May 8, 2019
CALGARY, May 8, 2019 /CNW/ - (TSX:PMT) – Perpetual Energy Inc. ("Perpetual", the "Corporation" or the "Company") is pleased to release its first quarter 2019 financial and operating results. Highlights from the quarter include:
A complete copy of Perpetual's unaudited condensed interim consolidated financial statements and related Management's Discussion and Analysis ("MD&A") for the three months ended March 31, 2019 can be obtained through the Company's website at www.perpetualenergyinc.com and SEDAR at www.sedar.com.
Perpetual adopted IFRS 16 "Leases" effective January 1, 2019 using the modified retrospective approach, therefore comparative information has not been restated. The adoption of IFRS 16 had a minimal impact on net loss, and increased cash flow from operating activities and adjusted funds flow by $0.1 million compared to what would have occurred had the new accounting policy not been adopted. Refer to the "recently adopted accounting pronouncements" section of the Q1 2019 MD&A for details.
FIRST QUARTER 2019 HIGHLIGHTS
Capital Spending, Production and Operations
EARLY REDEMPTION OF 2019 SENIOR NOTES
On May 7, 2019, Perpetual announced it will early redeem the $14.6 million 8.75% senior unsecured notes due July 23, 2019 (the "2019 Senior Notes"), effective June 11, 2019 for $1,000 for each $1,000 principal amount of 2019 Senior Notes (the "Cash Consideration"), or $1,075 principal amount of 8.75% senior unsecured notes due January 23, 2022 (the "2022 Senior Notes"). A significant shareholder will backstop the Cash Consideration such that the redemption of the $14.6 million 2019 Senior Notes will be fully funded, and result in the issuance of $15.7 million 2022 Senior Notes.
Perpetual's 2019 capital expenditure and adjusted funds flow guidance remains unchanged from guidance released with its 2018 year-end results on March 27, 2019.
The Company's Board of Directors has approved a total capital spending program of $21 to $25 million for 2019 to be funded from adjusted funds flow. At least 50% will be spent in Eastern Alberta, primarily targeting heavy oil development at Mannville along with abandonment and reclamation work of up to $2 million to prudently address decommissioning obligations associated with non-producing wells. The remaining expenditures will be concentrated in East Edson, developing liquids-rich natural gas reserves in the Wilrich formation if AECO forward gas prices support investment in the second half of 2019, or alternatively, will be deployed in an expanded heavy oil drilling program.
Forecast capital activity in Eastern Alberta for 2019 includes the drilling of up to 10 (10.0 net) horizontal wells, including several multi-lateral wells, targeting a mix of step outs, exploratory wells, and infill wells in waterflooded pools. Timing for start-up of the 2019 program is dependent on surface lease conditions, but is expected to be in June or early July to take advantage of lower drilling, completion, and equipping costs generally realized in the summer in Eastern Alberta. Decommissioning expenditures will continue to be focused in the Mannville area and are expected to provide future surface lease rental and property tax expense reductions while maintaining regulatory compliance. In Eastern Alberta, production is forecast to increase by 20% to 30% from 2018, to a range of 2,200 to 2,400 boe/d (61% oil) in 2019.
At East Edson, the Company has budgeted a two (2.0 net) well drilling program to come onstream during the fourth quarter of 2019. The two wells will be extended reach horizontal ("ERH") wells, as the performance of the ERH wells drilled in late 2017 and early 2018 indicate improved capital efficiencies over the wells drilled with less than 2,500 meters of lateral length. If AECO forward gas prices normalize above $2.00/Mcf, drilling activities are expected to continue into 2020. Processing capacity at the Company's 100% working interest and operated West Wolf Lake facility is 65 MMcf/d, with an additional 13 MMcf/d of working interest capacity at the non-operated Rosevear plant, plus associated liquids. The planned drilling will not have a material impact on production in 2019, as new wells are forecast to come on stream late in the year. Natural declines and capital spending deferrals to late 2019 result in lower anticipated 2019 production in East Edson with an average of 7,000 to 7,200 boe/d (10% oil and NGL). Despite reduced production in East Edson and a substantially fixed operating cost base, operating costs are forecast to remain low in 2019, at less than $3.25/boe.
The table below summarizes anticipated capital spending and drilling activities for the first and second half of 2019.
