Peyto Exploration & Development Corp. (“Peyto” or the
“Company”) is pleased to present the results and in-depth analysis
of its independent reserve report effective December 31, 2021. The
evaluation encompassed 100% of Peyto’s reserves and was conducted
by GLJ Ltd. (“GLJ”). The year 2021 marks the Company’s 23rd year of
successful reserves development.
2021
Highlights
- Total Company reserve values (BT
NPV5) for Proved Developed Producing (“PDP”), Total Proved (“TP”),
and Proved plus Probable Additional (“P+P”) reserves increased 76%,
55% and 53% on a debt adjusted per share basis to $17/share,
$34/share, and $54/share due to higher commodity prices, increased
reserve volumes, and the expiry of synthetic natural gas
transportation costs.
- Total Company reserve volumes for
PDP, TP and P+P were up 11%, 6% and 8%, respectively, in absolute
terms and increased 9%, 4% and 6%, respectively, on a per share
basis
- Peyto developed 375 BCF3e (62.5
million barrels of oil equivalent, “mmboes”) of new PDP reserves at
a Finding, Development and Acquisition (“FD&A”) cost of
$0.97/Mcfe ($5.84/boe) while the average field netback1 was
$2.69/Mcfe ($16.14/boe), resulting in a 2.8 times recycle
ratio2(3.8 times on an unhedged basis). The PDP FD&A cost was
the lowest in the last 19 years of Peyto’s history.
- Peyto replaced 188%, 194% and 308%
of annual production with new PDP, TP, and P+P reserves. FD&A
costs, including the change in Future Development Capital (“FDC”),
for TP and P+P were $1.10/Mcfe ($6.61/boe) and $1.09/Mcfe
($6.53/boe), which reflects an increase of FDC for future drilling
locations of $62 million and $304 million (forecast cost inflation
combined with an increased number of future locations), for the
respective categories. For comparative purposes, FD&A costs
before increases in FDC were $0.94/Mcfe and $0.59/Mcfe,
respectively.
- The Reserve Life Index (“RLI”) for
the PDP, TP and P+P reserves fell slightly to 9, 16 and 25 years,
respectively, mostly due to an 18% increase in fourth quarter
production used to determine RLI. By comparison, Peyto’s PDP
reserve life is one of the longest in the North American
industry.
- At year end, P+P reserves of 904
mmboes (4.7 TCF3 of gas, 67 mmbbls of pentanes and condensate, 27
mmbbls butane, 33 mmbbls propane and inclusive of 1274 future
locations) had been assigned to just 19% of Peyto’s total Deep
Basin rights.
- For the year ended December 31,
2021, Peyto invested $365 million of total capital1 to build
approximately 40,300 boe/d at a cost of $9,000/boe/d, matching the
lowest cost in Company history, and inclusive of the $35MM Cecilia
acquisition of 2,750 boe/d ($12,700/boe/d).
1 Capital Expenditures, Field Netback
(Revenue less Royalties, Operating costs, and Transportation), Net
Debt, Funds from Operations and Production are estimated and remain
unaudited at this time. 2 Recycle Ratio is Field Netback
divided by FD&A. 3 BCF and TCF refers to billions and trillions
of cubic feet, respectively.
2022
CAPITAL BUDGET
- The Board of Directors of Peyto has
approved a 2022 capital budget of $350-$400 million which, at the
high end of the range, is 10% greater than the $365 million
invested in 2021. 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.
- This capital budget along with
Peyto’s current monthly dividend is expected to be funded by a
portion of free cashflow with the remainder used to pay down
indebtedness. The 2022 capital program is projected to add between
35,000 and 40,000 boe/d of new production by year end, based on
inflation adjusted onstream metrics of approximately $10,000/boe/d.
Peyto expects that increases due to inflation will be partially
offset by continued operational efficiency gains.
IMPROVED SUSTAINABILITY
- Low Production and Reserves
Replacement Cost: The Company invested 78% of funds from
operations in 2021 to replace over 188% of produced reserves in the
year and grow PDP reserves by 11%. Capital efficiency for 2021
matched the lowest in Company history at $9,000/boe/d while PDP
FD&A was lowest in 19 years at $0.97/Mcfe. Looking forward to
2022, the Company expects capital efficiency of $10,000/boe/d, this
implies a sustaining capital investment of $280 million on a 28%
base production decline.
- Long Life, Low Decline
Production: Peyto’s base production is forecasted by GLJ
to fall to 72,000 boe/d in December of 2022, implying a 28% annual
decline from 100,000 boe/d in December 2021. This annual production
decline rate is similar to the 27% in 2021, despite 14% year over
year production growth. Peyto’s PDP RLI is 9 years, based on Q4
2021 production rate of 98,400 boe/d, which is one of the longest
PDP RLIs in the industry.
- Low Risk Reserves:
At year end, Peyto had 1,820 gross (1,612 net) producing wells that
are forecast to remain on production for decades to come. The lack
of mobile water in the low permeability, Deep Basin reservoirs
combined with Peyto’s low-cost operations and efficient processing
facilities results in very long producing lives for the existing
proven producing wells which are exempt from the vulnerabilities of
high-cost, third party midstream processing.
- Minimal
Liabilities: The forecast cost of Peyto’s future
abandonment and reclamation liability (all wells, pipelines, well
sites, & facilities) is $61.5 million (NPV5), which represents
1% of the total $5.0 billion of forecast future value of the
developed reserves1 (NPV5), illustrating Peyto’s disciplined,
organic approach to finding and developing natural gas that has
delivered one of the highest ratios of producing to non-producing
wells in the industry.
- Strong ESG
Performance: Methane (particularly flared and vented)
emissions intensity was reduced again in 2021, now down
approximately 55% since 2016. This positions the Company to achieve
its new goal of a 75% reduction by 2023. With less than half of the
emissions intensity (emissions per unit of production) of the rest
of the natural gas production and processing industry in Canada,
Peyto’s reserves are extracted with far less environmental impact*.
During 2021 Peyto also completed a geological and feasibility
assessment of nearby deep porous reservoirs as candidates for
carbon capture and underground storage in the Greater Sundance
area. These reservoirs appear to have more than adequate capacity
to store all Peyto’s future carbon emissions from the area.
*Refer to Peyto’s 2021 ESG Report
at:http://www.peyto.com/Files/Corporate%20Responsibility/ESG%20Committee/Peyto_2021_ESG_Report_v2.pdf
Historical PERSPECTIVE
- Over the past 23 years, Peyto has
explored for and discovered 7.7 TCFe of Alberta Deep Basin natural
gas and associated liquids, of which 60% has now been
developed1.
|
Peyto 23-year cumulative production (to Dec. 31/21): |
2.234 TCFe |
|
|
Total Proved + Probable Additional Developed reserves: |
2.313 TCFe |
|
|
Total Developed natural gas and liquids: |
4.547 TCFe |
|
|
Total Proved + Probable Additional Undeveloped reserves: |
3.109 TCFe |
|
|
Total explored for and discovered: |
7.655 TCFe |
|
|
|
|
|
Each year the Company
invests in the discovery of new reserves and the efficient and
profitable development of existing reserves into high netback
natural gas and NGL production for the purpose of generating the
maximum possible return on capital for its shareholders.
- In those 23 years, a total of $6.8
billion was invested in the Canadian economy in the acquisition and
development of 4.5 TCFe of total developed natural gas and
associated liquids at an average cost of $1.49/Mcfe, while a
weighted average field netback3 of $3.43/Mcfe delivered $6.9
billion in FFO, $2.5 billion in dividends and distributions to
shareholders, and resulted in a cumulative recycle ratio2 of 2.3
times. Royalty payments made to Alberta during this time have
totaled over $966 million.
- Based on the December 31, 2021
evaluation, the debt adjusted, Net Present Value of the Company’s
remaining Proved plus Probable Additional reserves (“P+P NPV”, 5%
discount, less debt) was $54/share, comprised of $26/share of
developed reserves and $28/share of undeveloped reserves. This
includes a provision for all abandonment liability for wells, well
sites, pipelines, and facilities for which Peyto has ownership and
responsibility.
1 Developed Reserves is Total Proved +
Probable Additional Developed Reserves and includes Proved
Developed Producing+Probable Additional reserves and Proved
Developed Non-Producing+Probable Additional reserves.
2021 RESERVES REPORT AND
ANALYSIS
The following table summarizes Peyto’s reserves
and the discounted Net Present Value of future cash flows, before
income tax, using the 3 Consultant Average (3CA) pricing forecast
(GLJ, McDaniel, and Sproule), at December 31, 2021.
|
|
|
|
|
Before Tax Net Present Value ($millions) |
|
|
|
|
|
Discounted at |
Reserve Category |
Gas (BCF) |
Oil &NGL(mstb) |
BCFe(6:1) |
mmboe(6:1) |
0% |
5% |
8% |
10% |
Proved Developed Producing |
1,569 |
42,286 |
1,823 |
304 |
6,194 |
3,965 |
3,272 |
2,943 |
Proved Non-producing |
43 |
1,114 |
50 |
8 |
159 |
104 |
85 |
76 |
Proved Undeveloped |
1,307 |
38,047 |
1,535 |
256 |
5,136 |
2,830 |
2,088 |
1,732 |
Total Proved |
2,919 |
81,447 |
3,407 |
568 |
11,490 |
6,900 |
5,445 |
4,752 |
Probable Additional |
1,737 |
46,191 |
2,014 |
336 |
7,701 |
3,291 |
2,228 |
1,779 |
Proved + Probable Additional |
4,656 |
127,638 |
5,421 |
904 |
19,191 |
10,191 |
7,673 |
6,531 |
Note: Based on the GLJ report effective December
31, 2021. Tables may not add due to rounding.
ANALYSIS FOR PEYTO
SHAREHOLDERS
One of the guiding principles at Peyto is “to
tell you the business facts that we would want to know if our
positions were reversed”. Therefore, each year Peyto provides an
extensive analysis of the independent reserve evaluation that goes
far beyond industry norms in order to answer the most important
questions for shareholders:
- Base Reserves – How did the “base
reserves” that were on production at the time of the last reserve
report perform during the year, and how did any change in commodity
price forecast affect their value?
- Value Creation – How much value did
the 2021 capital investments create, both in current producing
reserves and in undeveloped potential? Has the Peyto team earned
the right to continue investing shareholders’ capital?
- Growth and Income – Are the
projected cash flows capable of funding the growing number of
undeveloped opportunities and a sustainable dividend stream to
shareholders, without sacrificing Peyto’s financial flexibility or
allowing for the timely repayment of any debt used?
- Risk Assessment – What are the
risks associated with the assessment of Peyto’s reserves and the
risk of recovering future cashflows from the forecast production
streams?
1. Base Reserves
Peyto’s existing PDP reserves at the start of
2021 (the base reserves) were evaluated and adjusted for 2021
production as well as any technical or economic revisions resulting
from the additional twelve months of production and commodity price
data. As part of GLJ’s independent engineering analysis, all base
1572 producing reserve entities (zones/wells) were evaluated. These
base producing wells and zones represent a total gross Estimated
Ultimate Recoverable (EUR) volume of 4.3 TCF (remaining PDP+PA
reserves plus all cumulative production to date), which is within
1% from the prior year estimate. As a result, Peyto is pleased to
report that its total base reserves continue to meet expectation,
which provides confidence in the prediction of future
recoveries.
For the first time in the last 13 years, the
commodity price forecast for natural gas used by the independent
engineers in this year’s evaluation is significantly higher than
last year which has had the effect of increasing the Net Present
Value of all reserve categories. For example, the debt adjusted
NPV, discounted at 5%, of last year’s Proved Developed Producing
reserves, increased $564 million, or 35%, due to the difference in
commodity price forecasts and Peyto’s realized historical offsets
to posted prices. The 3CA price forecast used in the variable
dollar economics is available on GLJ’s website at www.gljpc.com.
This forecast indicates falling AECO and liquid prices for the next
two years followed thereafter by rising prices into the future.
For 2022, GLJ is forecasting the total base
production (PDP reserves) to decline to approximately 72,000 boe/d
(378 MMcf/d of gas and 9,000 bbl/d of NGLs) by December 2022. This
decline implies a total base decline rate of approximately 28% from
December 2021. The 2022 forecast decline rate is only slightly
higher than the 2021 actual base decline of 27%. The 2021 base
decline was higher than originally forecast due to facility and
pipeline capacity restrictions, which should be eliminated with the
2022 infrastructure additions. The historical base decline rates
and capital programs are shown in the following table:
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
2015 |
|
2016 |
|
2017 |
|
2018 |
|
2019 |
|
2020 |
|
2021 |
|
2022F |
Base Decline (%/yr)* |
22% |
|
33% |
|
35% |
|
34% |
|
38% |
|
40% |
|
40% |
|
37% |
|
35% |
|
29% |
|
23% |
|
27% |
|
28% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures ($MM) |
$261 |
|
$379 |
|
$618 |
|
$578 |
|
$690 |
|
$594 |
|
$469 |
|
$521 |
|
$232 |
|
$206 |
|
$236 |
|
$365 |
|
$375 |
*The base decline represents the
aggregate annual decline of all wells on production at the end of
the previous year.
2. Value Creation/Reconciliation
During 2021, Peyto invested a total of $330
million in organic activity to evaluate exploration lands, expand
its pipeline gathering network, and drill 95 gross (85.6 net)
wells. Additionally, the Company invested $35 million to acquire a
very low decline, under-developed producing asset in Cecilia. In
keeping with Peyto’s strategy of maximizing shareholder returns, an
evaluation of the economic outcome of this investment activity is
necessary to determine, on a go-forward basis, the best use of
shareholders’ capital. Not only does this look back analysis give
shareholders a detailed report card on the capital that was
invested, but it also helps illustrate the potential returns that
can be generated from similar future undeveloped opportunities.
Exploration, Development, and
Acquisition Activity
Of the total capital invested in exploration and
development activities (excluding acquisitions) in 2021,
approximately 3% was spent acquiring lands and seismic, 15% on
pipeline and facility projects, and the remaining 82% was spent
drilling, completing, and connecting existing and new reserves.
Sixty one of the 95 gross wells drilled, or 64%, were previously
identified as undeveloped reserves in last year’s reserve report
(52 Proved, 9 Probable Additional). The remaining 34 wells were
locations developed in the year, on both existing and acquired
lands, and were not recognized in last year’s report. Out of the 95
gross wells drilled in 2021, 81 wells were brought onstream during
the year and 28 of those wells (35%) fully recovered their capital
investment before the end of 2021. This rapid payout of capital is
the quickest in Peyto history.
In January 2021, Peyto acquired strategic assets
in Cecilia, immediately adjacent to and contiguous with Peyto’s
Greater Sundance core area, including a 30 mmcf/d gas plant and
interconnected pipelines. The combined acquisition cost was $35
million and included 114 gross (106 net) producing wells with
stable, very low decline (less than 5%/yr) production of
approximately 2,900 boe/d (95% gas). During 2021, Peyto drilled and
brought onstream 20 gross (20 net) development wells on the
acquired lands and grew production to 15,000 boe/d by year end
through expansion of the Cecilia plant, using additional
compression, and by routing gas through the interconnected
gathering system to other Peyto plants in the area.
The undeveloped reserves at year end 2020
originally booked to the 61 drilled locations referred to above,
totaled 221 BCFe (3.6 BCFe/well) of Proved Undeveloped plus
Probable Additional reserves for a forecast capital investment of
$193 million ($0.87/Mcfe). In actuality, $192 million of capital
($0.84/Mcfe) was spent on these 61 wells during 2021, yielding
Proved Developed Producing plus Probable Additional reserves of 227
BCFe (3.7 BCFe/well).
The following table illustrates the Company’s
historical performance in converting predicted future undeveloped
locations into producing wells and demonstrates that Peyto has
consistently converted more reserves at a lower cost than was
forecast.
ReserveYear |
TotalDrills |
BookedLocationsConverted |
Booked/Total |
Forecast Outcome |
ForecastCost perUnit |
Actual Outcome |
Actual Costper Unit |
Actual/ ForecastCost perUnit |
|
grosswells |
gross wells |
|
BCFe |
Capex*$MM |
$/Mcfe |
BCFe |
Capex*$MM |
$/Mcfe |
|
2010 |
48 |
30 |
63 |
% |
84 |
$123 |
$1.46 |
102 |
$138 |
$1.35 |
-8 |
% |
2011 |
70 |
51 |
73 |
% |
152 |
$214 |
$1.41 |
151 |
$209 |
$1.38 |
-2 |
% |
2012 |
86 |
60 |
70 |
% |
189 |
$295 |
$1.56 |
196 |
$278 |
$1.42 |
-9 |
% |
2013 |
99 |
69 |
70 |
% |
206 |
$332 |
$1.61 |
218 |
$310 |
$1.42 |
-12 |
% |
2014 |
123 |
90 |
73 |
% |
278 |
$417 |
$1.50 |
288 |
$419 |
$1.45 |
-3 |
% |
2015 |
140 |
103 |
74 |
% |
307 |
$456 |
$1.49 |
348 |
$385 |
$1.11 |
-26 |
% |
2016 |
128 |
82 |
64 |
% |
254 |
$297 |
$1.17 |
254 |
$246 |
$0.97 |
-17 |
% |
2017 |
142 |
97 |
68 |
% |
298 |
$295 |
$0.99 |
321 |
$305 |
$0.95 |
-4 |
% |
2018 |
70 |
37 |
53 |
% |
104 |
$115 |
$1.10 |
120 |
$118 |
$0.98 |
-11 |
% |
2019 |
61 |
39 |
64 |
% |
129 |
$111 |
$0.86 |
123 |
$109 |
$0.88 |
+2 |
% |
2020 |
64 |
52 |
81 |
% |
172 |
$158 |
$0.92 |
165 |
$135 |
$0.82 |
-11 |
% |
2021 |
95 |
61 |
64 |
% |
221 |
$193 |
$0.87 |
227 |
$192 |
$0.84 |
-3 |
% |
Total |
1,126 |
771 |
68 |
% |
2,394 |
3,006 |
$1.26 |
2,513 |
$2,844 |
$1.13 |
-10 |
% |
*Capex represents only well related capital for
drilling, completion, equipping and tie-in
This annual analysis of reserves that are
converted from undeveloped to developed helps to validate the
accuracy of the remaining future undeveloped reserves and the
associated capital requirements. This accuracy, by which Peyto can
predict future reserve recoveries and capital requirements, also
helps to reduce the risk associated with valuing future undeveloped
locations.
Value Reconciliation
In order to measure the success of all capital
invested in 2021, it is necessary to quantify the total amount of
value created during the year and compare that to the total amount
of capital invested. Each year, Peyto runs last year’s reserve
evaluation with this year’s price forecast to remove the change in
value attributable to commodity prices. This approach isolates the
value created by the Peyto team from the value created (or lost) by
those changes outside of their control (ie. commodity prices).
Since the capital investments can be funded from a combination of
cash flow, debt and equity, it is necessary to know the change in
debt and the change in shares outstanding to see if the change in
value is truly accretive to shareholders.
At year-end 2021, Peyto’s estimated net debt had
decreased by 7% or $78 million to $1.098 billion while the number
of shares outstanding increased slightly due to stock option
program exercises by 2% to 168.2 million shares. The change in debt
includes all capital expenditures, and the total fixed and
performance-based compensation paid out for the year. Although
these estimates are believed to be accurate, they remain unaudited
at this time and may be subject to change.
Based on this reconciliation of changes in BT
NPV, the Peyto team was able to create $1.89 billion of Proved
Developed Producing, $2.02 billion of Total Proven, and $4.20
billion of Proved plus Probable Additional undiscounted reserve
value, with $365 million of capital investment. The ratio of
capital expenditures to value creation is what Peyto refers to as
the NPV recycle ratio, which is simply the undiscounted value
addition, resulting from the capital program, divided by the
capital investment. For 2021, the Proved Developed Producing NPV
recycle ratio is 5.2 which means for each dollar invested, the
Peyto team was able to create 5.2 new dollars of Proved Developed
Producing reserve value. This is the highest PDP NPV recycle ratio
in the company’s history and illustrates the incredible success of
the 2021 capital program.
The historic NPV recycle ratios are presented in
the following table.
|
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
10 yrWt. Avg. |
Capital Investment ($MM) |
$618 |
$578 |
$690 |
$594 |
$469 |
$521 |
$232 |
$206 |
$236 |
$365 |
NPV0 Recycle
Ratio |
|
|
|
|
|
|
|
|
|
|
|
Proved Developed Producing |
1.6 |
1.5 |
1.5 |
2.3 |
2.9 |
2.3 |
4.6 |
1.8 |
3.5 |
5.2 |
2.4 |
Total Proved |
2.2 |
2.0 |
1.7 |
3.3 |
4.2 |
3.2 |
11.7 |
5.5 |
6.9 |
5.5 |
3.7 |
Proved + Probable Additional |
3.2 |
4.0 |
2.6 |
5.0 |
7.3 |
4.0 |
15.1 |
9.2 |
6.5 |
11.5 |
5.7 |
*NPV0 (net present
value) recycle ratio is calculated by dividing the undiscounted NPV
of reserves added in the year by the total capital cost for the
period (eg. 2021 Proved Developed Producing $1883/$365) = 5.2).
3. Growth
and Income
Over the past 18.5 years, Peyto has paid a total
of $19.47/share to shareholders in the form of distributions and
dividends. Peyto’s objective, as a dividend paying, growth-oriented
corporation, is to profitably grow the resources which generate
sustainable income (dividends) for shareholders. For income to be
sustainable and grow, Peyto must profitably find and develop more
reserves. Simply increasing production from the existing reserves
will not make that income more sustainable. Reserve Life Index
(RLI), or a reserve to production ratio, provides a measure of this
long-term sustainability.
During 2021, the Company deployed a conservative
capital program but was successful in replacing 188% of annual
production with new PDP reserves, resulting in 11% growth, using
only 78% of funds from operations. Fourth quarter production
increased 18%, from 83,500 boe/d (433 MMcf/d gas, 11,300 bbl/d
NGLs) to 98,400 boe/d (522 MMcf/d gas, 11,300 bbl/d NGLs). The
change in both PDP reserves and fourth quarter production resulted
in a slight reduction of the Proved Developed Producing reserve
life index (ratio of the two) from 9.0 years to 8.5 years.
For comparative purposes, the Total Proved and
P+P RLI index was 16 and 25 years, respectively, however;
Management believes that the most meaningful method to evaluate the
current reserve life is by dividing the Proved Developed Producing
reserves by the actual fourth quarter annualized production. This
way production is being compared to producing reserves as opposed
to producing plus non-producing reserves.
The following table highlights the Company’s
historical RLI Index.
|
2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
Proved Developed Producing |
12 |
13 |
14 |
14 |
11 |
9 |
9 |
7 |
7 |
7 |
7 |
7 |
9 |
9 |
9 |
9 |
Total Proved |
14 |
16 |
17 |
21 |
17 |
16 |
15 |
12 |
11 |
11 |
11 |
11 |
16 |
19 |
18 |
16 |
Proved + Probable Additional |
20 |
21 |
23 |
29 |
25 |
22 |
22 |
19 |
18 |
17 |
18 |
18 |
25 |
29 |
27 |
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future Undeveloped
Opportunities
As of December 31, 2021, Peyto had 951 net
sections of Alberta Deep Basin lands. In many of these sections,
mineral rights are held in a number of stacked prospective horizons
expanding this land base by almost four-fold to a total of 3,610
net sections of rights over Duvernay, Montney and seven Cretaceous
horizons. During Peyto’s 23-year history, the Company has both
found and developed 4.5 TCFe of total natural gas and associated
liquids which resides in 380 of these net sections. Effectively,
Peyto has invested $6.8 billion to fully develop 10.5% of its
existing land base which has also resulted in the generation of
$6.9 billion of cumulative funds from operations and $2.7 billion
in cumulative earnings to date.
Peyto’s remaining undeveloped land base still
holds significant future potential. The independent reserve
evaluators have modelled a limited amount of development activity
over the next nine years as shown in the following table of future
development capital designed to ensure Peyto’s existing facilities
remain full. This capital investment is projected to develop an
additional 8.4% of Peyto 3,610 net sections of rights listed
above.
|
Future Development Capital |
|
Proved Reserves |
Proved+ Probable Additional Reserves |
Year |
Undisc., ($Millions) |
Undisc., ($Millions) |
2022 |
243 |
|
329 |
|
2023 |
346 |
|
396 |
|
2024 |
430 |
|
447 |
|
2025 |
441 |
|
496 |
|
2026 |
333 |
|
480 |
|
2027 |
175 |
|
433 |
|
2028 |
10 |
|
333 |
|
2029 |
|
|
335 |
|
2030 |
|
|
342 |
|
Thereafter |
1 |
|
21 |
|
Total |
1,979 |
|
3,612 |
|
|
|
|
|
|
Every year Peyto finds and develops new drilling
inventory that the independent evaluators review to create a
forecast of future development activity. Their forecast is by no
means a complete assessment of Peyto’s current opportunities, nor
is Peyto content to just sit back and harvest these current
opportunities. Each year the results from the drilling activity
spawn additional offsetting locations both on currently owned lands
and lands Peyto does not yet own but attempts to acquire. In
addition to the growth in inventory, Peyto has been evolving its
horizontal well design to employ longer horizontal laterals and
increased stimulation intensity. This design allows more reservoir
to be developed in each wellbore which has the effect of reducing
the total number of wells required to develop a given resource. The
result is lower cost per unit of reserves and less environmental
footprint.
As of December 31, 2021, the future drilling
locations recognized in the reserve report totaled 1,274 gross
(1,022 net). This is up from the previous year of 1,230 (983 net).
Of these future locations, 786 (62%) are categorized as Proven
Undeveloped by the independent reserve evaluators, while 488 (38%)
are Probable Undeveloped locations. The net reserves associated
with the undeveloped locations (not including existing uphole
zones) totals 3.1 TCFe (3.0 BCFe/well) consisting of 2.7 TCF of
natural gas and 70 mmbbls of NGLs, while the capital required to
develop them is estimated at $3.6 billion or $1.15/Mcfe. This
development is forecast to create Before Tax Net Present Value of
$5.2 billion (at 5% discount rate, inclusive of profit after
capital recovery and future abandonment liability) or $28 per share
(debt adjusted) of incremental value at the 3CA commodity price
forecast.
The undiscounted, forecast for Net Operating
Income for the TP and P+P reserves over the future development
capital schedule, as contained in the evaluator’s report, totals
$5.9 billion and $9.8 billion, respectively, more than sufficient
to fund the future development capital shown in the table above,
ensuring those reserve additions are accretive to shareholders.
The total estimated Future Development Capital
for both Total Proved and P+P reserves increased from the previous
year by $62 million and $304 million, respectively, reflecting the
increased number of undeveloped locations and forecast cost
inflation expected with higher forecast commodity prices.
4. Risk
Assessment
Effectively 100% of Peyto’s natural gas and
natural gas liquid reserves exist in low permeability (tight),
sandstone reservoirs in the Alberta Deep Basin. In almost all
cases, the volumetric capacity of these sandstone reservoirs can be
determined using traditional geological and reservoir engineering
methods, which, when complimented by production performance data,
increases the certainty of the reserve estimates. In the majority
of Peyto’s core areas, continuous drilling activity has further
refined the geologic and geometric definition of these reservoirs
to a higher level of certainty. Determination of these predicted
volumes has remained consistent amongst different independent
reserve evaluators as illustrated by this year’s evaluation
conducted by GLJ in comparison to last year’s evaluation conducted
by Insite Petroleum Consultants.
In addition, these Deep Basin sandstone
reservoirs do not contain mobile water, nor are they supported by
active aquifers. Mobile water traditionally increases the risk
associated with reservoir recovery by impeding the flow of
hydrocarbons through the reservoir and up the wellbore. Water
production, separation and disposal processes also increase
operating costs which shortens the economic life of producing
wells, further contributing to reduced recovery. As many of these
traditional reserves determination and recovery risks are not
present in Peyto’s Deep Basin reservoirs, Management has a higher
level of confidence in its reserves and their ultimate
recovery.
Peyto’s high operating margins (historically
approximately 40% higher than the industry average) have meant that
forecasts of net operating income are less affected by commodity
price volatility than in most traditional reserve evaluations. As a
result, the predicted economic life of Peyto’s producing wells is
less sensitive to changes in commodity prices. These high operating
margins are achieved through the Company’s high level of ownership
and control of all levels of production operations, through a
concentrated geographic asset base, and by striving to be the
lowest cost producer in the industry.
Peyto attempts to further reduce the risk of
predicted operating incomes with an active market diversification
and hedging program that is designed, over time, to smooth out the
volatility in both Alberta and US natural gas markets through a
series of frequent transactions which is like “dollar cost
averaging” the future gas price.
Finally, Peyto is the operator of over 99% of
its producing wells and has one of the highest ratios of producing
to non-producing wells in the industry. Approximately 98% of
Peyto’s asset base has been organically developed by Peyto and
contains very few abandonment liabilities. As of December 31, 2021,
Peyto owned a total of 1,820 net wells of which over 89% are on
production today and most are expected to produce for decades to
come. Despite the Company’s very low non-producing well count,
Peyto has an active well retirement program where 11.5 net wells
were abandoned and cut and capped in 2021. Of the remaining
non-producing wellbores, 30.7 net wells are considered medium risk,
inactive wells that require downhole abandonment over the next
several years. The estimated cost to abandon, reclaim and remediate
these wells is approximately $3.0 million For perspective, the
current existing developed reserves have a forecast value of $5.0
billion (NPV5 of the PDP + PA and PDNP + PA), while the cost to
abandon and reclaim all wells, well sites, pipelines, and
facilities is estimated at $61.5 million using the same 5% discount
rate for future costs.
These cumulative factors listed above, which
reduce the traditional risk of realizing future cashflows from
Peyto’s reserves, is why, in Management’s opinion, Peyto’s reserves
can be valued at lower discount rates than other, more conventional
asset bases and why Management highlights Net Present Values (NPV)
at 5% discount rates.
Performance Ratios
The following table highlights annual
performance ratios after the implementation of horizontal wells in
late 2009. These can be used for comparative purposes, but it is
cautioned that on their own they do not measure investment
success.
|
2021 |
2020 |
2019 |
2018 |
2017 |
2016 |
2015 |
2014 |
2013 |
2012 |
Proved Developed Producing |
|
|
|
|
|
|
|
|
|
|
FD&A ($/Mcfe) |
$0.97 |
$1.06 |
$1.55 |
$1.18 |
$1.36 |
$1.44 |
$1.64 |
$2.25 |
$2.35 |
$2.22 |
RLI (yrs) |
9 |
9 |
9 |
9 |
7 |
7 |
7 |
7 |
7 |
9 |
Recycle Ratio |
2.8 |
1.5 |
1.4 |
2.3 |
2.1 |
1.8 |
2.0 |
1.9 |
1.6 |
1.6 |
Reserve Replacement |
188% |
127% |
75% |
98% |
171% |
153% |
193% |
183% |
190% |
284% |
Total Proved |
|
|
|
|
|
|
|
|
|
|
FD&A ($/Mcfe) |
$1.10 |
$0.20 |
$1.41 |
$1.21 |
$1.39 |
$1.01 |
$0.72 |
$2.37 |
$2.23 |
$2.04 |
RLI (yrs) |
16 |
18 |
19 |
16 |
11 |
11 |
11 |
11 |
12 |
15 |
Recycle Ratio |
2.4 |
8.0 |
1.7 |
2.2 |
2.0 |
2.6 |
4.5 |
1.8 |
1.6 |
1.7 |
Reserve Replacement |
194% |
132% |
137% |
294% |
225% |
183% |
188% |
254% |
230% |
414% |
Future Development Capital ($ millions) |
$1,979 |
$1,917 |
$2,107 |
$1,971 |
$1,488 |
$1,305 |
$1,381 |
$1,721 |
$1,406 |
$1,318 |
Proved + Probable Additional |
|
|
|
|
|
|
|
|
|
|
FD&A ($/Mcfe) |
$1.09 |
($0.01) |
$1.25 |
1.02 |
$1.49 |
$0.62 |
$0.54 |
$2.01 |
$1.86 |
$1.68 |
RLI (yrs) |
25 |
27 |
29 |
25 |
18 |
18 |
17 |
18 |
19 |
22 |
Recycle Ratio |
2.5 |
N/A |
1.7 |
2.6 |
1.9 |
4.2 |
6.1 |
2.1 |
2.0 |
2.1 |
Reserve Replacement |
308% |
167% |
140% |
342% |
279% |
283% |
287% |
328% |
450% |
527% |
Future Development Capital ($millions) |
$3,612 |
$3,308 |
$3,547 |
$3,445 |
$2,978 |
$2,563 |
$2,657 |
$2,963 |
$2,550 |
$2,041 |
|
|
|
|
|
|
|
|
|
|
|
- FD&A (finding, development and
acquisition) costs are used as a measure of capital efficiency and
are calculated by dividing the capital costs for the period,
including the change in undiscounted FDC, by the change in the
reserves, incorporating revisions and production, for the same
period (eg. 2021 Total Proved ($365+$62)/(567.9-536.5+33.2) =
$6.61/boe or $1.10/Mcfe).
- The RLI is calculated by dividing
the reserves (in boes) in each category by the annualized Q4
average production rate in boe/year (eg. 2021 Proved Developed
Producing 303,810/(98.4x365) = 8.5). Peyto believes that the most
accurate way to evaluate the current reserve life is by dividing
the proved developed producing reserves by the annualized actual
fourth quarter average production. In Peyto’s opinion, for
comparative purposes, the proved developed producing reserve life
provides the best measure of sustainability.
- The Recycle Ratio is calculated by
dividing the field netback per boe, by the FD&A costs for the
period (eg. 2021 Proved Developed Producing $16.12/$5.84=2.8). The
recycle ratio is comparing the netback from existing reserves to
the cost of finding new reserves and may not accurately indicate
investment success unless the replacement reserves are of
equivalent quality as the produced reserves.
- The reserve replacement ratio is
determined by dividing the yearly change in reserves before
production by the actual annual production for the year (eg. 2021
Total Proved (567.9-536.5+33.2)/33.2 = 194%).
RESERVES COMMITTEE
Peyto has a reserves committee, comprised of
independent board members, that reviews the qualifications and
appointment of the independent reserve evaluators. The committee
also reviews the procedures for providing information to the
evaluators. All booked reserves are based upon annual evaluations
by the independent qualified reserve evaluators conducted in
accordance with the COGE (Canadian Oil and Gas Evaluation) Handbook
and National Instrument 51-101. The evaluations are conducted using
all available geological and engineering data. The reserves
committee has reviewed the reserves information and approved the
reserve report.
MANAGEMENT CHANGES
Peyto is pleased to announce the promotion of
Mr. Riley Frame to Vice President, Engineering. Mr. Frame joined
Peyto in 2013 and has spent the last 3 years as the Manager of
Exploitation playing an integral role in directing the Company’s
development plans. Mr. Frame has worked in various engineering
roles since entering the industry in 2008 and is a member of the
Association of Professional Engineers and Geoscientists of
Alberta.
OUTLOOK
With the development cost of new reserves at
historic lows, combined with much stronger near-term commodity
prices, the profitability of Peyto’s future undeveloped
opportunities has rarely looked better. Combining those future
opportunities with the expanded margins on current producing
reserves means Peyto’s total reserves are substantially more
valuable, as evidenced by the 53% year over year increase in P+P BT
NPV5 (per debt adjusted share). This considerable increase in value
is not only good for Peyto shareholders but also for the citizens
of Alberta whose royalty revenues will be likewise improved. With
increased commodity prices comes increased pressure on costs. As
the lowest cost producer, Peyto will continue to focus on cost
control throughout its business, while striving to improve
efficiency and preserve its profit margins. This does not mean
cutting corners on safety or environmental stewardship. As always,
Peyto will focus on its long-term strategy which means responsibly
developing high quality, long life natural gas assets that have low
emissions, and provide clean, affordable energy for Albertans and
Canadians. With only 10.5% of Peyto’s land base developed, there is
much work left to do to provide Albertans with the natural gas
resources they need for a cleaner power grid, and a long-term
natural gas strategy involving hydrogen, petrochemicals, recycled
plastics and LNG exports. Peyto is proud to be part of that bright
future and ever evolving Western Canadian energy industry.
GENERAL
A complete filing of the Statement of Reserves
(form 51-101F1), Report on Reserves (form 51-101F2), and Report of
Management and Directors on Oil and Gas Disclosure (form 51-101F3)
will be available in the Annual Information Form to be filed by the
end of March 2022. Shareholders are encouraged to actively visit
Peyto’s website located at www.peyto.com. For further information,
please contact Darren Gee, Chief Executive Officer of Peyto at
(403) 261-6081.
This news release contains certain
forward–looking information and statements within the meaning of
applicable securities laws. The use of any of the words "expect",
"anticipate", "continue", "estimate", "may", "will", "project",
"should", "believe", "plans", "intends" and similar expressions are
intended to identify forward-looking information or statements. In
particular, but without limiting the foregoing, this news release
contains forward-looking information and statements pertaining to
the following: management's assessment of Peyto's future plans and
operations, including the 2022 program, capital expenditures, the
volumes and estimated value of Peyto's reserves, the life of
Peyto's reserves, production estimates, project economics including
NPV, netback and recycle ratio, the ability to enhance value of
reserves for shareholders and ensure the reserves generate the
maximum possible return. Forward-looking statements or information
are based on a number of material factors, expectations or
assumptions of Peyto which have been used to develop such
statements and information, but which may prove to be incorrect.
Although Peyto believes that the expectations reflected in such
forward-looking statements or information are reasonable, undue
reliance should not be placed on forward-looking information and
statements because Peyto can give no assurance that such
expectations will prove to be correct. In addition to other factors
and assumptions which may be identified herein, assumptions have
been made regarding, the impact of increasing competition, the
timely receipt of any required regulatory approvals, the ability of
Peyto to obtain qualified staff, equipment and services in a timely
and cost efficient manner, drilling results, field production rates
and decline rates, the ability to replace and expand reserves
through development and exploration, future commodity prices,
currency, exchange and interest rates, regulatory framework
regarding royalties, taxes and environmental matters and the
ability of Peyto to successfully market its oil and natural gas
products. By their nature, forward-looking information and
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. 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 information and
statements will transpire or occur, or if any of them do so, what
benefits that Peyto will derive therefrom. The forward-looking
information and statements contained in this news release speak
only as of the date of this news release, and Peyto does not assume
any obligation to publicly update or revise any of the included
forward-looking statements or information, whether as a result of
new information, future events or otherwise, except as may be
required by applicable securities laws.
This news release contains information,
including in respect of Peyto's 2022 capital program, which may
constitute future oriented financial information or a financial
outlook. Such information was approved by the Board of Directors of
Peyto on February 16, 2022, and such information is included herein
to provide readers with an understanding of the Company's
anticipated capital expenditures for 2022. Readers are cautioned
that the information may not be appropriate for other purposes.
Boes may be misleading, particularly if used in
isolation. A boe conversion ratio of 6 Mcf:1 bbl is based on an
energy equivalency conversion method primarily applicable at the
burner tip and does not represent a value equivalency at the
wellhead. Given that the value ratio based on the current price of
crude oil as compared to natural gas is significantly different
from the energy equivalency of 6:1, utilizing a conversion on a 6:1
basis may be misleading as an indication of value.
Finding, development and acquisition costs,
reserves replacement and netbacks do not have standardized meanings
or standard methods of calculation and therefore such measures may
not be comparable to similar measures used by other companies and
should not be used to make comparisons. Such metrics have been
included by Peyto to give readers additional measures to evaluate
the Peyto's performance; however, such measures are not reliable
indicators of the future performance of Peyto and future
performance may not compare to the performance in previous periods
and therefore such metrics should not be unduly relied upon.
Some values set forth in the tables above may
not add due to rounding. It should not be assumed that the
estimates of future net revenues presented in the tables above
represent the fair market value of the reserves. There is no
assurance that the forecast prices and costs assumptions will be
attained, and variances could be material. The aggregate of the
exploration and development costs incurred in the most recent
financial year and the change during that year in estimated future
development costs generally will not reflect total finding and
development costs related to reserves additions for that year.
The Toronto Stock Exchange has neither approved
nor disapproved the information contained herein.
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