Mr. Derek Evans reports
PENGROWTH ANNOUNCES STRONG FIRST QUARTER FUNDS FLOW, DECLARATION OF COMMERCIALITY AND RECORD PRODUCTION AT ITS LINDBERGH THERMAL PROJECT
Pengrowth Energy Corp. has released its financial and operating results for the three months ended March 31, 2015.
Derek Evans, president and chief executive officer of Pengrowth, said: "We had an exceptional first quarter with Lindbergh production ramping up as per expectations to over 10,000 barrels per day at present, and robust first quarter funds flow that was essentially flat to the fourth quarter of 2014, despite commodity prices declining by an average of 30 per cent. Our significant commodity hedge book continues to provide us with cash flow certainty, not only in the first quarter, but also as we move forward through 2015 and into 2016. In the quarter, we continued to strengthen and stabilize our balance sheet through the realization of foreign exchange hedging gains, the renewal and extension of our revolving credit facility to 2019, and the pending sale of $24-million of non-core assets. We are working diligently to execute and deliver on our 2015 goals."
Financial and operating highlights:
- Lindbergh production continued to ramp up, averaging approximately 10,500
barrels per day for the five-day period ending May 6, 2015. This
includes production volumes from the former two-well pair pilot project
of approximately 1,500 barrels per day;
- Generated strong first quarter funds flow from operations of $113-million (21 cents per share), down only 2 per cent from the fourth quarter
of 2014, despite commodity prices declining by an average of 30 per cent;
- First quarter operating netback of $25.37 per barrel of oil equivalent
increased 6 per cent compared with $24.04 per barrel of oil equivalent in the fourth
quarter of 2014;
- Achieved first quarter average production of 69,334 barrels of oil equivalent per day. This
excludes Lindbergh commercial production as commerciality had not been
declared until April 1, 2015;
- Realized commodity risk management gains of $85.7-million during the
quarter. As at March 31, 2015, the value of Pengrowth's unrealized
foreign exchange, power and commodity price hedges was $357.5-million;
- Monetized $84.1-million of foreign currency hedges related to debt
principal due in 2017 and beyond, and applied the proceeds to reducing
total indebtedness and reset $400-million (U.S.) of foreign exchange hedges;
- Completed the renewal and extension of Pengrowth's unsecured, revolving
$1-billion credit facility to 2019.
"Despite the uncertainty and volatility in commodity prices, we delivered a strong quarter highlighted by robust funds flow. We are poised to execute and deliver solid results for the remainder of 2015 through our commodity hedging program, which continues to provide us with cash flow certainty and stability, coupled with the ongoing ramp-up at our Lindbergh project," said Mr. Evans.
SUMMARY OF FINANCIAL AND OPERATING RESULTS
(in millions of dollars except per-boe and per-share amounts)
Three months ended
March 31, Dec. 31, March 31,
2015 2014 2014
Production
Average daily
production (boe/d) 69,334 71,802 75,102
Financial
Funds flow from
operations (1)(2) $ 113.0 $ 115.8 $ 139.5
Funds flow from
operations per share
(1)(2) $ 0.21 $ 0.22 $ 0.27
Oil and gas sales $ 199.9 $ 291.5 $ 429.2
Oil and gas sales
per boe $ 32.03 $ 44.13 $ 63.50
Realized commodity risk
management gains
(losses) $ 85.7 $ 21.7 $ (42.3)
Realized commodity risk
management gains
(losses) per boe $ 13.74 $ 3.29 $ (6.26)
Operating expenses $ 92.9 $ 94.5 $ 104.0
Operating expenses
per boe $ 14.89 $ 14.31 $ 15.39
Royalty expenses $ 24.8 $ 51.2 $ 73.7
Royalty expenses per boe $ 3.97 $ 7.75 $ 10.90
Royalty expenses as a
per cent of sales 12.4% 17.6% 17.2%
Operating netback per
boe (1) $ 25.37 $ 24.04 $ 29.71
Cash G&A expenses (1) $ 24.9 $ 21.2 $ 23.1
Cash G&A expenses per
boe (1) $ 3.99 $ 3.21 $ 3.42
Capital expenditures $ 98.4 $ 258.8 $ 233.7
Capital expenditures
per share $ 0.18 $ 0.49 $ 0.45
Net cash acquisitions
(dispositions) $ (0.5) $ (19.8) $ 2.6
Net cash acquisitions
(dispositions) per
share $ -- $ (0.04) $ --
Dividends paid $ 53.4 $ 63.8 $ 62.7
Dividends paid per
share $ 0.10 $ 0.12 $ 0.12
Statement of income (loss)
Adjusted net income
(loss) (1)(3) $ 64.8 $ (854.8) $ (2.8)
Net income (loss) $ (160.5) $ (506.0) $ (116.2)
Net income (loss) per
share $ (0.30) $ (0.95) $ (0.22)
Contribution based on operating netbacks (1)
Light oil 57% 50% 49%
Heavy oil 14% 17% 15%
Natural gas liquids 3% 11% 11%
Natural gas 26% 22% 25%
Notes:
(1) See disclosures at end of release for definitions of
additional GAAP, non-GAAP measures and operational measures.
