Perpetual Energy Inc. Releases Second Quarter 2016 Financial and Operating Results

CALGARY, Aug. 4, 2016 /CNW/ - (TSX:PMT) - Perpetual Energy Inc. ("Perpetual", the "Corporation" or the "Company") reports its financial and operating results for the three and six months ended June 30, 2016. A complete copy of Perpetual's unaudited interim consolidated financial statements and related Management's Discussion and Analysis ("MD&A") for the three and six months ended June 30, 2016 can be obtained through the Corporation's website at www.perpetualenergyinc.com and SEDAR at www.sedar.com.

SECOND QUARTER HIGHLIGHTS

Production and Operations

  • Perpetual continues to defer material capital spending in light of depressed commodity prices. Perpetual's exploration and development spending for the second quarter of 2016 was limited to $0.8 million, of which $0.7 million was attributed to spending in west central Alberta primarily for incremental costs associated with the natural gas well drilled during the first quarter of 2016.

  • First quarter average production of 15,959 boe/d was down four percent year over year (16,621 boe/d) and 13 percent from the first quarter of 2016 (18,378 boe/d), reflecting the Company's decision to restrict capital spending in response to low commodity prices. East Edson production averaged 41.2 MMcfe/d in the second quarter of 2016, 22 percent higher year over year compared to 33.9 MMcfe/d in the second quarter of 2015.

  • Natural gas production of 85.2 MMcf/d was marginally lower than the second quarter in 2015 and 13 percent below the preceding first quarter of 2016 (98.2 MMcf/d) reflecting natural declines and the decision to defer drilling and recompletion projects and preserve inventory and value with a view to eventual commodity price recovery.

  • Compared to the prior year, natural gas liquids ("NGL" or "liquids") production increased 31 percent to 682 bbl/d (Q2 2015 – 522 bbl/d) consistent with increased liquids-rich natural gas production from 2015 capital development in East Edson. NGL production decreased 18 percent from the first quarter of 2016 (836 bbl/d) as a result of restricted spending.

  • Crude oil production of 1,073 bbl/d declined nine percent from the previous quarter (Q1 2016 – 1,174 bbl/d) and 39 percent compared to the prior year (Q2 2015 - 1,766 bbl/d) due to natural declines and the decision to defer drilling in the Company's Mannville heavy oil property. Natural declines have been partially mitigated by the positive response of several heavy oil pools to waterflood programs initiated in 2015.

  • Asset dispositions during the second quarter included the sale of the Company's 30 percent partnership interest in Warwick Gas Storage LP ("WGS LP") as well as 9,207 net acres of surrounding lands and associated wells and infrastructure with current net production of 470 Mcf/d for cash proceeds of $20 million. The transaction included the disposition of Perpetual's share of WGS LP's $8.3 million of debt net of working capital held by the partnership. In addition, Perpetual received a net dividend of $0.5 million at closing, for an effective total value of approximately $23 million.

Financial Highlights

  • In April 2016, Perpetual announced a proposal to give holders of senior notes an opportunity to exchange their senior notes for shares of Tourmaline Oil Corp. ("TOU Shares") owned by Perpetual (the "Securities Swap"). In late May, Perpetual completed the Securities Swap transaction by settling all senior notes tendered with a total principal amount of $214.4 million in exchange for 4.4 million TOU shares owned by Perpetual with a fair market value of $130.5 million ($29.64 per share).

  • Concurrent with the Securities Swap, Perpetual also reduced outstanding bank debt with the repayment of its $42 million margin loan and executed a new margin loan arrangement for $10.6 million secured by 0.8 million TOU shares held by Perpetual. The $10.6 million margin loan has a maturity date of April 30, 2017 and was based on a 40 percent loan to value ratio at funding, allowing Perpetual to reduce the number of TOU shares pledged as security to facilitate the Securities Swap.

  • At June 30, 2016, Perpetual had net debt of $28.8 million, net of working capital and the market value of 1.8 million TOU shares held by Perpetual, down $120.3 million (81 percent) since March 31, 2016 for a total decrease of $174.8 million (86 percent) in the first half of 2016. Second quarter reductions in net debt were achieved primarily through the Securities Swap and disposition of the Company's partnership interest in the gas storage business operated by WGS LP.

  • Perpetual's second quarter natural gas price, before derivatives of $1.37/Mcf was down 51 percent from $2.80/Mcf in 2015, reflecting decreased AECO Monthly Index prices in 2016. The Company's realized second quarter natural gas price was increased by realized gains of $3.8 million on natural gas derivatives resulting in a second quarter 2016 average realized gas price, including derivatives, of $1.85/Mcf. Perpetual benefits from the higher heat content of its west central natural gas production combining for a corporate sales gas conversion rate of 1.12 GJ/Mcf in 2016 (2015 – 1.10 GJ/Mcf).

  • Perpetual's oil price, before derivatives, of $38.47/bbl increased 74 percent from the first quarter of 2016 ($22.08/bbl), reflecting higher WTI prices and a narrowing of the WCS differential; however, the second quarter oil price was still 27 percent lower than the prior year, with 2016 prices remaining below average prices realized in 2015. Realized gains of $0.1 million increased Perpetual's second quarter realized oil price to $39.17/bbl, including derivatives.

  • Perpetual's realized an average NGL price of $34.71/bbl during the second quarter, ten percent lower than the same period in the previous year reflecting the drop in all NGL component prices as a function of the decrease in WTI prices, as well as NGL supply growth which has been bottlenecked by infrastructure in many regions of North America.

  • Petroleum and natural gas revenue, before derivatives, for the second quarter of $16.5 million decreased 49 percent from 2015 primarily due to depressed commodity prices along with the four percent lower production volumes resulting from natural declines and deferred drilling activities.

  • Year over year, the Company realized material cost savings for the quarter in all aspects of its operations, highlighted by a 40 percent reduction (37 percent on a per boe basis) in production and operating expenses to $6.53/boe. Royalties were also down 37 percent (35 percent on a per boe basis) to $1.27/boe, while transportation costs were reduced 15 percent (11 percent on a per boe basis) to $1.46/boe.

  • The impact of lower commodity prices which reduced realized revenue by $10.38/boe more than offset the cost savings of $4.78/boe recorded on royalites, production and operating expenses and transportation costs, resulting in a second quarter operating netbacks of $4.56/boe, down 55 percent from $10.16/boe for the same period in 2015.

  • