Perpetual Energy Inc. Releases Fourth Quarter and Year-End 2015 Financial and Operating Results and 2015 Year-End Reserves

CALGARY, March 2, 2016 /CNW/ - (TSX:PMT) – Perpetual Energy Inc. ("Perpetual", the "Corporation" or the "Company") herein reports its fourth quarter and year end 2015 financial and operating results together with a summary of the Company's year-end 2015 reserves as reported by the independent engineering firm McDaniel and Associates Consultants Ltd. ("McDaniel").

A complete copy of Perpetual's audited consolidated financial statements, Management's Discussion and Analysis ("MD&A") and Annual Information Form ("AIF") for the year ended December 31, 2015 can be obtained through the Corporation's website at www.perpetualenergyinc.com and SEDAR at www.sedar.com.

FOURTH QUARTER 2015 HIGHLIGHTS

  • Perpetual continued to restrict spending in response to the low commodity price environment, with fourth quarter spending of $3.2 million primarily related to abandonment and reclamation activities and residual spending on capital activities initiated earlier in the year.

  • Fourth quarter production of 19,661 boe/d was 17 percent lower than 2014 (23,685 boe/d), reflecting volumes associated with the fourth quarter 2014 disposition of heavy oil assets at Mannville, the second quarter 2015 West Edson property swap for shares ("TOU Shares") in Tourmaline Oil Corp. ("Tourmaline" or "TOU"), and natural declines. These reductions were partially offset by an increase in East Edson production related to the Company's successful focused drilling program and facilities expansion in the area.

  • Natural gas production of 105.1 MMcf/d was consistent with the preceding third quarter (105.5 MMcf/d) and 14 percent lower than the fourth quarter of 2014, reflecting the decision to swap the West Edson property and to defer drilling projects and preserve value and inventory with a view to future commodity price recovery. Liquids-rich gas production from West Central Alberta represented 55 percent (57.4 MMcf/d) of fourth quarter natural gas production and 38 percent (822 bbl/d) of fourth quarter oil and natural gas liquids production.

  • Natural gas liquids ("NGL" or "liquids") production of 866 bbl/d was 39 percent higher than the fourth quarter of 2014 (624 bbl/d) as a result of higher liquids yields from West Central Alberta related to the proportionate increase in more liquids-rich East Edson production relative to West Edson.

  • Oil production of 1,278 bbl/d was 51 percent below the fourth quarter of 2014 (2,638 bbl/d) reflecting the fourth quarter 2014 disposition of non-core heavy oil pools at Mannville as well as natural declines on the Company's Mannville heavy oil property and the decision to defer drilling and only implement modest waterflood activities in light of depressed crude oil prices.

  • Consistent with the decline in AECO benchmark prices, Perpetual's average natural gas price, before derivatives, for the fourth quarter of 2015 of $2.74/Mcf, was 31 percent lower than $3.96/Mcf in the fourth quarter of 2014. Including net gains on derivatives of $1.8 million, Perpetual's realized gas price for the fourth quarter 2015 was $2.92/Mcf.

  • Perpetual's oil price, before derivatives, of $33.04/bbl in the fourth quarter decreased 45 percent compared to 2014 ($59.80/bbl) due to declines in global oil pricing. Perpetual's realized oil price, including derivatives was $39.81/bbl, reflecting net gains of $0.8 million realized during the quarter.

  • Perpetual's realized NGL price of $33.68/bbl was 44 percent lower than the prior year ($59.63/bbl), reflecting lower benchmark prices for condensate as well as all other NGL components resulting from the strong supply to market of these commodities.

  • Production from the company's Duvernay evaluation well at Waskahigan commenced in December of 2015 flowing at an average daily gross production rate for December of 289 bbl/d of condensate with 277 Mcf/d of liquids-rich gas. A downhole pump assembly will be installed in the first quarter to maintain steady production and continue to enhance the understanding of the long term production capability and flow characteristics of the Duvernay formation on this acreage. This well is the first test well on the Company's 6,240 acre block in the Waskahigan area that was farmed out in 2015. Perpetual retains a 35 percent working interest ("WI") in this well and 3,840 gross acres as well as a 100 percent WI in an additional 2,400 acres.

  • Perpetual recorded significant reductions in all elements of its cost structure in the fourth quarter of 2015. As compared to the fourth quarter of 2014, royalties were down $4.8 million ($1.90/boe); operating costs were down $8.0 million ($2.48/boe) and cash G&A was down $3.5 million ($1.08/boe) for all-in cash cost reductions of $16.3 million ($5.46/boe).

  • Highlighting increased efficiencies with the new East Edson gas plant, operating costs in East Edson were $2.46/boe, a 62 percent and 29 percent reduction relative to $6.42/boe in the fourth quarter of 2014 and $3.48/boe in the preceding 2015 quarter respectively. During the fourth quarter of 2015, 73 percent of East Edson production was processed through the new 100 percent owned and operated gas plant.

  • Despite the 28 percent decrease in costs, Perpetual recorded funds flow of $0.4 million for the fourth quarter of 2015 compared to $17.3 million in 2014, reflecting the impact of weak commodity prices and reduced year-over-year production.

