07:24:48 EDT Fri 29 Mar 2024
Enter Symbol
or Name
USA
CA



Pengrowth Energy Corp
Symbol PGF
Shares Issued 533,438,177
Close 2015-01-21 C$ 3.15
Market Cap C$ 1,680,330,258
Recent Sedar Documents

Pengrowth lowers 2015 capital budget to $200-million

2015-01-21 21:02 ET - News Release

Mr. Derek Evans reports

PENGROWTH ANNOUNCES SIGNIFICANT 2014 ACHIEVEMENTS AND PRO-ACTIVE MEASURES TO ENSURE ITS FINANCIAL HEALTH AND SUSTAINABILITY IN A LOW-COMMODITY-PRICE ENVIRONMENT

Pengrowth Energy Corp. has made significant accomplishments in 2014. They include:

  • Production performance exceeding the top end of production guidance of 71,000 to 73,000 barrels of oil equivalent per day even with mature asset sales of 1,400 boe per day;
  • Superior execution costs and production rates on Pengrowth's conventional assets;
  • Completing the construction, commissioning and first steam at Lindbergh, all on time;
  • Adding to low-cost Montney development inventory at Groundbirch with the acquisition of 32.6 gross/net sections of liquids-rich lands at Bernadet for $123-million in the fourth quarter, partially financed by proceeds of $89-million from the 2014 minor disposition program.

In light of the rapid decline in commodity prices, Pengrowth is announcing extensive and pro-active measures for 2015 designed to ensure the company's financial health and sustainability in a low-commodity-price environment. These steps include:

  • A significantly reduced capital program for 2015 of $200-million, representing a 74-per-cent reduction from 2014, with no decrease in expected production compared with 2014;
  • A revised two-phase development plan for Lindbergh that is expected to deliver total production of 40,000 to 50,000 barrels per day, with $800-million less in capital spending, which also incorporates the deferral of Lindbergh phase 2 by one year;
  • A 50-per-cent dividend reduction to two cents per share per month, which aims to balance 2015 cash inflows with capital obligations and dividends;
  • Enhanced focus on management of all aspects of capital, operating, and general and administrative cost structures;
  • Commitment to continuing hedging efforts to protect future cash flows and capital programs; existing hedges are expected to protect more than $300-million of cash flow in 2015 at a $50-(U.S.)-barrel WTI crude oil price.

Derek Evans, president and chief executive officer, said: "On the back of a very successful 2014, we have moved quickly and decisively, taking important steps to ensure the financial health and sustainability of Pengrowth. We believe that these conservative and pro-active steps are prudent and responsible measures that will protect our balance sheet in this volatile commodity price environment. We have an established track record of delivering on exactly what we said we would do, and executing on these measures will help ensure that Pengrowth emerges as a stronger company when commodity prices strengthen."

Capital plan for 2015 and dividend level

With the objective of maintaining production at 2014 levels, Pengrowth's board of directors has approved a $200-million capital budget for 2015, representing a decrease of 74 per cent from its 2014 capital budget of $770-million. The reduced capital budget will focus on optimization and enhancement activities, targeting continuing production, and does not contemplate an active drilling program.

Previous capital spending at Lindbergh has established a low-decline production base going forward, that Pengrowth expects to maintain with a lower level of capital investment through 2016, which, at today's commodity prices, does not take advantage of the significant growth opportunities that the company has at Lindbergh, in the Montney and in the Cardium.

Pengrowth is maintaining spending on its asset integrity and maintenance programs to mitigate risk to its employees and the environment.

The 2015 capital budget was based on the assumption of a WTI crude oil price of $50 (U.S.) per barrel, an AECO natural gas price of $2.75 (Canadian) per thousand cubic feet and an 85-U.S.-cent/$1-(Canadian) exchange rate.

In addition to the reduction in 2015 capital spending, Pengrowth's board has approved an amended dividend policy, reflecting a monthly payment of two cents per share, starting with the March 16, 2015, payment. The previous dividend level was based on higher commodity prices, and, given the current low-commodity-price environment and the uncertainty over how long it will persist, Pengrowth believes that it is prudent to lower the amount of its monthly dividend to ensure that it balances its 2015 cash inflows with capital obligations and dividends in today's commodity price environment.

The 2015 capital budget and revised dividend rate reflect a balance, whereby capital expenditures and dividends are expected to be less than internally generated funds flow from operations, with any and all excess funds flow being directed toward reducing debt. There will be a strong emphasis in 2015 on reducing Pengrowth's indebtedness.

Production volumes

Despite the 74-per-cent reduction in 2015 capital spending, Pengrowth nonetheless expects to increase volumes by up to 1.5 per cent to a range of 73,000 and 75,000 boe per day in 2015, compared with 2014 annual average production of 73,000 boe per day, thanks to the new volumes from the first commercial phase at Lindbergh.

