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Perpetual Energy Inc
Symbol PMT
Shares Issued 150,094,806
Close 2015-03-05 C$ 1.08
Market Cap C$ 162,102,390
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Perpetual Energy earns $3.36-million in fiscal 2014

2015-03-06 00:14 ET - News Release

Ms. Susan Riddell Rose reports

PERPETUAL ENERGY INC. RELEASES FOURTH QUARTER AND YEAR-END 2014 FINANCIAL AND OPERATING RESULTS

Perpetual Energy Inc. has released its fourth quarter and year-end 2014 financial and operating results. Perpetual continues to report year-over-year gains in production, revenue and funds flow, reflecting operational and financial success on key diversifying strategies in the Greater Edson area for liquids-rich natural gas and at Mannville for heavy oil. A focus on debt reduction in 2014 was successfully reflected in a 12-per-cent decrease in net debt at the end of 2014, as compared with the end of 2013, achieved with the monetization of future gas over bitumen (GOB) royalty credits, property dispositions and execution of the East Edson joint venture. Financial flexibility was further enhanced with the issuance of senior notes and early redemption of $125-million of convertible debentures in 2014 which extend the term for the majority of Perpetual's debt to 2018 and beyond.

A complete copy of Perpetual's audited consolidated financial statements and related management's discussion and analysis for the year ended Dec. 31, 2014, can be obtained through the corporation's website and SEDAR.

Fourth quarter 2014 highlights

Capital spending and property dispositions

  • Capital expenditures of $26.0-million during the fourth quarter were focused on liquids-rich natural gas development at East and West Edson, start-up of a waterflood pilot project at Mannville, and spending to prepare for the cyclic heat stimulation test planned as phase 1 of the LEAD (low pressure electro-thermally assisted drive) pilot project for bitumen extraction at Panny. At West Edson, two (one net) wells were drilled, while at East Edson, fourth quarter development projects included nine (nine net) new wells drilled and continuing construction costs for the new East Edson gas plant. Drilling operations at East Edson were primarily financed by the joint venture partner under the East Edson JV.
  • In November, 2014, Perpetual closed the disposition of non-core heavy oil properties in eastern Alberta for net proceeds of $21.4-million, which included heavy oil Mannville reserves, undeveloped lands and estimated production of 400 barrels of oil equivalent per day.

Production highlights

  • Fourth quarter average production of 23,685 boe/d increased 21 per cent quarter over quarter (third quarter 2014 -- 19,640 boe/d) and 28 per cent relative to the comparative 2013 quarter (Q4 2013 -- 18,559 boe/d), resulting in a 2014 exit rate of approximately 24,150 boe/d, 30 per cent higher than the company's 2013 exit production rate.
  • Natural gas production of 122.5 million cubic feet per day was 36 per cent higher than the fourth quarter of 2013, reflecting production from new wells drilled in the greater Edson area. At West Edson, increased production from new wells held the company-operated West Edson gas plant at or above full capacity of 60 million cubic feet per day (30 million cubic feet per day net) plus associated C5+ liquids. Continued drilling at East Edson under the East Edson JV similarly increased production to fully utilize existing compression and processing facilities at just over 30 million cubic feet per day plus associated liquids of 15 to 20 barrels per million cubic feet.
  • Oil and natural gas liquids production of 3,262 bbl/d was 7 per cent below the fourth quarter of 2013 (3,509 barrels per day). This reflected lower natural gas liquids sales due to a combination of leaner wells and processing changes at both East and West Edson, as well as the disposition of non-core heavy oil properties completed during the fourth quarter of 2014 and natural declines on the company's Mannville heavy oil property.

