Peyto Exploration & Development Corp. ("Peyto" or the "Company") is pleased to report operating and financial results for the fourth quarter and 2023 fiscal year.
Full Year and Q4 2023 Highlights:
As previously announced, Peyto closed the acquisition of Repsol Canada Energy Partnership (the "Repsol Acquisition") for cash consideration of $699 million, including post-closing adjustments. The acquisition provided Peyto with over 800 low-risk, high-quality drilling locations1 and synergistic infrastructure to allow for the optimization of production and costs in the Greater Sundance area.
Delivered $200 million in funds from operations2,3 ("FFO"), or $1.05/diluted share, and $85 million of free funds flow4 in the quarter. Annual FFO totaled $670 million or $3.72/diluted share, the third highest FFO/share in Peyto's 25-year history. Free funds flow totaled $258 million in 2023.
The Company's disciplined hedging and diversification program in 2023 protected revenues from the sharp decline in benchmark natural gas prices. The 2023 average daily prices for AECO and Henry Hub decreased 50% and 60%, respectively, from 2022, while Peyto's realized natural gas price, including hedging gains, was only 13% lower. The Company exited 2023 with a strong hedge position, which currently protects approximately 70% and 56% of forecast gas production for 2024 and 2025, respectively. The securing of future revenues supports the sustainability of the Company's dividends and capital program along with debt repayment.
Peyto generated earnings of $88 million, or $0.46/diluted share, in the quarter and $293 million, or $1.62/diluted share, in 2023. Approximately 82% of earnings, or $239 million ($1.32/share) were returned to shareholders as dividends.
As previously announced, Peyto increased reserves by 35%, 41%, and 40% in the Proved Developed Producing ("PDP"), Total Proved ("TP"), and Total Proved plus Probable ("P+P") reserves categories, respectively. Low PDP Finding, Development and Acquisition ("FD&A") costs of $1.21/Mcfe and average field netback of $3.51/Mcfe in 2023 resulted in 2.9 times recycle ratio. Refer to more details in the February 15, 2024 press release.
Fourth quarter production volumes averaged 120,002 boe/d (623.0 MMcf/d of natural gas, 16,175 bbls/d of NGLs), a 14% increase year-over-year as a result of the Repsol Acquisition which was partially offset by lower production additions due to the moderation of Peyto's capital program in response to low commodity prices. Annual production averaged 104,948 during 2023.
Quarterly cash costs5 totaled $1.57/Mcfe, including royalties of $0.30/Mcfe, operating costs of $0.55/Mcfe, transportation of $0.26/Mcfe, G&A of $0.06/Mcfe and interest expense of $0.40/Mcfe. These costs include approximately $0.09/mcfe of non-recurring financing and integration costs associated with the Repsol Acquisition. Peyto's operating costs increased over prior quarters due to the higher cost structure of the Repsol facilities. The Company expects to reduce these costs with continued optimization and increased utilization of the acquired gas processing plants. Despite this increase, Peyto continues to have the lowest cash costs in the Canadian natural gas industry.
Total capital expenditures6 were $115 million in the quarter. Peyto drilled 19 wells (18.4 net), completed 22 wells (20.8 net), and brought 24 wells (22.5 net) on production. The Company spent a total of $413 million on capital expenditures during 2023, $12 million lower than previous guidance.
Peyto delivered a 70% operating margin7 and a 28% profit margin8, resulting in a 9% return on capital employed9 ("ROCE") and a 11% return on equity8 ("ROE"), on a trailing 12-month basis.
2023 in Review
The year 2023 was the completion of Peyto’s 25th year of successful operations. The Company delivered funds from operations of $670 million and earnings of $293 million in the year, allowing Peyto to return $239 million of dividends to shareholders. Peyto moderated capital investment in the first half of the year in response to lower commodity prices and focused activities in the Greater Sundance and Brazeau areas. The Company increased activities in the second half of 2023 in response to improved commodity prices and completed the acquisition of Repsol's remaining western Canadian assets. The Repsol Acquisition included approximately 23,000 boe/d of low-decline production, 455,000 net acres of mineral land and interests in 5 operated gas plants in the Alberta Deep Basin, directly adjacent to the Company’s Greater Sundance area. The acquisition was motivated by the internal identification of over 800 low-risk, high impact, undrilled locations, the synergies with Peyto’s lands and facilities, and the Company's extensive knowledge of the area. Peyto immediately began drilling on the newly acquired lands after closing on October 17, 2023, and brought on 8 high quality wells by year-end. Operating and profit margins were strong in 2023 at 70% and 28%, respectively, despite the significant drop in benchmark gas prices which were offset by the Company's disciplined hedging and diversification program.
