Mr. Jean-Paul Lachance reports

PEYTO REPORTS STRONG Q1 2023 CASH FLOW DESPITE LOWER GAS PRICES

Peyto Exploration & Development Corp. has released its operating and financial results for the first quarter of 2023. A 71-per-cent operating margin, combined with a 32-per-cent profit margin in the quarter, delivered a return on capital employed (ROCE) of 14 per cent and return on equity (ROE) of 17 per cent, on a trailing-12-month basis. Additional highlights included:

• Strong funds from operations (FFO) of $1.02 per diluted share: Peyto generated $180-million in funds from operations in Q1 2023, despite lower realized commodity prices and current income tax of $19-million (nil in Q1 2022).
• Free funds flow of $58-million: Free funds flow totalled $58-million in Q1 2023, down from $60-million in Q1 2022, due to lower realized commodity prices and current income tax, partially offset by lower total capital expenditures.
• Total cash costs of $1.52 per mcfe (thousand cubic feet equivalent) (or 99 cents per mcfe before royalties): Quarterly cash costs of 99 cents per mcfe, before royalties of 53 cents per mcfe, were 6 per cent higher than Q1 2022, due to inflationary pressures on costs. Q1 operating costs of 50 cents per mcfe, transportation of 24 cents per mcfe, general and administrative (G&A) of three cents per mcfe, and interest expense of 22 cents per mcfe resulted in a 71-per-cent operating margin. Peyto continues to have the lowest cash costs in the Canadian natural gas industry.
• Total capital expenditures of $122-million: A total of 19 gross wells (17.6 net) were drilled in the first quarter, 14 gross wells (13.2 net) were completed and 14 gross wells (13.3 net) were brought on production. Facilities and pipeline projects totalled $32-million in the quarter and included $13-million for the construction of the 23-kilometre large-diameter pipeline that directly connects Peyto's Swanson gas plant to the Cascade power plant.
• Net debt down 18 per cent: Net debt was reduced by $186-million from Q1 2022 to $878-million. Interest costs increased 5 per cent from 21 cents per mcfe in Q1 2022 to 22 cents per mcfe in Q1 2023, while the average Bank of Canada rate increased from 0.33 per cent in Q1 2022 to 4.33 per cent in Q1 2023. Net debt has now fallen for 10 consecutive quarters.
• Earnings of 51 cents per share, dividends of 33 cents per share (11 cents per month): Earnings of $90-million were generated in the quarter while dividends of $58-million were paid to shareholders.
• Strong record of shareholder returns: Over the past 10 quarters, Peyto has increased production from 78,200 boe/d (barrels of oil equivalent per day) to 102,900 boe/d and returned $183.5-million of dividends to shareholders, while reducing net debt by $300-million.

First quarter 2023 in review

Peyto was active with four drilling rigs operating in the first quarter, as well as pipeline and infrastructure projects, including well optimization programs and the construction of a 23-kilometre pipeline that directly connects Peyto's Swanson gas plant to the Cascade power plant. Production volumes were 1 per cent higher in the quarter, compared with Q1 2022, however, FFO decreased to $179-million from $204-million in Q1 2022, due to a decline in realized commodity prices and a current tax provision in the quarter of $19-million (nil in Q1 2022). Natural gas prices were particularly volatile in the quarter with many benchmarks decreasing sharply from the Q1 2022 averages. The average daily Henry Hub price was down 42 per cent and the average daily AECO price was down 32 per cent in the quarter compared with the first quarter of 2022. The average daily Malin price, however, was 235 per cent higher as a result of supply shortages in California. So, while Peyto benefited from NYMEX hedging gains, the company's Malin hedges resulted in hedging losses. Going forward, Peyto has 40,000 mmBtu/d (million British thermal units per day) of unhedged exposure to Malin prices, which are expected to remain volatile. Operating costs increased to 50 cents per mcfe in the quarter from 41 cents per mcfe in Q1 2022, due to increased plant and well maintenance, and inflationary pressures on insurance, power, trucking, fuels and lubricants. The first quarter of each year typically represents the high-water mark for operating costs due to increased expenses in cold weather conditions and operating costs are expected to taper down through 2023. Despite the significant and rapid drop in natural gas prices in the first quarter, Peyto's profit margin of 32 per cent remained strong and drove quarterly earnings of $90-million, allowing the company to declare $58-million in dividends to shareholders.

Exploration and development

The bulk of first quarter 2023 activity was spread out amongst the existing core areas of greater Sundance and greater Brazeau. Additionally, three wells were drilled in the Minehead/Whitehorse region as part of a delineation and farm-in program to earn certain offsetting lands. Target formations were also widespread, as summarized in the attached table.

Average measured depth drilled increased 11 per cent in the quarter compared with fourth quarter of 2022, as Peyto drilled the longest average wells in the company's history. The pursuit of extended-reach horizontal (ERH) wells resulted in lower costs per metre drilled as compared with the previous quarter. Although inflationary pressures have eased on drilling operations, completion costs per metre and per stage were up 5 per cent and 13 per cent, respectively, due to service rate increases as compared with the previous quarter.

