Mr. Derek Evans reports

PENGROWTH DELIVERS STRONG SECOND QUARTER OPERATIONAL PERFORMANCE AND CONTINUED DEBT AND COST REDUCTIONS

Pengrowth Energy Corp.'s continued focus on all cost structures was clearly demonstrated with the second quarter results, where operating costs are now expected to come in approximately $65-million below guidance, year-to-date general and administrative (G&A) costs dropped by approximately $9.0-million year over year, and transportation costs were also reduced. The impact of cost-reduction efforts is evident in the successful reduction of approximately $225-million of outstanding debt since the end of 2015, and having $54.1-million of cash on hand at the end of the quarter. With the expected benefits from Pengrowth's risk management program, the company expects to have approximately $150-million to $200-million of cash on hand by the end of the year, which could be used to partially retire debt maturing in 2017.

The company delivered second quarter 2016 average daily production of 56,735 barrels of oil equivalent per day, which was essentially unchanged from the first quarter after accounting for the impact of divested properties and scheduled turnaround activity, demonstrating the continuing focus on production optimization and the low decline nature of Pengrowth's asset base.

Pengrowth continues to see strong evidence of improving capital efficiencies on both the conventional and thermal sides of its business. Montney productivity continues to improve with associated declining capital costs. The thermal business continues to indicate strong capital cost reductions, with phase 2 cost estimates for Lindbergh down by an estimated 20 per cent on a year-over-year basis.

"In the last 18 months, our relentless focus on both our cost structures and asset performance has delivered significant and sustainable improvements," said Derek Evans, president and chief executive officer of Pengrowth. "We are pleased with the excellent results in terms of decreased cost structures and production optimization of our assets, as well as the resulting positive impact that this work has had on our debt reduction efforts."

Financial and operating highlights:

• Year to date, Pengrowth has successfully reduced its outstanding debt by approximately $225-million and year-over-year outstanding debt has been reduced by approximately $371-million. The company had $54.1-million of cash on hand at the end of the quarter, which is expected to increase to approximately $150-million to $200-million by the end of the year;
• Realized improvements in operating expenses resulting in the lowering of full-year operating expense guidance by approximately $65-million, with full-year per-unit guidance now at $13.50 to $14.25 per barrel of oil equivalent;
• Achieved significant reductions in G&A and transportation expenses;
• Received Environmental Protection and Enhancement Act (EPEA) approval for the expansion of Lindbergh thermal production to 30,000 barrels per day. This approval allows Pengrowth to produce above the current nameplate capacity, as well as providing the opportunity for additional incremental optimization capital to take production to approximately 18,000 barrels per day;
• Increased Lindbergh production by 2 per cent in the second quarter, averaging 15,532 barrels per day at an average steam oil ratio (SOR) of 2.35, compared with average daily production of 15,256 barrels per day in the first quarter;
• Generated second quarter funds flow from operations of $89.1-million (16 cents per share), compared with $106.2-million (20 cents per share) in the first quarter 2016;
• Realized gains of $77.1-million during the quarter and $204.1-million in the first six months of the year from the commodity risk management program. The company continues to benefit from a risk management portfolio, including foreign exchange hedges, with an estimated fair value of $220-million as at July 29, 2016.

Year to date, Pengrowth's focus on cost management and debt reduction has resulted in the company successfully reducing its outstanding debt by approximately $225-million to $1.63-billion, from $1.86-billion at Dec. 31, 2015, through a combination of cash repayments and the impact of favourable foreign exchange movements in respect of U.S.-dollar-denominated term debt. The company also had $54.1-million of cash on hand at the end of the quarter and maintains a $1.0-billion committed, revolving credit facility, which was undrawn at the end of the quarter.

