Perpetual Energy Inc. Releases Fourth Quarter and Year-End 2014 Financial and Operating Results

CALGARY, March 5, 2015 /CNW/ - (TSX:PMT) - Perpetual Energy Inc. ("Perpetual", the "Company" or the "Corporation") is pleased to report its fourth quarter and year end 2014 financial and operating results. Perpetual continues to report year-over-year gains in production, revenue and funds flow, reflecting operational and financial success on our key diversifying strategies in the Greater Edson area for liquids-rich natural gas and at Mannville for heavy oil.  A focus on debt reduction in 2014 was successfully reflected in a 12 percent decrease in net debt at the end of 2014, as compared to the end of 2013, achieved with the monetization of future gas over bitumen ("GOB") royalty credits, property dispositions and execution of the East Edson joint venture ("East Edson JV").  Financial flexibility was further enhanced with the issuance of senior notes and early redemption of $125 million of convertible debentures in 2014 which extends the term for the majority of Perpetual's debt to 2018 and beyond.

A complete copy of Perpetual's audited consolidated financial statements and related Management's Discussion and Analysis ("MD&A") for the year ended December 31, 2014 can be obtained through the Corporation's website at www.perpetualenergyinc.com and SEDAR at www.sedar.com.

FOURTH QUARTER 2014 HIGHLIGHTS

Capital Spending and Property Dispositions

  • Capital expenditures of $26.0 million during the fourth quarter were focused on liquids-rich natural gas development at East and West Edson, start-up of a waterflood pilot project at Mannville and spending to prepare for the cyclic heat stimulation test planned as phase 1 of the LEAD (low pressure electro-thermally-assisted drive) pilot project for bitumen extraction at Panny.  At West Edson, two (1.0 net) wells were drilled, while at East Edson, fourth quarter development projects included nine (9.0 net) new wells drilled and on-going construction costs for the new East Edson gas plant.  Drilling operations at East Edson were primarily funded by the joint venture partner under the East Edson JV.

  • In November 2014, Perpetual closed the disposition of non-core heavy oil properties in Eastern Alberta for net proceeds of $21.4 million, which included heavy oil Mannville reserves, undeveloped lands and estimated production of 400 boe/d.

Production Highlights

  • Fourth quarter average production of 23,685 boe/d increased 21 percent quarter over quarter (Q3 2014 – 19,640 boe/d) and 28 percent relative to the comparative 2013 quarter (Q4 2013 - 18,559 boe/d), resulting in a 2014 exit rate of approximately 24,150 boe/d, 30 percent higher than the Company's 2013 exit production rate.

  • Natural gas production of 122.5 MMcf/d was 36 percent higher than the fourth quarter of 2013, reflecting production from new wells drilled in the Greater Edson area.  At West Edson, increased production from new wells held the Company-operated West Edson gas plant at or above full capacity of 60 MMcf/d (30 MMcf/d net) plus associated C5+ liquids.  Continued drilling at East Edson under the East Edson JV similarly increased production to fully utilize existing compression and processing facilities at just over 30 MMcf/d plus associated liquids of 15 to 20 bbl per MMcf.

  • Oil and natural gas liquids ("NGL" or "liquids") production of 3,262 bbl/d was seven percent below the fourth quarter of 2013 (3,509 bbl/d). This reflected lower NGL sales due to a combination of leaner wells and processing changes at both East and West Edson as well as the disposition of non-core heavy oil properties completed during the fourth quarter of 2014 and natural declines on the Company's Mannville heavy oil property.

Financial Highlights

  • Perpetual recorded funds flow of $17.3 million ($0.12 per share) for the fourth quarter of 2014, up 33 percent from the same period in 2013 ($13.0 million), reflecting increased year-over-year production as well as stronger natural gas prices compared to the fourth quarter of 2013.

  • Perpetual's average natural gas price, before derivatives, for the fourth quarter of 2014 was $3.96/Mcf, up 18 percent from $3.37/Mcf in the fourth quarter of 2013, consistent with the increase in AECO market prices year over year. Inclusive of $2.7 million in realized gains related to natural gas risk management contracts, Perpetual's realized gas price, including derivatives, for the fourth quarter was $4.16/Mcf, 15 percent higher than the prior year's fourth quarter.

