President

Peyto Exploration & Development Corp.
President’s Monthly Report
February 2015
From the desk of Darren Gee, President & CEO
Margin Math
My monthly reports in the past have regularly discussed
Peyto’s low cost advantage – how we get it, how we maintain
it, and why it’s important. And yet it still seems that, especially
in times like now, it’s worth repeating the obvious. Low costs
equate to high margins. Peyto’s costs are the lowest, which is
why our margins are the highest (see Figure 2).
Figure 2
25
POU
PMT
CR
PWT
ERF
NVA
LTS
BXE
BTE
KEL
PGF
ARX
BNP
TET
VET
0%
50
Source: Company Financials
PWT
HSK
APA
TA…
PMT
VET
TAL
POU
VII
BXE
CPC
CNR
TOU
PEY
Operating Margin is defined as funds from operations divided by revenue before royalties but including realized hedging gains/losses.
BNP
0
20%
CPG
75
40%
BIR
100
60%
WCP
125
80%
AAV
2014 Alberta Deep Basin Gas Spuds
Operating Margin
TOU
Figure 1
100%
PEYTO
Q3/14 Operating Margin
So much has changed with the oil price lately that most
industry participants, from investors to bankers to producers,
are frantically analyzing the numbers to figure it all out.
Thankfully for us, the drop in oil price was more of a positive
than a negative (as I outlined last month), so it leaves me with
more time to look at a different set of numbers. Like who
drilled the most wells last year! I’ve always believed that “the
true entrepreneur is a doer, not a dreamer,” and the following
graph of 2014 Deep Basin Spuds is evidence of that.
Interestingly, it’s not always who you think it is.
Source: Peyto, IHS Accumap
Most of the drilling we’ve done so far in 2015 is sitting idle
waiting to come on. TCPL has restricted our production (see
production table below) and many others on the mainline,
while they go about proving to the NEB the integrity of two of
their smaller pipeline laterals. Their pace is frustratingly slow,
but we’re hoping the problem is soon rectified.
High margins, in turn, provide insulation from volatile
revenues driven by volatile commodity prices. A simple
percentage analysis, like that shown below in Figure 3, shows
how the netbacks (or cashflows) of a high cost/low margin
business changes with commodity prices versus a low
cost/high margin business like Peyto. A 30% drop in
commodity prices can cause a 60% drop in the cashflow of
the first, versus just a 38% drop in the second.
Figure 3
As in the past, this report includes an estimate of monthly
capital spending as well as our field estimate of production for
the most recent month (see Capital Investment and
Production tables below).
Capital Investment*
2013/14 Capital Summary (millions$ CND)*
Q1 Q2 Q3 Q4 2013 Q1 Q2
2
6
3
2
11.9
7
8
Land & Seismic
Drilling
76 32 86 60 253.0 80 68
Completions
41 10 54 47 151.7 36 48
Tie ins
15 7 14 12 48.2 16 10
Facilities
36 18 24 34 112.2 40 16
Total
169 74 181 155 578 179 151
Q3 Oct Nov Dec Q4
0
4
1
1
6
83 28 29
24 81
46 20 16
17 54
11
7
5
3
14
40 14
6
5
26
180 73 56
50 180
2014
21.3
310.8
183.1
51.3
122.2
690
Production*
2013/14 Production ('000 boe/d)*
Q4 13 2013 Q1 14
Sundance
47.4
42.6
49.4
Ansell
13.9
10.8
15.7
Brazeau
1.6
Kakwa
2.5
2.9
2.4
Other
3.6
3.1
3.2
Total
67.3
59.3
72.3
Q2 14 Q3 14
51.7
57.2
14.2
14.3
1.3
1.2
2.4
2.4
2.5
2.4
72.1
77.5
Oct
59.3
16.1
1.8
2.4
2.1
81.7
Nov
59.6
16.3
3.4
2.2
2.0
83.5
Dec Q4 14
59.2
59.4
17.0
16.5
4.4
3.2
2.2
2.3
1.9
2.0
84.7
83.3
2014
54.4
15.2
1.8
2.4
2.5
76.3
Jan
57.8
17.2
3.9
2.2
1.9
83.0
*This is an estimate based on real field data, not a forecast, and the actual numbers will vary from the
estimate due to accruals and adjustments. Such variance may be material. Tables may not add due to
rounding.