Capital Expenditures
Peyto drilled 72 gross (67.8 net) horizontal wells in 2023 and completed 71 gross (66.8 net) wells for a capital investment of $302 million. The activity includes 1 gross (1 net) well drilled but not completed by Repsol prior to the closing of the acquisition. The Company also invested $31 million to bring 72 gross (67.8 net) wells on production using ultra-low emissions electric wellsite equipment. Drilling costs per meter were up 5% from 2022 while completion costs per meter were down 4%. The Company continued to increase the number of extended reach horizontal wells drilled in 2023, resulting in a 19% increase in average horizontal length from 2022. The combination of longer average horizontal wells and the change in species mix year over year resulted in a 25% increase in per well recovery, on a Proved Developed Producing (“PDP”) basis, as per the Company’s most recent reserves report.
Facilities and pipeline expenditures in 2023 totaled $64 million and included a 23 km large diameter pipeline that directly connects the Company’s Swanson gas plant to the Cascade power plant near the town of Edson, Alberta. Peyto is ready to supply gas to the 900 MWh Cascade power plant, once it is fully operational, which is expected in the second quarter of 2024. Additionally, several significant pipeline projects were completed to both optimize gathering and sales in both the Greater Sundance and Greater Brazeau area.
Peyto continued to be active pursuing high quality opportunities at land sales as well as through swaps, purchases, farm-ins etc. In total, the Company spent $4.6 million to acquire 22 net sections of land across the Company’s core areas. The Company also completed a $10 million, large scale seismic purchase as part of the Repsol Acquisition that provided 3,520 square kilometers of coverage over the newly acquired lands. The purchase price represents significant savings over current retail pricing and the acquired data will be an essential tool for all future development activity across the underdeveloped Repsol assets.
Reserves
The combination of a successful capital program and the Repsol Acquisition provided significant growth across all reserves categories. The value of Peyto's reserves per share increased in the Total Proved and Proved plus Probable categories despite the reduction of commodity price forecasts used in the GLJ report. The following table illustrates the change in reserve volumes and Net Present Value ("NPV") of future cash flows, discounted at 5%, before income tax and using the 3-Consultant average forecast pricing.
For more information on Peyto’s reserves, refer to the Press Release dated February 15, 2024, announcing the Year End Reserve Report which is available on the website at www.peyto.com. The complete statement of reserves data and required reporting in compliance with NI 51-101 will be included in Peyto's Annual Information Form to be released in March 2024.
Fourth Quarter 2023
Peyto continued with steady drilling activity throughout the fourth quarter of 2023 and ended the year with four rigs running across the Company’s Deep Basin core areas. Drilling and completions capital of $81 million was invested to drill 19 gross (18.4 net) wells and complete 22 gross (20.8 net) wells. In addition, $10 million was invested in the tie-in of 24 gross (22.5 net) wells while $12 million was invested in facility and major pipeline infrastructure which included several pipeline looping projects across both Greater Sundance and Greater Brazeau. Peyto was active at crown land sales and spent $2 million to add drilling opportunities and purchased 3D seismic licenses to cover most of the lands acquired from Repsol for $10 million.
Shortly after closing the Repsol Acquisition, Peyto moved swiftly and began development of the newly acquired lands, drilling a total of 8 gross (8 net) wells by the end of the quarter. As part of Peyto’s 2023 year-end reserves evaluation, the Company booked an average proved plus probable developed producing (“PDP+PA”) ultimate recovery of 7.0 Bcfe/well for these wells which represents a half-cycle finding and development cost10 of $0.76/Mcfe, exceeding the Company’s initial expectations.
