CALGARY, May 4, 2020 /CNW/ - (TSX: PMT) –
Perpetual Energy Inc. ("Perpetual", or the "Company") is pleased to
release its first quarter 2020 financial and operating results. A
complete copy of Perpetual's unaudited condensed interim
consolidated financial statements and related Management's
Discussion and Analysis ("MD&A") for the three months ended
March 31, 2020 can be obtained
through the Company's website at www.perpetualenergyinc.com and
SEDAR at www.sedar.com.
EAST EDSON
TRANSACTION
On April 1, 2020, the Company
closed the sale of a 50% working interest in its East Edson property in West Central Alberta to
a third-party purchaser for consideration including a cash payment
of $35 million and the carried
interest funding of the drill, complete and tie-in costs for an
eight-well drilling program (the "East Edson Transaction"). A
minimum of two horizontal wells targeting development of the
Wilrich formation are required to be drilled, completed and tied-in
following spring break-up 2020. The purchaser is required to
complete the eight-well horizontal drilling program by April 1, 2022.
The cash proceeds from the East Edson Transaction will be used
to repay bank debt and fund profitable investment in the
Clearwater play in Eastern Alberta as oil prices recover and
stabilize. The eight-well development capital carry at East Edson is anticipated to restore gross
production levels to more fully utilize the existing processing
capacity, improve operating netbacks given the largely fixed
operating cost base, and result in improved capital spending
efficiency.
FIRST QUARTER 2020 HIGHLIGHTS
Capital Spending, Production and Operations
- Late in the first quarter of 2020, the onset of the COVID-19
pandemic caused a wide-spread economic slowdown and corresponding
oil and natural gas demand destruction. The impact of COVID-19,
coupled with the Saudi Arabia and
Russia induced oil price shock,
dramatically impacted Perpetual's operations. Oil prices dropped
abruptly to levels below Perpetual's variable production costs,
prompting the shut-in of all heavy oil production in late March to
minimize operating losses and preserve reserves.
- To ensure employees remain safe and healthy, corporate
employees began working from home in mid-March and field protocols
have been put in place to enforce physical distancing and reduce
the risk of transmission. Emergency support measures have
been announced by both federal and provincial governments which are
expected to provide cost reductions of $0.8
million over 2020, as well as the temporary payment deferral
of various taxes and other costs.
- Exploration and development spending for the first quarter of
2020 was $5.2 million, and included
costs to drill, complete and tie-in four (4.0 net) heavy oil wells
in the Ukalta area of Eastern
Alberta, targeting the Clearwater formation. The program successfully
demonstrated enhanced capital efficiency and performance utilizing
a modified drilling mud system and de-risked additional development
drilling inventory. These four wells commenced production in late
January through early March and production had ramped up to a
combined rate of over 540 bbl/d prior to curtailment and shut-in
later in March in response to the significant decline in heavy oil
prices. Additional Clearwater
exploration and development opportunities were also secured during
the quarter.
- Perpetual spent $0.2 million (Q1
2019 – $0.3 million) on abandonment
and reclamation projects. Nine reclamation certificates were
received from the AER during the first quarter of 2020 (Q1 2019 –
four reclamation certificates) which will result in the cessation
of associated property tax and surface lease expenses.
- Production averaged 7,479 boe/d in the first quarter of 2020,
down 27% from the comparable period in 2019 and down 6% from the
fourth quarter of 2019. The decrease was driven by natural declines
at East Edson due to the deferral
of gas-focused capital spending in response to continued low
natural gas prices. Additionally, the temporary shut-in of heavy
oil production in late March reduced first quarter production by
approximately 100 boe/d. Heavy oil production in Eastern Alberta was 17% higher than the first
quarter of 2019, despite the heavy oil production shut-in during
March. The increase in oil-weighted production was due to the
positive impact of the heavy oil focused 2019 and first quarter
2020 Clearwater drilling program at Ukalta, combined with lower
base declines at Mannville due to
waterflood operations.
- Production and operating costs were down by $1.1 million (22%) compared to the first quarter
of 2019. On a unit-of-production basis, production and operating
expenses were up 6% to $6.12/boe for
the first quarter of 2020, compared to $5.77/boe for the comparable period of 2019. West
Central production and operating expenses of $1.7 million were down 16% relative to the first
quarter of 2019, while production was down 32% over the same
period, illustrating the largely fixed cost nature of the
East Edson property.
