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Pengrowth Energy Corp
Symbol PGF
Shares Issued 540,693,645
Close 2015-08-06 C$ 1.94
Market Cap C$ 1,048,945,671
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Pengrowth Energy loses $134.4-million in Q2

2015-08-06 18:27 ET - News Release

Mr. Derek Evans reports

PENGROWTH REPORTS SEVEN PERCENT INCREASE IN CORPORATE PRODUCTION, STABLE FUNDS FLOW IN THE SECOND QUARTER AND ONGOING MEASURES TO PROTECT ITS FINANCIAL HEALTH AND STABILITY

Pengrowth Energy Corp. has provided its financial and operating results for the three and six months ended June 30, 2015. The company continued to deliver on its commitments, increasing its production, providing stable funds flow and moving to enhance the strength of its balance sheet.

Pengrowth achieved solid production growth in the second quarter of 2015, with daily production averaging 74,113 barrels of oil equivalent (boe) per day, a 7-per-cent increase from the first quarter of 2015. Driving this growth was the steady ramp-up of production from its Lindbergh thermal oil project. Since commencing steaming operations in mid-December of 2014, production rates from Lindbergh have increased substantially, exceeding the 12,500-barrel-ber-day nameplate capacity of the facility. In the second quarter, Lindbergh production rates averaged approximately 10,900 bbl per day at an average instantaneous steam oil ratio (ISOR) of 2.5 times. Current production rates for the five-day period ended July 27, 2015, at Lindbergh were approximately 14,600 bbl per day at an ISOR of 2.06 times. The current outlook for Lindbergh remains unchanged with production rates expected to reach 16,000 bbl per day by the end of the year. Based on the second quarter operating netbacks, Lindbergh is expected to remain cash flow positive at prices as low as $30 (U.S.) West Texas Intermediate (WTI) crude oil, at current heavy oil differentials and foreign exchange rates.

Despite the volatility in commodity prices, Pengrowth delivered stable funds flow from operations, with second quarter funds flow of $111.5-million (21 cents per share), essentially unchanged compared with first quarter 2015 funds flow of $113.0-million (21 cents per share), largely as a result of the stability provided through Pengrowth's risk management program. The strength of Pengrowth's risk management program is evidenced by the fact that second quarter funds flow declined 8 per cent compared with the same period in 2014, while oil prices declined 44 per cent and natural gas prices declined 40 per cent.

In light of the continuing weakness in commodity prices, Pengrowth continues to prudently adjust its capital expenditures, undertake asset sales, and focus on the reduction of its cost structures to ensure the company's financial health and sustainability in a low commodity price environment. These steps include:

  • A 10- to 15-per-cent reduction in anticipated 2015 capital spending guidance from $220-million to $240-million down to $190-million to $210-million, with no decrease in expected production in 2015;
  • A reduction in overall corporate indebtedness with targeted non-core asset sales of $600-million;
  • Continued focus on capital cost reductions, resulting in a 20- to 25-per-cent reduction for most types of services;
  • Continuing staffing realignments with a 7-per-cent reduction in head office full-time staff in the last eight months;
  • Commitment to continuing hedging efforts to protect future cash flows and capital programs.

"These are challenging times for the oil and gas industry, and Pengrowth continues to take prudent steps to ensure the financial health and stability of the company in this low commodity price environment," said Derek Evans, president and chief executive officer of Pengrowth. "We have delivered on our Lindbergh thermal project with the production ramp-up progressing as expected and is on target to reach 16,000 bbl per day by year-end. Despite commodity price volatility, we continue to achieve stable funds flow as a result of our significant commodity hedge book, and have added additional protection with hedges added for 2017 and 2018. We are strengthening our balance sheet by reducing our corporate indebtedness through the planned sale of $600-million of non-core assets, a reduction of our 2015 capital program and the ongoing focus on management of all cost structures."

Financial and operating highlights:

  • Lindbergh production continued to ramp up, averaging approximately 10,900 bbl per day at an average ISOR of 2.5 times in the second quarter, with current production rates of approximately 14,600 bbl per day for the five-day period ending July 27, 2015, at an ISOR of 2.06 times;
  • Achieved second quarter average production of 74,113 boe per day, an increase of 7 per cent from first quarter 2015 average production of 69,334 boe per day, despite a significant decrease in capital spending and the impact of asset dispositions;
  • Generated strong second quarter funds flow from operations of $111.5-million versus second quarter 2014 funds flow of $121.4-million despite light oil prices and natural gas prices declining by 44 per cent and 40 per cent, respectively, on a year-over-year basis;
  • Realized commodity risk management gains of $59.1-million during the quarter. As at July 31, 2015, the estimated fair value of Pengrowth's commodity and foreign exchange hedges was $417-million.