Cost-reduction efforts across the organization remain a priority, and these efforts have translated into significant savings in both operating and G&A expenses. Year to date, operating expenses to June 30, 2016, of $136.8-million were approximately $63-million lower compared with the same period in 2015, while cash G&A expenses of $37.8-million were approximately $9.0-million lower compared with the same period in 2015. Operating expenses declined $3.4-million in the second quarter to $66.7-million, compared with $70.1-million in the first quarter of 2016. This continued improvement in operating expenses has resulted in year-to-date per-unit operating cost of $12.65 per barrel of oil equivalent, which is trending well below previous corporate guidance of $15.25 to $16.25 per barrel of oil equivalent. As a result of the lower operating expenses realized thus far in 2016, Pengrowth is revising its full-year operating expense estimate down by approximately $65-million, resulting in a new per-barrel-of-oil-equivalent guidance range of $13.50 to $14.25 per barrel of oil equivalent. This represents a decline of approximately 12 per cent using the midpoint of production guidance.

Over the quarter, Pengrowth continued to benefit from the stabilization in operating funds flow provided by the company's risk management strategy, as commodity prices remained at challenging levels. In total, realized hedging gains in the quarter were $77.1-million ($14.93 per barrel of oil equivalent) and, on a year-to-date basis, the company has realized hedging gains in excess of $200-million ($18.88 per barrel of oil equivalent). For the remainder of the year, Pengrowth has hedged approximately 82 per cent of oil production at a price of $83.44 (Canadian) per barrel and approximately 96 per cent of natural gas production at an average price of $3.26 (Canadian) per thousand cubic feet (with percentages based on midpoint of production guidance).

During the quarter, Pengrowth's Lindbergh thermal oil project continued its strong performance with production remaining well above the project's nameplate capacity of 12,500 barrels per day. Second quarter average daily production of 15,532 barrels per day at an average SOR of 2.35 increased by approximately 2 per cent from the first quarter of 2016. Thus far in 2016, production results from Lindbergh have tracked closely to expectations and the project remains on track to achieve annual average production of 15,700 barrels per day for 2016. Also in the quarter, the company announced that it had received the anticipated EPEA approval for the 17,500-barrel-per-day second commercial phase of Lindbergh. With this approval, Pengrowth has the necessary regulatory approvals to produce up to 30,000 barrels per day at Lindbergh. In addition to the expansion to 30,000 barrels per day, this approval allows Pengrowth to continue to produce above the current 12,500-barrel-per-day nameplate capacity, as well as providing the opportunity for additional incremental optimization capital to take phase 1 production up to 18,000 barrels per day.

Overall corporate production in the quarter was 56,735 barrels of oil equivalent per day, which was a decline of approximately 9 per cent, compared with the first quarter 2016 average production of 62,056 barrels of oil equivalent per day. Second quarter production levels incorporated the full impacts of:

• Property dispositions that were completed at the end of the first quarter;
• Planned turnaround activities;
• Integrity-related maintenance activities.

Pengrowth continues to estimate its full-year 2016 annual average production to be within a range of 56,000 to 58,000 barrels of oil equivalent per day.

                   SUMMARY OF FINANCIAL & OPERATING RESULTS 
(in millions of dollars, except per-share amounts and barrels of oil equivalent)