2019 Exploration and Development Forecast Capital Expenditures
# of wells
Q2 – Q4 2019
# of wells
West Central liquids-rich gas
Excludes budgeted abandonment and reclamation spending of $1.5 to $2.0 million in 2019 (Q1 2019 - $0.3 million).
Perpetual expects the 2019 capital program will be funded by adjusted funds flow. Perpetual forecasts average production of 9,200 to 9,600 boe/d, with oil and NGL production growing to represent approximately 20% to 24% of the production mix. This represents an expected reduction in average daily production in 2019 of approximately 11% relative to 2018, but includes a 16% increase in oil and NGL production. The Company expects to exit the year at over 11,500 boe/d as natural gas and NGL production ramps up again driven by the second half capital spending program targeting seasonal natural gas price optimization.
Cash costs of $17.00 to $18.00/boe are forecast for 2019, up approximately 13% to 16% from 2018 due to the impact of lower forecast 2019 production on a substantially fixed operating cost base. Increased oil production in 2019, which is higher cost compared to natural gas cash costs, is also expected to contribute to the increase in 2019 cash costs per boe.
Perpetual has diversified its commodity and natural gas pricing point exposure (net of royalties) away from AECO as detailed below:
Estimated 2019 Exposure
AECO - fixed price(2)
Total natural gas
Natural gas liquids - Condensate(1)
Natural gas liquids - Other(1)
Total forecast production, net of royalties
Net of royalties.
See "Commodity price risk management and sales obligations" section of the Q1 2019 MD&A for details.
The market diversification contract is expected to continue to provide higher natural gas pricing and enhanced risk management through future periods of volatile natural gas prices in Western Canada related to market access constraints.
Guidance assumptions are as follows:
2019 Annual Guidance
2019 exploration and development expenditures ($ millions)
$21 - $25
2019 cash costs ($/boe)
$17.00 - $18.00
2019 average daily production (boe/d)
9,200 – 9,600
2019 average production mix (%)
20% - 24% oil and NGL
2019 adjusted funds flow ($ millions)
$22 - $27
2019 adjusted funds flow ($/share)
$0.36 - $0.44
Commodity price assumptions reflect forward market price levels as follows:
2019 average NYMEX natural gas price (US$/MMBtu)
2019 average West Texas Intermediate ("WTI") oil price (US$/bbl)
2019 average Western Canadian Select ("WCS") differential (US$/bbl)
2019 average exchange rate (US$1.00 = Cdn$)
Reflects settled and forward market prices.
Year-end 2019 net debt (net of the estimated market value of the Company's TOU share investment of approximately $35 million), is forecast at $107 - $113 million, consistent with prior 2019 guidance issued on March 27, 2019. Current guidance is based on the following assumptions:
The following sensitivities can be applied to estimate changes to annualized cash flow from operating activities and adjusted funds flow, assuming no change in differentials to Perpetual's market pricing points:
Financial and Operating Highlights
Three months ended March 31,
($Cdn thousands except volume and per share amounts)
Oil and natural gas revenue
Per share – basic and diluted(2)
Cash flow from operating activities
Adjusted funds flow(1)
Per share – basic and diluted(1)(2)
Revolving bank debt
Term loan, principal amount
TOU share margin demand loan, principal amount
Senior Notes, principal amount
TOU share investment
Adjusted working capital deficiency (surplus)(1)
Net payments on acquisitions and dispositions
Net capital expenditures
Common shares (thousands)(3)
End of period
Weighted average - basic and diluted
Daily average production
Natural gas (MMcf/d)
Realized natural gas price ($/Mcf)
Realized oil price ($/bbl)
Realized NGL price ($/bbl)
Wells drilled – gross (net)
These are non-GAAP measures. Please refer to "Non-GAAP Measures" below.
Based on weighted average basic common shares outstanding for the period.
All common shares are net of shares held in trust (Q1 2019 – 0.9 million; Q1 2018 – 0.3 million). See "Note 15 to the condensed interim consolidated financial statements".
Perpetual is an oil and natural gas exploration, production and marketing company headquartered in Calgary, Alberta. Perpetual operates a diversified asset portfolio, including liquids-rich natural gas assets in the deep basin of west central Alberta, heavy oil and shallow natural gas in eastern Alberta, with longer term opportunities through undeveloped oil sands leases in northern Alberta. Additional information on Perpetual can be accessed at www.sedar.com or from the Corporation's website at www.perpetualenergyinc.com.
The Toronto Stock Exchange has neither approved nor disapproved the information contained herein.