The breakdown of 2015 expected production volumes, using the midpoint of guidance, is set out in the attached production volumes for 2015 table.

                           PRODUCTION VOLUMES FOR 2015 
Production volumes 2015                                             Volume per day

Light oil (bbl per day)                                                     17,500
Heavy oil (including Lindbergh) (bbl per day)                               17,000
NGLs (bbl per day)                                                           8,000
Natural gas (Mcf per day)                                                  188,000
Boe per day equivalent (i)                                                  74,000

(i) Assumes midpoint of average daily production guidance.

Capital allocation

The breakdown of 2015 expected capital expenditures by area is set out in the attached capital allocation table.

                              CAPITAL ALLOCATION
                                                                    Budgeted
Capital allocation by expenditure area                            $ millions

Lindbergh                                                                $75
Conventional                                                             $30
Discretionary unallocated capital                                        $20
Maintenance and asset integrity                                          $65
Corporate (land, seismic and capitalized G&A)                            $10
Total capital                                                           $200

Pengrowth has a significant inventory of high-quality, low-cost, low-decline drilling opportunities that will be exploited in a stronger price and lower-cost environment.

Lindbergh phase 1 update

Construction of the initial 12,500-barrel-per-day commercial phase of Lindbergh was completed on time with steaming operations commencing in December, 2014. Steaming operations have continued as planned following the same timeline established for the pilot well pairs. Operations have commenced on two of the three-well pads, with 15 of 20 well pairs steaming. Significant production is expected to build through February and March, 2015. Steaming operations on the remaining five-well-pair pad has been intentionally staggered by a few weeks to allow for smooth transition of operation through the stages of circulation and are expected to start in the first week of February.

Results from the two-well-pair pilot continue to point to exceptional performance, with December production averaging a combined 1,600 barrels per day and an instantaneous steam oil ratio of 2.8 times. Total cumulative production from the two well pairs exceeded 1.6 million barrels by Dec. 31, 2014, at a cumulative steam oil ratio of 2.1 times.

Lindbergh phase 2

With the rapid and steep decline in world crude oil prices, Pengrowth has elected to defer the long-lead-time Lindbergh phase 2 capital spending by one year. With the strong production performance and low steam oil ratios exhibited at the Lindbergh pilot, Pengrowth has revised the development plan for Lindbergh into two optimized phases. The revised development strategy utilizes the anticipated excess treating capacity being built into the existing facilities, along with the efficiencies associated with expected low SORs, to optimize performance in the future expansion. This is expected to result in an overall capital cost savings of approximately $800-million and ultimately achieve a production target of 40,000 to 50,000 bbl per day once the project is fully developed.

Lindbergh capital in 2015

The 2015 allocation of $75-million of capital to Lindbergh is intended to allow for the finalizing of the engineering design work on phase 2, the building of the sales pipeline connection to Husky and the addition of treating capacity at the existing facilities, which should result in an increased productive capacity of 16,000 bbl per day by the end of this year.

Despite the pullback in oil prices, Lindbergh remains a viable and robust project with positive cash flow, even down to a WTI price of approximately $40 per bbl.

Conventional capital in 2015

The 2015 conventional budget will focus primarily on maintenance and enhancement activities on existing conventional operations. Approximately $65-million will be spent on maintenance infrastructure to support continuing operations across Pengrowth's asset portfolio.

An additional $30-million has been budgeted for drilling and development activities, targeting light oil and liquids production in the Olds/Garrington area, that is being carried out in January of 2015. A further $20-million of discretionary capital has been set aside and could be invested in the second half of 2015 if commodity prices and costs become more favourable. Pengrowth is working closely with all of its vendors to significantly reduce its capital cost structure.

Operating expenses

Pengrowth expects per boe operating expenses to rise from approximately $15.50 per boe in 2014 to approximately $16 per boe in 2015. While operating expenses in the conventional business segment are expected to decline in 2015, overall operating expenses are expected to rise year over year due to the addition of Lindbergh operations. First-year start-up costs at Lindbergh are anticipated to be higher than the corporate average and then decline in subsequent years to approximately $15 per bbl. Pengrowth will undertake further cost reduction initiatives that are expected to result in a cost savings of approximately 75 cents per boe to $1 per boe, which is included in the operating expense estimate for the year.

General and administrative expenses

Cash general and administrative expenses are expected to remain flat on an aggregate basis in 2015. Cost management efforts in 2014 throughout the company resulted in cash G&A costs declining by approximately 3 per cent on a gross dollar basis. On a unit basis, 2015 G&A costs are expected to be unchanged at between $3.20 per boe and $3.30 per boe.

