Mr. Derek Evans reports

PENGROWTH ANNOUNCES INTERIM 2017 CAPITAL BUDGET WITH OPTIMIZATION AND DEVELOPMENT CAPITAL ALLOCATED TO ITS LINDBERGH THERMAL PROJECT

Pengrowth Energy Corp.'s board of directors has approved an interim 2017 capital expenditure budget of $125-million. The interim nature of the budget reflects the current divestiture processes that are being pursued and the lack of visibility with respect to the capital programs associated with assets that may be sold. Upon the conclusion of these divestiture processes, and with the anticipated reduction in debt levels, Pengrowth will update investors on its future growth plans.

The interim 2017 capital budget is expected to support annual average daily production of between 50,000 and 52,000 barrels of oil equivalent per day before any potential dispositions. The majority of the interim 2017 capital budget will be spent at the Lindbergh thermal project, with a focus on the optimization of the first commercial phase, as well as the continued engineering and design of the second commercial phase.

Derek Evans, president and chief executive officer, said: "We are excited to put further capital dollars to work at Lindbergh in order to optimize phase 1. The optimization activities are projected to generate high pad-specific IRRs ranging from approximately 30 to 50 per cent at a West Texas (WTI) crude oil price of $45 (U.S.) per barrel and approximately 55 to 90 per cent at a WTI price of $55 (U.S.) per barrel. The continued phase 2 design and engineering work will enhance our ability to quickly sanction the project upon conclusion of the contemplated asset sales and consequent reduction of indebtedness."

Capital plan for 2017

The interim 2017 capital budget of $125-million represents a conservative spending level given the asset sales process and the company's focus on improving its financial flexibility ahead of its scheduled debt maturities in 2017. The 2017 capital budget was based on the assumption of an average WTI crude oil price of $55 (U.S.) per bbl, an AECO natural gas price of $3.25 (Canadian) per thousand cubic feet and a 74-U.S.-cent-per-$1-(Canadian) exchange rate.

The company is allocating approximately $80-million toward development and maintenance activities at its Lindbergh thermal project. Lindbergh is one of the most economic, ultralong-life thermal projects with sizable low-cost, low-risk organic growth opportunities. In 2015, Pengrowth executed the start-up of the first commercial phase of Lindbergh, which has generated much stronger production than the 12,500-barrel-per-day (design steam oil ratio (SOR) of 3.6) nameplate design capacity of the project. Average production from the first commercial phase of Lindbergh for the five days ended Dec. 31, 2016, was 15,654 bbl per day at an average SOR of 2.48. In May of 2016, the company received regulatory approval for the next expansion phase of Lindbergh, which is expected to increase nameplate capacity to approximately 30,000 bbl per day once completed.

Approximately $60-million of the Lindbergh capital has been allocated to the optimization of phase 1 production, which is expected to increase production from the first phase to approximately 18,000 bbl per day by the end of 2017. The optimization program includes the first new drilling since commercial production started in April of 2015. In 2017, Pengrowth plans on drilling seven new well pairs and two infill wells, and expand the associated infrastructure. These optimization activities on three well pads are anticipated to generate strong pad-specific internal rate of returns ranging from approximately 30 to 50 per cent at a WTI price of $45 (U.S.) per bbl and approximately 55 to 90 per cent at a WTI price of $55 (U.S.) per bbl.

Ten million dollars of the capital allocated to Lindbergh are targeted toward engineering and design for the phase 2 expansion. By the end of the year, Pengrowth expects the design work to be approximately 70 per cent complete and to be ready to execute on phase 2 as funds become available.

The remaining $10-million of capital allocated to Lindbergh is targeted toward maintenance activities on phase 1, including a planned plant turnaround in the third quarter of the year.

The interim 2017 capital program also includes approximately $42-million allocated toward safety, asset integrity and maintenance programs on Pengrowth's conventional assets. This capital will be directed toward maintenance of infrastructure and integrity initiatives to support continuing operations across Pengrowth's conventional asset portfolio. The 2017 program currently has no development capital allocated for drilling in the conventional side of the business.

Production volumes

The makeup of 2017 expected production volumes of 50,000 to 52,000 barrels of oil equivalent per day, using the midpoint of guidance, is set out herein.

Production volume summary for 2017:

Light oil:  10,300 barrels per day

Thermal oil:  15,400 bbl per day

Natural gas liquids:  6,100 bbl per day

Total liquids:  31,800 bbl per day

Natural gas:  115 million cubic feet per day

Total production*:  51,000 barrels of oil equivalent per day

* Assumes midpoint of production guidance.

Capital allocation

The makeup of 2017 expected capital expenditures by area is set out herein.