  • A net loss of $93.5 million was recorded for the fourth quarter of 2015, including a non-cash finance expense of $56.1 million related to the change in the fair value of TOU Shares held by the Company and $23.7 million for an estimated net impairment loss on the Company's shallow gas assets. The impairment loss was primarily attributable to the de-recognition of close to 20 Bcf of reserves previously shut-in due to the gas over bitumen regulatory issue as the Company determined that future production is unlikely in the continued absence of a mutually-acceptable technical solution or permitted production. Further impairment was recorded in the Company's east central Alberta shallow gas properties related to reduced proved and probable reserve values as a result of lower forecast natural gas prices at year end 2015.

  • To improve liquidity and address financial obligations due in the fourth quarter of 2015, Perpetual completed a series of recapitalization transactions which included a new financing arrangement that provided net proceeds of $18.2 million collateralized by one million TOU Shares, repayment of the outstanding 7.00% Convertible Debentures with 228.9 million common shares of Perpetual on December 31, 2015 and a $25.0 million fully backstopped rights offering (the "Rights Offering") which closed on January 18, 2016.

  • In conjunction with the recapitalization transactions, the Company's bank credit facility was extended to October 31, 2016 with total borrowing capacity of $62 million, comprised of a $20 million demand loan and a $42 million margin loan secured by 5.5 million TOU Shares.

  • Following the closing of the Rights Offering on January 18, 2016, the Company had 1,047.7 million common shares outstanding.

  • Perpetual has provided notice to its shareholders of its annual and special meeting, scheduled to be held on March 24, 2016. At the meeting, shareholders will vote on a proposed share consolidation which, if approved, would result in a consolidation of common shares on a twenty for one basis.

2015 ANNUAL FINANCIAL AND OPERATING HIGHLIGHTS

Capital Spending and Property Dispositions/Asset Swaps

  • Perpetual's exploration and development spending in 2015 totaled $75.4 million, with $67.5 million focused on liquids-rich development at East Edson with the construction and expansion of the new East Edson gas plant, 3D seismic activities in the greater Edson area, as well as drilling three (3.0 net) wells at East Edson and three (1.5 net) natural gas wells at West Edson prior to the swap transaction with Tourmaline in April 2015. Capital spending in 2015 also included $1.4 million for the continuation of waterflood activities in Mannville and $4.6 million at Panny to initiate cyclic heat stimulation testing, the first phase of the planned technology pilot for bitumen extraction, which included drilling two (2.0 net) observation wells.

  • Exploration and development spending in 2015 in West Central Alberta included construction and expansion of the East Edson gas plant, which was brought online on July 15, 2015 at a capacity of 30 MMcf/d and expanded to 45 MMcf/d in mid-September 2015. Total facility and infrastructure costs of $35.6 million also included sales pipelines, transmission lines and construction of an expanded gathering system.

  • Development at East Edson included drilling three (3.0 net) liquids-rich natural gas wells in the first quarter of 2015 and completion and tie-in of seven (7.0 net) wells including the remaining wells drilled during the fourth quarter of 2014, with wells brought online as processing capacity and transportation became available with the start-up and expansion of the East Edson gas plant. With these activities, Perpetual completed its short-term spending commitments under the East Edson joint venture entered into in July 2014, with only $18.5 million of further spending required prior to December 31, 2022 to fulfill the terms of the arrangements.

  • In April 2015 Perpetual swapped its joint interest share in the West Edson asset in West Central with Tourmaline in exchange for 6.75 million TOU Shares. The transaction included all joint interest lands Perpetual held with Tourmaline in West Edson, together with the associated wells and infrastructure (the "West Edson Property"). Included in the disposition were three (1.5 net) wells drilled at West Edson in the first quarter of 2015.

  • Net property dispositions of $23.7 million in 2015 included the sale of certain fee simple lands and related seismic data in east central Alberta for gross proceeds of $21.0 million; the disposition of non-core undeveloped land for proceeds of $0.8 million and net cash proceeds of $1.8 million received on an asset swap whereby Perpetual acquired an increased interest in reserves and undeveloped acreage on the Company's core East Edson property in exchange for a working interest in certain undeveloped lands.

  • Perpetual spent $7.6 million on abandonment and reclamation projects during 2015 mainly in eastern Alberta, including $1.0 million of internal labor. The Company scaled up the redeployment of operational personal and internal resources to accelerate progress and drive efficiencies on abandonment and reclamation projects. By utilizing internal labor and equipment rather than third party services for various stages of reclamation and abandonment, substantial cost savings were realized on 2015 projects. Driven by efficiencies and cost savings achieved in 2015 through its innovative approach to abandonment and reclamation activities in its eastern Alberta shallow gas properties, the Company reduced its estimate of undiscounted future abandonment liabilities by $59.9 million year over year.

Production and Operations Highlights

  • Total natural gas, oil and NGL production for the year ended December 31, 2015 of 19,706 boe/d was four percent lower than 2014 (20,554 boe/d). Production volumes from the new East Edson gas plant largely offset lost production volumes associated the disposition of non-core Mannville heavy oil assets during the fourth quarter of 2014, the West Edson property swap which closed April 1, 2015 and natural declines with the Company's decision to defer development spending in response to the low commodity price environment.

  • Perpetual's natural gas production of 104.2 MMcf/d increased slightly from 2014 (102.7 MMcf/d) reflecting production increases related to the 2014 and 2015 development program as well as production through the new East Edson gas plant which came online July 15, 2015.

  • NGL production of 711 bbl/d in 2015 increased 32 percent from 537 bbl/d in 2014 primarily as a result of higher liquids yields from production processed through the new East Edson gas plant relative to 2014 when production was processed through West Edson. Reduced NGL production resulting from the second quarter 2015 West Edson swap and processing changes were offset by a 76 percent increase in East Edson NGL production relative to 2014.

