Peyto Exploration & Development Corp. (TSX:PEY) ("Peyto") is pleased to present
its operating and financial results for the first quarter of the 2012 fiscal
year. Peyto's production per share grew for the tenth consecutive quarter while
first quarter operating margins of 76%(1) and profit margins of 26%(2) were
consistent with the previous quarter. First quarter 2012 highlights were as
follows:
-- Production per share up 25%. First quarter 2012 production increased 30%
(25% per share) from 189 MMcfe/d (31,531 boe/d) in Q1 2011 to 245
MMcfe/d (40,903 boe/d) in Q1 2012.
-- Funds from operations of $0.56/share. Generated $78 million in Funds
from Operations ("FFO") in Q1 2012 up 4% from $75 million in Q1 2011.
Increased production offset the 22% year over year reduction in realized
commodity prices.
-- Operating costs less than $2/boe. Industry leading operating costs were
further reduced from $0.39/mcfe ($2.32/boe) in Q1 2011 to $0.33/mcfe
($1.96/boe) in Q1 2012. Total cash costs, including royalties, operating
costs, transportation, G&A and interest were $1.11/mcfe ($6.67/boe),
resulting in a $3.48/mcfe ($20.86/boe) cash netback or 76% operating
margin.
-- Capital Investments of $99 million. At quarter end, production additions
resulting from the $99 million capital program totaled 8,000 boe/d. The
annualized cost (trailing twelve months) to build new production has
averaged approximately $18,000/boe/d over the last two and a half years.
A total of 19 gross wells were drilled during the first quarter.
-- Earnings of $0.19/share, dividends of $0.18/share. Earnings of $27
million were generated in the quarter while dividends of $25 million
were paid to shareholders, representing a before tax payout ratio of 32%
of FFO.
-- NGLs realized $85/boe. Natural gas liquid production of 4,101 boe/d,
comprised of approximately 65% condensate and pentanes, 17% butane, and
18% propane averaged 92% of Edmonton light oil price of $92/bbl.
First Quarter 2012 in Review
The first quarter was another active period as Peyto continued to deliver
industry leading efficiency and results with its capital program. Drilling
activity during the quarter focused on the liquids rich formations within
Peyto's large inventory of opportunities. As well, Peyto successfully acquired
22 sections of new Deep Basin land, with drilling opportunities already
identified, which will more than replace the 19 drilled locations. Peyto's
natural gas liquids made up 10% of its production and realized 92% of the light
oil price. The revenue from these liquids was more than sufficient to cover all
of Peyto's cash costs, while a solid hedge book helped offset the 34% year over
year drop in Alberta monthly natural gas prices. As a result of these low costs
and production increases, funds from operations increased from the prior year's
period. Subsequent to the quarter, Peyto's revolving bank line capacity was
increased from $625 million to $700 million, for a total debt capacity of $800
million, including $100 million of senior secured notes. As of the quarter end,
64% of this capacity was utilized representing a net debt to annualized FFO
ratio of 1.65 times. The strong financial and operating performance delivered in
the quarter resulted in an annualized 11% Return on Equity (ROE) and 10% Return
on Capital Employed (ROCE).
1. Operating Margin is defined as funds from operations divided by revenue
before royalties but including realized hedging gains/losses.
2. Profit Margin is defined as net earnings for the quarter divided by
revenue before royalties but including realized hedging gains/losses.
Natural gas volumes recorded in thousand cubic feet (mcf) are converted
to barrels of oil equivalent (boe) using the ratio of six (6) thousand
cubic feet to one (1) barrel of oil (bbl). Natural gas liquids and oil
volumes in barrel of oil (bbl) are converted to thousand cubic feet
equivalent (Mcfe) using a ratio of one (1) barrel of oil to six (6)
thousand cubic feet. This could be misleading, particularily if used in
isolation as it is based on an energy equivalency conversion method
primarily applied at the burner tip and does not represent a value
equivalency at the wellhead.
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3 Months Ended Mar. 31 %
2012 2011 Change
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Operations
Production
Natural gas (mcf/d) 220,811 166,710 32%
Oil & NGLs (bbl/d) 4,101 3,746 9%
Thousand cubic feet equivalent
(mcfe/d @ 1:6) 245,417 189,187 30%
Barrels of oil equivalent (boe/d @
6:1) 40,903 31,531 30%
Product prices
Natural gas ($/mcf) 3.53 4.92 (28)%
Oil & NGLs ($/bbl) 84.83 76.19 11%
Operating expenses ($/mcfe) 0.33 0.39 (15)%
Transportation ($/mcfe) 0.12 0.13 (8)%
Field netback ($/mcfe) 3.75 4.75 (21)%
General & administrative expenses
($/mcfe) 0.04 0.09 (56)%
Interest expense ($/mcfe) 0.23 0.27 (15)%
Financial ($000, except per share)
Revenue 102,496 99,577 3%
Royalties 8,835 9,922 (11)%
Funds from operations 77,645 74,696 4%
Funds from operations per share 0.56 0.56 -
Total dividends 24,912 23,921 4%
Total dividends per share 0.18 0.18 -
Payout ratio 32 32 -
Earnings 26,868 31,688 (15)%
Earnings per diluted share 0.19 0.24 (21)%
Capital expenditures 98,632 103,786 (5)%
Weighted average common shares
outstanding 138,312,078 132,737,066 4%
As at March 31
Net debt (before future compensation
expense and unrealized hedging gains) 512,627 453,376 13%
Shareholders' equity 1,027,231 850,442 21%
Total assets 1,800,394 1,527,845 18%
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Three Months ended Mar. 31
($000) 2012 2011
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Cash flows from operating activities 59,383 43,644
Change in non-cash working capital 16,367 26,829
Change in provision for performance based
compensation 1,895 4,223
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Funds from operations 77,645 74,696
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Funds from operations per share 0.56 0.56
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(1) Funds from operations - Management uses funds from operations to analyze the
operating performance of its energy assets. In order to facilitate comparative
analysis, funds from operations is defined throughout this report as earnings
before performance based compensation, non-cash and non-recurring expenses.
Management believes that funds from operations is an important parameter to
measure the value of an asset when combined with reserve life. Funds from
operations is not a measure recognized by Canadian generally accepted accounting
principles ("GAAP") and does not have a standardized meaning prescribed by GAAP.
Therefore, funds from operations, as defined by Peyto, may not be comparable to
similar measures presented by other issuers, and investors are cautioned that
funds from operations should not be construed as an alternative to net earnings,
cash flow from operating activities or other measures of financial performance
calculated in accordance with GAAP. Funds from operations cannot be assured and
future distributions may vary.
Exploration & Development
Peyto continued to advance many of its Deep Basin plays in the quarter through
exploratory and development drilling, land acquisitions, and seismic
evaluations. A focus on liquids rich formations like the Cardium and Falher
improved the corporate average liquid yield by over 10% from the start of the
year.
In the Kiskiu-Smoky area, six horizontal Cardium wells were drilled during the
winter program which further defined and proved up an inventory of over 40
locations. Natural gas liquid yields from the Kiskiu Cardium are the highest of
any formation that Peyto develops with average first year condensate and pentane
yields of 48 bbl/mmcf, butane yields of 12 bbl/mmcf and propane yields of 13
bbl/mmcf, totaling 73 bbls per mmcf of sales gas.
In Sundance, Peyto drilled and brought on production, with encouraging results,
its first two Bluesky horizontal wells. Capital costs of $3.4 million to drill
and $1.8 million to complete were in line with expectations and consistent with
those of other Mannville zones that Peyto is developing in the area. Production
performance over the next several months will assist in determining the full
cycle returns that can be achieved from the Bluesky. The internal assessment of
inventory in this formation currently stands at 20 locations.
The enhanced natural gas liquids recovery project at the Oldman plant in
Sundance continues to advance with the fabrication of major equipment. Field
construction is scheduled for July 2012 with startup anticipated in late
September. In addition, engineering and procurement is proceeding on a similar
facility for the Nosehill gas plant, with equipment fabrication expected to
start in September. Nosehill site construction is forecast to occur at the end
of 2012 and plant start-up is scheduled for early 2013.
In addition to focusing the majority of capital on maximizing liquids revenue in
this time of low natural gas prices, Peyto continues to advance its drier gas
plays in the Notikewin and Wilrich formations. Step out drilling in five new
areas has proven successful, despite three of these areas remaining "behind
pipe" or shut in until more attractive processing arrangements can be made or
higher natural gas prices are achieved.
Capital Expenditures
During the first quarter 2012, Peyto spent $51.8 million to spud 19 gross (16.4
net) horizontal wells and $31.2 million completing 21 gross (19.8 net) zones.
Wellsite equipment and tie-ins accounted for $8.5 million. A total of $4.3
million was invested in new facilities to complete the Nosehill gas plant
expansion as well as progress payments on the Oldman Deep Cut equipment. New
lands were acquired for $2.2 million, or $154/ acre, while new seismic accounted
for $0.6 million.
Since Peyto began drilling horizontal multi-stage frac wells in the Deep Basin
in the fall of 2009, a total of 136 horizontal wells have been drilled. By
continuously evolving the design and improving the execution, drilling times
have been reduced by over 30% from an average of 33 days (spud to rig release)
down to 23 days. While this normally would have translated into substantial
reductions in drilling cost, it has only served to offset the inflation in
drilling rig rates and the increased fuel costs which have been driven by higher
oil prices. In the present low gas price environment, fewer wells are being
drilled which should bring lower service rates and allow Peyto to realize the
financial gains of these operational efficiencies.
Despite this service rate inflation, a new drilling design has recently been
tried that has resulted in measurable cost savings in Peyto's Cardium play at
Sundance. The last four Cardium horizontal wells were drilled using a monobore
well design resulting in further reducing drilling times and eliminating some
casing costs. This has lowered average drilling costs for this type of well by
over 20% to $2.0 million. Peyto has attempted this same design on other
formations but due to increased borehole risk, has only seen limited success to
date.
Financial Results
Peyto realized an unhedged natural gas price of $2.67/mcf in the quarter, 15%
greater than the volume weighted average AECO monthly natural gas price of
$2.32/GJ due to above average heat content. Inclusive of natural gas liquids
revenues, the realized effective natural gas price was $3.82/mcfe, before
hedging gains of $0.77/mcfe. This realized effective price was 1.65 times that
of dry gas and illustrates the benefit of high heat content, liquids rich
natural gas production.
Total cash costs of $1.11/mcfe ($6.67/boe) comprised of $0.39/mcfe of royalties,
$0.33/mcfe of operating costs, $0.12/mcfe of transportation, $0.04/mcfe of G&A
and $0.23/mcfe of interest costs deducted from the realized hedged price of
$4.59/mcfe ($27.54/boe) resulted in a cash netback of $3.48/mcfe ($20.86/boe) or
an operating margin of 76%. Depletion, depreciation and amortization, along with
a provision for future tax and market based bonus payments further reduced the
cash netback to earnings of $1.20/mcfe. The profit margin, or earnings divided
by revenue, was 26%, down from 35% in Q1 2011.
Subsequent to the end of the first quarter, Peyto's credit facility was reviewed
and the annual revolver increased to $700 million from $625 million. This
increase was a reflection of the 2011 growth in volume and value of Peyto's
Proved Producing reserves. Including the $100 million of senior secured notes,
Peyto's total borrowing capacity increased to $800 million.
Marketing
North American natural gas prices fell dramatically during the first quarter in
response to the abnormally warm winter weather and a lack of natural gas heating
demand. Storage reservoirs, which are normally drawn down in the winter months,
left the heating season with over 50% more in storage than normal and caused
both Henry Hub (US) and AECO (Canadian) natural gas prices to drop by over 30%.
By the end of the first quarter natural gas prices were at their lowest level in
over a decade with Henry Hub at $2.00/MMBTU and AECO at $1.60/GJ. Peyto's
practice of layering in future sales of natural gas provided insulation from
this drop in gas prices.
The continued practice of Peyto's hedging strategy, designed to smooth out the
volatility in the price of natural gas, has resulted in approximately 45% of
current natural gas production being sold in 2012 for an average of $4.23/mcf.
In addition to the forward sales of natural gas, Peyto is now applying the same
strategy to Propane and Butane sales. Starting in April of 2012, Peyto began
layering in small fixed price swaps for Propane and Butane volumes. These future
sales have a term that begins in September of 2012, coincident with the
anticipated startup of the Oldman Deep Cut facility. For detailed information on
these contracts, see the Management Discussion and Analysis. As at March 31,
2012, Peyto had committed to the future sale of 14,000 barrels of propane at an
average price of $49.56 per barrel and 41,750,000 gigajoules (GJ) of natural gas
at an average price of $3.54 per GJ or $4.15 per mcf. Had these contracts been
closed on March 31, 2012, Peyto would have realized a gain in the amount of
$54.7 million.
Activity Update
Peyto is in the middle of spring breakup with 6 rigs employed but sitting idle
as heavy traffic road bans are still in place. Three of the rigs had commenced
drilling on wells prior to breakup and were shut down at intermediate progress
points with the onset of the road bans. The timing for resumption of all six
rigs is expected to occur in late May, leading to a typical breakup period of
six weeks. After breakup, the drilling program will continue to target a mix of
Cardium and Falher liquids-rich opportunities, primarily in the Greater Sundance
Area. A Kakwa Cardium program is scheduled to commence later in the year.
Five gross (3.4 net) wells have been drilled and currently await completion and
tie in after breakup. These include two Cardiums and two Falher wells.
Additionally, Peyto has 4 new wells drilled and completed but not yet on
production.
With the Oldman plant nearing capacity, a major intra-field pipeline project,
designed to offload volumes from the Oldman plant to the Nosehill plant was
completed in the first quarter of 2012. As a result of this volume shift, Peyto
is well positioned with sufficient capacity in each of the gas plants to
accommodate an aggressive drilling program and subsequent production growth into
the second half of 2012.
Outlook
Current natural gas prices in both Canada and the US present substantial
financial challenges for most gas producers. Few plays and even fewer operators
are able to cover both the production costs and replacement costs at these
levels, let alone generate a return for shareholders on the capital invested.
Peyto is one of the few exceptions, with its industry leading low production
costs and long life, liquids rich natural gas plays that can be efficiently
developed. The combination of $1/mcfe cash cost, $2/mcfe PDP FD&A replacement
cost, and a production stream that receives 165% of the dry gas price, means
Peyto can generate positive total margins below $2/GJ.
Peyto is not content to sit on this advantage. Additional optimization can
further reduce cash costs while investments in Deep Cut facilities can extract
more propane and butane from the natural gas to improve realized prices. By
operating over 99% of production and processing 98% in Peyto owned and operated
facilities these strategies can be achieved in a timely manner to protect
shareholder returns and monthly dividends from further natural gas price
erosion.
The capital program for the year will remain flexible and be opportunistic. The
current rate of capital spending would result in a $350 million capital program
for 2012. Peyto's budget, however, looks to take advantage of reduced service
costs and a foreseeable recovery in natural gas prices and has been approved to
accommodate an acceleration in activity to spend $400 million with an option to
increase spending to $450 million should market conditions allow. As always,
capital investments will only be pursued if return objectives can be met.
Conference Call and Webcast
A conference call will be held with the senior management of Peyto to answer
questions with respect to the 2012 first quarter financial results on Thursday,
May 10th, 2012, at 9:00 a.m. Mountain Daylight Time (MDT), or 11:00 a.m. Eastern
Daylight Time (EDT). To participate, please call 1-416-340-2216 (Toronto area)
or 1-866-226-1792 for all other participants. The conference call will also be
available on replay by calling 1-905-694-9451 (Toronto area) or 1-800-408-3053
for all other parties, using passcode 6827666. The replay will be available at
11:00 a.m. MDT, 1:00 p.m. EDT Thursday, May 10th, 2012 until midnight EDT on
Thursday, May 17th, 2012. The conference call can also be accessed through the
internet at http://events.digitalmedia.telus.com/peyto/051012/index.php. After
this time the conference call will be archived on the Peyto Exploration &
Development website at www.peyto.com.
Annual General Meeting
Shareholders are invited to attend Peyto's AGM at 3:00 p.m. on Wednesday, June
6, 2012 at Livingston Place Conference Centre, +15 level, 222-3rd Avenue SW,
Calgary, Alberta.
Management's Discussion and Analysis
Management's Discussion and Analysis of this first quarter report is available
on the Peyto website at http://www.peyto.com/news/Q12012MDandA.pdf. A complete
copy of the first quarter report to shareholders, including the Management's
Discussion and Analysis, and Financial Statements is also available at
www.peyto.com and will be filed at SEDAR, www.sedar.com, at a later date.
Darren Gee, President and CEO
May 9, 2012
Certain information set forth in this document and Management's Discussion and
Analysis, including management's assessment of Peyto's future plans and
operations, capital expenditures and capital efficiencies, contains
forward-looking statements. By their nature, forward-looking statements are
subject to numerous risks and uncertainties, some of which are beyond these
parties' control, including the impact of general economic conditions, industry
conditions, volatility of commodity prices, currency fluctuations, imprecision
of reserve estimates, environmental risks, competition from other industry
participants, the lack of availability of qualified personnel or management,
stock market volatility and ability to access sufficient capital from internal
and external sources. Readers are cautioned that the assumptions used in the
preparation of such information, although considered reasonable at the time of
preparation, may prove to be imprecise and, as such, undue reliance should not
be placed on forward-looking statements. Peyto's actual results, performance or
achievement could differ materially from those expressed in, or implied by,
these forward-looking statements and, accordingly, no assurance can be given
that any of the events anticipated by the forward-looking statements will
transpire or occur, or if any of them do so, what benefits Peyto will derive
there from. In addition, Peyto is providing future oriented financial
information set out in this press release for the purposes of providing clarity
with respect to Peyto's strategic direction and readers are cautioned that this
information may not be appropriate for any other purpose. Other than is required
pursuant to applicable securities law, Peyto does not undertake to update
forward looking statements at any particular time.
Peyto Exploration & Development Corp.
Condensed Balance Sheet (unaudited)
(Amount in $ thousands)
March 31 December 31
2012 2011
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Assets
Current assets
Cash - 57,224
Accounts receivable 45,753 53,829
Due from private placement (Note 6) - 9,740
Financial derivative instruments (Note 8) 50,179 38,530
Prepaid expenses 6,087 3,991
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102,019 163,314
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Long-term financial derivative instruments (Note
8) 4,495 6,304
Prepaid capital 6,342 1,414
Property, plant and equipment, net (Note 3) 1,687,538 1,629,220
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1,698,375 1,636,938
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1,800,394 1,800,252
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Liabilities
Current liabilities
Accounts payable and accrued liabilities 86,158 110,483
Dividends payable (Note 6) 8,309 8,278
Provision for future performance based
compensation (Note 7) 5,842 4,321
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100,309 123,082
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Long-term debt (Note 4) 470,000 470,000
Provision for future performance based
compensation (Note 7) 1,608 1,235
Decommissioning provision (Note 5) 37,652 38,037
Deferred income taxes 163,594 152,190
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672,854 661,462
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Shareholders' equity
Shareholders' capital (Note 6) 901,041 889,115
Shares to be issued (Note 6) - 9,740
Retained earnings 84,845 82,889
Accumulated other comprehensive income (Note 6) 41,345 33,964
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1,027,231 1,015,708
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1,800,394 1,800,252
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Approved by the Board of Directors
Michael MacBean, Director
Darren Gee, Director
Peyto Exploration & Development Corp.
