Mr. Derek Evans reports

PENGROWTH COMPLETES TRANSFORMATION INTO THERMAL OIL AND MONTNEY GAS FOCUSED COMPANY

Pengrowth Energy Corp. has released its third quarter 2017 financial and operating results and the completion of its strategic objective of focusing its asset base to its two growth assets. Pengrowth's long-term development plan is centred on operational excellence on a concentrated asset portfolio with long-life reserves, reduced cost structures, reduced long-term liabilities and reduced infrastructure costs. The company and its teams have worked relentlessly this year to execute its asset disposition program, transforming to a leaner, stronger company with significant upside exposure to a recovering crude oil price. Underpinning the new Pengrowth is a focused portfolio consisting of two key long-term growth assets at Lindbergh and Groundbirch, with significant future development opportunities.

The substantial completion of the company's disposition programs and the recent agreement with the company's lenders and noteholders along with the quality of the company's SAGD thermal oil and Montney assets has positioned the company to source less restrictive debt capital. With success in obtaining less restrictive debt, and a sustained improvement in commodity prices to over $55 (U.S.) per barrel West Texas Intermediate (WTI), the company expects to be in a better position to access financing to move forward with the sanctioning of phase two of Lindbergh.

The phase two expansion of Lindbergh, which is projected to increase production capacity to approximately 40,000 barrels (bbl) per day, has received all necessary regulatory approvals and could be on stream within 24 months of sanctioning. The Lindbergh phase two expansion has been significantly derisked by the success of phase one and based on current assumptions, could deliver full cycle internal rate of returns of approximately 20 per cent at a WTI crude oil price of $55 (U.S.) per barrel and a 75-U.S.-cent Canadian dollar exchange rate. In addition to Lindbergh, Pengrowth's thermal portfolio includes inventory north of Lindbergh at Muriel Lake as well as the Selina project in which Pengrowth holds a 50-per-cent working interest. Following the development of Lindbergh phase two, Selina is expected to produce approximately 12,500 (6,250 net) bbl per day when fully developed. Pengrowth's Groundbirch Montney asset is expected to offset and underpin the gas supply requirements of current and future expansion plans on the company's thermal portfolio.

With the full development Pengrowth expects its total thermal oil production to exceed 50,000 bbl per day, supplemented by natural gas production potential at Groundbirch that could reach 60 million cubic feet per day. These key assets are expected to form the foundation of Pengrowth's growth strategy over the next several years and are expected to position the company to deliver years of production and cash flow growth for the company and its stakeholders.

Derek Evans, president and chief executive officer of Pengrowth, commented: "The company and our teams have worked relentlessly this year to execute on our asset disposition program and to enable us to focus on our key growth assets. The work that we have done has transformed Pengrowth into a leaner, focused company that is poised to deliver on its long-term development strategy, upon a sustained recovery in crude oil prices, resulting in significant growth in production and associated cash flow over the next five years."

2017 year-to-date highlights:

Closed or announced nearly $1.0-billion of asset sales, which are summarized in the table.

Gross proceeds               ($ million)                Closing date  

Lindbergh GORR                     $250                 Jan. 6, 2017
Bernadet Lands                      $92               April 11, 2017
Swan Hills (Judy Creek)            $185                 July 6, 2017
Olds/Garrington                    $300                Aug. 11, 2017
Alberta W4M                          $-                Oct. 23, 2017
Swan Hills                         $150                 Nov. 3, 2017
Quirk Creek                        $6.5                     Q4, 2017
                               --------
Total gross proceeds               $984                            

Reduced total debt by $731-million during the first nine months of 2017 through the repayment of the $400-million (U.S.) term notes originally due July 26, 2017, and the repayment of $126.6-million of convertible debentures at maturity.

Subsequent to Sept. 30, 2017, total debt was further reduced with the repayment of all outstanding $265-million (U.S.) term notes and $15-million term notes, both originally due on Aug. 21, 2018. Pengrowth also prepaid an additional $78-million of principal on its remaining outstanding term notes.

Pengrowth's current term debt, as at Nov. 9, 2017, is approximately $545-million, with the first amount of term debt, approximately $60-million due in October of 2019. A total $68-million of bank debt was drawn on the credit facility, which matures in March of 2019.