Certain information regarding Perpetual in this news release including management's assessment of future plans and operations may constitute forward-looking information or statements under applicable securities laws. The forward looking information includes, without limitation, anticipated amounts and allocation of capital spending; statements pertaining to adjusted funds flow levels, statements regarding estimated production and timing thereof; statements pertaining to type curves being exceeded, forecast average production; completions and development activities; infrastructure expansion and construction; estimated FDC required to convert proved plus probable non-producing and undeveloped reserves to proved producing reserves; prospective oil and natural gas liquids production capability; projected realized natural gas prices and adjusted funds flow; estimated decommissioning obligations; commodity prices and foreign exchange rates; and commodity price management. Various assumptions were used in drawing the conclusions or making the forecasts and projections contained in the forward-looking information contained in this news release, which assumptions are based on management's analysis of historical trends, experience, current conditions and expected future developments pertaining to Perpetual and the industry in which it operates as well as certain assumptions regarding the matters outlined above. Forward-looking information is based on current expectations, estimates and projections that involve a number of risks, which could cause actual results to vary and in some instances to differ materially from those anticipated by Perpetual and described in the forward-looking information contained in this news release. Undue reliance should not be placed on forward-looking information, which is not a guarantee of performance and is subject to a number of risks or uncertainties, including without limitation those described under "Risk Factors" in Perpetual's Annual Information Form and MD&A for the year ended December 31, 2018 and those included in other reports on file with Canadian securities regulatory authorities which may be accessed through the SEDAR website (www.sedar.com) and at Perpetual's website (www.perpetualenergyinc.com). Readers are cautioned that the foregoing list of risk factors is not exhaustive. Forward-looking information is based on the estimates and opinions of Perpetual's management at the time the information is released, and Perpetual disclaims any intent or obligation to update publicly any such forward-looking information, whether as a result of new information, future events or otherwise, other than as expressly required by applicable securities law.
This news release contains the terms "adjusted funds flow", "adjusted funds flow per share", "adjusted funds flow per boe", "available liquidity", "cash costs", "net working capital deficiency (surplus)", "net debt", "net bank debt", "net debt to adjusted funds flow ratio", "operating netback", "realized revenue" and "enterprise value" which do not have standardized meanings prescribed by GAAP. Management believes that in addition to net income (loss) and net cash flows from operating activities as defined by GAAP, these terms are useful supplemental measures to evaluate operating performance. Users are cautioned however that these measures should not be construed as an alternative to net income (loss) or net cash flows from operating activities determined in accordance with GAAP as an indication of Perpetual's performance and may not be comparable with the calculation of similar measurements by other entities.
Adjusted funds flow: Management uses adjusted funds flow and adjusted funds flow per boe as key measures to assess the ability of the Company to generate the funds necessary to finance capital expenditures, expenditures on decommissioning obligations and meet its financial obligations. Adjusted funds flow is calculated based on cash flows from (used in) operating activities, excluding changes in non-cash working capital and expenditures on decommissioning obligations since Perpetual believes the timing of collection, payment or incurrence of these items is variable. Expenditures on decommissioning obligations may vary from period to period depending on capital programs and the maturity of the Company's operating areas. Expenditures on decommissioning obligations are managed through the capital budgeting process which considers available adjusted funds flow. The Company has also deducted the change in gas over bitumen royalty financing from adjusted funds flow, in order to present these payments net of gas over bitumen royalty credits received. These payments are indexed to gas over bitumen royalty credits and are recorded as a reduction to the Corporation's gas over bitumen royalty financing obligation in accordance with IFRS. Additionally, the Company has excluded payments of restructuring costs associated with surplus office lease obligations, which management considers to not be related to cash flow from operating activities.
Adjusted funds flow per share is calculated using the same weighted average number of shares outstanding used in calculating income (loss) per share. Adjusted funds flow is not intended to represent net cash flows from (used in) operating activities calculated in accordance with IFRS.
Adjusted funds flow per boe is calculated as adjusted funds flow divided by total production sold in the period.
Available Liquidity: Available Liquidity is defined as Perpetual's Credit Facility Borrowing Limit, plus Tourmaline Oil Corp. ("TOU") share investment, less borrowings and letters of credit issued under the Credit Facility and TOU share margin demand loan. Management uses available liquidity to assess the ability of the Company to finance capital expenditures, expenditures on decommissioning obligations and meet financial obligations.