  • Oil production of 1,626 bbl/d for 2015 was 44 percent lower than 2014 (2,906 bbl/d) mainly due to the disposition of non-core Mannville heavy oil assets during the fourth quarter of 2014 combined with natural declines and the decision to defer crude oil drilling activities and waterflood spending in light of depressed crude oil prices.

  • Total production and operating expenses decreased 17 percent to $65.1 million ($9.06/boe) for 2015 compared to $78.1 million ($10.41/boe) for 2014, reflecting company-wide cost saving initiatives, the re-deployment of operations personnel to abandonment and reclamation projects, and start-up of the new low cost Company owned and operated gas plant at East Edson.

  • Municipal property taxes of $10.2 million continued to represent a significant portion of fixed operating costs at $1.42 per boe (16 percent of total operating costs) for the year ended December 31, 2015. The calculation of property taxes for machinery and equipment, pipelines and wells is based on a prescribed formula methodology which results in a tax assessment base that is dramatically misrepresentative of the property value for the Company's mature shallow gas assets. As a result, property taxes for Perpetual's shallow gas production in Eastern Alberta were $9.7 million ($0.49 per Mcf) for 2015, which represents 20 percent of operating costs for shallow gas production and 130 percent of pre-municipal tax operating netbacks for these properties, completely eliminating positive operating cash flow on most shallow gas properties.

Financial Highlights

  • Revenues of $142.4 million in 2015 decreased 46 percent from 2014, primarily due to lower commodity prices with effectively flat year over year overall production performance.

  • Decreased AECO Monthly Index prices were reflected in Perpetual's natural gas price before derivatives of $2.87/Mcf, down 36 percent from $4.50/Mcf in 2014. Perpetual's average realized gas price, including derivatives, decreased 31 percent to $3.01/Mcf for the year ended December 31, 2015 from $4.36/Mcf in 2014. The Corporation's realized 2015 natural gas price with derivatives includes $2.0 million of realized gains on natural gas derivatives and $3.1 million of gains realized on crystallizations of contracts before maturity.

  • Perpetual's oil price, before derivatives, of $41.27/bbl in 2015 decreased 45 percent compared to 2014 due primarily to the decline in global oil pricing. Perpetual's realized oil price of $52.48/bbl, including derivatives, was higher than the price before derivatives due to gains of $2.9 million recorded on financial crude oil derivative contracts and $3.8 million of gains realized on crystallizations of contracts before maturity.

  • Perpetual's realized average NGL price decreased 54 percent from the prior year to $33.72/bbl, reflecting the drop in all NGL component prices as NGL supply growth has been bottlenecked by infrastructure in many regions of North America resulting in excess inventory levels.

  • Royalty expense of $16.3 million in 2015 represented a combined royalty rate of 11.5 percent compared to 12.2 percent in 2014. Average crown royalty rates decreased to 3.1 percent in 2015 compared to 6.3 percent in 2014 as a result of lower commodity prices as well as increased production from new East Edson wells which benefited from reduced rates and credits received under the Crown's natural gas deep drilling program. Freehold and overriding royalty rates for the year ended December 31, increased from 6.0 percent in 2014 to 8.4 percent in 2015 as a result of the full year effect of the additional gross overriding royalties beginning July 1, 2014 with the payment of the East Edson royalties.

  • Operating netbacks decreased 57 percent to $7.44/boe in 2015 (2014 - $17.44/boe) with the dramatic decrease in commodity prices more than offsetting lower operating costs and decreased royalties.

  • Driven by the $106.6 million drop in revenue related to commodity price declines, funds flow was eroded to $2.0 million in 2015 (2014 - $81.4 million) despite consistent production levels year-over-year and significant corporate cost-savings initiatives throughout 2015 reducing operating, transportation costs and general and administrative expenses. Combined with royalty reductions, all-in cash costs were 19 percent ($33.8 million) lower than 2014.

  • At December 31, 2015, Perpetual had total debt, net of working capital and the market value of TOU Shares, of $203.6 million, down $128.1 million (39 percent) from December 31, 2014. The reduction reflects repayment of the convertible debentures with common shares and the inclusion of the period end value of the TOU Shares. This reduction was offset by $83 million in 2015 capital spending and decommissioning expenditures funded primarily through increased bank indebtedness and net property dispositions with limited funds flow during the year as a result of depressed oil, natural gas and NGL prices.

  • The Corporation recorded a net loss of $89.3 million in 2015 which included a $104.8 million unrealized loss on the market value of TOU Shares based on the decrease in trading price from $38.32/share on April 1, 2015 to $22.35/share on December 31, 2015 as well as a $23.7 impairment loss primarily recorded on the Company's shallow gas assets including the de-recognition of close to 20 Bcf of reserves previously shut-in due to the gas over bitumen regulatory issue.

YEAR-END 2015 RESERVES

2015 Year-End Reserve Highlights

  • Total proved and probable reserves of 77.8 MMboe at December 31, 2015 were effectively flat year over year, adjusting for the West Edson swap for TOU Shares of 23.5 MMboe and the de-recognition of 3.3 MMboe of probable shut-in Gas Over Bitumen ("GOB") reserves in 2015.