Financial Highlights
- Realized revenue was $13.88/boe
in the first quarter of 2020, 43% lower than the comparative period
of 2019 ($24.24/boe). The decrease
was due to the 67% reduction in Perpetual's realized natural gas
price to $1.16/Mcf, combined with a
realized oil price of $32.60/bbl
which was 21% lower than the comparative period of 2019. Lower
realized natural gas prices were the result of the 22% and 38%
decrease in the AECO and NYMEX Daily Index prices, respectively.
The decline in NYMEX prices outpaced AECO price decreases and
reduced the basis differential price, combining to generate
AECO-NYMEX basis hedging losses that further reduced realized
prices.
- Perpetual's operating netback of $1.6
million ($2.39/boe) in the
first quarter of 2020 decreased 87% from $12.3 million ($13.36/boe) in the comparative 2019 period as a
result of lower reference prices for both natural gas and crude
oil, physical and financial hedging losses, and the 27% decrease in
production caused by natural declines at the East Edson property in West Central.
- Non-cash impairment charges of $60.5
million were recognized in the first quarter of 2020,
triggered by the impact of materially lower third-party engineering
consultant forward commodity price forecasts on Perpetual's heavy
oil and liquids-rich natural gas assets, along with certain
undeveloped lands classified as exploration and evaluation
("E&E") assets.
- Net loss for the first quarter of 2020 was $59.7 million ($0.98/share) due primarily to impairment charges
of $60.5 million, offset partially by
unrealized gains on derivatives of $12.1
million (Q1 2019 – $7.6
million unrealized loss) attributable to the reduction in
forward WTI and WCS oil prices.
- Cash flow used in operating activities in the first quarter of
2020 was $3.1 million ($0.05/share), down $12.4
million from the prior year period (Q1 2019 – cash flow from
operating activities of $9.3 million
or $0.15/share) due to the impact of
the 27% decrease in production combined with lower realized natural
gas and crude oil prices of 67% and 21%, respectively.
- Adjusted funds flow in the first quarter of 2020 was negative
$3.6 million ($0.06/share), down $10.0
million (157%) from the prior year period of $6.4 million ($0.11/share) due primarily to lower realized
commodity prices as well as the 27% decrease in production.
- The Company's remaining 1.0 million TOU shares were sold in
January 2020 for proceeds of
$14.3 million which were used to
repay the outstanding TOU share margin loan of $0.1 million and reduce the bank Credit
Facility.
- At March 31, 2020, Perpetual had
total net debt of $128.7 million, up
$10.6 million (9%) from December 31, 2019. The increase in net debt was
attributable to cash flows used in operating activities of
$3.1 million, combined with first
quarter capital expenditures of $5.2
million.
- Incorporating the impact of the East Edson Transaction,
effective April 1, 2020, Perpetual's
syndicate of Credit Facility lenders reduced the Borrowing Limit
from $45 million to $20 million, with the next Borrowing Limit
redetermination scheduled on or prior to July 31, 2020. The Credit Facility will continue
to revolve until July 31, 2020 and
may be extended for a further period of up to 364 days subject to
approval by the Company's lenders. If not extended, the Credit
Facility will cease to revolve, and all outstanding advances will
be repayable on November 30,
2020.
- After giving effect to the $35
million of cash proceeds received from the East Edson
Transaction and the reduced Borrowing Limit effective April 1, 2020, Perpetual had available liquidity
of $13.6 million.
SEQUOIA LITIGATION
On January 13, 2020, the Court of
Queen's Bench issued its written decision related to the Statement
of Claim filed on August 3, 2018
against Perpetual and its President and Chief Executive Officer
("CEO") with respect to the Company's disposition of shallow gas
assets in Eastern Alberta to an
unrelated third party on October 1,
2016 (the "Sequoia Litigation"). The decision dismissed and
struck all claims against the Company's CEO and all but one of the
claims filed by PwC in its capacity as trustee in bankruptcy (the
"Trustee") against Perpetual. The Court did not find that the test
for summary dismissal relating to whether the transaction was an
arm's length transfer for purposes of section 96(1) of the
Bankruptcy and Insolvency Act (the "BIA") was met, on the balance
of probabilities. Accordingly, the BIA claim was not dismissed or
struck and only that part of the claim can continue against
Perpetual. The Trustee filed a notice of appeal with the Court of
Appeal of Alberta, challenging the
decision, and Perpetual filed a similar notice of appeal contesting
the BIA claim portion of the decision. The appeal proceedings are
scheduled to be heard in December
2020.