(2) Funds flow from operations excludes $84.1-million related to
the monetization of a portion of Pengrowth's foreign exchange swap
contracts.
(3) Percentage changes in excess of 500 are excluded.
(4) Debt includes the current and long-term portions.
Full-year 2015 average production
Pengrowth is updating its 2015 full-year guidance to account for the timing of Lindbergh commerciality, the shut-in of certain production and expected disposition volumes. The original full-year guidance reflected commerciality at the initial phase of Lindbergh as of Jan. 1, 2015. With commercial declaration being made on April 1, 2015, certain guidance items are being revised.
Production volumes from the Lindbergh commercial project are excluded from the first quarter results, as commerciality was not declared until April 1, 2015. In the second quarter and beyond, all Lindbergh production, and related revenue and expenses from the project, will be included in the company's financial and operating results, which up to April 1, 2015, had been capitalized. In addition to, and given the current weakness in oil and natural gas prices, Pengrowth has shut in approximately 950 barrels of oil equivalent per day of production from certain fields that have been deemed uneconomic in the current commodity price environment. Subsequent to quarter-end, Pengrowth signed purchase and sale agreements for minor non-core gas property dispositions producing approximately 1,000 barrels of oil equivalent per day. The shut-in and disposition volumes are not expected to have a material impact on 2015 funds flow from operations, but will contribute to a reduction in Pengrowth's full-year 2015 production forecast.
Given these events, and with Lindbergh commercial production excluded from the first quarter results, Pengrowth now expects full-year average daily production to be within a range of 70,000 to 72,000 barrels of oil equivalent per day, down from the previous guidance of 73,000 to 75,000 barrels of oil equivalent per day.
REVISED 2015 FULL-YEAR GUIDANCE
Average 2015 operating Capital
volume expenses expenditures
(boe/day) ($MM) ($/boe) ($MM)
Midpoint of original
full-year 2015 guidance 74,000 432 16.00 200
Impact of Lindbergh initial
steam circulation and
commercial declaration
timing on April 1 (800) (13) 10 (i)
Restated original full-year
2015 guidance 73,200 419 15.69 210
Disposition of non-core
properties (1,000)
Shut-in of uneconomic
production (950)
Miscellaneous (third party
restrictions) (250)
Incremental Lindbergh phase
II engineering and pipeline
specification changes 20
Midpoint of revised full-year
2015 guidance 71,000 415 16.00 230
(i) Capitalized expenses, net of revenue.
A full summary of Pengrowth's 2015 revised forecast guidance is provided in the attached table.
REVISED 2015 GUIDANCE SUMMARY
Current guidance Original guidance
(May 7, 2015) (Jan. 21, 2015)
Average daily production
volume (boe/day) 70,000 to 72,000 73,000 to 75,000
Total capital expenditures ($MM) 220 to 240 190 to 210
Royalties (1)(% of sales) 11 to 14 12 to 15
Net operating costs ($/boe)(2) 15.50 to 16.50 15.50 to 16.50
Cash G&A expense ($/boe)(2) 3.50 to 3.60 3.20 to 3.30
Notes:
(1) Royalties are before impacts of commodity risk management activities.
(2) Per-boe estimates based on high and low ends of production guidance.
Full-year 2015 capital expenditures are expected to be between $220-million and $240-million to reflect the impact of all expenses, net of revenue from the initial commercial phase of Lindbergh being capitalized during the first three months of 2015, an anticipated further investment on the Husky sales pipeline, and incremental spending on engineering and development for the subsequent development phase of Lindbergh.