Financial liquidity

Following the repayment of $100-million of convertible debentures that came due on Dec. 31, 2014, Pengrowth's senior unsecured debt totalled approximately $1.73-billion. This included approximately $200-million drawn on its $1-billion credit facility. The senior unsecured revolving credit facility has a maturity date of July 26, 2017. In addition to balanced cash inflows and outflows in 2015, Pengrowth is targeting further reductions to total debt. Pengrowth remains fully compliant with the various financial covenants that it is subject to under its long-term debt and bank facilities.

Commodity risk management

Pengrowth has extensive oil and natural gas hedges in place through 2015 and into 2016 that are expected to provide a significant degree of cash flow certainty notwithstanding the current low-commodity-price environment.

Currently, Pengrowth has approximately 26,000 bbl per day of 2015 crude oil production (75 per cent of 2015 estimated oil production) hedged at $93.96 (Canadian) per bbl and approximately 20,000 bbl per day of 2016 crude oil production (58 per cent of 2015 estimated oil production) hedged at $89.95 (Canadian) per bbl. For natural gas, Pengrowth has approximately 93 million cubic feet per day of 2015 natural gas production (49 per cent of 2015 estimated gas production) hedged at $3.77 (Canadian) per thousand cubic feet and approximately 64 million cubic feet per day of 2016 natural gas production (34 per cent of estimated 2015 gas production) hedged at $3.53 (Canadian) per thousand cubic feet.

Pengrowth continues to mitigate commodity price risk and provide a measure of stability and predictability to cash flows through the utilization of hedging. Current hedging efforts are targeting 2017 and 2018 at prices that are substantially higher than the current prevailing markets.

Dividends

Since July, 2012, Pengrowth has been paying a monthly dividend of four cents per share (48 cents per share annualized), for a total of approximately $250-million annually (approximately $200-million, net of dividend reinvestment plan proceeds) based on 530 million shares outstanding. Given the current low-commodity-price environment and the uncertainty over how long it will persist, Pengrowth believes that it is prudent to lower the amount of monthly dividends to two cents per share (24 cents per share annualized) to ensure that it balances its cash inflows with capital obligations and dividends in today's commodity price environment. The revised dividend rate will take effect beginning with the dividend payable on March 16, 2015.

Financing the 2015 capital program

Pengrowth's 2015 capital program has been designed with an emphasis on preserving its financial health and sustainability in a low-commodity-price environment, while paying shareholders a monthly dividend of two cents per share. The capital budget was based on the assumption of a WTI oil price of $50 (U.S.) per barrel, a 12-per-cent discount for light oil, a 29-per-cent discount for heavy oil, an AECO natural gas price of $2.75 (Canadian) per thousand cubic feet and an 85-U.S.-cent/$1-(Canadian) exchange rate. Pengrowth expects to fully finance its 2015 capital program and dividends through internally generated funds flow from operations.

Forecast guidance summary for 2015

The attached forecast guidance summary for 2015 table provides a summary of Pengrowth's 2015 guidance and does not reflect any anticipated acquisition or divestment activity. Certain guidance estimates may fluctuate with changes in commodity prices.

                      FORECAST GUIDANCE SUMMARY FOR 2015

Average daily production volume (boe per day)               73,000 to 75,000
Total capital expenditures ($ millions)                         $190 to $210
Royalties (1) (% of sales)                                          12 to 15
Net operating costs ($ per boe) (2)                           15.50 to 16.50
Cash G&A expense ($ per boe) (2)                                3.20 to 3.30

(1) Royalties are before impacts of commodity risk management activities     
(2) Per barrel of oil equivalent estimates based on high and low ends of 
production guidance

In light of the rapid and significant decrease in world oil prices in late 2014 and with continued volatility in energy commodity markets anticipated in 2015, Pengrowth is discontinuing and no longer updating previously published long-term forward guidance through to year-end 2018. This guidance was previously included in various investor presentations throughout 2013 and 2014. The assumptions and expectations in the previous long-term guidance were based on expected higher commodity prices and higher capital spending by Pengrowth. As a result of the current commodity price environment, these estimates are no longer valid, and Pengrowth is now only providing guidance for 2015, as set out herein.

Summary

Pengrowth's management team has moved quickly and decisively to take steps to ensure that the financial health and sustainability of Pengrowth remain intact. Pengrowth's management prides itself on delivering on its stated objectives and believes the steps taken are the appropriate course of action to allow Pengrowth to weather the current storm. Delivering on these measures will help ensure that Pengrowth emerges as a stronger company when commodity prices strengthen.

Investor day

As previously announced, an investor day presentation, discussing spending plans and projected results from operations for 2015, will be held on Jan. 22, 2015, at 9 a.m. MT. A live, listen-only webcast of the event will be available for those unable to attend in person.

An archive of the webcast and accompanying presentation will be available following the conclusion of the live event on Pengrowth's website.

We seek Safe Harbor.

© 2024 Canjex Publishing Ltd. All rights reserved.