Mr. Jean-Paul Lachance reports

PEYTO DELIVERS STRONG SECOND QUARTER RESULTS

Peyto Exploration & Development Corp. has released its operating and financial results for the second quarter of 2023. A 70-per-cent operating margin (1) (2), combined with a 26-per-cent profit margin (3) in the quarter delivered a return on capital employed (ROCE) (4) of 13 per cent and return on equity (ROE) (4) of 15 per cent, on a trailing 12-month basis. Additional highlights included:

• Funds from operations (5) of 81 cents per diluted share: The company generated $142-million in funds from operations (FFO) in Q2 2023, down 31 per cent from Q2 2022, despite a 71-per-cent decline in the Henry Hub daily average gas price and current income tax of $11.6-million (nil in Q2 2022);
• Free funds flow (6) of $60-million: Free funds flow totalled $60-million in Q2 2023, down from $98-million in Q2 2022 due to lower realized commodity prices and current income tax, which was partially offset by lower total capital expenditures.
• Total cash costs (7) of $1.21 per thousand cubic feet equivalent (mcfe) (or $1.03 per mcfe before royalties): Quarterly cash costs of $1.03 per mcfe, before royalties of 18 cents per mcfe, were 17 per cent higher than Q2 2022 due to inflationary pressures on costs and additional transportation service. Q2 operating costs of 47 cents per mcfe, transportation of 29 cents per mcfe, G&A (general and administrative expenses) of five cents per mcfe and interest expense of 22 cents per mcfe resulted in a 70-per-cent operating margin. Peyto continues to have the lowest cash costs in the Canadian natural gas industry.
• Total capital expenditures (8) of $82-million: Total capital expenditures decreased 24 per cent compared with the second quarter of 2022 as Peyto curtailed activity in response to the decline in natural gas prices. A total of 15 gross wells (13.7 net) were drilled, 16 gross wells (14.5 net) were completed and 14 gross wells (13.1 net) were brought on production. The company's drilling and completion costs per metre decreased 3 per cent and 7 per cent, respectively, from efficiency gains and the moderating of inflation.
• Net debt (9) down 12 per cent: Net debt was reduced by $122-million from Q2 2022 to $870-million. Interest costs increased 10 per cent from 20 cents per mcfe in Q2 2022 to 22 cents per mcfe in Q2 2023, while the average Bank of Canada rate increased from 1.09 per cent in Q2 2022 to 4.56 per cent in Q2 2023. Net debt has fallen for 11 consecutive quarters.
• Earnings of 33 cents per share, dividends of 33 cents per share (11 cents per month): Earnings of $57-million were generated in the quarter while dividends of $58-million were paid to shareholders.
• Strong record of shareholder returns: Over the past 11 quarters, Peyto has increased production from 78,200 barrels of oil equivalent per day (boe/d) to 98,777 boe/d and returned $241.2-million of dividends to shareholders, while reducing net debt by over $300-million.

Second quarter 2023 in review

Production volumes averaged 98,777 boe/d in the quarter, 5 per cent lower than Q2 2022 due to the reduced capital expenditure program, coupled with the impact from Alberta wildfires in May and June. In response to the wildfires in Alberta, Peyto briefly shut in two gas plants in the Brazeau area as a safety precaution and modified plant refrigeration processes to accommodate trucking restrictions due to road closures, which reduced production by approximately 1,500 boe/d in the quarter. Natural gas prices continued to fall in the quarter, with Henry Hub daily averaging $2.12 (U.S.) per million British thermal unit (mmBtu) and AECO daily averaging $2.32 per gigajoule (GJ), down 71 per cent and 66 per cent, respectively, from Q2 2022. Peyto's mechanistic hedging program helped deliver strong funds from operations, totalling $142.4-million in the quarter and down only 31 per cent from the second quarter of 2022. Realized hedging gains totalled $47.8-million in the quarter and the company remains well hedged for the second half of 2023 and 2024, as detailed in the marketing section in this news release. Operating costs totalled 47 cents per mcfe in the quarter, up from 39 cents per mcfe in Q2 2022, due to inflationary pressures on operating expenses. Operating expenses have stabilized and are down 6 per cent from the first quarter of 2023. Peyto's transportation costs increased to 29 cents per mcfe in the quarter from 24 cents per mcfe in Q1 2023, due to the addition of 150,000 GJ per day of Empress delivery service, which provides the company access to the TC Energy Canadian mainline and the option to sell gas outside of the AECO market. The company's operating margin and profit margin were 70 per cent and 26 per cent, respectively, despite low gas prices and the impacts of wildfires. Earnings totalled $57.4-million and $57.7-million in dividends were paid to shareholders in the quarter.