Financial highlights

  • Perpetual recorded funds flow of $17.3-million (12 cents per share) for the fourth quarter of 2014, up 33 per cent from the same period in 2013 ($13.0-million), reflecting increased year-over-year production as well as stronger natural gas prices compared with the fourth quarter of 2013.
  • Perpetual's average natural gas price, before derivatives, for the fourth quarter of 2014 was $3.96/thousand cubic feet, up 18 per cent from $3.37/thousand cubic feet in the fourth quarter of 2013, consistent with the increase in AECO market prices year over year. Inclusive of $2.7-million in realized gains related to natural gas risk management contracts, Perpetual's realized gas price, including derivatives, for the fourth quarter was $4.16/thousand cubic feet, 15 per cent higher than the prior year's fourth quarter.
  • Perpetual's oil and NGL price, before derivatives, of $59.77/bbl was 9 per cent lower than the prior year's fourth quarter ($65.35/bbl), directionally reflecting the severe drop in West Texas Intermediate (WTI) crude oil prices to average $73.15 (U.S.)/bbl (Q4 2013 -- $97.46 (U.S.)/bbl) during the fourth quarter of 2014. The impact of the drop in the WTI benchmark price was diminished somewhat by the tightening of the Western Canadian Select heavy oil differential and the drop in the Canadian-dollar/U.S.-dollar exchange rate. Risk management strategies resulted in hedging gains of $1.6-million related to crude oil contracts, which were reflected in an average realized price, including derivatives, of $64.39/bbl, 2 per cent lower than the fourth quarter of 2013 ($65.88/bbl).
  • Primarily utilizing remaining proceeds from the senior notes issued during the third quarter of 2014, the corporation redeemed $25.0-million of its 7.00-per-cent convertible debentures on Dec. 31, 2014. The balance of the 7.00-per-cent convertible debentures ($34.9-million) have a maturity date of Dec. 31, 2015.
  • On Nov. 5, 2014, Perpetual's borrowing base increased to $105-million as a result of reserve additions driven by drilling activities at East Edson, despite adjustments related to the monetization of additional GOB royalty credits and the disposition of non-core heavy oil properties.
  • A net loss of $18.3-million (12 cents per share) was recorded for the fourth quarter of 2014, including $21.4-million for an estimated net impairment loss on the company's Birchwavy assets. The impairment resulted primarily from the decrease in crude oil and natural gas forecast prices at year-end 2014.

Annual highlights for 2014

Capital spending and property dispositions

  • Exploration and development expenditures of $115.8-million during 2014 included $81.1-million allocated to liquids-rich natural gas development activities in the corporation's west-central district (greater Edson area), $24.5-million for heavy oil development at Mannville and $10.2-million on shallow gas optimization projects.
  • Drilling operations included 11 (5.5 net) operated wells and two (0.1 net) non-operated wells drilled in West Edson; 15 (15.0 net) wells drilled in East Edson, including 13 (13.0 net) wells financed from the partner's escrow account, and 20 (17.8 net) horizontal heavy oil wells on the company's Mannville property.
  • Development activities also included expansion of the West Edson facility to 60 million cubic feet per day gross (30 million cubic feet per day net); initial construction costs for the new East Edson gas plant; recompletion, workover and optimization projects on the company's shallow gas assets; the conversion of seven wells to injection and expenditures for related pipelines and facilities on the start-up of the Mannville waterflood pilot project; and initial spending for a cyclic heat stimulation test as phase 1 of the LEAD pilot project for bitumen extraction at Panny.
  • Dispositions, net of acquisitions, of $70.4-million included net proceeds of $47.0-million under the East Edson JV on the disposition of an overriding royalty interest, $21.4-million on the disposition of non-core Mannville heavy oil assets and $3.0-million received on the sale of undeveloped land. Offsetting property dispositions were acquisitions of $1.0-million, primarily related to additional land purchases in the greater Edson area.
  • Perpetual closed two transactions in 2014 which effectively monetized the majority of its future GOB royalty credits associated with certain shut-in properties in northeast Alberta for net proceeds of $21.3-million. In exchange for the proceeds, Perpetual makes monthly payments to the purchaser, which are based on the gas over bitumen formula set out in the Alberta gas royalty regulations, effectively flowing through proceeds which result from GOB royalty credits.

Production highlights

  • Total production increased 10 per cent to 20,554 boe/d in 2014 (2013 -- 18,696 boe/d) reflecting new production from the 2014 drilling program which continued to be focused on the company's liquid-rich properties in west-central and heavy oil properties in Mannville, as well as highly efficient workover, recompletion and facility optimization projects mitigating shallow gas production declines in eastern Alberta.
  • Natural gas production of 102.7 million cubic feet per day increased 16 per cent from 88.9 million cubic feet per day in 2013, primarily due to production growth at West Edson, which averaged 25.6 million cubic feet per day (2013 -- 10.8 million cubic feet per day) and East Edson, which averaged 17.7 million cubic feet per day (2013 -- 14.3 million cubic feet per day). Increases in higher-heat-content deep basin gas production at East and West Edson more than offset year-over-year declines in gas production from Perpetual's eastern Alberta assets, which was reduced to just 5 per cent by highly profitable shallow gas optimization projects.
  • Oil and NGL production of 3,443 barrels per day was 11 per cent lower than 2013 (3,860 bbl/d). Crude oil production of 2,906 bbl/d (2013 -- 3,205 bbl/d) reflected a reduced Mannville heavy oil drilling program compared with 2013 as well as the impact of the non-core heavy oil disposition completed in the fourth quarter. NGL production of 537 bbl/d (2013 -- 655 bbl/d) reflected lower average NGL yields on wells drilled at West Edson as well as a change in processing arrangements at both East and West Edson, which results in previously reported liquids now included as part of higher-heat-content natural gas sales.
  • Deep basin resource-style assets in west-central Alberta contributed 7,649 boe/d of natural gas and associated liquids, representing 37 per cent of total production in 2014, up from 26 per cent in 2013. High-netback Mannville heavy oil production of 2,860 boe/d comprised 14 per cent of total production in 2014.