Capital expenditures

During the first quarter of 2023, Peyto drilled 19 gross (17.6 net) wells, completed 14 gross (13.2 net) wells, and brought 14 gross (13.3 net) wells on production for drilling, completions, equipping and tie-in capital of $89-million. Facilities and major pipeline projects included $12.9-million for the construction of the 23-kilometre large-diameter pipeline that directly connects the company's Swanson gas plant to the Cascade power plant near the town of Edson, Alta., and $18.8-million for other infrastructure projects, including debottlenecking pipeline projects in the Sundance and Brazeau areas. Land and seismic investments totalled $1.3-million in the quarter.

Commodity prices

Peyto's natural gas was sold in Q1 2023 at various hubs, including AECO, Empress, Malin, Dawn, Ventura, Emerson 2 and Henry Hub using both physical fixed price and basis transactions to access those locations (diversification activities). Natural gas prices were left to float on daily or monthly pricing or locked in using fixed price financial and physical swaps at those hubs. In Q1 2023, net of diversification activities of 62 cents per mcf (thousand cubic feet), Peyto realized a natural gas price of $5.35 per mcf before natural gas hedging losses reduced this price to $3.91 per mcf. Peyto's natural gas hedging activity resulted in a realized loss of $1.44 per mcf, due mainly to high Malin prices in the quarter, averaging $18.98 (U.S.) per mmBtu, partially offset by realized gains on NYMEX hedges. Peyto's Malin hedges ended on March 31, 2023, and the company has floating price exposure on its Malin contract through to Oct. 31, 2024, as noted below in the marketing update section of this news release.

Condensate and pentane volumes were sold in Q1 2023 for an average price of $103.06 per bbl (barrel), which is down 18 per cent from $125.81 per bbl in Q1 2022 and Peyto realized a marginal premium over the Q1 2023 Canadian WTI (West Texas Intermediate) oil price of $102.90 per bbl. Butane and propane volumes were sold in combination at an average price of $39.20 per bbl or 38 per cent of light oil price, down 26 per cent from $52.68 per bbl in Q1 2022, due to increased NGL (natural gas liquid) supplies. NGL hedging gains increased the combined realized NGL price of $76.15 per bbl by $2.88 per bbl to $79.03 in Q1 2023.

Peyto's realized prices for the three months ended March 31, 2023, and March 31, 2022, and are shown in the attached table.

Financial results

The company's realized price for natural gas in Q1 2023 was $5.97 per mcf, prior to 62 cents per mcf of market diversification activities and a $1.44 per mcf hedging loss, while its realized liquids price was $76.15 per bbl, before a $2.88 per bbl hedging gain, which yielded a combined revenue stream of $5.10 per mcfe (including nine cents per mcfe of other income). This net sales price was 3 per cent lower than the $5.25 per mcfe realized in Q1 2022. Total cash costs of $1.52 per mcfe were consistent with the $1.53 per mcfe in Q1 2022 as increased operating costs were offset by royalties. Peyto's cash netback (net sales price plus other income plus realized gain on foreign exchange less total cash costs) was $3.58 per mcfe, driving a 71-per-cent operating margin. Historical cash costs and operating margins are shown in the attached table.

Depletion, depreciation and amortization charges of $1.39 per mcfe, along with provisions for current tax, deferred tax and stock-based compensation payments, resulted in earnings of $1.62 per mcfe or a 32-per-cent profit margin. Dividends to shareholders totalled $1.04 per mcfe.

Marketing update

Hedging

In general, Peyto's commodity risk management program is designed to smooth out the short-term fluctuations in the price of natural gas and natural gas liquids through future sales. This smoothing gives greater predictability of cash flows for the purposes of capital planning and dividend payments. The future sales are meant to be methodical and consistent to avoid speculation. In general, this approach will show hedging losses when short term prices climb and hedging gains when short-term prices fall.

Peyto currently has 317,977 mcf/d (thousand cubic feet per day) fixed with financial hedges for April 1, 2023, to Dec. 31, 2023, at $4.49 per mcf. The company's current financial commodity hedges and foreign exchange forward contracts are summarized in the attached table.

Diversification

The company's natural gas sales are diversified with exposure to hubs other than AECO, including Henry Hub, Ventura, Emerson 2, Empress, Malin, Dawn and Chicago. On April 1, 2023, Peyto's firm delivery service to the Empress hub increased by 150,000 GJ per day upon completion of the NGTL 2021 expansion program. Empress service provides Peyto access to the TC Energy Canadian mainline and the option to sell gas outside of the AECO market. As a result, Peyto has no exposure to AECO prices for the rest of 2023 and, accounting for projected volume growth, limited exposure in 2024. Peyto anticipates that AECO prices will remain weak due to elevated gas supply in Western Canada, coupled with substantial NGTL system maintenance planned during summer.

