Mr. Derek Evans reports
PENGROWTH STARTS COMMISSIONING OF 12,500 BBL/D LINDBERGH THERMAL PROJECT AND DELIVERS STRONG THIRD QUARTER PERFORMANCE
With Pengrowth Energy Corp.'s conventional business continuing to meet expectations and commissioning activities at Lindbergh progressing, the third quarter marked another significant milestone in Pengrowth's transition to sustainable growth.
"We continue to deliver on our strategic plan and we remain confident in our future. This is an exciting time for our company. We are in the best shape we have been in for some time in terms of the visibility and robustness of the go-forward plan and the growth prospects for the company," said Derek Evans, president and chief executive officer of Pengrowth. "Our conventional business is firing on all cylinders, completion of the first phase of our Lindbergh thermal commercial project is just around the corner and our cash flow is well protected by our extensive hedge positions. These factors are expected to provide Pengrowth with the platform needed to achieve long-term sustainable growth in production and cash flow starting in 2015, where we anticipate a significant increase in funds flow per share."
Average third quarter daily production of 72,472 barrels of oil equivalent per day, operating costs of $15.36 per boe and funds flow of 24 cents per share were supported by the company's industry-leading costs and results in the Cardium in the greater Olds/Garrington area. Pengrowth continues to be one of the most active and efficient developers of the Cardium.
After 32 months of operation, performance from the Lindbergh pilot remains robust. Production in the quarter from the two well pairs averaged 1,626 barrels per day of bitumen at an average instantaneous steam oil ratio of 2.4. These top-quartile results reinforce the company's confidence in the Lindbergh project and foreshadow a successful commercial project.
Subsequent to quarter-end, commissioning and start-up activities commenced at the Lindbergh commercial facilities, with first steam anticipated in early December. First production from the initial 12,500-barrel-per-day commercial project is expected in January, 2015, meeting Pengrowth's original project timeline.
Pengrowth's extensive oil and natural gas hedging program continues to provide cash flow certainty notwithstanding the volatile commodity markets. The hedging program is designed to provide stability to cash flows, ensuring Pengrowth's ability to support the payment of dividends and the financing of capital program commitments. Pengrowth's hedging program should benefit shareholders over the coming months, particularly if the current price environment persists through 2015.
Irrespective of its extensive hedging program, Pengrowth will take a measured approach to allocating 2015 capital, ensuring that all capital plans generate high rates of return and dependable cash flow, while maintaining its financial flexibility and strength in a lower commodity price environment.
Highlights:
- Pengrowth maintained a monthly dividend of four cents per share.
- The company commenced commissioning and start-up activities at the 12,500-barrel-per-day first-commercial-phase facilities at Lindbergh.
- The company recorded strong and consistent results from the Lindbergh pilot, with
combined production from the two well pairs averaging 1,626 barrels per day during
the quarter. The average ISOR for the pilot was 2.4 in the quarter,
representing one of the best ISORs in the industry.
- The company achieved average daily production for the quarter of 72,472 boe per day,
primarily driven by strong oil production from wells targeting the
Cardium formation in the greater Olds/Garrington area.
- Pengrowth delivered funds flow from operations for the quarter of $129-million
(24 cents per share).
- The company's significant hedging positions in the fourth quarter of 2014 through to the
end of 2016 offer protection against lower commodity prices and will
help insure cash flow certainty. The positions include the following:
- 77 per cent, or 23,000 barrels per day, of fourth quarter 2014 oil is hedged at
$94.51 per barrel.
- 59 per cent, or 119 million cubic feet per day, of fourth quarter 2014 natural gas is
hedged at $3.81 per thousand cubic feet.
- 63 per cent, or 26,000 barrels per day, of 2015 oil is hedged at $93.99 per
barrel.
- 47 per cent, or 84 million cubic feet per day, of 2015 natural gas is hedged at $3.85
per thousand cubic feet.