On January 28, 2020, the Court of
Appeal issued its decision with respect to Perpetual's application
for security for costs, requiring the Trustee to post security with
the Court of Appeal in the amount of $0.2
million. Applications have been filed by the Trustee to
appeal the security for costs decision and alter the reasons for
the decision. The Court of Appeal is scheduled to hear these
applications in June 2020.
On February 25, 2020, Perpetual
filed a new application to strike and summarily dismiss the BIA
claim on the basis that there was no transfer at undervalue, and
Sequoia was not insolvent at the time of the transaction nor caused
to be insolvent by the transaction. The Court is scheduled to hear
this application in June 2020.
Management expects that the Company is more likely than not to
be successful in defending against the Sequoia Litigation such that
no damages will be awarded against it, and therefore, no amounts
have been accrued as a liability in Perpetual's financial
statements.
2020 OUTLOOK
Capital spending in the first quarter of 2020 of $5.2 million was primarily directed to the four
well (4.0 net) heavy oil drilling program targeting the
Clearwater formation in the Ukalta
area of Eastern Alberta. In
response to the recent significant decline in global oil prices,
all further capital expenditures in 2020 in Eastern Alberta will be deferred and
substantially all of the Company's heavy oil production has been
temporarily suspended, pending a recovery to oil prices. Capital
activity in 2020 at the 50% owned East
Edson property will consist of the carried interest drilling
program forming part of the East Edson Transaction
consideration.
Assuming a mid-year recovery of oil prices sufficient to support
the restart of oil production later in the year, Perpetual
anticipates average 2020 sales volumes of 4,500 to 5,500 boe/d (25%
liquids). Actions have been implemented to minimize operating and
corporate costs. To ensure employees remain safe and healthy,
corporate employees began working from home in mid-March, and
strict social distancing and hygiene protocols were implemented
across field operations. All employees have been reduced to 80% of
base compensation with a corresponding reduction in hours worked,
to reduce costs by an estimated annualized amount of $0.7 million per year.
Abandonment and reclamation expenditures of $1.4 million are forecast for 2020, primarily at
Mannville, as required to comply
with the minimum expenditure level directed by the Alberta Energy
Regulator's area-based closure program, addressing decommissioning
obligations and thereby decreasing fixed operating costs associated
with non-producing wells. In late April, the Government of
Alberta announced its Site
Rehabilitation Program aimed at incenting abandonment and
reclamation activity. Perpetual will consider directing additional
spending to retire inactive wells and sites depending on incentives
available and as resources permit.
Financial and
Operating Highlights
|
Three months ended
March 31,
|
($Cdn thousands
except volume and per share amounts)
|
2020
|
2019
|
Change
|
Financial
|
|
|
|
Oil and natural gas
revenue
|
10,497
|
22,199
|
(53%)
|
Net loss
|
(59,718)
|
(4,892)
|
(1,121%)
|
Per share – basic and
diluted(2)
|
(0.98)
|
(0.08)
|
(1,125%)
|
Cash flow from (used
in) operating activities
|
(3,114)
|
9,292
|
(134%)
|
Adjusted funds
flow(1)
|
(3,601)
|
6,362
|
(157%)
|
Per share – basic and
diluted(1)(2)
|
(0.06)
|
0.11
|
(155%)
|
Total
assets
|
173,241
|
328,495
|
(47%)
|
Revolving bank
debt
|
39,145
|
39,598
|
(1%)
|
Term loan, principal
amount
|
45,000
|
45,000
|
–
|
TOU share margin
demand loan, principal amount
|
–
|
14,100
|
(100%)
|
Senior Notes,
principal amount
|
33,580
|
32,490
|
3%
|
TOU share
investment
|
–
|
(34,196)
|
(100%)
|
Adjusted working