Condensed Income Statement (unaudited)
(Amount in $ thousands)
Three months ended March 31
2012 2011
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Revenue
Oil and gas sales 85,221 86,458
Realized gain on hedges (Note 8) 17,275 13,119
Royalties (8,835) (9,922)
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Petroleum and natural gas sales, net 93,661 89,655
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Expenses
Operating 7,300 6,571
Transportation 2,606 2,163
General and administrative 972 1,607
Future performance based compensation (Note 7) 1,895 4,223
Interest 5,138 4,618
Accretion of decommissioning provision 257 232
Depletion and depreciation (Note 3) 39,673 29,026
Gain on disposition of assets (Note 3) - (818)
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57,841 47,622
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Earnings before taxes 35,820 42,033
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Income tax
Deferred income tax expense 8,952 10,345
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Earnings for the period 26,868 31,688
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Earnings per share (Note 6)
Basic and diluted $ 0.19 $ 0.24
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Weighted average number of common shares
outstanding (Note 6)
Basic and diluted 138,312,078 132,737,066
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Peyto Exploration & Development Corp.
Condensed Statement of Comprehensive Income(unaudited)
(Amount in $ thousands)
Three months ended
March 31
2012 2011
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Earnings for the period 26,868 31,688
Other comprehensive income
Change in unrealized gain on cash flow hedges (net of
deferred tax; $2.5 million expense (2011 - $2.4
million recovery)) 24,656 6,350
Realized (gain) loss on cash flow hedges (17,275) (13,119)
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Comprehensive income 34,249 24,919
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Peyto Exploration & Development Corp.
Condensed Statement of Changes in Equity(unaudited)
(Amount in $ thousands)
Three months ended
March 31
2012 2011
----------------------------------------------------------------------------
Shareholders' capital, beginning of period 889,115 755,831
----------------------------------------------------------------------------
Common shares issued - -
Common shares issued by private placement 11,952 17,150
Common shares issuance costs (net of tax) (26) (65)
Common shares issued pursuant to DRIP - 1,973
Common shares issued pursuant to OTUPP - 2,889
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Shareholders' capital, end of period 901,041 777,778
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Common shares to be issued, beginning of period 9,740 17,285
----------------------------------------------------------------------------
Common shares issued (9,740) (17,285)
Common shares to be issued - -
----------------------------------------------------------------------------
Common shares to be issued, end of period - -
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Retained earnings, beginning of period 82,889 50,774
----------------------------------------------------------------------------
Earnings for the period 26,868 31,688
Dividends (Note 6) (24,912) (23,921)
----------------------------------------------------------------------------
Retained earnings, end of period 84,845 58,541
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Accumulated other comprehensive income, beginning of
period 33,964 20,893
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Other comprehensive income (loss) 7,381 (6,769)
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Accumulated other comprehensive income, end of
period 41,345 14,124
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Total shareholders' equity 1,027,231 850,443
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Peyto Exploration & Development Corp.
Condensed Statement of Cash Flows(unaudited)
(Amount in $ thousands)
Three months ended March 31
2012 2011
----------------------------------------------------------------------------
Cash provided by (used in) operating activities
Earnings 26,868 31,688
Items not requiring cash:
Deferred income tax 8,952 10,345
Depletion and depreciation 39,673 29,026
Gain on disposition of assets - (818)
Accretion of decommissioning provision 257 232
Change in non-cash working capital related to (16,367) (27,585)
operating activities
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59,383 42,888
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Financing activities
Issuance of common shares 11,952 17,150
Issuance costs (35) (86)
Cash dividends paid (24,881) (31,762)
Increase in bank debt - 70,000
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(12,964) 55,302
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Investing activities
Additions to property, plant and equipment (103,643) (95,344)
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Net increase (decrease) in cash (57,224) 2,846
Cash, Beginning of Period 57,224 7,894
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Cash, End of Period - 10,740
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The following amounts are included in cash flows from operating activities:
----------------------------------------------------------------------------
Cash interest paid 4,313 4,536
Cash taxes paid - -
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Peyto Exploration & Development Corp.
Notes to Condensed Financial Statements (unaudited)
As at March 31, 2012 and 2011
(Amount in $ thousands, except as otherwise noted)
1. Nature of operations
Peyto Exploration & Development Corp. ("Peyto" or the "Company") is a Calgary
based oil and natural gas company. Peyto conducts exploration, development and
production activities in Canada. Peyto is incorporated and domiciled in the
Province of Alberta, Canada. The address of its registered office is 1500, 250 -
2nd Street SW, Calgary, Alberta, Canada, T2P 0C1.
These financial statements were approved and authorized for issuance by the
Audit Committee of Peyto on May 8, 2012.
2. Basis of presentation
The condensed interim financial statements have been prepared by management and
reported in Canadian dollars in accordance with International Accounting
Standard ("IAS") 34, "Interim Financial Reporting". These condensed interim
financial statements do not include all of the information required for full
annual financial statements and should be read in conjunction with the Company's
Financial Statements for the year ended December 31, 2011.
The timely preparation of the condensed interim financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingencies, if any, as at the date
of the financial statements and the reported amounts of revenue and expenses
during the period. By their nature, estimates are subject to measurement
uncertainty and changes in such estimates in future years could require a
material change in the condensed interim financial statements.
All accounting policies and methods of computation followed in the preparation
of these financial statements are the same as those disclosed in Note 2 of
Peyto's audited Financial Statements as at and for the years ended December 31,
2011 and 2010.
