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Perpetual Energy Inc. (PMGYF: OTC Link) | Perpetual Energy Inc. Releases Second Quarter 2012 Financial and Operating Results

Category : Stocks

Perpetual Energy Inc. Releases Second Quarter 2012 Financial And Operating Results

Aug 13, 2012

CALGARY, Aug. 13, 2012 /CNW/ – (TSX:PMT) – Perpetual Energy Inc. (“Perpetual” or the “Corporation”) releases its financial and operating results for the second quarter of 2012. A copy of Perpetual’s unaudited interim consolidated financial statements and notes and related management’s discussion and analysis (“MD&A”) for the three and six months ended June 30, 2012 and 2011 can be obtained through the Corporation’s website at www.perpetualenergyinc.com and SEDAR at www.sedar.com.

Second Quarter Summary

Perpetual continued to make progress on its key priorities for 2012, which include:

  1. Profitable capital investment in chosen proven diversifying growth plays to increase oil and natural gas liquids (“NGL”) production;
  2. Debt reduction;
  3. Manage downside risks; and
  4. Continue to advance the assessment of high impact, longer term growth opportunities with risk-managed investment.

Operational Highlights

  • Oil and NGL production increased 92 percent from the second quarter of 2011 to 3,446 bbl/d, representing 16 percent of total production versus seven percent in the 2011 period. Mannville heavy oil production grew 407 percent from last year’s second quarter and 17 percent from the first quarter of 2012 to average 2,605 bbl/d. Heavy oil sales were slightly lower than expected due to wet weather which impaired trucking and delayed drilling and completion operations.

  • Perpetual executed a $9.6 million second quarter capital program focused on heavy oil exploration and development in the Mannville area of eastern Alberta. Six gross (6.0 net) horizontal wells were drilled in the quarter.
  • Perpetual completed construction of a new compression facility at West Edson to bring on highly successful Wilrich horizontal natural gas wells drilled in late 2011 and the first quarter of 2012. Production through the new facility began in late March and continued at maximum throughput capacity for much of the second quarter, with an average NGL yield of over 430 bbl/d.

Gas Storage Disposition

  • The Corporation closed the disposition of 90 percent of its Warwick gas storage business (“WGSI”) on April 25, 2012 for cash proceeds of $80.3 million net of transaction costs. The interest was acquired by a partnership sponsored by Brookfield Asset Management. As part of the agreement, Perpetual has the option, exercisable within one year of closing, to buy back up to an additional 30 percent ownership interest in WGSI at the same price as the initial sale plus adjustments, for a final ownership interest of up to 40 percent. In addition, Perpetual has a separate agreement to provide management services and operate the facility for an annual fee over an initial two-year term.

Financial Results

  • Perpetual repaid its $74.9 million 6.5% unsecured convertible debentures (the “6.50% Debentures”) at maturity on June 30, 2012.

  • Total net debt was reduced 17 percent to $401.9 million at the end of the quarter from $483.6 million at March 31, 2012. Net debt has decreased by $125 million in the first six months of 2012 through an asset disposition program announced in late 2011. Bank debt outstanding was $85.5 million on a borrowing base of $140 million as of June 30, 2012.
  • The AECO Monthly Index price decreased 51 percent to $1.84 per Mcf from $3.74 per Mcf for the second quarter of 2011. North American natural gas prices continued to experience pressure from strong supply from shale gas plays in the United States combined with unseasonably high natural gas storage levels after an unusually warm winter.
  • Perpetual’s natural gas price before derivatives declined 47 percent to $2.12 per Mcf from $4.01 per Mcf for the comparative quarter in 2011. Perpetual’s gas price before derivatives was 15 percent higher than the AECO Monthly Index price mainly due to the benefit of a physical natural gas delivery contract for 25,000 GJ/d at a price of $2.59 per GJ ($2.73 per Mcf).
  • Perpetual’s realized natural gas price, including hedging activities was $3.28 per Mcf, 17 percent lower than the second quarter of 2011, but 78 percent higher than the AECO Monthly Index price for the quarter.
  • Oil and NGL prices before derivatives decreased 21 percent from last year’s second quarter to $61.10 per bbl, which reflects heavy oil making up a larger proportion of liquids production, and a widening of the price differential between the heavy oil benchmark Western Canadian Select (“WCS”) and West Texas Intermediate (“WTI”).
  • Realized gains on derivatives totaled $10.3 million for the three-month period, primarily from natural gas price risk management contracts.
  • Total cash costs were down nine percent from the second quarter of 2011, led by a 67 percent reduction in royalties and a 41 percent decline in cash general and administrative expenses.
  • Quarterly funds flow measured $12.7 million or $0.09 per common share, compared to $17.9 million or $0.12 per common share for the same period in 2011. Lower natural gas prices and production were partially offset by increasing heavy oil production and lower total cash costs.