Exploration and development

The second quarter 2023 activity was spread out among the existing core areas of greater Sundance and greater Brazeau. Target formations were also widespread, as summarized in the attached table.

Peyto's average drilling and completion costs decreased in the second quarter both on an aggregate and on a per-unit basis. Drilling cost per metre was reduced by 3 per cent while completion cost per metre and cost per stage were reduced by 7 per cent and 19 per cent, respectively. Inflationary costs have stabilized and efficiencies in operations can now be recognized as the company continues to drill extended-reach horizontal ERH wells to maximize reservoir contact with each well.

Capital expenditures

During the second quarter of 2023, Peyto drilled 15 gross (13.7 net) wells, completed 16 gross (14.5 net) wells, and brought 14 gross (13.1 net) wells on production for drilling, completions, equipping and tie-in capital of $72.2-million. Facilities and pipeline expenditures included $9.1-million for debottlenecking pipeline projects and gas plant upgrades. Land and seismic investments totalled $1.1-million in the quarter.

Marketing

Commodity prices

Peyto realized a natural gas price after hedging and diversification of $3.13 per mcf or $2.72 per GJ, 17 per cent higher than the average AECO daily price of $2.32 per GJ during the second quarter of 2023. Peyto's natural gas hedging activity resulted in a realized gain of 93 cents per mcf ($45-million) due to the sharp decline in AECO and Henry Hub natural gas prices in the first half of the year.

Condensate and pentanes volumes were sold in Q2 2023 for an average price of $90.97 per barrel (bbl), which is down 32 per cent from $134.57 per bbl in Q2 2022, while Canadian WTI (West Texas Intermediate) decreased 28 per cent to $99.11 per bbl over the same period. Butane and propane volumes were sold in combination at an average price of $28.11 per bbl or 28 per cent of light oil price, down 51 per cent from $57.03 per bbl in Q2 2022. NGL (natural gas liquid) hedging gains increased the combined realized NGL price of $66.11 per bbl by $3.16 per bbl to $69.28 in the quarter. Peyto's realized NGL price in the quarter was affected by increased liquids trucking, as a major third party liquids pipelines were shut in due to maintenance that was extended by the wildfires.

Hedging

Peyto currently has 327,902,000 cubic feet per day fixed with financial hedges for the second half of 2023 at $4.66 per mcf and 220,781,000 cubic feet per day fixed with financial hedges for 2024 at $5.19 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. Additionally, Peyto has excess Empress service with 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's construction of the 23-kilometre (km) pipeline to the Cascade power plant was completed in the first quarter of 2023. Connection work at both ends of the pipeline and measurement facilities is under way and expected to be completed in the third quarter of 2023. Peyto will provide plant base load volumes of 60,000 GJ per day (GJ/d) (approximately 52 million cubic feet per day (mmcf/d) of gas production) under a 15-year gas supply agreement to this highly efficient, 900-megawatt combined cycle power plant starting in late 2023 or early 2024. Based on AECO average monthly power pool price for the first half of 2023, Peyto would receive over $10 per GJ for sales gas under this agreement.

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

Financial results

The company's realized natural gas and NGL sales yielded a combined revenue stream of $4.07 per mcfe, after hedging. This net sales price was 26 per cent lower than the $5.48 per mcfe realized in Q2 2022 due to the sharp decline in commodity prices. Total cash costs of $1.21 per mcfe were 34 per cent lower than the $1.83 per mcfe in Q2 2022 due to lower royalties. Peyto's cash netback (net sales price plus other income plus realized gain on foreign exchange less total cash costs) was $2.86 per mcfe, maintaining a strong 70-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 $1.06 per mcfe or a 26-per-cent profit margin. Dividends to shareholders totalled $1.07 per mcfe.