3. Property, plant and equipment, net
Development
and
Production Corporate Total
Assets Assets Assets
----------------------------------------------------------------------------
Cost
----------------------------------------------------------------------------
At December 31, 2011 1,842,759 1,007 1,843,766
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Additions 97,991 - 97,991
Dispositions - - -
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At March 31, 2012 1,940,750 1,007 1,941,757
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Accumulated depreciation
----------------------------------------------------------------------------
At December 31, 2011 (213,755) (791) (214,546)
----------------------------------------------------------------------------
Depletion and depreciation (39,659) (14) (39,673)
Dispositions - - -
----------------------------------------------------------------------------
At March 31, 2012 (253,414) (805) (254,219)
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Carrying amount at March 31, 2012 1,687,336 202 1,687,538
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Proceeds received for assets disposed of during the period ended March 31, 2012
were $nil (2011 - $1.5 million).
During the period ended March 31 2012, Peyto capitalized $1.7 million (2011 -
$1.2 million) of general and administrative expense directly attributable to
production and development activities.
4. Long-term debt
Peyto has a syndicated $725 million extendible revolving credit facility with a
stated term date of April 29, 2012. The bank facility is made up of a $30
million working capital sub-tranche and a $695 million production line. The
facilities are available on a revolving basis for a period of at least 364 days
and upon the term out date may be extended for a further 364 day period at the
request of Peyto, subject to approval by the lenders. In the event that the
revolving period is not extended, the facility is available on a non-revolving
basis for a further one year term, at the end of which time the facility would
be due and payable. Outstanding amounts on this facility will bear interest at
rates ranging from prime plus 1.25% to prime plus 2.75% determined by Peyto's
debt to earnings before interest, taxes, depreciation, depletion and
amortization (EBITDA) ratios ranging from less than 1:1 to greater than 2.5:1. A
General Security Agreement with a floating charge on land registered in Alberta
is held as collateral by the bank.
On January 3, 2012, Peyto issued CDN $100 million of senior secured notes
pursuant to a note purchase and private shelf agreement. The notes were issued
by way of private placement and rank equally with Peyto's obligations under its
bank facility. The notes have a coupon rate of 4.39% and mature on January 3,
2019. Interest will be paid semi-annually in arrears. The private shelf
agreement provides for the issuance, on an uncommitted basis, of an additional
US $25 million of senior notes on or prior to January 3, 2015. A General
Security Agreement with a floating charge on land registered in Alberta is held
as collateral by the bank. Peyto's total borrowing capacity remains at $725
million; however Peyto's net credit facility has been reduced to $625 million in
conjunction with this private placement.
Upon the issuance of the senior secured notes January 3, 2012, Peyto became
subject to the following financial covenants as defined in the credit facility
and note purchase and private shelf agreements:
-- Senior Debt to EBITDA Ratio will not exceed 3.0 to 1.0.
-- Total Debt to EBITDA Ratio will not exceed 4.0 to 1.0.
-- Interest Coverage Ratio will not be less than 3.0 to 1.0
-- Total Debt to Capitalization Ratio will not exceed 0.55:1.0
Peyto is in compliance with all financial covenants at March 31, 2012.
Total interest expense for the period ended March 31, 2012 was $5.1 million
(2011 - $4.6 million) and the average borrowing rate for the period was 4.5%
(2011 - 4.7%).
Subsequent to March 31, 2012, Peyto's banking syndicate has agreed to increase
the credit facility to $800 million (net $700 million) and extend the stated
term date of the credit facility to April 28, 2013.
5. Decommissioning provision
Peyto makes provision for the future cost of decommissioning wells, pipelines
and facilities on a discounted basis based on the commissioning of these assets.
The decommissioning provision represents the present value of the
decommissioning costs related to the above infrastructure, which are expected to
be incurred over the economic life of the assets. The provisions have been based
on Peyto's internal estimates of the cost of decommissioning, the discount rate,
the inflation rate and the economic life of the infrastructure. Assumptions,
based on the current economic environment, have been made which management
believes are a reasonable basis upon which to estimate the future liability.
These estimates are reviewed regularly to take into account any material changes
to the assumptions. However, actual decommissioning costs will ultimately depend
upon the future market prices for the necessary decommissioning work required
which will reflect market conditions at the relevant time. Furthermore, the
timing of the decommissioning is likely to depend on when production activities
ceases to be economically viable. This in turn will depend and be directly
related to the current and future commodity prices, which are inherently
uncertain.
The following table reconciles the change in decommissioning provision:
----------------------------------------------------------------------------
Balance, December 31, 2011 38,037
----------------------------------------------------------------------------
New or increased provisions 1,600
Accretion of decommissioning provision 257
Change in discount rate and estimates (2,242)
----------------------------------------------------------------------------
Balance, March 31, 2012 37,652
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Current -
Non-current 37,652
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Peyto has estimated the net present value of its total decommissioning provision
to be $37.7 million as at March 31, 2012 ($38.0 million at December 31, 2011)
based on a total future undiscounted liability of $97.9 million ($101.2 million
at December 31, 2011). At March 31, 2012 management estimates that these
payments are expected to be made over the next 50 years with the majority of
payments being made in years 2040 to 2061. The Bank of Canada's long term bond
rate of 2.66 per cent (2.49 per cent at December 31, 2011) and an inflation rate
of two per cent (two per cent at December 31, 2011) were used to calculate the
present value of the decommissioning provision.