  • Proved reserves of 44.4 MMboe at year-end 2015 reflected dispositions of 12.4 MMboe of proved reserves, primarily at West Edson and production of 7.1 MMboe, down from 56.5 MMboe at year end 2014.

  • On a commodity basis, oil and NGL represent ten percent of Perpetual's total proved and probable reserves (nine percent of proved) at December 31, 2015.

  • Positive technical proved reserve revisions in both eastern Alberta shallow gas assets and East Edson offset negative proved reserve revisions due to decreased forecast prices and annual production of 7.1 MMboe, highlighting positive operational performance in both the Company's mature, legacy shallow gas as well as its diversifying deep basin growth assets.

  • Reserves from Perpetual's liquids-rich gas and NGL in East Edson area grew 14 percent, offsetting production of 2.9 MMboe to represent 73 percent of Perpetual's total proved and probable reserves at year end 2015.

  • McDaniel's estimate of net present value (NPV8%) of Perpetual's reserves at year-end 2015 was $388.6 million, down from $497.1 million at year-end 2014 adjusted for the West Edson property swap for TOU Shares to which no reserves or value are allocated. The decrease in net present value of reserves reflected materially lower future commodity price forecasts, other asset dispositions and the de-recognition of GOB reserves. The effect of these adjustments were partially offset by lower future development costs ("FDC") in 2015 as a result of changes in well design and efficiencies supported by actual drilling experience.

  • Perpetual's reserve-based net asset value ("NAV") (discounted at eight percent) at year-end 2015 is estimated at $247.2 million ($0.65 per share). On a pro forma basis at December 31, 2015, after reflecting the shares issued and net proceeds of the Rights Offering, the estimated NAV (discounted at 8 percent) is $0.26 per share. Giving effect to the Rights Offering and proposed twenty for one share consolidation, as described above, Perpetual's NAV (discounted at eight percent) at year end 2015 is estimated at $5.15 per share. See the detailed NAV calculation under the heading "NET ASSET VALUE".

Reserves Disclosure

Working interest reserves included herein refer to working interest reserves before royalty deductions. Reserves information is based on an independent reserves evaluation report prepared by McDaniel with an effective date of December 31, 2015 (the "McDaniel Report"), and has been prepared in accordance with National Instrument 51-101 ("NI 51-101") using McDaniel's forecast prices and costs. Complete NI 51-101 reserves disclosure including after-tax reserve values, reserves by major property and abandonment costs will be included in Perpetual's Annual Information Form ("AIF"), available on the Corporation's website at www.perpetualenergyinc.com and SEDAR at www.sedar.com. Perpetual's reserves at December 31, 2015 are summarized below.

Working Interest Reserves at December 31, 2015(1)


Light and
Medium Crude Oil
(Mbbl)

Heavy

Oil
(Mbbl)

Conventional
Natural Gas
(MMcf)

Natural
Gas Liquids

(Mbbl)

Oil

Equivalent
(Mboe)

Proved Producing

60

1,227

94,819

550

17,641

Proved Non-Producing

-

53

9,375

5

1,621

Proved Undeveloped

10

355

138,410

1,688

25,122

Total Proved

70

1,636

242,604

2,243

44,383

Probable Producing

29

633

31,072

174

6,015

Probable Non-Producing

-

89

17,528

3

3,014

Probable Undeveloped

4

358

130,588

2,251

24,378

Total Probable 

33

1,081

179,188

2,428

33,407

Total Proved and Probable 

103

2,716

421,792

4,671

77,790

(1)

May not add due to rounding

Total proved reserves account for 57 percent (2014 – 54 percent) of total proved and probable reserves. Proved producing reserves of 17.6 MMboe comprise 40 percent (2014 – 39 percent) of total proved reserves. Proved and probable developed reserves of 28.3 MMboe represent 36 percent (2014 – 38 percent) of total proved and probable reserves.

Reserves Reconciliation

Working Interest Reserves(1) 




Barrels of Oil Equivalent (Mboe)

Proved

Probable

Proved
and Probable

Opening Balance, December 31, 2014

56,488

48,702

105,190

Discoveries

-

-

-

Extensions and Improved Recovery

-

-

-

Technical Revisions

9,962

(4,428)

5,534

Acquisitions

-

1,579

1,579

Dispositions

(12,380)

(11,295)

(23,675)

Production

(7,148)

-

(7,148)

Economic Factors

(2,540)

(1,151)

(3,691)

Closing Balance, December 31, 2015

44,383

33,407

77,790

(1)

May not add due to rounding

McDaniel recorded net positive technical revisions of 5.5 MMboe related to performance on a proved and probable basis in 2015. Positive technical revisions were primarily attributed to well performance on East Edson wells drilled in 2014 and 2015 which outperformed the proved and probable type curves used in the McDaniel 2014 reserve evaluation. Additionally, positive technical revisions related to continued reliable performance of the Company's eastern Alberta shallow gas assets were largely offset by reductions due to materially lower future commodity price forecasts. Offsetting positive East Edson technical revisions were 3.3 MMboe of negative revisions related to the discontinuation of probable shut-in GOB reserves, which were removed on the basis that no significant progress has been made on finding a mutually-acceptable technical solution to re-establish production of these reserves within a relevant timeline.

Dispositions of 23.7 MMboe of proved plus probable reserves represented reserves associated with the April 2015 asset swap of the West Edson property for TOU Shares as well as the disposition of fee simple lands in 2015. Reduced commodity prices resulted in a decrease of 3.7 MMboe of proved plus probable reserves due to economic factors with certain shallow gas reserves being truncated or written off as uneconomic based on the January 1, 2016 price forecast used to prepare the 2015 year end reserves.