Financial highlights

  • Revenue of $262.8-million was 31 per cent higher than 2013 ($201.3-million) reflecting increased production and higher average commodity prices in 2014.
  • Realized natural gas prices, including derivatives, of $4.36/thousand cubic feet in 2014 increased 24 per cent from $3.53/thousand cubic feet in 2013, reflecting a 40-per-cent increase in AECO monthly index prices year over year, partially offset by losses realized on gas price hedging contracts during 2014. Due to the higher percentage of liquids-rich gas production and processing changes in both West and East Edson, Perpetual's heat content averaged 1.13 gigajoules/thousand cubic feet in 2014 relative to 1.10 gj/thousand cubic feet in 2013.
  • Oil and NGL prices, including derivatives, of $71.82/bbl increased 8 per cent in 2014 due to strong WTI prices during the first half of 2014, which, along with a narrowing of WCS differentials, offset the effect of oil and NGL price declines realized in the fourth quarter. Perpetual's realized oil and NGL price, including derivatives, was 4 per cent lower than the price before derivatives in 2014, primarily due to hedging losses recorded on financial WTI price contracts during the first three quarters of 2014, which were not fully overcome by gains realized during the fourth quarter of 2014 as oil prices declined.
  • Royalty expense of $32.0-million in 2014 represented a combined royalty rate of 12.2 per cent compared with 9.4 per cent in 2013. An increase in freehold and overriding royalty expense reflected new royalties payable pursuant to the East Edson JV, which entitle the partner to overriding royalties based on a maximum of 5.6 million cubic feet per day of natural gas from the East Edson property plus oil and associated NGL on a monthly basis beginning July 1, 2014. Excluding overriding royalty payments related to the East Edson JV, the combined royalty rate for 2014 was 10.2 per cent, which was still higher than in 2013 due to higher Alberta gas reference prices and higher oil royalties related to production on freehold lands and wells transitioning from incentive periods.
  • Operating costs decreased another 6 per cent in 2014 to $10.41/boe, down from $11.05/boe in 2013, with absolute savings realized in most areas of operations. Infrastructure expansion and enhancements at West Edson, and the rerouting of the majority of East Edson production from a third party deep cut facility to utilize the company's minority interest in the lower-cost Rosevear plant, resulted in decreased processing fees paid to third parties and increased efficiency on a unit-of-production basis.
  • Operating netbacks increased 15 per cent to $17.44/boe (2013 -- $15.23/boe) with higher commodity prices and lower operating costs more than offsetting higher transportation costs as well as increased royalties.
  • Funds flow of $81.4-million (55 cents per share) in 2014 increased 39 per cent from $58.5-million (39 cents per share) in 2-13 as a result of increased production, stronger crude oil and natural gas prices, and higher operating netbacks in 2014.
  • Perpetual issued $125-million in 8.75-per-cent senior notes during the third quarter of 2014 with the proceeds utilized for the early redemption of $100-million of 7.25-per-cent convertible debentures in August, 2014, and $25-million of 7.00-per-cent convertible debentures on Dec. 31, 2014. The issue of senior notes bolstered Perpetual's financial flexibility by extending its long-term debt beyond 2018.
  • Total net debt decreased by 12 per cent ($45.2-million) from $377.0-million on Dec. 31, 2013, to $331.7-million at Dec. 31, 2014. The reduction in net debt resulted from 2014 funds flow, combined with proceeds received on dispositions, the monetization of GOB royalty credits and Perpetual's escrow funds related to the East Edson JV, which, in total, exceeded 2014 capital expenditures. The ratio of net debt to trailing 12 months funds flow improved by 36 per cent from year-end 2013 to a ratio of 4.1 to 1 at Dec. 31, 2014.
  • The corporation recorded net income of $3.4-million (two cents per share) compared with $7.6-million (five cents per share) in 2013.

Outlook for 2015

In 2015, Perpetual is focused on five strategic priorities:

  • Grow greater Edson liquids-rich gas production, cash flow, inventory, reserves and value;
  • Optimize value of Mannville heavy oil;
  • Refine elements of production growth strategy for 2017 to 2020;
  • Maximize value of shallow gas;
  • Reduce debt and improve debt-to-cash-flow ratio.