6. Shareholders' capital
Authorized: Unlimited number of voting common shares
Issued and Outstanding
Number of Amount
Common Shares (no par value) Common Shares $
----------------------------------------------------------------------------
Balance, December 31, 2010 131,875,382 755,831
----------------------------------------------------------------------------
Common shares issued 4,899,000 115,126
Common share issuance costs (net of tax) - (3,854)
Common shares issued by private placement 906,196 17,150
Common shares issued pursuant to DRIP 113,527 1,973
Common shares issued pursuant to OTUPP 166,196 2,889
----------------------------------------------------------------------------
Balance, December 31, 2011 137,960,301 889,115
----------------------------------------------------------------------------
Common shares issued by private placement 525,655 11,952
Common share issuance costs (net of tax) - (26)
----------------------------------------------------------------------------
Balance, March 31, 2012 138,485,956 901,041
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Peyto reinstated its amended distribution reinvestment and optional trust unit
purchase plan (the "Amended DRIP Plan") effective with the January 2010
distribution whereby eligible unitholders could elect to reinvest their monthly
cash distributions in additional trust units at a 5 percent discount to market
price. The DRIP plan incorporated an Optional Trust Unit Purchase Plan ("OTUPP")
which provided unitholders enrolled in the DRIP with the opportunity to purchase
additional trust units from treasury using the same pricing as the DRIP. The
DRIP and the OTUPP plans were cancelled December 31, 2010.
On December 31, 2010, Peyto completed a private placement of 655,581 common
shares to employees and consultants for net proceeds of $12.4 million ($18.95
per share). These common shares were issued on January 6, 2011.
On January 14, 2011, 279,723 common shares (113,527 pursuant to the DRIP and
166,196 pursuant to the OTUPP) were issued for net proceeds of $4.9 million.
On March 25, 2011, Peyto completed a private placement of 250,615 common shares
to employees and consultants for net proceeds of $4.7 million ($18.86 per
share).
On December 16, 2011, Peyto closed an offering of 4,899,000 common shares at a
price of $23.50 per common share, receiving proceeds of $110.1 million (net of
issuance costs).
On December 31, 2011 Peyto completed a private placement of 397,235 common
shares to employees and consultants for net proceeds of $9.7 million ($24.52 per
share). These common shares were issued on January 13, 2012.
On March 23, 2012 Peyto completed a private placement of 128,420 common shares
to employees and consultants for net proceeds of $2.2 million ($17.22 per
share).
Per share amounts
Earnings per share or unit have been calculated based upon the weighted average
number of common shares outstanding for the period ended March 31, 2012 of
138,312,078 (2011 - 132,737,066). There are no dilutive instruments outstanding.
Dividends
During the period ended March 31, 2012, Peyto declared and paid dividends of
$0.18 per common share or $0.06 per common share per month, totaling $24.9
million (2011 - $0.18 or $0.06 per share per month, $23.9 million).
Comprehensive income
Comprehensive income consists of earnings and other comprehensive income
("OCI"). OCI comprises the change in the fair value of the effective portion of
the derivatives used as hedging items in a cash flow hedge. "Accumulated other
comprehensive income" is an equity category comprised of the cumulative amounts
of OCI.
Accumulated hedging gains
Gains and losses from cash flow hedges are accumulated until settled. These
outstanding hedging contracts are recognized in earnings on settlement with
gains and losses being recognized as a component of net revenue. Further
information on these contracts is set out in Note 8.
7. Future performance based compensation
Peyto awards performance based compensation to employees annually. The
performance based compensation is comprised of reserve and market value based
components.
Reserve based component
The reserves value based component is 4% of the incremental increase in value,
if any, as adjusted to reflect changes in debt, equity, dividends, general and
administrative costs and interest, of proved producing reserves calculated using
a constant price at December 31 of the current year and a discount rate of 8%.
Market based component
Under the market based component, rights with a three year vesting period are
allocated to employees. The number of rights outstanding at any time is not to
exceed 6% of the total number of common shares outstanding. At December 31 of
each year, all vested rights are automatically cancelled and, if applicable,
paid out in cash. Compensation is calculated as the number of vested rights
multiplied by the total of the market appreciation (over the price at the date
of grant) and associated dividends of a common share for that period.
The fair values were calculated using a Black-Scholes valuation model. The
principal inputs to the option valuation model were:
March 31 March 31
2012 2011
----------------------------------------------------------------------------
Share price $16.38 -$24.75 $18.83 - $20.60
Exercise price $12.06 - $24.75 $9.56 - $18.83
Expected volatility 31% 23%
Option life 1 year 1 year
Dividend yield 0% 0%
Risk-free interest rate 1.19% 1.77%
----------------------------------------------------------------------------
8. Risk management contracts
Peyto uses derivative instruments to reduce its exposure to fluctuations in
commodity prices. Peyto considers all of these transactions to be effective
economic hedges for accounting purposes.