Reserves from Perpetual's liquids-rich gas and NGL's in East Edson area grew 14 percent, offsetting production of 2.9 MMboe to represent 73 percent of Perpetual's total proved and probable reserves at year end 2015. On a commodity basis, oil and NGL represent ten percent of Perpetual's total proved and probable reserves (nine percent of proved), compared to nine percent (nine percent of proved) at year-end 2014.

The table below summarizes the FDC estimated by McDaniel by play type to bring non-producing and undeveloped reserves to production.

Future Development Capital(1)






($ millions)

2016

2017

2018

2019

2020

Remainder

Total

Eastern Alberta Shallow Gas

0.2

2.0

1.6

4.4

0.4

0.6

9.2

Mannville Heavy Oil

-

6.0

3.8

-

-

-

9.8

Greater Edson Wilrich

36.3

48.4

61.2

47.9

46.1

199.7

439.6

Total

36.5

56.4

66.6

52.3

46.5

200.3

458.7

(1)

May not add due to rounding

McDaniel estimates the FDC required to convert proved and probable non-producing and undeveloped reserves to proved producing reserves to be $458.7 million at December 31, 2015. Including changes related to the West Edson Property swap, estimated FDC decreased by $219.6 million, down from $678.2 million at year-end 2014. On a proved and probable basis, FDC decreased by $127.9 million as a result of swaps and dispositions and a further $85.7 million related to the future development of reserves at East Edson, adjusted for 2015 spending as well as revised future costs to reflect reduced labor costs and improved drilling efficiencies due to changes to well design and drilling programs. East Edson projects are forecast by McDaniel to generate annual operating cash flow in excess of the annual FDC, making the projects self-funding.

RESERVE LIFE INDEX ("RLI")

Perpetual's proved and probable reserves to production ratio, also referred to as reserve life index, was 11.9 years at year-end 2015 while the proved RLI was 7.3 years, based upon the 2016 production estimates in the McDaniel Report. The 2015 RLI was unchanged from the prior year. The following table summarizes Perpetual's historical calculated RLI.

Reserve Life Index(1)





2015

2014

2013

2012

2011

Total Proved

7.3

7.3

5.2

6.1

5.3

Proved and Probable

11.9

11.9

8.6

11.0

9.7

(1)

Calculated as year-end reserves divided by year one
production estimate from the McDaniel Report.

NET PRESENT VALUE ("NPV") OF RESERVES SUMMARY

Perpetual's oil, natural gas and NGL reserves were evaluated by McDaniel using McDaniel's product price forecasts effective January 1, 2016 prior to provision for financial oil and natural gas price hedges, income taxes, interest, debt service charges and general and administrative expenses. The following table summarizes the NPV of funds flows from recognized reserves at January 1, 2016, assuming various discount rates. It should not be assumed that the discounted future net funds flows estimated by McDaniel represent the fair market value of the potential future production revenue of the company.

NPV of Reserves, before income tax(1)(2)


Discounted at

($millions except as noted)

Undiscounted

5%

8%

10%

 

 

15%

 

 

20%

Unit Value
Discounted at
10%/Year

($/boe)

Proved Producing

49.2

57.6

59.4

59.9

59.6

58.2

4.19

Proved Non-Producing

6.8

6.2

5.8

5.4

4.7

4.1

3.69

Proved Undeveloped

157.5

101.3

76.6

63.0

37.2

19.7

3.30

Total Proved

213.5

165.1

141.7

128.4

101.5

81.9

3.68

Probable Producing

52.5

43.1

38.3

35.5

29.7

25.3

7.45

Probable Non-Producing

14.0

12.9

12.0

11.4

9.9

8.6

4.08

Probable Undeveloped

459.4

264.7

196.6

163.4

107.4

74.5

7.26

Total Probable

525.9

320.6

246.9

210.3

147.0

108.4

6.99

Total Proved and Probable

739.4

485.8

388.6

338.6

248.5

190.3

5.21

(1)

January 1, 2016 McDaniel Forecast Prices and Costs

(2)

May not add due to rounding

McDaniel's estimate of net present value (NPV8%) of Perpetual's reserves at year-end 2015 was $388.6 million, down 50 percent from $781.7 million at year-end 2014. The decrease in net present value reflected the West Edson Property swap for TOU Shares to which no reserves are assigned, other asset dispositions and lower commodity price forecasts, which were partially offset by lower future development costs ("FDC") in 2015. At an eight percent discount factor, total proved reserves account for 36 percent (2014 – 39 percent) of the proved and probable value. Proved and probable producing reserves represent 25 percent (2014 – 33 percent) of the total proved and probable value discounted at eight percent.

FAIR MARKET VALUE OF UNDEVELOPED LAND

Perpetual's independent third party estimate of the fair market value of its undeveloped acreage by region for purposes of the net asset value calculation is based on past Crown land sale activity, adjusted for tenure and other considerations. In West Central Alberta, no undeveloped land value was assigned where proved and/or probable undeveloped reserves have been booked.