Pengrowth is also revising royalty rate guidance down slightly, as the impact of lower commodity pricing on royalties is expected to continue through the remainder of 2015. Full-year operating costs per barrel of oil equivalent are expected to be within original guidance due to lower first quarter operating expenses. Cash general and administrative expenses are expected to be $3.50 to $3.60 per barrel of oil equivalent, reflecting the impact of the revised production guidance.
For full-year 2015, Pengrowth does not expect a material change to funds flow resulting from the revised production guidance. The shut-in and disposition production volumes were low netback volumes, and their absence from corporate figures is expected to result in cost savings and higher overall netbacks. Despite the revised production guidance, Pengrowth expects funds flow from operations to exceed its 2015 capital program and dividends. Anticipated excess funds flow from operations is expected to be applied to debt repayment in 2015.
Production
First quarter 2015 average daily production of 69,334 barrels of oil equivalent per day decreased 3 per cent compared with fourth quarter 2014 average daily production of 71,802 barrels of oil equivalent per day. The decrease is mainly due to reduced capital activity in the first quarter of 2015 and shut-in of uneconomic production volumes, partly offset by the continued strength in production performance from the two Groundbirch wells completed in the fourth quarter of 2014. These two wells continue to produce at over 5.5 million cubic feet per day each.
Adding back the Lindbergh precommerciality volumes and shut-in uneconomic production volumes, Pengrowth's first quarter production would have been approximately 71,400 barrels of oil equivalent per day, and represents only a nominal variance from fourth quarter 2014 average daily production of 71,802 barrels of oil equivalent per day.
Funds flow from operations
The company continues to benefit from its extensive commodity hedging program, which is providing a measure of certainty and stability to cash flows in the current low commodity price environment. Funds flow from operations of $113-million (21 cents per share) in the first quarter of 2015 represented a decrease of 2 per cent compared with the fourth quarter 2014 funds flow of $115.8-million (22 cents per share). Funds flow remained relatively robust, supported by higher netbacks and realized commodity risk management gains of $85.7-million, but excluding realized gains from Pengrowth's foreign currency hedges. Despite substantially lower oil and gas prices in the quarter, and including commodity hedging gains, Pengrowth's operating netback of $25.37 per barrel of oil equivalent increased 6 per cent compared with the fourth quarter 2014 netback of $24.04 per barrel of oil equivalent.
Capital expenditures
Pengrowth has taken a conservative stance for its development plans in 2015 and has constrained its capital budget. The company had originally budgeted $200-million of capital in 2015, of which nearly 50 per cent was spent in the first quarter. This is expected to increase to $220-million to $240-million for the full year. The company completed residual drilling from 2014 and curtailed its conventional winter drilling program early in January. Pengrowth has elected to defer any future capital expenditures on development activities on its conventional assets until a sustained recovery in commodity prices, coupled with reduced costs structures, is evident. With the strong initial production results from the first commercial phase of Lindbergh, Pengrowth is increasing Lindbergh capital by $20-million for increased costs and project specification changes associated with the Husky sales line, and incremental capital to finalize engineering design work on the next development phase of Lindbergh.
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 ultimately develop annual bitumen production of 40,000 to 50,000 barrels per day, starting with the initial 12,500-barrel-per-day commercial phase coming on stream in 2015. Lindbergh's robust economics make it a strong, viable project even in the current low commodity price environment, with positive netbacks at prices as low as $30 (U.S.) on the West Texas Intermediate.
In the first quarter, $49.2-million of capital was spent at Lindbergh, which included $9.2-million of expenses net of revenue relating to precommercial operations at the initial phase of Lindbergh. The remaining $40-million was invested on the sales pipeline connection to Husky, completion of initial phase construction activities and central processing facility optimization.
Progress continues on the Lindbergh commercial project, where steaming operations have been continuing since mid-December, 2014. Installation of the downhole electric submersible pumps in each of the 20 producing wells commenced on March 9, 2015, with 14 pumps installed to date. It is anticipated that the pump installation process will continue through May, allowing for all of the 20 well pairs to be converted to full SAGD (steam-assisted gravity drainage) at that time. Production rates from the first commercial phase of Lindbergh continue to increase as wells transition from steam circulation to full SAGD. Average production rates at Lindbergh for the five-day period ending May 6, 2015, were approximately 10,500 barrels per day, including 1,500 barrels per day from the former pilot facility. As pumps are installed, Pengrowth anticipates a continued ramp-up of production from the project through the rest of 2015, with rates expected to reach 16,000 barrels per day by the end of the year.