Following is a summary of all risk management contracts in place as at March 31,
2012:
----------------------------------------------------------------------------
Monthly Price
PropanePeriod Hedged Type Volume (CAD)
----------------------------------------------------------------------------
September 1, 2012 to March 31, 2013 Fixed Price 2,000 bbl $49.56/bbl
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Description Effective
Notional (1) Term Rate
----------------------------------------------------------------------------
Natural gas financial swaps -
AECO 41.75GJ (2) 2012- 2014 $3.54/GJ
----------------------------------------------------------------------------
(1) Notional values as at March 31, 2012 (2) Millions of gigajoules
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Description March 31, December 31,
Fair Value Level 2012 2011
----------------------------------------------------------------------------
Natural gas financial swaps -
AECO Level 1 54,674 44,834
----------------------------------------------------------------------------
(1) Notional values as at March 31, 2012 (2) Millions of gigajoules
----------------------------------------------------------------------------
As at March 31, 2012, Peyto had committed to the future sale of 14,000 barrels
of propane at an average price of $49.56 per barrel and 41,750,000 gigajoules
(GJ) of natural gas at an average price of $3.54 per GJ or $4.15 per mcf. Had
these contracts been closed on March 31, 2012, Peyto would have realized a gain
in the amount of $54.7 million. If the AECO gas price on March 31, 2012 were to
increase by $1/GJ, the unrealized gain would decrease by approximately $41.8
million. An opposite change in commodity prices rates would result in an
opposite impact on other comprehensive income.
Subsequent to March 31, 2012 Peyto entered into the following contracts:
----------------------------------------------------------------------------
Monthly Price
PropanePeriod Hedged Type Volume (CAD)
----------------------------------------------------------------------------
September 1, 2012 to March 31, 2013 Fixed Price 2,000 bbl $ 44.10/bbl
----------------------------------------------------------------------------
----------------------------------------------------------------------------
ButanePeriod Hedged Monthly Price
Type Volume (CAD)
----------------------------------------------------------------------------
September 1, 2012 to March 31, 2013 Fixed Price 2,000 bbl $ 80.64/bbl
----------------------------------------------------------------------------
----------------------------------------------------------------------------
ISO ButanePeriod Hedged Monthly Price
Type Volume (CAD)
----------------------------------------------------------------------------
September 1, 2012 to March 31, 2013 Fixed Price 1,000 bbl $ 80.32/bbl
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Natural GasPeriod Hedged Daily Price
Type Volume (CAD)
----------------------------------------------------------------------------
May 1, 2012 to October 31, 2013 Fixed Price 5,000 GJ $ 2.30/GJ
November 1, 2012 to October 31, 2013 Fixed Price 5,000 GJ $ 2.60/GJ
November 1, 2012 to March 31, 2014 Fixed Price 5,000 GJ $ 2.81/GJ
November 1, 2012 to March 31, 2014 Fixed Price 5,000 GJ $ 3.00/GJ
----------------------------------------------------------------------------
9. Commitments and contingencies
Following is a summary of Peyto's commitment related to an operating lease as at
March 31, 2012.
2012 2013 2014 2015 2016 Thereafter
----------------------------------------------------------------------------
Operating lease 803 1,071 1,071 - - -
----------------------------------------------------------------------------
Total 803 1,071 1,071 - - -
----------------------------------------------------------------------------
Peyto has no other contractual obligations or commitments as at March 31, 2012.
Contingent liability
From time to time, Peyto is the subject of litigation arising out of its
day-to-day operations. Damages claimed pursuant to such litigation may be
material or may be indeterminate and the outcome of such litigation may
materially impact Peyto's financial position or results of operations in the
period of settlement. While Peyto assesses the merits of each lawsuit and
defends itself accordingly, Peyto may be required to incur significant expenses
or devote significant resources to defending itself against such litigation.
These claims are not currently expected to have a material impact on Peyto's
financial position or results of operations.
Officers
Darren Gee Tim Louie
President and Chief Executive Vice President, Land
Officer
Scott Robinson David Thomas
Executive Vice President and Chief Vice President, Exploration
Operating Officer
Kathy Turgeon Jean-Paul Lachance
Vice President, Finance and Chief Vice President, Exploitation
Financial Officer
Stephen Chetner
Corporate Secretary
Directors
Don Gray, Chairman
Rick Braund
Stephen Chetner
Brian Davis
Michael MacBean, Lead Independent Director
Darren Gee
Gregory Fletcher
Scott Robinson
Auditors
Deloitte & Touche LLP
Solicitors
Burnet, Duckworth & Palmer LLP
Bankers
Bank of Montreal
Union Bank, Canada Branch
Royal Bank of Canada
Canadian Imperial Bank of Commerce
HSBC Bank Canada
The Toronto-Dominion Bank
Alberta Treasury Branches
Canadian Western Bank
Transfer Agent
Valiant Trust Company
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