                                Three months ended           Six months ended     
                                           June 30,                   June 30,
                                 2016         2015          2016         2015
Production
Average daily
production (boe/d)             56,735       74,113        59,396        71,737
Financial
Funds flow from
operations                   $   89.1     $  111.5      $  195.3      $  224.5
Funds flow from
operations per share         $   0.16     $   0.21      $   0.36      $   0.42
Oil and gas sales            $  137.2     $  249.9      $  251.4      $  449.8
Oil and gas sales per
barrel of oil equivalent     $  26.57     $  37.05      $  23.26      $  34.64
Realized commodity
risk management gains
(losses)                     $   77.1     $   59.1      $  204.1      $  144.8
Realized commodity
risk management gains
(losses) per barrel
of oil equivalent            $  14.93     $   8.77      $  18.88      $  11.15
Operating expenses           $   66.7     $  106.8      $  136.8      $  199.7
Operating expenses per
barrel of oil equivalent     $  12.92     $  15.83      $  12.65      $  15.38
Royalty expenses             $    7.8     $   26.5      $   15.9      $   51.3
Royalty expenses per
barrel of oil equivalent     $   1.51     $   3.93      $   1.47      $   3.95
Royalty expenses as a
percentage of sales               5.7%        10.6%          6.3%         11.4%
Operating netback per
barrel of oil equivalent     $  25.46     $  23.98      $  26.44      $  24.64
Cash G&A expenses            $   19.0     $   22.1      $   37.8      $   47.0
Cash G&A expenses 
per barrel of oil
equivalent                   $   3.68     $   3.28      $   3.50      $   3.62
Capital expenditures         $   12.0     $   50.8      $   20.7      $  149.2
Cash dispositions            $   34.6     $   23.5      $   47.4      $   24.0
Dividends paid               $      -     $   30.8      $      -      $   84.2
Dividends paid per
share                        $      -     $   0.06      $      -      $   0.16
Statement of income
(loss)
Adjusted net income
(loss)                       $  (16.4)    $  (38.9)     $  (16.0)     $   25.9
Net income (loss)            $ (173.4)    $ (134.4)     $ (148.4)     $ (294.9)
Net income (loss) per
share                        $  (0.32)    $  (0.25)     $  (0.27)     $  (0.55)
Debt
Senior debt                                             $1,504.4      $1,865.0
Convertible debentures                                  $  126.7      $  137.1
Total debt before
working capital                                         $1,631.1      $2,002.1
Contribution based on                                                       
operating netbacks                                                         
Light oil                          69%          51%           73%           54%
Heavy oil                          62%          47%           46%           33%
Natural gas liquids               (1)%           1%            -%            2%
Natural gas                      (30)%           1%         (19)%           11%       

Funds flow from operations

In the second quarter, Pengrowth generated funds flow from operations of $89.1-million (16 cents per share), compared with first quarter 2016 funds flow of $106.2-million (20 cents per share). The 16-per-cent decrease in funds flow quarter over quarter was the result of lower realized commodity risk management gains, coupled with lower production volumes in the quarter, partly offset by improved oil prices.

Production

Production in the second quarter averaged 56,735 barrels of oil equivalent per day, which represents a decline of approximately 9 per cent compared with first quarter 2016 average daily production of 62,056 barrels of oil equivalent per day. The decline of approximately 5,300 barrels of oil equivalent per day in production was mainly due to the absence of volumes from divested properties completed at the end of the first quarter (2,300 barrels of oil equivalent per day), combined with the impact of scheduled turnarounds at Olds and Judy Creek (1,400 barrels of oil equivalent per day), other planned integrity related maintenance activities (800 barrels of oil equivalent per day), and the absence of a Sable offshore energy project condensate shipment and natural declines (800 barrels of oil equivalent per day).

Pengrowth continues to forecast 2016 full-year average daily production to be in a range of between 56,000 and 58,000 barrels of oil equivalent per day.

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 production of 40,000 to 50,000 barrels per day, starting with the initial 12,500-barrel-per-day commercial phase, which came on stream in 2015. The EPEA application for the Lindbergh expansion to 30,000 barrels per day was approved on May 30, 2016. In addition to the expansion to 30,000 barrels per day, this approval allows Pengrowth to continue to produce above the current 12,500-barrel-per-day nameplate capacity, as well as providing the opportunity for additional incremental optimization capital to take production up to 18,000 barrels per day.

Production from the first commercial phase at Lindbergh continues to trend well above the nameplate capacity of 12,500 barrels per day, demonstrating top-quartile production rates and SORs for thermal projects. Second quarter production at Lindbergh continued to ramp up, increasing approximately 2 per cent from the first quarter, to an average of 15,532 barrels per day at an average SOR of 2.35. The first commercial phase of the project remains on track to achieve annual average production of 15,700 barrels per day for 2016.

Lindbergh represents a significant vehicle for production growth and the company continues to invest capital to further the development of the second expansion phase of Lindbergh. During the quarter, Pengrowth invested $2.7-million at Lindbergh on facility design and engineering for the second expansion phase, which is expected to ultimately increase total production from Lindbergh to approximately 30,000 barrels per day once the expansion phase is complete.