             SUMMARY OF FINANCIAL AND OPERATING RESULTS
                       (in millions of dollars)
                                                     Three months ended
                                                    June 30,  June 30,
                                                       2015       2014
Production
Average daily production (boe per day)              74,113     73,823
Financial
Funds flow from operations (1)                   $   111.5  $   121.4
Funds flow from operations per share (1)         $    0.21  $    0.23
Oil and gas sales                                $   249.9  $   407.1
Oil and gas sales per boe                        $   37.05  $   60.60
Realized commodity risk management gains
(losses)                                         $    59.1  $   (46.9)
Realized commodity risk management gains
(losses) per boe                                 $    8.77  $   (6.98)
Operating expenses                               $   106.8  $   114.5
Operating expenses per boe                       $   15.83  $   17.05
Royalty expenses                                 $    26.5  $    78.2
Royalty expenses per boe                         $    3.93  $   11.64
Royalty expenses as a per cent of sales               10.6%      19.2%
Operating netback per boe                        $   23.98  $   23.86
Cash G&A expenses                                $    22.1  $    19.4
Cash G&A expenses per boe                        $    3.28  $    2.89
Capital expenditures                             $    50.8  $   219.6
Capital expenditures per share                   $    0.09  $    0.42
Net cash acquisitions (dispositions)             $   (23.5) $   (21.0)
Net cash acquisitions (dispositions) per share   $   (0.04) $   (0.04)
Dividends paid                                   $    30.8  $    63.2
Dividends paid per share                         $    0.06  $    0.12
Statement of income (loss)
Adjusted net income (loss)                      $   (38.9) $   (24.8) 
Net income (loss) (2)                           $  (134.4) $    (8.8)
Net income (loss) per share (2)                 $   (0.25) $   (0.02)
Contribution based on operating netbacks    
Light oil                                              51%        61%
Heavy oil                                              47%        17%
Natural gas liquids                                     1%        11%
Natural gas                                             1%        11%

             SUMMARY OF FINANCIAL AND OPERATING RESULTS
                       (in millions of dollars)
                                                     Six months ended
                                                    June 30,  June 30,
                                                       2015       2014
Production
Average daily production (boe per day)              71,737     74,459
Financial
Funds flow from operations (1)                   $   224.5  $   260.9
Funds flow from operations per share (1)         $    0.42  $    0.50
Oil and gas sales                                $   449.8  $   836.3
Oil and gas sales per boe                        $   34.64  $   62.05
Realized commodity risk management gains
(losses)                                         $   144.8  $   (89.2)
Realized commodity risk management gains
(losses) per boe                                 $   11.15  $   (6.62)
Operating expenses                               $   199.7  $   218.5
Operating expenses per boe                       $   15.38  $   16.21
Royalty expenses                                 $    51.3  $   151.9
Royalty expenses per boe                         $    3.95  $   11.27
Royalty expenses as a per cent of sales               11.4%      18.2%
Operating netback per boe                        $   24.64  $   26.79
Cash G&A expenses                                $    47.0  $    42.5
Cash G&A expenses per boe                        $    3.62  $    3.15
Capital expenditures                             $   149.2  $   453.3
Capital expenditures per share                   $    0.28  $    0.86
Net cash acquisitions (dispositions)             $   (24.0) $   (18.4)
Net cash acquisitions (dispositions) per share   $   (0.04) $   (0.04)
Dividends paid                                   $    84.2  $   125.9
Dividends paid per share                         $    0.16  $    0.24
Statement of income (loss)
Adjusted net income (loss)                       $    25.9  $   (27.6)
Net income (loss) (2)                            $  (294.9) $  (125.0)
Net income (loss) per share (2)                  $   (0.55) $   (0.24)
Cash and cash equivalents                        $       -  $   133.2
Debt (3)
Senior debt                                      $ 1,865.0  $ 1,421.3
Convertible debentures                           $   137.1  $   235.5
Total debt before working capital                $ 2,002.1  $ 1,656.8
Total debt including working capital             $ 1,966.1  $ 1,851.4
Contribution based on operating netbacks    
Light oil                                              54%        55%
Heavy oil                                              33%        16%
Natural gas liquids                                     2%        11%
Natural gas                                            11%        18%

(1) Funds flow from operations for the three and six months ended June 
    30, 2015, excludes $9.8-million and $93.9-million, respectively, 
    related to the settlement of foreign exchange swap contracts.
(2) Percentage changes in excess of 500 are excluded.
(3) Debt includes the current and long-term portions.