SUMMARY OF FINANCIAL AND OPERATING RESULTS
(in millions of dollars, except per-boe and
per-share amounts, and where noted)
Three months ended Nine months ended
Sept. 30, Sept. 30,
2014 2013 2014 2013
Production
Average daily production (boe/d) 72,472 83,275 73,789 86,938
Financial
Funds flow from operations $ 129.0 $ 161.5 $ 389.9 $ 455.0
Funds flow from operations
per share $ 0.24 $ 0.31 $ 0.74 $ 0.88
Oil and gas sales $ 369.1 $ 439.6 $1,205.4 $1,249.7
Oil and gas sales per boe $ 55.36 $ 57.38 $ 59.84 $ 52.66
Realized commodity risk
management gains (losses) $ (28.6) $ (25.4) $ (117.8) $ (39.3)
Realized commodity risk
management gains (losses)
per boe $ (4.29) $ (3.32) $ (5.85) $ (1.66)
Operating expenses $ 102.4 $ 125.6 $ 320.9 $ 373.3
Operating expenses per boe $ 15.36 $ 16.39 $ 15.93 $ 15.73
Royalty expenses $ 65.5 $ 72.6 $ 217.4 $ 212.3
Royalty expenses per boe $ 9.83 $ 9.47 $ 10.79 $ 8.95
Royalty expenses as a
percentage of sales 17.7% 16.5% 18.0% 17.0%
Operating netback per boe $ 24.91 $ 27.10 $ 26.17 $ 25.41
Cash general and administrative
expenses $ 20.6 $ 20.0 $ 63.1 $ 66.1
Cash G&A expenses per boe $ 3.09 $ 2.61 $ 3.13 $ 2.79
Capital expenditures $ 191.9 $ 176.2 $ 645.2 $ 456.1
Capital expenditures per share $ 0.36 $ 0.34 $ 1.23 $ 0.88
Net cash acquisitions
(dispositions) $ (29.3) $ (623.4) $ (47.7) $ (948.5)
Net cash acquisitions
(dispositions) per share $ (0.06) $ (1.20) $ (0.09) $ (1.84)
Dividends paid $ 63.5 $ 62.2 $ 189.4 $ 185.7
Dividends paid per share $ 0.12 $ 0.12 $ 0.36 $ 0.36
Statement of income (loss)
Adjusted net income (loss) $ 3.4 $ (108.2) $ (24.2) $ (146.5)
Net income (loss) $ 52.2 $ (107.3) $ (72.8) $ (225.8)
Net income (loss) per share $ 0.10 $ (0.21) $ (0.14) $ (0.44)
Cash and cash equivalents $ 42.0 $ 583.0 $ 42.0 $ 583.0
Debt
Senior debt (1) $1,483.7 $1,366.8
Convertible debentures (1) $ 235.3 $ 236.3
Total debt before working
capital $1,719.0 $1,603.1
Total debt including
working capital $1,933.2 $1,235.7
Contribution based on
operating netbacks
Light oil 58% 67% 56% 67%
Heavy oil 19% 19% 17% 14%
Natural gas liquids 10% 10% 11% 11%
Natural gas 13% 4% 16% 8%
Note:
(1) Debt includes the current and long-term portions.
Production
Third quarter of 2014 average daily production was 72,472 boe per day, in line with expectations, and represented a decrease of 2 per cent compared with average daily production of 73,823 boe per day in the second quarter of 2014. The decline in production quarter over quarter was expected, and was mainly due to the absence of a Sable Island condensate shipment in the third quarter of 2014, a small property disposition and natural declines. Partly offsetting these declines was the continued strength from the Cardium development program. The strong performance from the Cardium over the past two years has provided Pengrowth with the optionality to rationalize (dispose of) small pieces of its asset portfolio while still achieving guidance targets.
Pengrowth expects to deliver near the top end for full-year production guidance of 71,000 to 73,000 boe per day.