Capital expenditures

Pengrowth remained focused on capital preservation despite the modest recovery in commodity prices seen in the quarter. The company continued to defer significant development capital, and instead focused capital efforts on maintenance and enhancement activities. Second quarter capital expenditures of $12.0-million increased slightly from first quarter 2016 capital expenditures of $8.7-million as a result of the maintenance activities planned during the quarter. Approximately 79 per cent of the capital spent in the quarter was spent on conventional operations, directed to turnaround, safety, integrity, maintenance and enhancement activities, including the planned turnaround at the Olds facility.

Operating expenses

Operating expenses of $66.7-million ($12.92 per barrel of oil equivalent) in the second quarter decreased by $3.4-million or 5 per cent as compared with first quarter 2016 operating expenses of $70.1-million ($12.41 per barrel of oil equivalent) due to absence of operating expenses related to divested properties, lower utility costs, lower activity and third party service rates. These decreases were partly offset by the second quarter scheduled turnaround costs at the Olds gas facility. On a per-barrel-of-oil-equivalent basis, second quarter of 2016 operating expenses increased 51 cents per barrel of oil equivalent, compared with the first quarter 2016, primarily due to lower production volumes in the quarter.

Pengrowth has achieved significant improvements in its operating expense structure over the year. As a result, Pengrowth is revising its full-year operating expense guidance down by approximately $65-million, to a new per-unit guidance of $13.50 to $14.25 per barrel of oil equivalent.

General and administrative expenses

Cash general and administrative expenses of $19.0-million ($3.68 per barrel of oil equivalent) in the second quarter remained essentially unchanged compared with $18.8-million ($3.33 per barrel of oil equivalent) in the first quarter of 2016. The slight difference in expenses resulted from the mark-to-market impact of the outstanding share-based incentives due to the share price at June 30, 2016, being 39 per cent higher than at March 31, 2016. On a per-barrel-of-oil-equivalent basis, second quarter of 2016 cash G&A expenses increased 35 cents per barrel of oil equivalent, compared with the first quarter of 2016, as a result of lower production volumes in the second quarter.

Full-year 2016 cash G&A expenses are anticipated to be within original guidance of $2.75 to $3.25 per barrel of oil equivalent.

Adjusted net income (loss)

Pengrowth reports adjusted net income (loss) to remove the effect of unrealized gains and losses on its earnings. In the second quarter, Pengrowth reported an adjusted net loss of $16.5-million, compared with adjusted net income of $500,000 in the first quarter of 2016. The reported net loss was primarily due to lower funds flow in the quarter, coupled with a loss on disposed properties, offset by a lower depletion, depreciation and amortization expense.

Financial resources and liquidity

Pengrowth continues with its objective to reduce its outstanding debt where possible. Long-term debt at June 30, 2016, was $1.63-billion, which was slightly lower than $1.68-billion at March 31, 2016. The approximately $52-million decrease in long-term debt from March 31, 2016, was primarily due to the repayment of the balance outstanding under Pengrowth's credit facilities. Year to date, Pengrowth's focus on cost management and debt reduction has resulted in the company successfully reducing its outstanding debt by approximately $225-million, from $1.86-billion at Dec. 31, 2015, through a combination of cash repayments and the impact of favourable foreign exchange movements in respect of U.S.-dollar-denominated term debt. The company also had $54.1-million of cash on hand at the end of the quarter. The majority of Pengrowth's long-term debt and interest payments is denominated in U.S. dollars, and, as such, is subject to fluctuations in the exchange rate between the Canadian and U.S. dollars. Pengrowth holds a series of swap contracts in order to fix the foreign exchange rate on a significant portion of principal for Pengrowth's U.S.-dollar-denominated term debt. The swaps offset a significant portion of foreign exchange gains or losses on U.S.-dollar-denominated debt.

At June 30, 2016, Pengrowth maintained a $1.0-billion committed revolving credit facility, which is covenant based and not subject to review until March 31, 2019. At the end of the quarter, the $1.0-billion credit facility was undrawn. The company has no scheduled debt maturities prior to 2017, and expects to have $150-million to $200-million of cash on the balance sheet at the end of the year, which could be directed to retiring 2017 debt maturities.