Fair Market Value of Undeveloped Land


Net Acres

Value ($ millions)

$/Acre

North

578,426

4.5

7.88

South

99,012

5.8

58.18

West Central

71,911

33.9

472.02

Oil Sands

272,299

38.8

142.35

Totals

1,021,648

83.0

81.26

The fair market value of Perpetual's undeveloped land at year-end 2015, adjusted to remove the value of undeveloped lands with reserves assigned in West Central Alberta, is estimated by an external land consultant at $83.0 million, a decrease of 50 percent from $164.4 million relative to year-end 2014.

ABANDONMENT AND RECLAMATION COSTS

In addition to the abandonment cost estimates provided by McDaniel inclusive in their reserve assessment, Perpetual compiles annually a detailed internal estimate of the Corporation's total future asset retirement obligation based on net ownership interest in all wells, facilities and pipelines, including estimated costs to abandon the wells, facilities and pipelines and reclaim the sites, and the estimated timing of the costs to be incurred in future periods. Pursuant to this evaluation, the estimated cost of future asset retirement obligations related to Perpetual's proved and probable reserves and other liabilities, net of the estimated salvage value of facilities and equipment and discounted at eight percent, was reduced by $38.1 million to $41.0 million as at December 31, 2015.

The McDaniel Report includes an undiscounted amount of $71.5 million, including $51.9 million related to developed reserves and $19.6 million for undeveloped reserves, with respect to expected future well abandonment and reclamation costs related specifically to proved and probable reserves and such amount is included in the values captioned "Total Proved and Probable Reserves" in the NPV of Reserves table (see "NPV OF RESERVES SUMMARY"). These values are consistent with changes to NI 51-101 amendments effective July 1, 2015 and reflect both well abandonment and reclamation costs.

The following table presents the estimated future asset retirement obligations and estimated net salvage values at various discount rates:

Abandonment and Reclamation Costs





Discounted

at

($ millions, net to Perpetual)

Undiscounted

5%

8%

10%

Total Estimated Future Abandonment and
Reclamation Costs(1)

179.2

108.0

71.0

54.0

Salvage Value

(90.3)

(45.0)

(30.0)

(24.0)

Abandonment and Reclamation Costs, net of Salvage

88.9

63.0

41.0

30.0

Well Abandonment Costs for Developed
Reserves included in McDaniel Report

(51.9)

(26.5)

(18.2)

(14.3)

Estimate of Additional Future Abandonment
and Reclamation Costs, net of Salvage(2)

37.0

36.5

22.8

15.7

(1)

Estimated internally in accordance with NI 51-101 for existing wells, pipelines and facilities.

(2)

Future abandonment and reclamation costs not included in the McDaniel Report, net of salvage value.

NET ASSET VALUE ("NAV")

The following net asset value table shows what is normally referred to as a "produce-out" NAV calculation under which the Corporation's reserves would be produced at forecast future prices and costs. The value is a snapshot in time and is based on various assumptions including commodity prices and foreign exchange rates that vary over time. It should not be assumed that the NAV represents the fair market value of Perpetual's shares. The calculations below do not reflect the value of the Corporation's prospect inventory to the extent that the prospects are not recognized within the NI 51-101 compliant reserve assessment, except as they are valued through the estimate of the fair market value of undeveloped land.

Pre-tax NAV at December 31, 2015(1)




Discounted

at

($ millions, except as noted)

Undiscounted

5%

8%

10%

15%

Total Proved and Probable Reserves(2)

739.4

485.8

388.6

338.6

248.5

TOU Shares(3)

145.3

145.3

145.3

145.3

145.3

Fair Market Value of Undeveloped Land(4)

83.0

83.0

83.0

83.0

83.0

Warwick Gas Storage(5)

25.3

25.3

25.3

25.3

25.3

Net Bank Debt(1,6)

(55.8)

(55.8)

(55.8)

(55.8)

(55.8)

Financing Arrangement(7)

(21.3)

(21.3)

(21.3)

(21.3)

(21.3)

Senior Notes

(275.0)

(275.0)

(275.0)

(275.0)

(275.0)

Estimate of Additional Future Abandonment

and Reclamation Costs(8)

(37.0)

(36.5)

(22.8)

(15.7)

(6.9)

Hedge Book(9)

(20.1)

(20.1)

(20.1)

(20.1)

(20.1)

NAV

593.8

330.7

247.2

204.3

123.0

Shares Outstanding (million) – basic

382.3

382.3

382.3

382.3

382.3

NAV per Share ($/Share)

1.55

0.87

0.65

0.53

0.32

(1)

Financial information is per Perpetual's 2015 consolidated financial statements.

(2)

Reserve values per McDaniel Report as at December 31, 2015.

(3)

TOU Share value based on 6.5 million shares at December 31, 2015 closing price ($22.35/share)

(4)

Independent third party estimate, excludes undeveloped land in West Central Alberta with
reserves assigned.

(5)

Reflects 30% interest in Warwick Gas Storage at carrying amount on December 31, 2015.

(6)

Includes bank debt, net of working capital.

(7)

Reflects notional amount of financing arrangement.

(8)

Amounts are in addition to amounts in the McDaniel report for future well abandonment costs,
net of salvage value, related to developed reserves. See "ABANDONMENT AND RECLAMATION
COSTS".

(9)

Hedging adjustments as at December 31, 2015 relative to McDaniel price forecast.

The above evaluation includes future capital expenditure expectations required to bring undeveloped reserves recognized by McDaniel that meet the criteria for booking under NI 51-101 on production. The fair market value of undeveloped land does not reflect the value of the Company's extensive prospect inventory which is anticipated to be converted into reserves and production over time through future capital investment. Additionally, no value has been assigned to reflect the investment to date in the ongoing bitumen extraction pilot project at Panny.