Cash costs: Management believes that cash costs assist management and investors in assessing Perpetual's efficiency and overall cost structure. Cash costs are comprised of royalties, production and operating, transportation, general and administrative and cash interest expense and income. Cash costs per boe is calculated by dividing cash costs by total production sold in the period.
Realized revenue: Realized revenue is the sum of realized natural gas revenue, realized oil revenue and realized NGL revenue which includes realized gains (losses) on financial natural gas, crude oil and foreign exchange contracts but excludes any realized gains (losses) resulting from contracts associated with the disposition of the shallow gas assets on October 1, 2016 (the "Shallow Gas Disposition"). Realized revenue, including foreign exchange and market diversification contracts, is used by management to calculate the Corporation's net realized commodity prices, taking into account monthly settlements on financial crude oil and natural gas forward sales, collars, basis differentials, and forward foreign exchange sales. These contracts are put in place to protect Perpetual's adjusted funds flow from potential volatility in commodity prices and foreign exchange rates, and as such, any related realized gains or losses are considered part of the Corporation's realized price.
Operating netback: Perpetual considers operating netback to be an important performance measure as it demonstrates its profitability relative to current commodity prices. Operating netback is calculated by deducting royalties, production and operating, and transportation costs from realized revenue. Operating netback is also calculated on a per boe basis using production sold for the period. Operating netback on a per boe basis can vary significantly for each of the Company's operating areas.
Net working capital deficiency (surplus): Net working capital deficiency (surplus) includes total current assets and current liabilities excluding short-term derivative assets and liabilities related to the Corporation's risk management activities, current portion of gas over bitumen royalty financing, TOU share investment, TOU share margin demand loan, current portion of senior notes, current portion of lease liabilities, revolving bank debt, and current portion of provisions.
Net bank debt, net debt and net debt to adjusted funds flow ratio: Net bank debt is measured as current and long-term revolving bank debt including net working capital deficiency (surplus). Net debt includes the carrying value of net bank debt, the principal amount of the term loan, the principal amount of the TOU share margin demand loan and the principal amount of senior notes, reduced for the mark-to-market value of the TOU share investment. Net debt, net bank debt and net debt to adjusted funds flow ratios are used by management to assess the Corporation's overall debt position and borrowing capacity. Net debt to adjusted funds flow ratios are calculated on a trailing twelve-month basis.
Enterprise value: Enterprise value is equal to net debt plus the market value of issued equity and is used by management to analyze leverage. Enterprise value is not intended to represent the total funds from equity and debt received by the Corporation upon issuance.
For additional reader advisories in regards to non-GAAP financial measures, including Perpetual's method of calculation and reconciliation of these terms to their corresponding GAAP measures, see the section entitled "Non-GAAP Measures" within the Company's MD&A filed on SEDAR.
Perpetual's aggregate proved and probable reserves are reported in barrels of oil equivalent (boe). Boe may be misleading, particularly if used in isolation. In accordance with NI 51-101, a boe conversion ratio for natural gas of 6 Mcf: 1 boe has been used, which is based on an energy equivalency conversion method primarily applicable at the burner tip and does not necessarily represent a value equivalency at the wellhead. As the value ratio between natural gas and crude oil based on the current prices of natural gas and crude oil 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.
The following abbreviations used in this news release have the meanings set forth below:
barrels of oil equivalent
thousand cubic feet
million cubic feet
million British Thermal Units
Also included in this news release are estimates of Perpetual's 2019 adjusted funds flow and year-end 2019 net debt, which is based on, among other things, the various assumptions as to production levels, capital expenditures, and other assumptions disclosed in this news release. To the extent such estimate constitutes a financial outlook, it was approved by management and the Board of Directors of Perpetual on May 7, 2019 and is included to provide readers with an understanding of Perpetual's anticipated adjusted funds flow and sensitivities based on the capital expenditure, production, and other assumptions described herein and readers are cautioned that the information may not be appropriate for other purposes.
SOURCE Perpetual Energy Inc.
For further information: Perpetual Energy Inc., Suite 3200, 605 - 5 Avenue SW Calgary, Alberta, Canada, T2P 3H5, Telephone: 403 269-4400, Fax: 403 269-4444, Email: firstname.lastname@example.org; Susan L. Riddell Rose, President and Chief Executive Officer; W. Mark Schweitzer, Vice President Finance and Chief Financial Officer