capital deficiency(1)
|
10,925
|
5,364
|
104%
|
Net
debt(1)
|
128,650
|
102,356
|
26%
|
Capital
expenditures
|
5,233
|
1,238
|
323%
|
Net payments
(proceeds) on acquisitions and dispositions
|
–
|
–
|
–
|
Net capital
expenditures
|
5,233
|
1,238
|
323%
|
Common shares
(thousands)(3)
|
|
|
|
End of
period
|
60,717
|
60,037
|
1%
|
Weighted average -
basic and diluted
|
60,674
|
60,111
|
1%
|
Operating
|
|
|
|
Daily average
production
|
|
|
|
Natural gas
(MMcf/d)
|
33.3
|
50.0
|
(33%)
|
Oil
(bbl/d)
|
1,320
|
1,121
|
18%
|
NGL
(bbl/d)
|
606
|
785
|
(23%)
|
Total
(boe/d)
|
7,479
|
10,240
|
(27%)
|
Average
prices
|
|
|
|
Realized natural gas
price ($/Mcf)
|
1.16
|
3.54
|
(67%)
|
Realized oil price
($/bbl)
|
32.60
|
41.12
|
(21%)
|
Realized NGL price
($/bbl)
|
36.48
|
32.16
|
13%
|
Wells drilled –
gross (net)
|
|
|
|
Natural gas
|
–
(–)
|
– (–)
|
|
Oil
|
4
(4.0)
|
– (–)
|
|
Total
|
4
(4.0)
|
– (–)
|
|
(1)
|
These are non-GAAP
measures. Please refer to "Non-GAAP Measures"
below.
|
(2)
|
Based on weighted
average basic common shares outstanding for the period.
|
(3)
|
All common shares are
net of shares held in trust (Q1 2020 – 0.6 million; Q1 2019 – 0.9
million). See "Note 14 to the condensed interim consolidated
financial statements".
|
ADDITIONAL INFORMATION
About Perpetual
Perpetual is an oil and natural gas exploration, production and
marketing company headquartered in Calgary, Alberta. Perpetual operates a
diversified asset portfolio, including liquids-rich natural gas
assets in the deep basin of west central Alberta, heavy oil and shallow natural gas in
eastern Alberta, with longer term
opportunities through undeveloped oil sands leases in northern
Alberta. Additional information on
Perpetual can be accessed at www.sedar.com or from the
Corporation's website at www.perpetualenergyinc.com.
The Toronto Stock Exchange has neither approved nor disapproved
the information contained herein.
Forward-Looking Information
Certain information regarding Perpetual in this news release
including management's assessment of future plans, operations, and
certain of the information contained under the heading "2020
Outlook" in this news release, may constitute forward-looking
information or statements under applicable securities laws. The
forward looking information includes, without limitation, the use
of cash proceeds from the East Edson Transaction including the
repayment of bank debt and the funding of profitable investment in
the Clearwater play in
Eastern Alberta, the future
recovery and stabilization of oil prices, any benefits to be
derived from the East Edson Transaction including that the
eight-well capital carry at East
Edson will restore gross production levels to more fully
utilize the existing processing capacity, improve operating
netbacks and result in improved capital spending efficiency, the
timing for the next Borrowing Limit review and any future extension
of the credit facility, the nature of the capital spending in 2020
at the 50% owned East Edson
property, the deferral and suspension of oil capital expenditures
in 2020 including heavy oil production and the anticipated timing
of an oil price recovery and production restart, anticipated
average 2020 sales volumes, the ability to minimize operating and
corporate costs, abandonment and reclamation expenditure forecasts
for 2020 and ability to decrease fixed operating costs associated
with non-producing wells, anticipated amounts and allocation of
capital spending; statements regarding estimated production and
timing thereof; forecast average production; completions and
development activities; prospective oil and natural gas liquids
production capability; projected realized natural gas prices and
adjusted funds flow; estimated decommissioning obligations;
commodity prices and foreign exchange rates; and commodity price
management.