Pengrowth will start including commercial volumes from Lindbergh as part of its reported financial and operational results as of April 1, 2015. Included in these volumes will be the pilot volumes, as the pilot facility became part of the main commercial project in early April and will no longer be reported separately.
Conventional oil and gas
Pengrowth's significant conventional 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 opportunities in the Cardium, Viking and Mannville sands as well as in the Mississippian carbonate section. The existing, extensive gathering and processing infrastructure provides an efficient platform for continued development in this area. Pengrowth also controls large light oil accumulations in the Swan Hills area of Northern Alberta with low production decline rates and strong cash flow.
Development capital of $37.8-million was spent in the first quarter on the drilling of seven (4.6 net) wells in the greater Olds/Garrington area, targeting the Cardium, Elkton and Ellerslie formations. Two (two net) wells were drilled in Jenner targeting the Glauconite formation and one (0.25 net) well drilled in Sawn Lake targeting the Slave Point formation. Also during the first quarter, nine (7.1 net) wells were completed and brought on production. Initial production rates indicate that all wells are meeting or exceeding expectations.
Operating expenses
First quarter 2015 operating expenses of $92.9-million ($14.89 per barrel of oil equivalent) decreased $1.6-million, or 2 per cent, compared with fourth quarter 2014 operating expenses of $94.5-million ($14.31 per barrel of oil equivalent). The decrease in aggregate operating costs resulted primarily from the decrease in activity during the first quarter of 2015 and the shut-in of uneconomic production. First quarter 2015 unit operating expenses increased 58 cents per barrel of oil equivalent as a result of lower production volumes.
General and administrative expenses
First quarter 2015 cash G&A expenses of $24.9-million ($3.99 per barrel of oil equivalent) were $3.7-million, or 17 per cent, higher compared with fourth quarter 2014 cash G&A expenses of $21.2-million ($3.21 per barrel of oil equivalent). The increase in cash G&A expense was due to higher personnel and IT costs in addition to the annual cash-settled phantom deferred share units granted to the directors of the company.
Adjusted net income/loss
Pengrowth reported an adjusted net income of $64.8-million in the first quarter of 2015 compared with an adjusted net loss of $854.8-million in the fourth quarter of 2014. This was primarily due to the absence of non-cash impairment charges recorded in the fourth quarter of 2014, combined with the realized foreign exchange gain from monetizing a series of U.S. dollar swap contracts in the first quarter of 2015.
Financial flexibility
Pengrowth continues to benefit from its extensive commodity risk management program, generating strong funds flow in spite of the current low commodity price environment. Pengrowth realized $85.7-million in commodity risk management gains through the first three months of 2015. The unrealized market value of the remaining commodity hedges in place at March 31, 2015, was $354.3-million.
For the remainder of 2015, Pengrowth has approximately 26,000 barrels per day of expected crude oil production hedged at $93.87 per barrel, and approximately 20,000 barrels per day of 2016 expected crude oil production hedged at $89.95 per barrel. For natural gas, Pengrowth has approximately 102 million cubic feet per day of 2015 expected natural gas production hedged at $3.72 per thousand cubic feet, and approximately 86 million cubic feet per day of 2016 expected natural gas production hedged at $3.44 per thousand cubic feet.
Details of Pengrowth's commodity risk management contracts in place as at May 7, 2015, are summarized in the attached table.