In light of current weakness and uncertainty in commodity prices, Perpetual's board of directors has approved a first quarter capital expenditure budget of $45-million. Nearly $42-million will be directed to the drilling of six wells (4.5 net) in west-central Alberta, with three (1.5 net) at West Edson and three (three net) at East Edson, coupled with the East Edson plant construction activities. All heavy oil drilling has been deferred until oil prices recover, although $1.3-million will be expended on advancing the Mannville waterflood. Strategic spending at Panny to advance the LEAD pilot project has been reduced to include only capital required to drill two (two net) observation wells associated with the pilot scheme, estimated at $1.2-million.

Capital activity for the remainder of the year will be assessed as the year progresses with the intention that spending will be largely financed from funds flow and available bank indebtedness. The reduction in drilling in first quarter 2015 will not materially impact 2015 gas production as the wells drilled to date have generally exceeded the type curves and provide the same production capability as originally budgeted. Further, variations in capital spending for the final three quarters of 2015 are not expected to materially affect average production or annual funds flow.

Perpetual has commodity price contracts in place for both crude oil and natural gas to protect a base level of cash flow. Natural gas contracts were entered into to provide downside protection on revenue, primarily through the summer months, with physical and financial contracts in place for 2015 on an average of close to 68,400 gigajoules per day at an average price of $2.63/gj. Crude oil contracts for 2015 on 1,000 bbl/d include costless collars protecting a WTI floor price of $87.50/bbl with an average ceiling of $95.50/bbl, as well as financial contracts which fix the basis differential between WTI and Western Canadian Select trading hubs at an average of $16.88 (U.S.)/bbl.

Amendment to credit facility

The corporation's credit facility is with a syndicate of Canadian chartered banks. As at Dec. 31, 2014, total availability under the facility was $105-million. The credit facility includes covenants with respect to debt and trailing funds flow ratios. The corporation was in compliance with the lender's covenants at Dec. 31, 2014. On March 5, 2015, the corporation's lenders agreed to revise financial covenants based on prevailing low commodity prices at the end of 2014 and uncertainty surrounding forecast commodity prices into 2016. Based on internal 2015 and 2016 financial and operating forecasts, Perpetual expects to be in compliance with the lender's new covenants. The next semi-annual redetermination of the corporation's borrowing base will occur on or before April 30, 2015.

                                  FINANCIAL AND OPERATING HIGHLIGHTS
                             (In thousands, except volume and per share) 
                 
                                                   Three months ended Dec. 31,       Year ended Dec. 31, 
                                                             2014        2013         2014         2013

Oil and natural gas revenue                                62,562      49,075      262,790      201,294
Funds flow                                                 17,316      12,998       81,395       58,468
Per share                                                    0.12        0.09         0.55         0.39
Net earnings (loss)                                       (18,273)    (13,745)       3,366        7,620
Per share                                                   (0.12)      (0.09)        0.02         0.05
Total assets                                              750,602     742,288      750,602      742,288
Net bank debt outstanding                                  21,867      67,201       21,867       67,201
Senior notes, at principal amount                         275,000     150,000      275,000      150,000
Convertible debentures, at principal amount                34,878     159,779       34,878      159,779
Total net debt                                            331,745     376,980      331,745      376,980
Capital expenditures
Exploration and development                                26,018      24,518      116,457       96,684
Dispositions, net of acquisitions                         (20,595)       (483)     (70,351)     (70,840)
Interest in Warwick gas storage                                 -           -            -       19,129
Other                                                          84           2          614          120
Net capital expenditures                                    5,507      24,037       46,720       45,093
Average production
Natural gas (MMcf/d)                                        122.5        90.3        102.7         88.9
Oil and NGL (bbl/d)                                         3,262       3,509        3,443        3,860
Total (boe/d)                                              23,685      18,559       20,554       18,696
Average prices
Natural gas, before derivatives ($/mcf)                      3.96        3.37         4.50         3.26
Natural gas, including derivatives ($/mcf)                   4.16        3.62         4.36         3.53
Oil and NGL, before derivatives ($/bbl)                     59.77       65.35        75.01        67.65
Oil and NGL, including derivatives ($/bbl)                  64.39       65.88        71.82        66.48
Barrel of oil equivalent, including derivatives ($/boe)     30.40       30.09        33.81        30.56
Drilling (wells drilled gross/net)
Gas                                                       11/10.0       4/2.0      29/20.9        6/3.0
Oil                                                             -       5/5.0      20/17.8      37/35.7
Total                                                     11/10.0       9/7.0      49/38.7      43/38.7
Success rate (%)                                          100/100     100/100      100/100      100/100

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