  • Perpetual's oil and NGL price, before derivatives, of $59.77/bbl was nine percent lower than the prior year's fourth quarter ($65.35/bbl), directionally reflecting the severe drop in West Texas Intermediate ("WTI") crude oil prices to average US$73.15/bbl (Q4 2013 - US$97.46/bbl) during the fourth quarter of 2014. The impact of the drop in the WTI benchmark price was diminished somewhat by the tightening of the Western Canadian Select heavy oil differential and the drop in the $Cdn/$US dollar exchange rate.  Risk management strategies resulted in hedging gains of $1.6 million related to crude oil contracts, which were reflected in an average realized price, including derivatives, of $64.39/bbl, two percent lower than the fourth quarter of 2013 ($65.88/bbl).

  • Primarily utilizing remaining proceeds from the senior notes issued during the third quarter of 2014, the Corporation redeemed $25.0 million of its 7.00% Convertible Debentures on December 31, 2014.  The balance of the 7.00% Convertible Debentures ($34.9 million) have a maturity date of December 31, 2015.

  • On November 5, 2014, Perpetual's borrowing base increased to $105 million as a result of reserve additions driven by drilling activities at East Edson, despite adjustments related to the monetization of additional GOB royalty credits and the disposition of non-core heavy oil properties.

  • A net loss of $18.3 million ($0.12 per share) was recorded for the fourth quarter of 2014, including $21.4 million for an estimated net impairment loss on the Company's Birchwavy assets.  The impairment resulted primarily from the decrease in crude oil and natural gas forecast prices at year end 2014.

2014 ANNUAL HIGHLIGHTS

Capital Spending and Property Dispositions

  • Exploration and development expenditures of $115.8 million during 2014 included $81.1 million allocated to liquids-rich natural gas development activities in the Corporation's West Central district (Greater Edson area), $24.5 million for heavy oil development at Mannville and $10.2 million on shallow gas optimization projects. 

  • Drilling operations included 11 (5.5 net) operated wells and two (0.1 net) non-operated wells drilled in West Edson; 15 (15.0 net) wells drilled in East Edson, including 13 (13.0 net) wells financed from the partner's escrow account; and 20 (17.8 net) horizontal heavy oil wells on the Company's Mannville property.

  • Development activities also included expansion of the West Edson facility to 60 MMcf/d gross (30 MMcf/d net); initial construction costs for the new East Edson gas plant; recompletion, workover and optimization projects on the Company's shallow gas assets; the conversion of seven wells to injection and expenditures for related pipelines and facilities on the startup of the Mannville waterflood pilot project; and initial spending for a cyclic heat stimulation test as phase 1 of the LEAD pilot project for bitumen extraction at Panny.

  • Dispositions, net of acquisitions, of $70.4 million included net proceeds of $47.0 million under the East Edson JV on the disposition of an overriding royalty interest; $21.4 million on the disposition of non-core Mannville heavy oil assets and $3.0 million received on the sale of undeveloped land.  Offsetting property dispositions were acquisitions of $1.0 million, primarily related to additional land purchases in the Greater Edson area.

  • Perpetual closed two transactions in 2014 which effectively monetized the majority of its future GOB royalty credits associated with certain shut-in properties in northeast Alberta for net proceeds of $21.3 million.  In exchange for the proceeds, Perpetual makes monthly payments to the purchaser, which are based on the gas over bitumen formula set out in the Alberta Gas Royalty Regulations, effectively flowing through proceeds which result from GOB royalty credits.

Production Highlights

  • Total production increased ten percent to 20,554 boe/d in 2014 (2013 - 18,696 boe/d) reflecting new production from the 2014 drilling program which continued to be focused on the Company's liquid-rich properties in West Central and heavy oil properties in Mannville as well as highly efficient workover, recompletion and facility optimization projects mitigating shallow gas production declines in eastern Alberta.

  • Natural gas production of 102.7 MMcf/d increased 16 percent from 88.9 MMcf/d in 2013, primarily due to production growth at West Edson, which averaged 25.6 MMcf/d (2013 - 10.8 MMcf/d) and East Edson, which averaged 17.7 MMcf/d (2013 - 14.3 MMcf/d).  Increases in higher heat content deep basin gas production at East and West Edson more than offset year over year declines in gas production from Perpetual's eastern Alberta assets, which was reduced to just five percent by highly profitable shallow gas optimization projects.

  • Oil and NGL production of 3,443 bbl/d was 11 percent lower than 2013 (3,860 bbl/d).  Crude oil production of 2,906 bbl/d (2013 – 3,205 bbl/d) reflected a reduced Mannville heavy oil drilling program compared to 2013 as well as the impact of the non-core heavy oil disposition completed in the fourth quarter.  NGL production of 537 bbl/d (2013 – 655 bbl/d) reflected lower average NGL yields on wells drilled at West Edson as well as a change in processing arrangements at both East and West Edson which results in previously reported liquids now included as part of higher heat content natural gas sales.