Finalized covenant amendments with noteholders and bank lenders for a period up to and including the period ending Sept. 30, 2019. The covenant relaxation is expected to provide Pengrowth with financial flexibility and opportunity to restructure its remaining debt and develop a financing strategy for the ongoing development of its Lindbergh and Groundbirch assets as commodity prices improve.

Q3, 2017 highlights:

• Achieved average daily production of 35,072 barrels of oil equivalent (boe) per day during the quarter and 45,727 boe per day year-to-date;

• Cash flow used in operations of $300,000 primarily due to significant onetime restructuring costs associated with asset sales;

• Continued achievement of reduced cost structures year-over-year with operating as well as cash general and administrative expenses down $21.7-million and $3.6-million, respectively, from the third quarter of 2016. Also achieved significant reductions in interest expense of approximately $11.4-million compared the third quarter of 2016 resulting from debt repayments completed thus far in 2017.

Operations

Third quarter average daily production was 35,072 boe per day, compared with average daily production of 55,137 boe per day in the third quarter of 2016. The decrease in production year-over-year is attributed to the absence of volumes related to sold properties, natural declines, as well as lower volumes due to planned maintenance activities on existing properties.

Production at the company's Lindbergh thermal project averaged 12,086 bbl per day at an average steam oil ratio of 2.9 times during the third quarter. The company conducted its first major turnaround of the central processing facility which resulted in significant production downtime in the quarter. Production levels have stabilized after the turnaround at approximately 14,500 bbl per day at an average steam oil ratio of 2.6.

During the third quarter, Pengrowth redirected $25-million of maintenance and enhancement capital earmarked for assets that had been sold, to its Lindbergh and Groundbirch assets.

At Lindbergh, $7-million of additional capital allowed for the drilling and completion of three additional well pairs that will be drilled in the fourth quarter of 2017 and are expected to commence production in 2018. These three new well pairs, in addition to the original seven well pairs and two infills are expected to result in average annual production from Lindbergh of approximately 17,000 bbl per day in 2018. In total, $26.9-million (including maintenance capital) of capital was invested at Lindbergh during the third quarter which resulted in the drilling of nine wells (four producer and five injector wells), in addition to related facility, infrastructure and engineering work. Pengrowth anticipates having 70 per cent of the engineering and design work relating to the second expansion phase completed by the end of year.

At Groundbirch, $18-million of planned capital initiated a drilling program which includes the drilling of four wells, with the drilling of the first well in the program commencing in the third quarter. These new wells are expected to be completed and tied in during the first quarter of 2018, growing natural gas sales to approximately 30 million cubic feet per day per day from the current production of nine million cubic feet per day per day. A total $4.5-million of the $18-million of capital allocated to the Groundbirch drilling and infrastructure program was spent in the third quarter of 2017.

The capital work undertaken at Lindbergh and Groundbirch is being completed within the original $125-million capital budget that the company had allocated at the start of 2017.

Financial results

Funds flow used in operations amounted to $300,000 compared with funds flow of $122.7-million (22 cents per share) for the same period in 2016. The decrease in funds flow year-over-year was primarily due to the decrease in production resulting from asset sales carried out in 2017 and lower realized commodity risk management gains, as a result of Pengrowth having substantially higher volumes hedged at materially higher prices in the same period in 2016 compared with 2017. In addition, the company recorded a restructuring cost of $9.2-million related to staff reductions in association with the asset divestitures carried out in 2017. Offsetting these were lower operating expenses, lower general and administrative, and lower interest and financing charges.

A net loss of $144.7-million was recorded in the third quarter of 2017 compared with a net loss of $52.9-million in the same period last year primarily due to an impairment charge of $127.1-million (approximately $93.0-million after-tax) in the quarter resulting from the sale of the non-core Alberta assets, additional impairments of other non-core legacy assets coupled with lower funds flow from operations. These were partly offset by lower unrealized commodity risk management losses recorded in the third quarter and lower DD&A expenses.

Financial resources and liquidity

Subsequent to the end of the quarter, Pengrowth finalized the terms of amending agreements with its lenders under its syndicated bank facility and the holders of its remaining term notes. Under the terms of the agreement, the existing financial covenants have been amended effective for the quarter ending Sept. 30, 2017, through to and including the quarter ending Sept. 30, 2019. The amendment includes the elimination of the senior debt to adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) and debt to book capitalization ratio covenants during the waiver period and a reduction of the adjusted EBITDA to adjusted interest expense ratio covenant during the waiver period. Additional details regarding the amendments are set out in the company's news release dated Oct. 12, 2017.