Capital expenditures
Third quarter of 2014 capital expenditures were approximately $192-million, following the strategy of selecting and executing projects that maximize cash flow and provide the highest rates of return while continuing to invest in the first commercial phase of the Lindbergh thermal project. Approximately 90 per cent of capital expenditures were invested in drilling, completions and facilities, with the remaining 10 per cent spent on maintenance, land, seismic capital and other capital.
Pengrowth invested approximately 58 per cent, or $111-million, of third quarter 2014 capital toward the construction of the first commercial phase of Lindbergh. Construction at Lindbergh during the third quarter was delayed due to wet weather, leading to additional costs of approximately 1 to 2 per cent as a result of the extended construction period. Costs associated with quality control issues at a third party fabrication shop are still outstanding, but are not expected to be material to the final project capital costs.
Approximately $62-million of capital spending in the quarter was spent on development activities in Pengrowth's non-thermal business, resulting in the drilling of 23 gross (15 net) wells, with 100-per-cent success.
Full-year 2014 capital expenditures are expected to remain on track with previous guidance of between $740-million and $770-million.
Lindbergh
Lindbergh, Pengrowth's 100-per-cent-owned-and-operated thermal project, is located in the Cold Lake area of eastern Alberta. The project offers Pengrowth the potential to develop annual bitumen production of up to 50,000 barrels per day over the next five years, starting with the initial 12,500-barrel-per-day commercial project coming on stream in 2015. Lindbergh's expected strong netbacks, low decline rates, long reserve life and low sustaining capital requirements are expected to be the foundation of Pengrowth's sustainable total return model, supporting future growth in cash flow per share and an attractive dividend.
Lindbergh's robust economics make it a strong viable project even in a low commodity price environment. Pengrowth estimates that Lindbergh can still generate a 10-per-cent rate of return at a West Texas Intermediate oil price of approximately $50 (U.S.) per barrel.
During the quarter, mechanical, electrical, building and overall field construction continued on the first 12,500-barrel-per-day commercial-phase central processing facilities. Well pad and surface pipeline construction are continuing, and are anticipated to be complete in the fourth quarter of 2014.
Operations at the Lindbergh pilot project, which has now been producing for over 32 months, continued to show strong results during the third quarter of 2014. Cumulative production from the two well pairs was approximately 1.46 million barrels of bitumen by Sept. 30, 2014, with a cumulative steam oil ratio of 2.1.
Non-thermal oil and gas
Pengrowth's significant non-thermal oil and gas portfolio includes a large contiguous land base in the greater Olds/Garrington area encompassing over 500 gross (250 net) sections of land, with stacked opportunities in the Cardium and Mannville sands, as well as in the Mississippian carbonate section. The company's existing extensive gathering and processing infrastructure provides an efficient platform for continued development in this area. Pengrowth also controls large oil accumulations in the Swan Hills area of Northern Alberta, providing additional continuing development projects with low decline production and strong cash flow.
During the third quarter of 2014, development continued in the greater Olds/Garrington area with an additional 10 gross (5.2 net) wells drilled in the Cardium, and an additional five gross (1.8 net) wells drilled in the Elkton, Ellerslie and Glauconite formations, all with 100-per-cent success.
Pengrowth's third quarter drilling program also included two gross (two net) injectors and one gross (one net) producer in the Lloydminster formation at Bodo, as well as two gross (two net) Montney wells at Groundbirch. The Groundbirch wells are expected to be completed and on stream before year-end. In addition, Pengrowth drilled two gross (two net) injectors and one gross (one net) producer at Judy Creek supporting incremental production and reserves in the miscible flood.
Operating expenses
Third quarter of 2014 operating expenses were approximately $102-million, or $15.36 per boe, a decrease of $12-million, or 11 per cent, compared with the second quarter of 2014. The absence of turnaround costs incurred in the second quarter of 2014 was the main driver behind the lower costs in the current quarter. On a per-boe basis, third quarter of 2014 operating expenses decreased $1.69 per boe as a result.
Full-year 2014 operating expenses are expected to remain within guidance of between $15.20 and $15.80 per boe.