The NAV calculated at December 31, 2015 does not include the impact of the Rights Offering, which closed on January 18, 2016, or the proposed share consolidation on a twenty for one basis, which is expected to be effective on or about March 24, 2016. As such, the following pro forma NAV is presented to illustrate the effect of these two items at December 31, 2015.

Pre-tax NAV at December 31, 2015, pro forma Rights Offering and Share Consolidation



Discounted

at

($ millions, except as noted)

Undiscounted

5%

8%

10%

15%

NAV at December 31, 2015

593.8

330.7

247.2

204.3

123.0

Rights Offering proceeds(1)

22.9

22.9

22.9

22.9

22.9

Pro Forma NAV

616.7

353.6

270.1

227.2

145.9

Shares Outstanding (million) – basic(2)

52.4

52.4

52.4

52.4

52.4

NAV per Share ($/Share)

11.77

6.75

5.15

4.34

2.78







(1)

Based on the estimated net proceeds of $22.9 million received by the Company on closing
of the Rights Offering.

(2)

Based on 382.1 million common shares at December 31, 2015 with an additional 665.4 million
common shares issued on closing of the Rights Offering and reflecting the proposed share
consolidation on the basis of twenty to one common share.

FINDING AND DEVELOPMENT COSTS

Under NI 51-101, the methodology to be used to calculate Finding and Development ("F&D") costs includes incorporating changes in FDC required to bring the proved undeveloped and probable reserves to production. Changes in forecast FDC occur annually as a result of development activities, acquisitions and disposition activities, undeveloped reserve revisions and capital cost estimates that reflect the independent evaluator's best estimate of what it will cost to bring the proved and probable undeveloped reserves on production. In 2015, F&D costs including changes in FDC cannot be calculated as the change in FDC more than offsets 2015 exploration and development spending. Similarly, Perpetual's Finding, Development and Acquisition ("FD&A") costs cannot be calculated as the change in FDC and impact of dispositions more than offsets exploration and development spending.

2016 OUTLOOK 

In 2016, Perpetual's has identified its top four strategic priorities which include:

  • Reduce debt and restore cash flow;
  • Grow value and scope of Greater Edson liquids-rich gas;
  • Maximize value potential of Eastern Alberta assets; and
  • Advance high impact opportunities.

With projected further low commodity prices in 2016, Perpetual will prioritize liquidity management and preservation of its balance sheet through restricted spending and a focus on reducing costs and maximizing efficiencies in administration and operations. A diligent focus on reductions in all areas of spending, including operating, financing and administrative costs, will continue in order to establish a sustainable cost structure in this low commodity price environment.

In order to protect a base level of funds flow, Perpetual has commodity price contracts in place in 2016 on an estimated 70 percent of forecast production from the remainder of the year. These include both AECO and NYMEX natural gas contracts from April to December 2016 on close to 70,000 GJ/d at an estimated price of $2.19/GJ; and oil sales arrangements on 1,000 bbl/d protecting a floor price at WTI of $USD43.50/bbl.

In light of the continued deterioration of commodity prices since December 2015, Perpetual has reduced its capital spending program for 2016 and Perpetual's Board of Directors has restricted its approval to a first quarter capital expenditure budget of $6 million. Approved first quarter spending is limited to drilling one (1.0 net) well at East Edson with minimal additional capital allocated to continue strategic production testing at Panny and Waskahigan, critical facility maintenance and overhauls, and third party abandonment and reclamation activity. Completion and tie in of the new East Edson well along with additional capital activity for the remainder of the year will be deferred and assessed on a project economics basis as the year progresses.

Perpetual continues to target strategic asset sales in 2016. In late February, the Company entered into a purchase and sale agreement for the disposition of 37 sections of its 425 net sections of oil sands leases in northeast Alberta in exchange for gross proceeds of $6.1 million and a one percent gross overriding royalty. Closing is scheduled prior to March 15, 2016. Proceeds from the disposition will be initially applied against outstanding debt.

Financial and Operating Highlights

THREE MONTHS

Ended December 31

YEAR ENDED

 December 31,

($Cdn thousands except volume and per share amounts)

2015

2014

 Change

2015

2014

 Change

Financial







Oil and natural gas revenue

33,044

62,562

(47%)

142,437

262,790

(46%)

Funds flow (1)

362

17,316

(98%)

2,004

81,395

(98%)


Per share (1) (2)

-

0.12

(100%)

0.01

0.55

(98%)

Net earnings (loss)

(93,539)

(18,273)

(412%)

(89,274)

3,366

(2752%)


Per share (2)

(0.61)

(0.12)

(417%)

(0.59)

0.02

(3050%)

Total assets

603,450

750,602

(20%)

603,450

750,602

(20%)

Net bank debt outstanding (1)

55,832

21,867

155%

55,832

21,867

155%

Senior notes, at principal amount

275,000

275,000

-

275,000

275,000

-

Share forward financial obligation, at carrying amount

18,059

-

100%

18,059


100%

Carrying value of marketable securities

(145,275)

-

-

(145,275)


-

Convertible debentures, at principal amount

-

34,878

(100%)

-

34,878

(100%)

Total net debt (1)

203,616

331,745

(39%)

203,616

331,745

(39%)

Capital expenditures








Exploration and development (3)

715

26,018

(97%)

76,957

116,457

(34%)