  • Deep basin resource-style assets in West Central Alberta contributed 7,649 boe/d of natural gas and associated liquids, representing 37 percent of total production in 2014, up from 26 percent in 2013. High netback Mannville heavy oil production of 2,860 boe/d comprised 14 percent of total production in 2014.

Financial Highlights

  • Revenue of $262.8 million was 31 percent higher than 2013 ($201.3 million) reflecting increased production and higher average commodity prices in 2014.

  • Realized natural gas prices, including derivatives, of $4.36/Mcf in 2014 increased 24 percent from $3.53/Mcf in 2013, reflecting a 40% increase in AECO Monthly Index prices year-over-year, partially offset by losses realized on gas price hedging contracts during 2014.  Due to the higher percentage of liquids-rich gas production and processing changes in both West and East Edson, Perpetual's heat content averaged 1.13 GJ/Mcf in 2014 relative to 1.10 GJ/Mcf in 2013.

  • Oil and NGL prices, including derivatives, of $71.82/bbl increased eight percent in 2014 due to strong WTI prices during the first half of 2014 which, along with a narrowing of WCS differentials, offset the effect of oil and NGL price declines realized in the fourth quarter.  Perpetual's realized oil and NGL price, including derivatives, was four percent lower than the price before derivatives in 2014, primarily due to hedging losses recorded on financial WTI price contracts during the first three quarters of 2014, which were not fully overcome by gains realized during the fourth quarter of 2014 as oil prices declined. 

  • Royalty expense of $32.0 million in 2014 represented a combined royalty rate of 12.2 percent compared to 9.4 percent in 2013.  An increase in freehold and overriding royalty expense reflected new royalties payable pursuant to the East Edson JV, which entitle the partner to overriding royalties based on a maximum of 5.6 MMcf/d of natural gas from the East Edson property plus oil and associated NGL on a monthly basis beginning July 1, 2014.  Excluding overriding royalty payments related to the East Edson JV, the combined royalty rate for 2014 was 10.2 percent, which was still higher than in 2013 due to higher Alberta gas reference prices and higher oil royalties related to production on freehold lands and wells transitioning from incentive periods.

  • Operating costs decreased another six percent in 2014 to $10.41/boe, down from $11.05/boe in 2013, with absolute savings realized in most areas of operations. Infrastructure expansion and enhancements at West Edson, and the re-routing of the majority of East Edson production from a third-party deep cut facility to utilize the Company's minority interest in the lower cost Rosevear plant, resulted in decreased processing fees paid to third parties and increased efficiency on a unit-of-production basis.

  • Operating netbacks increased 15 percent to $17.44/boe (2013 - $15.23/boe) with higher commodity prices and lower operating costs more than offsetting higher transportation costs as well as increased royalties.

  • Funds flow of $81.4 million ($0.55 per share) in 2014 increased 39 percent from $58.5 million ($0.39 per share) in 2013 as a result of increased production, stronger crude oil and natural gas prices, and higher operating netbacks in 2014.

  • Perpetual issued $125 million in 8.75 percent senior notes during the third quarter of 2014 with the proceeds utilized for the early redemption of $100 million of 7.25 percent Convertible Debentures in August 2014 and $25 million of 7.00 percent Convertible Debentures on December 31, 2014.  The issue of senior notes bolstered Perpetual's financial flexibility by extending its long-term debt beyond 2018.

  • Total net debt decreased by 12 percent ($45.2 million) from $377.0 million on December 31, 2013 to $331.7 million at December 31, 2014. The reduction in net debt resulted from 2014 funds flow, combined with proceeds received on dispositions, the monetization of GOB royalty credits, and Perpetual's escrow funds related to the East Edson JV, which, in total, exceeded 2014 capital expenditures.  The ratio of net debt to trailing 12 months funds flow improved by 36 percent from year end 2013 to a ratio of 4.1 to 1 at December 31, 2014.

  • The Corporation recorded net income of $3.4 million ($0.02 per share) compared to $7.6 million ($0.05 per share) in 2013.

2015 OUTLOOK

In 2015, Perpetual is focused on five strategic priorities:

  • Grow greater Edson liquids-rich gas production, cash flow, inventory, reserves and value;
  • Optimize value of Mannville heavy oil;
  • Refine elements of production growth strategy for 2017 to 2020;
  • Maximize value of shallow gas; and
  • Reduce debt and improve debt/cash flow ratio.