As part of the amendment agreement, the company's credit facility was reduced from $1.0-billion to $400-million with a further reduction to $330-million following the closing of the Swan Hills asset sale. The facility was undrawn at the end of the third quarter but was subsequently drawn by $175-million to facilitate the repayment of the company's 2018 term notes and the $78-million prepayment of the company's remaining term notes. Following the closing of the sale of the remaining Swan Hills assets, a portion of the proceeds were used to reduce the borrowings on the facility to approximately $68-million as of Nov. 9, 2017, and a prepayment offer was extended to noteholders which is expected to reduce the amount of term notes outstanding by an additional $37-million.

The full details of the amending agreements, including copies of the note purchase agreements and amending agreements, are available on SEDAR at SEDAR and on EDGAR.

To provide additional financial flexibility beyond Sept. 30, 2019, Pengrowth may consider replacing its existing term debt with less restrictive longer-term debt.

Dispositions

In the third quarter, Pengrowth completed the sale of the Olds/Garrington assets for total gross proceeds of $300-million. Subsequent to the end of the quarter, the company closed the sale of its remaining Swan Hills assets for gross proceeds of $150-million and the vast majority of its non-core Alberta assets for nominal consideration. Year-to-date, the success of Pengrowth's asset disposition program has generated approximately $1.0-billion of gross proceeds to the company, and has allowed the company to repay approximately $1.1-billion of term notes and convertible debentures thus far in 2017.

2017 guidance and 2018 outlook

Following the closing of the announced Quirk Creek sale, the company anticipates that its annual 2017 production guidance to be in a range of 39,500 to 41,500 boe per day, with fourth quarter average production of 24,500 boe per day. The company anticipates that December, 2017, production rates will be approximately 20,000 boe per day, after completion of all announced divestments.

A summary of the company's previous and updated 2017 guidance is seen in the table.

                                          Previous full-year  Current full-year    
                                               2017 guidance      2017 guidance

Average daily production (boe per day)      41,500 to 43,500   39,500 to 41,500
Total capital expenditures ($ million)                   125                125
Funds flow from operations (1) ($ million)                90                 65
Royalties (2) (% of sales)                               9.0                9.0
Operating costs (3) ($ per boe)               13.00 to 13.50     13.00 to 13.50
Cash general and administrative (3) 
($ per boe)                                     3.50 to 4.00       3.50 to 4.00

(1) Based on WTI price of $50 (U.S.) per barrel, AECO natural gas price of 
$2.25 per thousand cubic feet and an exchange rate of $1 (Canadian) to 77 U.S. 
cents.  

(2) Royalties are before impacts of commodity risk management activities. 

(3) Per-barrel-of-oil-equivalent estimates based on high and low ends of 
production guidance.                                                    
 

In addition to updating its 2017 guidance, Pengrowth is also providing an outlook for its preliminary production and capital expenditure estimates for 2018. The company anticipates a 2018 capital program of between $50-million and $60-million which is expected to support an annual production rate of 22,500 to 24,500 boe per day representing a production growth rate of approximately 18 per cent (based on midpoint of guidance) from anticipated December, 2017, production of 20,000 boe per day. Pengrowth anticipates providing full 2018 guidance and its 2018 capital budget in January of 2018.

Analyst call

Pengrowth will host an analyst call and listen-only audio webcast beginning at 6:30 a.m. Mountain Standard Time (MST) on Friday, Nov. 10, 2017, during which management will review Pengrowth's third 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:  844-358-9179 or international 478-219-0186

Live listen-only audio webcast:  on-line

Pengrowth's unaudited financial statements for the three and nine months ended Sept. 30, 2017, and related management's discussion and analysis can be viewed on Pengrowth's website. They have also been filed on SEDAR and EDGAR.

About Pengrowth Energy Corp.

Pengrowth Energy is a Canadian intermediate energy company focused on the sustainable development and production of oil and natural gas in Western Canada from its Lindbergh thermal oil property and its Groundbirch Montney gas property. The company is headquartered in Calgary and has been operating in the Western Canadian sedimentary basin for over 28 years.

We seek Safe Harbor.