Suite 1500, 250 – 2nd St. SW
Calgary, AB T2P 0C1
Fax: 403 451 4100
Okay, so Peyto’s low costs mean we’re well insulated from
commodity price volatility. What does that really mean
though? If we slow down and behave in a very defensive
manner during periods of low commodity prices, much like
everyone else in the industry, having that insulation doesn’t
really do much for us. Where it becomes a significant
advantage, however, is if it allows us to take the opposite
tactic. If we aggressively deploy capital in the low commodity
environment, much like we’ve been doing for the last few
years, then we are levering off this low cost advantage to
improve the returns on that capital. Things will cost less,
Page 1 of 2
TSX Symbol: PEY
E-mail: [email protected]
Peyto Exploration & Development Corp.
President’s Monthly Report
February 2015
From the desk of Darren Gee, President & CEO
dollars will go further, and the returns we generate on the
same kind of well will be even better at a lower capital cost.
That’s what having a “returns focused strategy” really means.
It means that we deploy capital at times in the cycle when the
returns are highest. See Figure 4 as evidence of that countercyclical strategy at work. Since 2010, we’ve been deploying
ever larger capital programs (black line), not because the
natural gas prices were high (red line), they were actually
much lower than before, but because the costs to build new
production (yellow line) was the lowest. Which also means
our returns were some of the highest.
$800
70,000
$700
60,000
AECO
$600
50,000
$500
40,000
$400
30,000
$300
20,000
$200
10,000
$100
0
It appears that after a brief hiatus, our Petro-dollar is back.
The recognition that a large portion of the Canadian economy
is driven by oil and gas was offered by the Bank of Canada
last week with its 25 BPS cut to the prime rate. As a result,
the dollar has now returned to its historic correlation with WTI.
This is a little bit of good news for Canadian producers who
convert US prices into Canadian. Realized Canadian oil and
natural gas prices will be stronger as a result of a weaker
dollar (see Fig. 6).
Figure 6
WTI Spot Price vs. CAD/USD Exchange Rate
$180
1.2
$160
0.8
$140
0.4
$120
0
$1.40
1
CADUSD $
$900
80,000
Activity Levels and Commodity Prices
Capital Expenditures ($MM)
Annual Production Wedge (boe/d)
Capital Efficiency ($/boe/d)
Figure 4
90,000
So the plan today is to attempt to drill a record number of
wells, delivering a record amount of new production, but with
less capital than we previously thought - hopefully, as much
as 20% less (Fig. 5). And more for less is never a bad thing.
$1.30
R² = 0.846
0.6
$1.20
0.2
$0
$50
$100
Oil Price
$150
$200
$1.10
$100
$1.00
$80
$0
$0.90
$60
$0.80
$40
Source: Peyto presentation
Sure, we still have to honor the economic impact of lower
commodity prices in the near term. But if the cost savings are
greater than what we give up in prices, then the returns
should be better. And when you’re at the bottom, there is
always the chance that commodity prices go up.
Figure 5
$0.70
$20
$0
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
WTI Spot Price (Left Scale)
$0.60
CAD/USD Exchange Rate (Right Scale)
Source: EIA, Bank of Canada
Usually after the Christmas break, the Canadian rig counts
shoot up. Not this year. If anything, they’re about to plunge. I
suspect gas rig counts will taper off almost as much as oil rig
counts with all the CAPEX cuts (see Fig. 7).
Figure 7
500
Canadian Rig Count
Oil Rigs
400
Gas Rigs
300
200
100
Source: Peyto presentation
So while most of the industry is running in fear, Peyto is
looking to be very opportunistic this year. We want to drill a
maximum number of wells at these lower costs, and because
we have such high margins, we will have more cash than
most with which to do it.
Suite 1500, 250 – 2nd St. SW
Calgary, AB T2P 0C1
Fax: 403 451 4100
0
2010
2011
2012
2013
2014
2015
2016
Source: EIA
Page 2 of 2
TSX Symbol: PEY
E-mail: [email protected]