Dispositions, net of Acquisitions

-

(20,595)

(100%)

(23,710)

(70,351)

(66%)


Other

25

84

(70%)

910

614

48%


Net capital expenditures

740

5,507

(87%)

54,157

46,720

16%

Common shares outstanding (thousands)







End of period

382,288

150,077

155%

382,288

150,077

155%

Weighted average

151,638

149,084

2%

150,140

149,084

1%

Operating







Average production








Natural gas (MMcf/d) (4)

105.1

122.5

(14%)

104.2

102.7

1%


Oil and NGL (bbl/d) (4)

2,144

3,262

(34%)

2,337

3,443

(32%)


Total (boe/d)

19,661

23,685

(17%)

19,706

20,554

(4%)

Average prices








Natural gas, before derivatives ($/Mcf)

2.74

3.96

(31%)

2.87

4.50

(36%)


Natural gas, including derivatives ($/Mcf)

2.92

4.16

(30%)

3.01

4.36

(31%)


Oil, before derivatives ($/bbl)

33.04

59.80

(45%)

41.27

75.21

(45%)


Oil, including derivatives ($/bbl)

39.81

67.05

(41%)

52.48

71.55

(27%)


NGL ($/boe)

33.68

59.63

(44%)

33.72

73.97

(54%)

Drilling (wells drilled gross/net)








Gas

-

11/10.0


6/4.5

29/20.9



Oil

-

-


-

20/17.8



Observation/Service

-

-


2/2.0

-



Total

-

11/10.0


8/6.5

49/38.7



Success rate (%)

-

100/100


100/100

100/100


(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)

Exploration and development costs include geological and geophysical expenditures.

(4) 

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

Forward-Looking Information 

Certain information regarding Perpetual in this news release including management's assessment of future plans and operations may constitute forward-looking information or statements under applicable securities laws. The forward looking information includes, without limitation, statements made under the heading "2016 Outlook"; anticipated amounts and allocation of capital spending; statements pertaining to funds flow levels, self-funding, future development and capital efficiencies; statements regarding estimated production and timing thereof; prospective drilling locations, forecast average production; completions and development activities; infrastructure expansion and construction; anticipated effect of commodity prices on reserves; estimates of gross recoverable gas sales; estimated net asset value as at December 31, 2015 and on a pro forma basis; prospective oil and natural gas liquids production capability; projected realized natural gas prices and funds flow; estimated asset retirement obligations; anticipated effect of commodity prices on future development capital and reserves; commodity prices and foreign exchange rates; and gas price management. Various assumptions were used in drawing the conclusions or making the forecasts and projections contained in the forward-looking information contained in this press 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 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 contained in this press release. 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 under "Risk Factors" in Perpetual's MD&A for the year-ended December 31, 2015 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 law.

Uncertainties in Estimating Reserves

There are numerous uncertainties inherent in estimating quantities of crude oil, natural gas and NGL reserves and the future funds flows attributed to such reserves. The reserve and associated funds flow information set forth above are estimates only. In general, estimates of economically recoverable crude oil, natural gas and NGL reserves and the future net funds flows therefrom are based upon a number of variable factors and assumptions, such as historical production from the properties, production rates, ultimate reserve recovery, timing and amount of capital expenditures, marketability of oil and natural gas, royalty rates, the assumed effects of regulation by governmental agencies and future operating costs, all of which may vary materially. For those reasons, estimates of the economically recoverable crude oil, NGL and natural gas reserves attributable to any particular group of properties, classification of such reserves based on risk of recovery and estimates of future net revenues associated with reserves prepared by different engineers, or by the same engineers at different times, may vary. The Company's actual production, revenues, taxes and development and operating expenditures with respect to its reserves will vary from estimates thereof and such variations could be material.

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.

Non-GAAP Financial Measures

This press release includes references to financial measures commonly used in the oil and gas industry of funds flow, operating netback and net debt, which do not have a standardized meaning prescribed by International Financial Reporting Standards ("GAAP"). Accordingly, the Company's use of these terms may not be comparable to similarly defined measures presented by other companies. Management uses the term "funds flow" for its own performance measures and to provide shareholders and potential investors with a measurement of the Company's efficiency and its ability to generate the cash necessary to fund a portion of its future growth expenditures or to repay debt. Perpetual considers operating netback an important performance measure as it demonstrates its profitability relative to current commodity prices. Operating netbacks are calculated by deducting royalties, operating costs, and transportation from realized revenue. Operating netbacks are also calculated on a per boe basis using average boe production for the period. Operating netbacks on a per boe basis can vary significantly for each of the Company's operating areas. Net bank debt is measured as current and long term bank indebtedness including adjusted working capital deficiency (surplus). Net debt includes the carrying value of net bank debt and the TOU Share financial arrangement and the principal amount of senior notes and convertible debentures reduced for the mark-to-market value of TOU Shares held. Net bank debt and net debt are used by management to analyze leverage. Investors are cautioned that non-GAAP measures should not be construed as alternatives to measures of financial performance determined in accordance with GAAP as an indication of the Company's performance. See Non-GAAP Financial Measures" in the Management's Discussion and Analysis for the definition and description of these terms.

Industry Metrics

The terms F&D, FDC, FD&A, operating netbacks, production ratio, NAV and RLI, while commonly used in the oil and gas industry, do not have standardized meanings and may not be comparable to similar measures presented by other companies, and therefore should not be used to make such comparisons.

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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