In light of current weakness and uncertainty in commodity prices, Perpetual's Board of Directors has approved a first quarter capital expenditure budget of $45 million. Nearly $42 million will be directed to the drilling of six wells (4.5 net) in west central Alberta, with three (1.5 net) at West Edson and three (3.0 net) at East Edson, coupled with the East Edson plant construction activities. All heavy oil drilling has been deferred until oil prices recover, although $1.3 million will be expended on advancing the Mannville waterflood. Strategic spending at Panny to advance the LEAD pilot project has been reduced to include only capital required to drill two (2.0 net) observation wells associated with the pilot scheme, estimated at $1.2 million.

Capital activity for the remainder of the year will be assessed as the year progresses with the intention that spending will be largely funded from funds flow and available bank indebtedness. The reduction in drilling in first quarter 2015 will not materially impact 2015 gas production as the wells drilled to date have generally exceeded the type curves and provide the same production capability as originally budgeted. Further, variations in capital spending for the final three quarters of 2015 are not expected to materially affect average production or annual funds flow.

Perpetual has commodity price contracts in place for both crude oil and natural gas to protect a base level of cash flow.  Natural gas contracts were entered into to provide downside protection on revenue, primarily through the summer months, with physical and financial contracts in place for 2015 on an average of close to 68,400 GJ/d at an average price of $2.63/GJ. Crude oil contracts for 2015 on 1,000 bbls/d include costless collars protecting a WTI floor price of Cdn$87.50/bbl with an average ceiling of Cdn$95.50/bbl, as well as financial contracts which fix the basis differential between WTI and Western Canadian Select trading hubs at an average of US$16.88/bbl. 

Incorporating the assumptions and commodity price contracts outlined above, the following table shows Perpetual's estimated 2015 funds flow using various commodity prices:

Projected 2015 funds flow(2) ($millions)

AECO gas price ($/GJ)(1)

WTI price (US$/bbl)(1)


$2.50

$3.00

$3.50

$4.00

$4.50

$45.00

4.7

13.8

22.9

32.1

41.2

$50.00

6.8

15.9

25.1

34.2

43.3

$55.00

8.9

18.0

27.2

36.3

45.4

$60.00

11.0

20.1

29.3

38.4

47.5

$65.00

13.1

22.2

31.4

40.5

49.6









(1)

The current settled and forward average AECO and WTI prices for 2015 as of March 4, 2015 were $2.69 per GJ and US$55.69 per bbl, respectively.

(2)

Funds flow is a non-GAAP measures. Please refer to "Non-GAAP Measures" below.

Amendment to Credit Facility

The Corporation's credit facility is with a syndicate of Canadian chartered banks. As at December 31, 2014 total availability under the facility was $105 million.  The credit facility includes covenants with respect to debt and trailing funds flow ratios.  The Corporation was in compliance with the lender's covenants at December 31, 2014. On March 5, 2015, the Corporation's lenders agreed to revise financial covenants based on prevailing low commodity prices at the end of 2014 and uncertainty surrounding forecast commodity prices into 2016.  Based on internal 2015 and 2016 financial and operating forecasts, Perpetual expects to be in compliance with the lender's new covenants. The next semi-annual redetermination of the Corporation's borrowing base will occur on or before April 30, 2015.

Financial and Operating Highlights

THREE MONTHS

Ended December 31

YEAR ENDED

December 31,

($Cdn thousands except volume and per share amounts)

2014

2013

 Change

2014

2013

 Change

Financial







Oil and natural gas revenue

62,562

49,075

27%

262,790

201,294

31%

Funds flow (1)

17,316

12,998

33%

81,395

58,468

39%


Per share (1) (2)

0.12

0.09

33%

0.55

0.39

41%

Net earnings (loss)

(18,273)

(13,745)

(33%)

3,366

7,620

(56%)


Per share (2)

(0.12)

(0.09)

(33%)

0.02

0.05

(60%)

Total assets

750,602

742,288

1%

750,602

742,288

1%

Net bank debt outstanding (1)

21,867

67,201

(67%)

21,867

67,201

(67%)

Senior notes, at principal amount

275,000

150,000

83%

275,000

150,000

83%

Convertible debentures, at principal amount

34,878

159,779

(78%)

34,878

159,779

(78%)

Total net debt (1)

331,745

376,980

(12%)

331,745

376,980

(12%)

Capital expenditures








Exploration and development (3)

26,018

24,518

6%

116,457

96,684

20%


Dispositions, net of Acquisitions

(20,595)

(483)

4164%

(70,351)

(70,840)

(1%)


Interest in Warwick Gas Storage

-

-

-

-

19,129

(100%)


Other

84

2

4100%

614

120

412%


Net capital expenditures

5,507

24,037

(77%)

46,720

45,093

4%

Common shares outstanding (thousands)