Production volumes during the fourth quarter 2023 averaged 120,002 boe/d, up 14% from Q4 2022. Natural gas production was up 13% from Q4 2022, condensate and pentanes production increased 11%, and propane, butane and ethane production increased 47%. The larger increase in propane, butane and ethane production in the quarter was attributable to the Repsol Acquisition. The acquisition closed on October 17, 2023, therefore only a partial quarter of contribution from the assets are included in Peyto's fourth quarter results.
The Company’s realized price for natural gas in Q4 2023 was $3.87/Mcf including hedging gains, while its realized liquids price was $64.32/bbl including hedging losses, which yielded an average net sale price of $4.79/Mcfe. The net sale price per unit for Q4 2023 was down 14% from $5.60/Mcfe in Q4 2022 due to a sharp decline in benchmark natural gas prices year over year. Total cash costs in Q4 2023 were $1.57/Mcfe ($9.34/boe), consistent with $1.58/Mcfe in Q4 2022 as lower royalty expenses offset increased operating, transportation, G&A and interest expenses. The total Q4 2023 cash cost included royalties of $0.30/Mcfe, operating costs of $0.55/Mcfe, transportation of $0.26/Mcfe, interest of $0.40/Mcfe, and G&A of $0.06/Mcfe. Peyto's Q4 2023 cash costs were burdened with one-time costs relating to the closing and integration of the Repsol Acquisition. Interest costs included $0.08/Mcfe relating to financing costs and G&A included $0.01/Mcfe of additional one-time costs. Peyto's cash netback (before current tax expense) was $3.26/Mcfe, down 22% from Q4 2022, and yielded a 68% operating margin.
Peyto generated funds from operations of $200 million in the quarter, or $1.05/diluted share. Q4 2023 funds from operations decreased by 9% from $221 million in Q4 2022 due to the sharp decline in natural gas prices, partially offset by hedging gains. The Q4 2023 profit margin was 28%, down from 35% in Q4 2022.
Marketing
Commodity Prices
During Q4 2023, Peyto realized a natural gas price after hedging and diversification of $3.87/Mcf, or $3.37/GJ, 55% higher than the average AECO daily price of $2.18/GJ. Peyto’s natural gas hedging activity resulted in a realized gain of $0.83/Mcf ($47 million) due to the sharp decline in AECO and Henry Hub natural gas prices.
Condensate and pentanes volumes were sold in Q4 2023 for an average price of $96.30/bbl, which is down 12% from $109.29/bbl in Q4 2022, while Canadian WTI decreased 5% to $106.72/bbl over the same period. Butane, propane and ethane volumes were sold in combination at an average price of $30.86/bbl, or 29% of light oil price, down 19% from $37.97/bbl in Q4 2022. Peyto's combined realized NGL price in the quarter was $64.68/bbl before hedging, and $64.32/bbl including a hedging loss of $0.36/bbl.
Hedging
The Company has been active in hedging future production with financial and physical fixed price contracts to protect a portion of its future revenue from commodity price and foreign exchange volatility. Currently, Peyto has 459 MMcf/d of natural gas hedged at $3.93/Mcf for 2024, and 417 MMcf/d hedged at $4.09/Mcf for 2025. Commodity price risk on condensate and pentane production is managed through WTI swaps and collars and Peyto currently has over 4,300 bbls/d hedged for 2024.
Peyto also protects a portion of its US dollar exposure with foreign exchange forward contracts and has hedged US$290 million at 1.3481 CAD/USD for 2024, and $US156 million at 1.3459 CAD/USD for 2025.
The Company's fixed price contracts combined with its diversification to the Cascade power plant, expected to commence in Q2 of 2024, and other premium market hubs in North America allow for revenue security and support continued shareholder returns through dividends and debt reduction. Details of Peyto’s ongoing marketing and diversification efforts are available on Peyto’s website at https://www.peyto.com/Marketing.aspx
The Peyto Strategy
The Peyto strategy has been one of the most consistent strategies in the Canadian Energy industry over the last two decades and has focused simply on maximizing the returns on shareholders’ capital by investing that capital into the profitable development of long life, low cost, and low risk natural gas resource plays. Peyto’s strategy of maximizing returns doesn’t just focus on the efficient execution of exploration and production operations in the field but continues in the head office where the management of corporate costs, including the cost of capital, is carefully controlled to ensure true returns are ultimately realized. Alignment of goals between what is good for the Company, its shareholders, its employees and what is good for the environment and all stakeholders is critical to ensuring that the greatest returns are achieved. Evidence of Peyto’s success deploying this strategy through the years is illustrated in the following table.