Peyto's construction of the 23-kilometre Cascade pipeline is now finished with just connection work remaining at both ends of the line. The Cascade power plant is a highly efficient 900-megawatt combined-cycle power plant and is expected to start operations in late 2023. Peyto will supply 60,000 gigajoules per cent (GJ/d) (approximately 10 per cent of current gas production) under a 15-year gas supply agreement to this plant.

Details of Peyto's continuing marketing and diversification efforts are available on Peyto's website.

Activity update

Since the end of the quarter, Peyto has reduced activity to three rigs as part of the current breakup plan. Activity will remain focused in the Chambers area of Brazeau as well as greater Sundance, where road and lease conditions are suitable, and a high level of operational efficiency can be maintained. Since the end of the quarter, five gross (4.4 net) wells have been drilled, eight gross (7.4 net) wells have been brought on production, and seven gross (6.7 net) wells are waiting on completion and/or tie-in. Peyto's efforts to maximize value by extending lateral length has continued through the first part of the year with average lateral lengths approaching 2,000 metres. Results from these wells continue to meet or exceed expectations, particularly in the underdeveloped Falher channels that Peyto has been targeting recently. Development continues for the assets acquired in 2022 in Brazeau with Peyto drilling eight gross (eight net) wells since acquiring these lands and growing production from 500 to 6,000 boe/d. This activity, in conjunction with the sales line and gathering line modifications made at the Aurora plant earlier this year, has allowed for maximum utilization of the Aurora facility. The remainder of this year's drilling program focuses on a species mix that generates the best overall returns, however, this program will remain flexible and could pivot toward a higher liquids-rich content, such as the Cardium, where the company could deploy the ERH design to improve efficiencies. Peyto's projections of returns continue to be strong, with a forecasted full-cycle internal rate of return of approximately 40 per cent for 2023 based on current strip pricing, year-to-date results and current drilling plans for the remainder of the year.

Peyto recently installed and commissioned its first waste heat recovery (WHR) system at Chambers, which will reduce fuel usage and emissions. The project is currently in the evaluation phase but economic success of the WHR system in Chambers will drive additional application across Peyto's vast plant processing capacity, further reducing Peyto's fuel usage and emissions.

Alberta wildfires

Peyto has been fortunate that although many of the wildfires have been proximal, they have not directly impacted the company's major infrastructure. However, on May 5, Peyto shut down two gas plants in the Brazeau area as a precautionary measure. The company was able to mitigate the temporary production losses by redirecting some volumes to other plants through Peyto's integrated gathering system. Peyto also adjusted refrigeration processes to minimize liquid production while third party trucking and pipeline services were suspended. Start-up of the Brazeau plant has already begun, however, sustained production will depend on continued access into the area and the ability to truck and transfer out liquids. At this time, the company believes the production impact for the second quarter will be a reduction between 1,000 and 2,000 boe/d, however, the situation continues to be dynamic.

Peyto's drilling and completion operations have continued throughout most of this period, however, they will remain flexible providing access into areas, oil field services and safe work conditions remain. The Peyto team remains ready to respond to changing conditions to keep the company's personnel and equipment safe.

Outlook

The long-term outlook for natural gas remains positive with increasing demand in North America and around the world. Future buildout of LNG (liquefied natural gas) export projects in Canada and the United States should play a major role in supplying clean, reliable natural gas to many nations currently limited to dirtier fuels. Peyto's low-cost, long-reserve-life, low-emission assets are well positioned in the Deep basin and the company can react quickly to increasing market demand. Peyto's strategic diversification to gas markets across North America provides excellent exposure to premium seasonal markets such as Malin in California and Ventura in Chicago, while reducing the risk of selling into potential dislocated markets like AECO.

The company's capital plan to spend $425-million to $475-million in 2023 is specifically designed to be flexible in the back half of the year to adjust to changing commodity prices and economic conditions. In the meantime, Peyto will target the lower range of the capital guidance while the company's systematic hedging and market diversification programs help secure revenues for future dividends and continued strengthening of the balance sheet.

Conference call and webcast

A conference call will be held with senior management of Peyto to answer questions with respect to the company's Q1 2023 results on Thursday, May 11, 2023, at 9 a.m. Mountain Time (11 a.m. Eastern Time).

A webcast will be available. To participate in the call, please register for the event on-line. Participants will be issued a dial-in number and PIN (personal identification number) to join the conference call and ask questions. Alternatively, questions can be submitted prior to the call at info@peyto.com. The conference call will be archived on the Peyto website.

Annual general meeting

Peyto's annual general meeting of shareholders is scheduled for 3 p.m. on Wednesday, May 17, 2023, at the Eau Claire Tower, +15 level, 600 3rd Ave. SW, Calgary, Alta. Shareholders who do not wish to attend are encouraged to visit the Peyto website, where there is a wealth of information designed to inform and educate investors and where a copy of the AGM presentation will be posted.

Management's discussion and analysis and financial statements

A copy of the first quarter report to shareholders, including the MD&A, unaudited consolidated financial statements and related notes, is available on the company's website and will be filed at SEDAR at a later date.

We seek Safe Harbor.