Capital allocation for 2017:

Lindbergh development and maintenance:  $80-million

Conventional maintenance and integrity:  $42-million

Corporate (land, seismic, and capitalized general and administrative):  $3-million

Total capital:  $125-million

Operating expenses

Pengrowth's continued focus on cost-saving initiatives is expected to translate into an additional $23-million (9 per cent) reduction in gross operating expenses in 2017 compared with 2016. This is in addition to approximately $97-million in savings that were realized in 2016 compared with 2015. Estimated operating expenses for 2017 include two planned turnarounds in the third quarter, one at Quirk Creek and one at Lindbergh. In addition, the company will continue with expenditures on safety, integrity and maintenance on its conventional assets. On a unit basis, operating expenses are expected to remain essentially unchanged from 2016 levels to a range of $13.25 per boe to $13.75 per boe due to the previously mentioned expected savings offset by lower anticipated production volumes in 2017 compared with 2016. Pengrowth will continue with its emphasis on cost minimization and will seek out opportunities to further reduce its operating costs.

Cash general and administrative expenses

Cash general and administrative expenses are expected to remain essentially unchanged, on a gross-dollar basis, compared with 2016 expenses. Cost-management efforts in 2016 translated into approximately $18-million savings in cash G&A compared with 2015. Despite maintaining the gross dollar savings through 2017, on a unit basis, 2017 cash G&A costs are expected to be in the range of $3.50 per boe and $4 per boe, which is approximately a 25-per-cent increase from 2016 per-unit costs reflecting the lower production volumes expected in 2017.

Financial flexibility and liquidity

Pengrowth has been working on enhancing its financial flexibility ahead of its scheduled debt maturities in 2017. The company has approximately $530-million of cash on hand today following the sale of a 4-per-cent non-convertible gross overriding royalty on Lindbergh, which closed on Jan. 6, 2017. The interim 2017 capital budget is expected to be more than fully financed from operating funds flow, based on current price assumptions generating 2017 funds flow of approximately $195-million at a WTI crude oil price of $55 (U.S.) per bbl.

Risk-management update

The company has historically utilized an active risk-management program to reduce commodity price volatility and reduce downside cash flow risk. Pengrowth's risk-management activities over the past two years generated approximately $700-million in risk-management gains as a result of the falling commodity price environment. Given the recent strengthening in commodity prices, Pengrowth has moderated its commodity risk-management program for 2017. Currently, the company has approximately 15,000 bbl per day of expected 2017 crude oil production (58 per cent of estimated oil production) hedged at an average Canadian-dollar-equivalent price of $66.04 per bbl. The company has a small amount of natural gas production hedged, with 4.7 million cubic feet per day of expected 2017 natural gas hedged (4 per cent of estimated gas production) at an average price of $3.46 per thousand cubic feet.

Forecast guidance summary for 2017

The following is a summary of Pengrowth's full-year 2017 guidance and does not reflect any anticipated acquisition or divestment activity. Certain guidance estimates may fluctuate with changes in commodity prices.

Average daily production:  50,000 to 52,000 boe per day

Total capital expenditures:  $125-million

Funds flow from operations (1):  $195-million

Royalties (2):  9.0 per cent of sales

Operating costs (3):  $13.25 to $13.75 per boe

Cash general and administrative (3):  $3.50 to $4 per boe

(1) Based on a WTI crude oil price of $55 (U.S.) per bbl, an AECO natural gas price of $3.25 (Canadian) per thousand cubic feet and a 74-U.S.-cent-per-$1-(Canadian) exchange rate.

(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.

Outlook

Pengrowth has managed the prolonged downturn in commodity prices, protecting its cash flows and financial flexibility through conservative capital spending, cost reduction efforts and its commodity risk-management program. The company continues to focus on enhancing its financial flexibility ahead of the debt maturities in 2017 with its continuing asset sales activity and having adopted a conservative interim capital budget for the year. Pengrowth continues to be in discussions with the lenders of its syndicated bank facility and with the holders of its senior term notes. The company remains confident that it will reach an agreement with its bank lenders and noteholders, in an effort to seek covenant amendments to provide Pengrowth with additional financial flexibility as it works to reduce its overall debt position.

Based on the current price assumptions in its 2017 capital budget, the company expects to generate 2017 funds flow of approximately $195-million and free funds flow of approximately $70-million. Pengrowth continues to manage its financial situation and monitor commodity prices to assess market conditions. Should an agreement with its lenders be reached and/or a more favourable commodity price environment develop, then the company may adjust spending levels and deploy additional capital toward development opportunities on its conventional assets.

We seek Safe Harbor.