenue stream of $3.33/Mcfe. This net sales price was 55% higher than the $2.15/Mcfe realized in Q3 2020. Cash costs of $1.22/Mcfe were 21% higher than the $1.01/Mcfe in Q3 2020 due to a $0.22/Mcfe increase in royalties. When the total cash costs of $1.22/Mcfe were deducted from realized revenues of $3.33/Mcfe, it resulted in a cash netback of $2.11/Mcfe or a 63% operating margin.
Depletion, depreciation, and amortization charges of $1.25/Mcfe, along with a provision for deferred tax and stock-based compensation payments resulted in earnings of $0.60/Mcfe, or a 18% profit margin. Dividends to shareholders totaled $0.03/Mcfe.
Since the end of the quarter, the Company has drilled 9 wells (80% WI), completed 11 wells (95% WI) wells, and brought onstream 11 new wells (95% WI). Eight additional wells (84% WI) are currently drilled and awaiting completion and tie-in. Recent drilling success has yielded higher productivity than expected which is driving Internal Rate of Return (BT IRR) estimates for this year’s capital program to over 100%. Several of this year’s new wells have already reached payout on their initial capital investment. Peyto expects to bring another 17 wells (91% WI) on production before the end of the year, driving exit production beyond 100,000 boe/d and delivering much needed natural gas supply for this coming winter.
In the Company’s Chambers area in South Brazeau, Peyto has prepared the site for its new 50 MMcf/d gas plant with foundations set and equipment delivery expected to begin by year end. Installation and commissioning of this new facility is expected by the end of Q1 2022. This new plant will be Peyto’s most environmentally efficient plant to date, deploying a new waste heat recovery technology to reduce the need for natural gas fired utility heat along with zero emissions controls and instrumentation systems. Much of the equipment for this new plant will be deployed from existing capital inventory, which successfully avoids supply chain delays, and is already reflected in Peyto’s net debt. A second drilling rig will be transferred into the Chambers area this winter which will develop sufficient production to more than fill the new plant prior to startup. As usual, this plant is designed with modular components for easy expansion and to maximize utilization which is key to minimizing per unit operating costs.
In Peyto’s Cecilia area, recent drilling success has filled all 30 MMcf/d of available compression at the acquired plant. An additional compressor will be added in the fourth quarter to take advantage of optimized capacity in the refrigeration process.
Issuance of Private placement of senior secured Notes
Peyto is pleased to announce that it has priced an issuance of USD$40 million of senior secured notes. The notes will have a coupon rate of 3.98% and mature in October 2028. The notes have been issued by way of a private placement pursuant to a note purchase agreement and rank equally with Peyto's obligations under its bank facility and existing note purchase and private shelf agreement. Interest will be paid semi-annually in arrears. Proceeds from the notes have been used to prepay the CND$50 million, 4.88% notes due September 6, 2022. Closing of the private placement occurred October 29, 2021. The senior notes have not been and will not be registered under the U.S. Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
Amended and Extended Credit Facility
On November 5, 2021, the Company finalized an agreement with its syndicate of lenders and term debt note holders to amend and extend its $950 million senior secured covenant-based credit facility and note purchase agreements. This new facility has a maturity date of October 13, 2023, is made up of a $40 million working capital tranche, a $910 million production line, and is available on a revolving basis. Borrowings under the facility bear interest at Canadian bank prime or US base rate, or, at Peyto’s option, Canadian dollar bankers’ acceptances or US dollar LIBOR loan rates, plus applicable margin and stamping fees. The total stamping fees range between 175 basis points and 365 basis points on Canadian dollar bankers’ acceptance and US dollar LIBOR borrowings. The undrawn portion of the facility is subject to a standby fee in the range of 35 to 73 basis points.
2022 Preliminary Budget
Substantial well performance improvements, combined with superior operational execution over the past twelve months has allowed Peyto to add new production at a record low cost of approximately $8,000/boe/d. When combined with significantly improved commodity prices, this efficiency is delivering record returns on invested capital and justifies a similar capital program for 2022. While specifics of the 2022 budget are still being finalized, a capital program of $350-$400 million is being contemplated, inclusive of a conservative 15% provision for cost inflation, which is estimated to add approximately 37,000 to 42,000 boe/d of new production by the end of the year. This volume addition would be more than sufficient to offset the annual forecast decline of 28% on anticipated 2021 exit production of 100,000 boe/d. Exact 2021 exit production and subsequent base decline will depend on timing of year-end activity.
The proposed 2022 capital program would require all five currently operating drilling rigs to execute continuous operations across Peyto’s deep basin core areas and is projected to be funded from less than half of Peyto’s total cashflow, leaving significant free cashflow available for debt reduction and dividend payments. As always, Peyto will ensure any capital plans will be nimble with the ability to react to changes in commodity prices and the global economic environment, both of which continue to be volatile and uncertain.
Monthly Dividend Reinstated
Over the past 12 months, Peyto has returned to its historic levels of profitability, with cumulative earnings of $147 million on capital expenditures of $324 million or $0.45 of profit per dollar invested. This is similar to Peyto’s entire history of $2.633 billion of cumulative earnings for a total capital investment of $6.657 billion. At current commodity prices, Peyto is forecasting this earnings ratio will grow significantly over the fourth quarter 2021 and throughout 2022. As a result, the Board of Directors of Peyto is please to approve a monthly dividend of $0.05/share starting in November 2021 for shareholders of record as of November 30, 2021 (ex-dividend date November 29, 2021), and paid on December 15, 2021.
Executive Leadership Appointment
The Board of Directors of Peyto is also pleased to announce the appointment of Mr. Jean-Paul Lachance to the position of President, in addition to his current role as the Chief Operating Officer of Peyto. Jean-Paul, “JP”, has been an integral part of Peyto’s leadership team for over 10 years, coordinating the profitable investment of over $4.5 billion of shareholders’ capital all while helping navigate Peyto through the volatile North American natural gas industry. Mr. Lachance, who was appointed Chief Operating Officer in 2018, brings to the role a deep technical understanding of the industry, a good perspective on the risks and pitfalls inherent in the business, and a single-minded focus on profitability. Mr. Lachance will continue to report to Mr. Darren Gee, Chief Executive Officer.
The Peyto senior management team, consisting of the following individuals, will continue to develop strategic direction, provide leadership, and execute on the Corporation's Deep Basin resource developments:
Darren Gee (CEO)
Jean-Paul Lachance (President and COO)
Kathy Turgeon (VP of Finance and CFO)
Scott Robinson (VP Business Development)
Dave Thomas (VP Exploration)
Lee Curran (VP Drilling and Completions)
Todd Burdick (VP Production)
Derick Czember (VP Land)
Short term hydrocarbon prices, both globally and domestically, continue to rise as post-pandemic consumption increases against a backdrop of constrained supply caused by a continued lack of investment. As winter approaches, natural gas prices in North America are rising to levels not seen since 2008. These higher prices, combined with Peyto’s growing production, will continue to drive enhanced returns for shareholders.
Peyto expects to crystalize those returns for shareholders, first in the form of material debt reduction and then with dividend payments that will reflect rising earnings. This prediction of increased shareholder returns includes a forecast of future commodity prices that is currently in backwardation. Peyto’s deep inventory of drilling prospects, extensive infrastructure asset with available capacity, track record of superior operational execution, and enhanced environmental performance will ensure continued success for the next chapter in Peyto’s unique story.