Various assumptions were used in drawing the conclusions or
making the forecasts and projections in the forward-looking
information contained in this news release, which assumptions are
based on management's analysis of historical trends, experience,
current conditions and expected future developments pertaining to
Perpetual and the industry in which it operates as well as certain
assumptions regarding the matters outlined above. Forward-looking
information is based on current expectations, estimates and
projections that involve a number of known and unknown risks,
including, without limitation, the impact of the ongoing oil price
war between Russia and
Saudi Arabia and COVID-19 as
further described below, which could cause actual results to vary
and in some instances to differ materially from those anticipated
by Perpetual and described in the forward-looking information
contained in this news release. In particular and without
limitation of the foregoing, the recent outbreak of COVID-19 has
had a negative impact on global financial conditions. Perpetual
cannot accurately predict the impact COVID-19 will have on its
ability to execute its business plans in response to government
public health efforts to contain COVID-19 and to obtain financing
or third parties' ability to meet their contractual obligations
with Perpetual including due to uncertainties relating to the
ultimate geographic spread of the virus, the severity of the
disease, the duration of the outbreak, and the length of travel and
quarantine restrictions imposed by governments of affected
jurisdictions; and the current and future demand for oil and gas.
In the event that the prevalence of COVID-19 continues to increase
(or fears in respect of COVID-19 continue to increase), governments
may increase regulations and restrictions regarding the flow of
labour or products, and travel bans, and Perpetual's operations,
service providers and customers, and ability to advance its
business plan or carry out its top strategic priorities, could be
adversely affected. In particular, should any employees,
consultants or other service providers of Perpetual become infected
with COVID-19 or similar pathogens, it could have a material
negative impact on Perpetual's operations, prospects, business,
financial condition and results of operations. Undue reliance
should not be placed on forward-looking information, which is not a
guarantee of performance and is subject to a number of risks or
uncertainties, including without limitation those described herein
and under "Risk Factors" in Perpetual's Annual Information Form and
MD&A for the year ended December 31,
2019 and in other reports on file with Canadian securities
regulatory authorities which may be accessed through the SEDAR
website (www.sedar.com) and at Perpetual's website
(www.perpetualenergyinc.com). Readers are cautioned
that the foregoing list of risk factors is not exhaustive.
Forward-looking information is based on the estimates and opinions
of Perpetual's management at the time the information is released,
and Perpetual disclaims any intent or obligation to update publicly
any such forward-looking information, whether as a result of new
information, future events or otherwise, other than as expressly
required by applicable securities law.
Non-GAAP Measures
This news release contains the terms "adjusted funds flow",
"adjusted funds flow per share", "adjusted funds flow per boe",
"available liquidity", "cash costs", "net working capital
deficiency (surplus)", "net debt", "net bank debt", "net debt to
adjusted funds flow ratio", "operating netback", "realized revenue"
and "enterprise value" which do not have standardized meanings
prescribed by GAAP. Management believes that in addition to net
income (loss) and net cash flows from operating activities as
defined by GAAP, these terms are useful supplemental measures to
evaluate operating performance. Users are cautioned however that
these measures should not be construed as an alternative to net
income (loss) or net cash flows from operating activities
determined in accordance with GAAP as an indication of Perpetual's
performance and may not be comparable with the calculation of
similar measurements by other entities.
Adjusted funds flow: Management uses adjusted funds flow and
adjusted funds flow per boe as key measures to assess the ability
of the Company to generate the funds necessary to finance capital
expenditures, expenditures on decommissioning obligations and meet
its financial obligations. Adjusted funds flow is calculated based
on cash flows from (used in) operating activities, excluding
changes in non-cash working capital and expenditures on
decommissioning obligations since Perpetual believes the timing of
collection, payment or incurrence of these items is variable.
Expenditures on decommissioning obligations may vary from period to
period depending on capital programs and the maturity of the
Company's operating areas. Expenditures on decommissioning
obligations are managed through the capital budgeting process which
considers available adjusted funds flow. The Company has also
deducted payments of the gas over bitumen royalty financing from
adjusted funds flow to present these payments net of gas over
bitumen royalty credits received. These payments are indexed to gas
over bitumen royalty credits and are recorded as a reduction to the
Corporation's gas over bitumen royalty financing obligation in
accordance with IFRS. Additionally, the Company has excluded
payments of restructuring costs associated with employee downsizing
costs, which management considers to not be related to cash flow
from operating activities.
Adjusted funds flow per share is calculated using the same
weighted average number of shares outstanding used in calculating
net income (loss) per share. Adjusted funds flow is not intended to
represent net cash flows from (used in) operating activities
calculated in accordance with IFRS.