SUMMARY OF COMMODITY RISK MANAGEMENT CONTRACTS
Volume Average price
Crude oil (bbl/day)
Remainder of 2015 26,000 $ 93.87/bbl
2016 19,858 $ 89.95/bbl
Natural gas (mmcf per day)
Remainder of 2015 102.0 $ 3.72/mcf
2016 85.9 $ 3.44/mcf
2017 64.5 $ 3.60/mcf
2018 59.2 $ 3.62/mcf
The company remains committed to ensuring its financial health and flexibility during these volatile times, and will focus on reducing its indebtedness in 2015. During the quarter, Pengrowth monetized the majority of its foreign exchange hedges on its long-term debt and realized approximately $84.1-million of hedging gains. The proceeds from the liquidation were used to repay outstanding debt under its credit facilities. Pengrowth immediately re-entered into a series of new foreign exchange hedges to replace the liquidated hedges. The monetization of currency hedges reduced Pengrowth's debt position, but had no impact on funds flow from operations, as the hedges were foreign exchange hedges on Pengrowth's U.S.-denominated long-term notes. Following the $84.1-million repayment, Pengrowth had approximately $236-million drawn on its $1-billion credit facility and $1.7-billion of term notes, resulting in approximately $2-billion in total debt outstanding. Reported total debt increased by approximately $107-million in the first quarter compared with the fourth quarter, as a result of the increase in the Canadian dollar value of the U.S. senior unsecured notes due to the weakening of the Canadian dollar, partly offset by a larger working capital surplus.
Also during the first quarter, the company completed the renewal and extension of its unsecured, revolving $1-billion credit facility, as well as the financial covenants associated with the facility. The credit facility which was scheduled to mature on July 26, 2017, now has a maturity date of March 30, 2019. All other terms and conditions associated with the facility remain the same, with the exception that the financial covenants announced on Jan. 24, 2014, that were scheduled to expire on Dec. 31, 2015, have now been extended for the life of the facility. Under the terms of the amended covenants, senior debt to EBITDA (12-month trailing) must be at or below 3.5:1, and total debt to EBITDA (12-month trailing) must be at or below 4:1.
Pengrowth continues to focus on opportunities to further reduce its indebtedness, including selling additional non-core minor assets. Currently, the company has signed purchase and sale agreements for minor property dispositions of approximately $24-million. The property dispositions are not expected to materially affect production or cash flows, but are expected to result in operating and administrative cost savings, and have been factored into the company's new production forecast. The minor dispositions are expected to close in the second quarter. Proceeds from the dispositions will be directed to further reduce indebtedness.
Conclusion and outlook
The first quarter was characterized by strong funds flow, continued progress on the first commercial phase of Lindbergh, and a commitment and action to strengthen and stabilize the company's balance sheet. These are the hallmarks of Pengrowth's strategic objectives for 2015. For the remainder of the year, production ramp-up at the first commercial phase of Lindbergh is expected to continue as the downhole electric submersible pumps are installed. Pengrowth anticipates production rates from the project to reach 16,000 barrels per day by the end of the year. Coupled with the company's strong hedge positions, which are providing cash flow stability and certainty, Pengrowth remains well positioned to execute and deliver on its strategic objectives through 2015.
Conference call
Pengrowth will host a conference call for investors at 6:30 a.m. Mountain Time on Friday, May 8, 2015. To participate, callers may dial in via telephone or participate on-line in listen-only mode via the audio webcast. To ensure timely participation in the teleconference, callers are encouraged to dial in 10 minutes prior to commencement of the call to register.
Dial-in numbers
Toll-free: 800-355-4959
Toronto local: 416-340-2216
Annual meeting
Pengrowth's 2015 annual meeting of shareholders will be held on June 23, 2015, at 3 p.m. MT at the Metropolitan Conference Centre, located at 333 Fourth Ave. SW, Calgary, Alta. Information circulars and proxy forms pertaining to this meeting are expected to be mailed in late May to shareholders of record as of May 14, 2015.
Additional and non-GAAP (generally accepted accounting principles) measures
In addition to providing measures prepared in accordance with international financial reporting standards (IFRS), Pengrowth presents additional and non-GAAP measures, adjusted net income/loss, operating netbacks, adjusted payout ratio and funds flow from operations. These measures do not have any standardized meaning prescribed by GAAP and therefore are unlikely to be comparable with similar measures presented by other companies.
These measures are provided, in part, to assist readers in determining Pengrowth's ability to generate cash from operations. Pengrowth believes these measures are useful in assessing operating performance and liquidity of Pengrowth's continuing business on an overall basis.
These measures should be considered in addition to, and not as a substitute for, net income/loss, cash provided by operations, and other measures of financial performance and liquidity reported in accordance with IFRS. Further information with respect to these additional and non-GAAP measures can be found in Pengrowth's most recent management's discussion and analysis.
We seek Safe Harbor.
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