The consistency and repeatability of Peyto’s operational execution in the field, combined with strict cost control in all aspects of its business has resulted in 46% of the average sales price being retained in financial benefit over the past 25 years. This healthy margin of benefit (as shown above), which rewards both royalty owners and shareholders, has been preserved for over a decade. Out of that financial benefit, royalty owners have received approximately 23%, while shareholders, whose capital has been at risk, have received the balance. This margin of benefit is what has and will continue to help insulate Peyto and its stakeholders from future volatility in commodity prices.
Economic Benefit to Canadians
Over Peyto’s 25-year history, the Company has invested a cumulative $7.7 billion in capital programs to drill wells, construct facilities, shoot seismic, and lease mineral rights in the province of Alberta. This significant expenditure has provided high quality employment opportunities for many Canadians to improve their quality of life. In addition, the Company has made payments to various levels of government that include provincial crown royalties, municipal property taxes, provincial mineral lease payments, carbon taxes, regulatory administration fees, federal and provincial corporate income taxes, and miscellaneous payments to the benefit of Albertans and all Canadians. Over the past decade, these payments have totaled $780 million.
Activity Update
Drilling operations in Q1 resumed with four rigs drilling across Peyto’s core areas after a short holiday break. Since the beginning of 2024, 12 gross (12 net) wells have been drilled, 10 gross (10 net) wells have been completed, and 9 gross (9 net) wells have been brought on production. Activity has shifted to increase focus in the Greater Sundance area to take advantage of the newly acquired lands and facilities, with three of Peyto's four active rigs now operating in this area. The Company has drilled 5 additional wells on the acquired lands, brought 3 wells on production, and will connect the other 2 wells in the first half of March. The recent results continue to exceed expectations and Peyto will continue to drill a steady program of Notikewin, Wilrich, Dunvegan, and Falher targets on these land through the remainder of 2024 with a focus on bringing new gas to underutilized facilities.
Mid-January saw a bout of severe cold weather that impacted production by approximately 3,500 boe/d for the month which was fully restored as temperatures warmed. The Company is currently implementing and exploring several initiatives aimed at improving reliability on the newly acquired assets.
Early success of the drilling program has confirmed Peyto's views of the quality of opportunities on the newly acquired lands. A major focal point for the Company in 2024 will be the continued reduction of operating costs on the newly acquired assets. The operations team has identified several projects that will involve the increase in plant utilization, the re-direction of volumes, and other optimization synergies that Peyto will seek to undertake during the year.
Management Changes
As previously announced, Kathy Turgeon is retiring as Chief Financial Officer (CFO) effective March 31, 2024. Ms. Turgeon started with Company in 2004 as Controller and was appointed Vice President of Finance in January 2006 and later appointed CFO in January 2008. The Board would like to thank Ms. Turgeon for her contributions and dedication to the Company over the last 20 years and wish her all the best in retirement. Peyto is pleased to announce that Tavis Carlson, VP Finance will be promoted to the role of CFO effective April 1, 2024. Mr. Carlson joined the Company in March 2022 and has been a key contributor to recent financings including playing a critical role in the recent Repsol Acquisition. Prior to Peyto, Mr. Carlson was the VP Finance and CFO at Altura Energy Inc. from 2015 to 2021 and has over 20 years of industry experience.
Outlook
Lower seasonal demand as a result of a warmer-than-normal North American winter, coupled with increased production has left gas storage levels above the 5-year average across the continent. This imbalance continues to put downward pressure on prices for 2024, however, the increase in gas-fired power demand and the buildout of LNG egress projects over the next two years bodes well for the longer-term future of natural gas prices.
The Company plans to execute a 2024 capital program between $450 to $500 million specifically designed with flexibility in the back half of the year to adjust to changing commodity prices. 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.