Adjusted funds flow per boe is calculated as adjusted funds
flow divided by total production sold in the period.
Available Liquidity: Available Liquidity is defined as
Perpetual's reserve-based credit facility (the "Credit Facility")
borrowing limit (the "Borrowing Limit"), less borrowings and
letters of credit issued under the Credit Facility. Management uses
available liquidity to assess the ability of the Company to finance
capital expenditures and expenditures on decommissioning
obligations, and to meet its financial obligations.
Cash costs: Cash costs are comprised of royalties, production
and operating, transportation, general and administrative, and cash
finance expense. Cash costs per boe is calculated by dividing cash
costs by total production sold in the period. Management believes
that cash costs assist management and investors in assessing
Perpetual's efficiency and overall cost structure.
Realized revenue: Realized revenue is the sum of realized
natural gas revenue, realized oil revenue and realized natural gas
liquids ("NGL") revenue which includes realized gains (losses) on
financial natural gas, crude oil, NGL, and foreign exchange
contracts. Realized revenue is used by management to calculate the
Corporation's net realized commodity prices, taking into account
monthly settlements on financial crude oil and natural gas forward
sales, collars, basis differentials, and forward foreign exchange
sales. These contracts are put in place to protect Perpetual's
adjusted funds flow from potential volatility in commodity prices
and foreign exchange rates. Any related realized gains or losses
are considered part of the Corporation's realized price.
Operating netback: Operating netback is calculated by
deducting royalties, production and operating expenses, and
transportation costs from realized revenue. Operating netback is
also calculated on a per boe basis using production sold for the
period. Operating netback on a per boe basis can vary significantly
for each of the Company's operating areas. Perpetual considers
operating netback to be an important performance measure as it
demonstrates its profitability relative to current commodity
prices.
Net working capital deficiency (surplus): Net working capital
deficiency (surplus) includes total current assets and current
liabilities excluding short-term derivative assets and liabilities
related to the Corporation's risk management activities, Tourmaline
Oil Corp. ("TOU") share investment, TOU share margin demand loan,
revolving bank debt, term loan, current portion of gas over bitumen
royalty financing, current portion of lease liabilities, and
current portion of provisions.
Net bank debt, net debt and net debt to adjusted funds flow
ratio: Net bank debt is measured as current and long-term revolving
bank debt including net working capital deficiency (surplus). Net
debt includes the carrying value of net bank debt, the principal
amount of the term loan, the principal amount of the TOU share
margin demand loan and the principal amount of senior notes,
reduced for the mark-to-market value of the TOU share investment.
Net debt, net bank debt, and net debt to adjusted funds flow ratios
are used by management to assess the Corporation's overall debt
position and borrowing capacity. Net debt to adjusted funds flow
ratios are calculated on a trailing twelve-month basis.
Enterprise value: Enterprise value is equal to net debt plus
the market value of issued equity, and is used by management to
analyze leverage. Enterprise value is not intended to represent the
total funds from equity and debt received by the Corporation upon
issuance.
For additional reader advisories in regards to non-GAAP
financial measures, including Perpetual's method of calculation and
reconciliation of these terms to their corresponding GAAP measures,
see the section entitled "Non-GAAP Measures" within the Company's
MD&A filed on SEDAR.
BOE Equivalents
Perpetual's aggregate proved and probable reserves are
reported in barrels of oil equivalent (boe). Boe may be misleading,
particularly if used in isolation. In accordance with NI 51-101, a
boe conversion ratio for natural gas of 6 Mcf: 1 boe has been used,
which is based on an energy equivalency conversion method primarily
applicable at the burner tip and does not necessarily represent a
value equivalency at the wellhead. As the value ratio between
natural gas and crude oil based on the current prices of natural
gas and crude oil is significantly different from the energy
equivalency of 6:1, utilizing a conversion on a 6:1 basis may be
misleading as an indication of value.
The following abbreviations used in this news release have
the meanings set forth below:
bbls
|
barrels
|
boe
|
barrels of oil
equivalent
|
Mcf
|
thousand cubic
feet
|
MMcf
|
million cubic
feet
|
SOURCE Perpetual Energy Inc.