Funds flow from operations
Third quarter of 2014 funds flow from operations of $129-million (24 cents per share) increased 6 per cent compared with the second quarter of 2014. The increase resulted from lower realized commodity risk management losses, lower royalties and operating expenses, partly offset by a decrease in commodity prices in the third quarter of 2014.
Adjusted net income and loss
Pengrowth posted adjusted net income of approximately $3-million in the third quarter of 2014, representing an improvement of approximately $28-million compared with the second quarter of 2014. The increase was primarily due to a gain on disposed properties in the current quarter, coupled with the absence of losses on the disposition of properties recognized in the second quarter.
General and administrative expenses
Third quarter of 2014 cash general and administrative expenses of approximately $21-million ($3.09 per boe) increased 6 per cent compared with the second quarter of 2014, mainly due to higher professional fees and severance costs. On a per-boe basis, third quarter of 2014 cash G&A expenses increased 20 cents per boe compared with the second quarter of 2014 due to the increase in costs.
Full-year 2014 cash G&A expenses are on track to meet guidance of between $3.15 and $3.25 per boe.
Financial flexibility
Pengrowth remained on sound financial footing with approximately $42-million of cash on hand at the end of the quarter and an undrawn $1-billion committed credit facility. The cash on hand will continue to be used in conjunction with internally generated cash flow to provide the capital for the remaining planned 2014 development program. Pengrowth expects to maintain a balanced cash flow profile in 2014, where cash outflows, including capital spending, will equal cash inflows plus cash on hand.
Pengrowth's risk management program is intended to mitigate commodity price risk, foreign exchange risk and power cost fluctuations, and provide a measure of stability and predictability to cash flows. Pengrowth has 77 per cent of expected fourth quarter 2014 oil production hedged at $94.51 per barrel and 63 per cent of 2015 expected oil production hedged at $93.99 per barrel. Natural gas hedges account for 59 per cent of expected fourth quarter 2014 gas production at $3.81 per thousand cubic feet and 47 per cent of 2015 expected production hedged at $3.85 per thousand cubic feet. Pengrowth also hedges portions of its power consumption in order to mitigate volatility in operating expenses. Additional details of Pengrowth's risk management contracts are outlined in the management's discussion and analysis and accompanying notes to the Sept. 30, 2014, unaudited financial statements.
Outlook
Pengrowth remains on track with its long-term strategy, a strategy it has been executing on for the past three years. The commercial development of the Lindbergh thermal project is proceeding on schedule, with commissioning having commenced in October and first steam expected in early December. First commercial production from Lindbergh is expected in early 2015. The conventional development program continues to deliver strong operational results, especially in the Cardium, where results continue to meet expectations. Pengrowth's hedging program helps provide cash flow certainty to ensure support of the company's dividend and capital program commitments going forward.
Looking forward into 2015, the start of production from the Lindbergh commercial project is expected to provide significant cash flow growth and ultimately position Pengrowth as a sustainable low-decline dividend-paying energy producer. Irrespective of its extensive hedging program, Pengrowth will take a measured approach to allocating 2015 capital, ensuring that all capital plans generate high rates of return and dependable cash flow, while maintaining its financial flexibility and strength in these lower commodity price environments.
Pengrowth looks forward to updating shareholders on additional operating milestones and 2015 guidance at an investor day presentation to be held in January of 2015.
Pengrowth's unaudited financial statements for the three and nine months ended Sept. 30, 2014, and the related management's discussion and analysis, can be viewed on Pengrowth's website. They have also been filed on SEDAR and on EDGAR.
Conference call
Pengrowth will conduct a conference call and webcast with investors on Thursday, Oct. 30, 2014, at 3:30 p.m. (Mountain Time)/5:30 p.m. (Eastern Time). Participants should call 1-866-223-7781 10 minutes before the start of the call or they can listen on-line through the webcast.
A replay of the call will be made available until midnight (Eastern Time) on Nov. 7, 2014, by calling 1-800-408-3053. The passcode is 8236566.
We seek Safe Harbor.
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