Pengrowth was in compliance with all financial covenants under its senior unsecured notes and credit facilities as at June 30, 2016. The company anticipates it will remain in compliance with such covenants for the remainder of 2016; however, if commodity prices remain at or below July 1, 2016, GLJ forecast pricing for WTI crude oil and AECO natural gas, and an exchange rate of 75 U.S. cents per $1 (Canadian), Pengrowth may not remain in compliance with certain financial covenants in its senior unsecured notes and credit facilities during the second half of 2017. If the company is unable to obtain a waiver or relaxation of such covenants and is not able to remain in compliance with them, the senior unsecured notes and credit facilities may become due on demand.

There can be no assurance that Pengrowth would be able to obtain a relaxation or waiver of the covenants in its senior unsecured notes and credit facilities. Pengrowth intends to continue with its previously announced asset disposition efforts, the planned monetization of foreign exchange and commodity hedge contracts, and to apply the proceeds along with cash from operations to reduce its indebtedness.

Commodity risk management

Pengrowth has significant oil and natural gas hedges in place, through the end of 2018, that are expected to provide a substantial degree of cash flow certainty notwithstanding volatile commodity prices. For the remainder of 2016, the company has approximately 23,250 barrels per day of crude oil (82 per cent of 2016 estimated crude oil production) hedged at $83.44 (Canadian) per barrel and approximately 125 million cubic feet per day of natural gas (96 per cent of 2016 estimated natural gas production) hedged at $3.26 (Canadian) per thousand cubic feet. The company also has significant natural gas hedges in place for 2017 and 2018, and continues to target opportunities to add additional crude oil and natural gas hedges for 2017 and 2018, should the commodity price opportunity present itself.

The mark-to-market value of Pengrowth's hedge book, including foreign exchange hedges, was approximately $220-million as at July 29, 2016.

A summary of Pengrowth's commodity risk management contracts in place as at June 30, 2016, is provided in this news release. A complete listing of all risk management contracts in place is available in the management discussion and analysis (MD&A).

                 SUMMARY OF COMMODITY RISK MANAGEMENT CONTRACTS 

                                                     Per cent            Average price
                                                      of 2016  (Canadian $/bbl for oil)
                                        Volume     production  (Canadian $/mcf for gas)
Crude oil (bbl/d)  
Remainder of 2016                       23,250             82                   $83.44
2017                                    15,000             53                   $65.50
2018                                     5,500             19                   $80.49
Natural gas (mmcf/d) 
Remainder of 2016                        124.4             96                    $3.26
2017                                      90.6             70                    $3.47
2018                                      66.3             51                    $3.59
2019                                       2.4              2                    $3.52

Outlook

The company is continuing with its cost and production optimization efforts, which, to date, have allowed it to generate significant cost savings across all segments of its business, which have been applied to debt reduction. Pengrowth remains committed to ensuring its financial flexibility, and, after capital spending, expects to direct all excess cash flow from its hedging program, disposition proceeds and funds flow from operations toward further reductions to its outstanding debt position.

Following the successful results in the second quarter, the company is taking the opportunity to update its 2016 full-year operating expense guidance to account for the results achieved in the first half of the year. Full-year operating expense guidance has been lowered by approximately $65-million, with full-year per-unit guidance now at $13.50 to $14.25 per barrel of oil equivalent.

Analyst call

Pengrowth will host an analyst call and listen-only audio webcast beginning at 6:30 a.m. Mountain Time on Friday, Aug. 5, 2016, during which management will review Pengrowth's second quarter results and respond to questions from the analyst community.

To ensure timely participation in the teleconference, callers are encouraged to dial in 10 minutes prior to the start of the call to register.

Dial-in numbers:  toll-free 866-223-7781 and Toronto local 416-340-2216

A live listen-only audio webcast will be available.

Pengrowth's unaudited financial statements for the three months ended June 30, 2016, and the related MD&A can be viewed on Pengrowth's website. They have also been filed on SEDAR and on EDGAR.

We seek Safe Harbor.