Subsequent Events

  • Recently, AECO Monthly Index prices have reversed their downward trend as a result of relatively hot weather and strong summer heating demand across the continent. In addition, low natural gas prices have favoured fuel switching in the power generation sector with significant coal-to-gas switching in the second quarter. Given these favorable trends, Perpetual terminated its 2013 forward natural gas sales positions for a net gain of $1.2 million in July 2012.

  • Heavy oil production now represents close to 40 percent of Perpetual’s revenue. To provide downside price protection, oil price management positions have been put in place for a minimum of 2,000 bbl/d for the remainder of 2012 and 2013, protecting an average WTI floor price of $US 84.25 per bbl and $US 88.00 per bbl respectively. In addition, recent transactions provide downside WTI oil price protection for 1,000 bbl/d at $US 85.00 per bbl for 2014.

2012 Outlook and Sensitivities

The Board of Directors approved a capital spending budget of $65 million for 2012, of which $40.7 million was spent in the first half of the year. Capital spending for the remainder of the year is expected to remain within funds flow. Spending will be focused primarily on heavy oil drilling activities in the Mannville area, where Perpetual plans to drill up to 12 (11.3 net) wells. In addition in the Edson area, Perpetual is preparing to drill up to 2 (1.5 net) wells to secure additional land rights and further delineate its high deliverability Wilrich prospect, in addition to modest spending to secure land rights and increase the prospect inventory for future drilling.

Longer term, high impact growth opportunities are being evaluated with risk-managed investment:

  • Evaluation of Perpetual’s extensive bitumen resources is continuing with a project at Panny. Minor expenditures are planned for testing, reservoir simulation and field preparatory work to advance a Low Pressure Electro Thermally Assisted Drive (“LEAD”) bitumen extraction pilot project for the development of the significant bitumen resource established in the Bluesky formation.

  • Completion and testing work is continuing to define a pilot project to evaluate technical and commercial development parameters for the Viking/Colorado shallow shale gas play in east central Alberta.
  • At the Warwick gas storage facility, two new wells are planned and application work for delta-pressuring is underway for the step-wise expansion of working gas capacity. Perpetual continues to operate the WGSI facility and hold a 10 percent ownership interest.

Aggressive downside risk management is a key priority:

  • Perpetual has very little exposure to further weakness in natural gas prices in 2012. An average of 99,250 GJ/d of natural gas sales is hedged through physical forward sales and financial contracts for the period July through October at an average price of $3.13 per GJ and 89,250 GJ/d for November through December at $3.17 per GJ.

  • Oil price management contracts are also in place to provide an average WTI floor price of $US 84.25 for the second half of 2012 and the WTI to WCS differential at $24.22 on 2,000 bbl/d for September through December 2012.

The following sensitivity table reflects Perpetual’s projected funds flow for the second half of 2012 at various commodity price levels. These sensitivities incorporate average daily production of 3,800 bbl/d of oil & NGL, 96 MMcf/d of natural gas, operating costs of $43 million, cash general and administrative expenses of $14 million and an interest rate on bank debt of 5.4 percent.

Projected funds flow, second half of 2012 (2)
($ millions)

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