End of period

150,077

148,490

1%

150,077

148,490

1%

Weighted average

149,084

148,144

1%

149,084

148,144

1%

Operating







Average production








Natural gas (MMcf/d) (4)

122.5

90.3

36%

102.7

88.9

16%


Oil and NGL (bbl/d) (4)

3,262

3,509

(7%)

3,443

3,860

(11%)


Total (boe/d)

23,685

18,559

28%

20,554

18,696

10%

Average prices








Natural gas, before derivatives ($/Mcf)

3.96

3.37

18%

4.50

3.26

38%


Natural gas, including derivatives ($/Mcf)

4.16

3.62

15%

4.36

3.53

24%


Oil and NGL, before derivatives ($/bbl)

59.77

65.35

(9%)

75.01

67.65

11%


Oil and NGL, including derivatives ($/bbl)

64.39

65.88

(2%)

71.82

66.48

8%


Barrel of oil equivalent, including derivatives ($/boe)

30.40

30.09

1%

33.81

30.56

11%

Drilling (wells drilled gross/net) (5)








Gas

11/10.0

4/2.0


29/20.9

6/3.0



Oil

-

5/5.0


20/17.8

37/35.7



Total

11/10.0

9/7.0


49/38.7

43/38.7



Success rate (%)

100/100

100/100


100/100

100/100


(1)

These are non-GAAP measure. Please refer to "Non-GAAP Measures" below.

(2)

Based on weighted average basic common shares outstanding for the period.

(3)

Exploration and development costs include geological and geophysical expenditures.

(4)

Production amounts are based on the Corporation's interest before royalty expense.

(5)

Wells drilled includes gas wells drilled as part of the East Edson JV

Forward-Looking Information and Statements

Certain information regarding Perpetual in this news release including management's assessment of future plans and operations and including the information contained under the heading "2015 Outlook" may constitute forward-looking information and statements under applicable securities laws. The forward-looking information and statements includes, without limitation, statements regarding capital expenditure levels for 2015, prospective drilling activities; forecast production, production type, operations, funds flows, and timing thereof; forecast and realized commodity prices; expected funding, allocation and timing of capital expenditures; expected compliance with credit facility covenants in 2015 and 2016; projected use of funds flow and anticipated funds flow; planned drilling and development and the results thereof; expected dispositions, anticipated proceeds therefrom and the use of proceeds therefrom; and commodity prices. Various assumptions were used in drawing the conclusions or making the forecasts and projections contained in the forward-looking information and statements contained in this press release, which assumptions are based on management 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 risks, 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 and statements contained in this press release. Undue reliance should not be placed on forward-looking information and statements, which is not a guarantee of performance and is subject to a number of risks or uncertainties, including without limitation those described under "Risk Factors" in Perpetual's Annual Information Form and MD&A for the year ended December 31, 2014 and those included 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 laws.

Volume Conversions

Barrel of oil equivalent ("boe") may be misleading, particularly if used in isolation. In accordance with National Instrument 51-101 ("NI 51-101"), a conversion ratio for natural gas of 6 Mcf:1bbl has been used, which is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. In addition, utilizing a conversion on a 6 Mcf:1 bbl basis may be misleading as an indicator of value as the value ratio between natural gas and crude oil, based on the current prices of natural gas and crude oil, differ significantly from the energy equivalency of 6 Mcf:1 bbl.

Non-GAAP Measures

This news release contains financial measures that may not be calculated in accordance with generally accepted accounting principles in Canada ("GAAP"). Readers are referred to advisories and further discussion on non-GAAP measures contained in the "Significant Accounting Policies and non-GAAP Measures" section of management's discussion and analysis.

About Perpetual

Perpetual Energy Inc. is a Canadian energy company with a spectrum of resource-style opportunities spanning heavy oil, NGL and bitumen along with a large base of shallow gas assets. Perpetual's shares and convertible debentures are listed on the Toronto Stock Exchange under the symbol "PMT", "PMT.DB.D" and "PMT.DB.E", respectively. Further information with respect to Perpetual can be found at its website at www.perpetualenergyinc.com.

The Toronto Stock Exchange has neither approved nor disapproved the information contained herein.

SOURCE Perpetual Energy Inc.

For further information: Perpetual Energy Inc., Suite 3200, 605 - 5 Avenue SW Calgary, Alberta, Canada T2P 3H5, Telephone: 403 269-4400, Fax: 403 269-4444, Email: info@perpetualenergyinc.com; Susan L. Riddell Rose, President and Chief Executive Officer; Cameron R. Sebastian, Vice President, Finance and Chief Financial Officer

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