Activity update

Since the end of the quarter, Peyto has continued to moderate drilling activity given current commodity prices but will be ready to increase drilling activity quickly if prices improve, as expected, into the fall and winter. Throughout July, the company was busy catching up on completions that had been delayed due to wildfires followed by heavy rains and flooding throughout June. The team was successful in working through the backlog of drilled but uncompleted wells, which saw most of those wells coming on stream in the latter half of July and into early August. Since the end of the quarter, five gross (4.5 net) wells have been drilled, 12 gross (10.9 net) wells have been brought on production and six gross (5.5 net) wells are waiting on completion and/or tie-in.

Peyto continues to be active drilling in the Falher formation, specifically targeting the underdeveloped channels across the company's land base, and expects to drill an additional eight gross wells into different channels before year-end. Peyto also completed two gross (2 net) Dunvegan wells in July, both of which were drilled to over 2,200 metres, horizontally. Early results from these recent wells are in line with expectations and continue to verify the high liquid yields and the low-decline production performance Peyto expects from the Dunvegan. Through the remainder of the year, the company will continue to apply a disciplined approach to capital deployment and focus on opportunities that generate the highest returns. As always, Peyto will remain flexible and can adjust the program to best suit the commodity price environment. Peyto's projections of before tax 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.

Outlook

The long-term demand for natural gas remains robust as the fuel of choice and continues to be recognized both for satisfying the world's energy needs and as a feedstock for important materials used in the modern world. Future buildout of LNG (liquefied natural gas) export projects in Canada and the United States will play a major role in supplying the world with responsibly developed natural gas. Peyto's low-cost, long-reserve-life and low-emission reserves are well positioned in the Deep basin and can be quickly grown to match increasing market demand. The company's strategic diversification to gas markets across North America provides excellent exposure to premium seasonal markets such as Malin in California, Chicago and Ventura in the U.S. Midwest, and local Alberta power markets, which reduces the risk of selling into potential dislocated markets like AECO.

The company continues to target the low end of capital guidance of $425-million in 2023 but will take a thoughtful approach to the ramp-up of activity in the fall, quickly adjusting to changing commodity prices and economic conditions. Peyto continues to use a systematic hedging program and has secured over 55 per cent of forecasted gas volumes for the upcoming winter season at $4.77 per mcf (including diversification costs and physical fixed price contracts) and over 45 per cent for summer 2024 at $3.76 per mcf. These fixed prices represent a premium to the current AECO futures strip. The securing of revenues coupled with a disciplined capital program provides confidence for future dividends and continued strengthening of the balance sheet.

October, 2023, will mark 25 years of operations for Peyto as one of Canada's longest-standing oil and gas companies, the focus of which has always been on creating long-term shareholder value through the development of long-life reserves and industry leading costs.

Conference call and webcast

A conference call will be held with senior management of Peyto to answer questions with respect to the company's Q2 2023 results on Thursday, Aug. 10, 2023, at 9 a.m. Mountain Time (or 11 a.m. Eastern Time).

Access to the webcast can be found on-line. 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.

Management's discussion and analysis and financial statements

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

(1) This news release contains certain non-GAAP (generally accepted accounting principles) and other financial measures to analyze financial performance, financial position and cash flow, including, but not limited to, operating margin, profit margin, return on capital, return on equity, netback, funds from operations, free funds flow, total cash costs and net debt. These non-GAAP and other financial measures do not have any standardized meaning prescribed under IFRS and therefore may not be comparable with similar measures presented by other entities. The non-GAAP and other financial measures should not be considered to be more meaningful than GAAP measures, which are determined in accordance with IFRS, such as earnings, cash flow from operating activities and cash flow used in investing activities, as indicators of Peyto's performance.

(2) Operating margin is a non-GAAP financial ratio.

(3) Profit margin is a non-GAAP financial ratio.

(4) Return on capital employed and return on equity are non-GAAP financial ratios.

(5) Funds from operations is a non-GAAP financial measure.

(6) Free funds flow is a non-GAAP financial measure.

(7) Total cash costs is a non-GAAP financial ratio defined as the sum of royalties, operating expenses, transportation expenses, G&A expenses and interest, on a per-thousand-cubic-feet-equivalent basis.

(8) Total capital expenditures is a non-GAAP financial measure.

(9) Net debt is a non-GAAP financial measure.

We seek Safe Harbor.