Funds flow from operations

The company continues to generate stable funds flow despite the volatility in commodity prices, benefiting from its extensive commodity hedging program. Funds flow from operations of $111.5-million (21 cents per share) in the second quarter of 2015 remained relatively robust compared with first quarter 2015 funds flow of $113.0-million (21 cents per share). Increased sales volumes, mainly from Lindbergh phase 1 and higher commodity prices, were modestly offset by higher operating, interest and transportation expenses in the quarter.

Despite a 39-per-cent decrease in realized prices year over year, second quarter 2015 funds flow from operations decreased 8 per cent to $111.5-million (21 cents per share) compared with $121.4-million (23 cents per share) in the same period last year. The impact of lower commodity prices was partly offset by realized gains from Pengrowth's commodity risk management program as well as lower royalties. Pengrowth's second quarter 2015 operating netback of $23.98 per boe remained essentially unchanged compared with the second quarter 2014 netback of $23.86 per boe.

Lindbergh production in the quarter provided a strong operating netback of $31.17 per bbl based on an average U.S. WTI crude oil price of $58.00 per bbl and contributed to the stable funds flow in the quarter.

                LINDBERGH HEAVY OIL OPERATING NETBACK 
                                                                 ($ per bbl)

Sales                                                               49.12
Royalties                                                           (1.03)
Operating expenses                                                 (12.66)
Transportation expenses                                             (4.26)
Lindbergh heavy oil operating netback                               31.17


Capital expenditures

In light of the continued weakness in commodity prices and uncertainty associated with future Alberta royalty rates, Pengrowth has reduced its 2015 capital spending by 10 to 15 per cent to a range of $190-million to $210-million for the full year. Pengrowth anticipates that any future capital expenditures will be deferred until there is greater certainty with respect to the future Alberta royalty structure, and a sustained recovery in commodity prices coupled with reduced cost structures, is evident.

Second quarter 2015 capital expenditures were $50.8-million with approximately 56 per cent of expenditures being spent at Lindbergh, and 34 per cent was spent on turnaround, maintenance and enhancement at Pengrowth's conventional properties, with the remainder being spent on minor partner operated development.

Production

Second quarter 2015 average daily production of 74,113 boe per day increased 7 per cent compared with the first quarter of 2015 as Lindbergh phase 1 production more than offset natural declines and planned turnaround activity in both operated and third party facilities.

Lindbergh

Lindbergh is Pengrowth's 100-per-cent-owned and operated thermal project and 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 bbl per day, starting with the initial 12,500 bbl per day nameplate commercial phase brought on stream in 2015. Lindbergh's robust economics make it a strong, viable project even in the current low commodity price environment, with positive operating netbacks at crude oil prices as low as $30 (U.S.) WTI, at current heavy oil differentials and foreign exchange rates.

During the quarter, Pengrowth invested $28.4-million of capital at Lindbergh on the completion of the sales pipeline connection to Husky, installation of 15 downhole pumps, central processing facility optimization and continuing engineering for the planned second phase expansion of Lindbergh to 30,000 bbl per day.

Production operations progressed as planned in the quarter, with all three well pads converted from circulation to SAGD by June 1, 2015. Phase 1 commercial well pairs continue to demonstrate similar production profiles as the two pilot well pairs. In the second quarter, average production rates from the commercial project were approximately 10,900 bbl per day at an ISOR of 2.5 times, with current production rates of approximately 14,600 bbl per day (for the five-day period ending July 27, 2015) with an ISOR of 2.06 times.

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 with low production decline rates and strong cash flow in the Swan Hills area of Northern Alberta, as well as Montney natural gas opportunities with anticipated significant liquid yields in northeast British Columbia.

Conventional development capital spending has been curtailed in 2015 as a result of low commodity prices, with second quarter 2015 capital spending of $20.9-million focused on turnaround, maintenance and enhancement, and minor partner-operated development.

Operating expenses

Second quarter 2015 operating expenses of $106.8-million ($15.83 per boe) increased $13.9-million or 15 per cent compared with first quarter 2015 operating expenses of $92.9-million ($14.89 per boe). The increase in aggregate operating costs was primarily due to inclusion of the Lindbergh phase 1 operating expenses, starting April 1, 2015, as well as second quarter 2015 scheduled turnaround costs. This was partly offset by the absence of expenses related to the shut-in of uneconomic gas volumes and property dispositions in 2015. Operating expenses are expected to remain on track with previous guidance.

General and administrative expenses

Second quarter 2015 cash G&A expenses of $22.1-million ($3.28 per boe) were $2.8-million or 11 per cent lower compared with first quarter 2015 cash G&A expenses of $24.9-million ($3.99 per boe). The decrease in cash G&A expense was due to lower IT and professional costs, and the absence of the annual phantom deferred share units grant to directors incurred in the first quarter of 2015, partly offset by severance costs incurred.

Adjusted net income (loss)

Pengrowth reported an adjusted net loss of $38.9-million in the second quarter of 2015 compared with an adjusted net income of $64.8-million in the first quarter 2015, primarily driven by the absence of the $84.1-million realized foreign exchange gain from monetizing a series of U.S. dollar swap contracts in the first quarter of 2015 and the second quarter of 2015 loss on property dispositions of $27.0-million.

Financial flexibility

Pengrowth continues to benefit from its extensive commodity risk management program, generating strong funds flow in spite of the low commodity price environment. Pengrowth realized $59.1-million in commodity risk management gains in the second quarter. The estimated fair value of the remaining commodity and foreign exchange hedges in place at July 31, 2015, was $417-million.

For the remainder of 2015, Pengrowth has approximately 26,000 bbl per day of crude oil production hedged at $93.68 (Canadian) per bbl and approximately 21,000 bbl per day of 2016 crude oil production hedged at $89.08 (Canadian) per bbl. The company has also been actively layering in additional oil hedges for 2017 and 2018 to provide additional cash flow stability. For natural gas, Pengrowth has approximately 106 million cubic feet per day of 2015 natural gas production hedged at $3.69 (Canadian) per thousand cubic feet and approximately 101 million cubic feet per day of 2016 natural gas production hedged at $3.39 (Canadian) per thousand cubic feet.

Pengrowth's commodity risk management contracts in place as at July 22, 2015, are summarized in the "Summary of commodity risk management contracts" table.

           SUMMARY OF COMMODITY RISK MANAGEMENT CONTRACTS
                                                              Average price
                                                       Volume         ($Cdn)

Crude oil (bbl per day)
July 1 to Dec. 31, 2015                                26,000     $93.68/bbl
2016                                                   21,485     $89.08/bbl
2017                                                    3,500     $79.85/bbl
2018                                                    5,500     $80.49/bbl

Natural gas (MMcf per day)
July 1 to Dec. 31, 2015                                 106.4      $3.69/Mcf
2016                                                    100.7      $3.39/Mcf
2017                                                     76.4      $3.55/Mcf
2018                                                     66.3      $3.59/Mcf


Outlook

Pengrowth achieved solid operational results in the second quarter, highlighted by a 7-per-cent growth in production and stable funds flow. Lindbergh is expected to continue its ramp-up through the remainder of the year with exit production rates expected to reach 16,000 bbl per day by year-end. Despite the volatility that persists in the capital markets, the company's commitment and action to strengthen and stabilize its balance sheet continues. A priority for the company in 2015 is the reduction in overall corporate indebtedness and Pengrowth has targeted the sale of non-core assets of $600-million. Currently, the company has two asset packages on the market and will provide an update on the progress of the sales in the coming months. It is expected that the successful completion of the planned disposition program, coupled with cash flow in excess of dividends and capital expenditures for 2015, will allow Pengrowth to reduce its corporate indebtedness.

Analyst call

Pengrowth will host an analyst call at 5:30 a.m. Mountain Daylight Time on Friday, Aug. 7, 2015. To listen to management's presentation and the question-and-answer session with analysts, callers may dial in via telephone or listen on-line 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: 866-225-0198 or Toronto local: 416-340-2216.

A telephone replay will be available through to midnight Eastern Time on Aug. 14, 2015, by dialling 800-408-3053 and entering passcode No. 9932248.

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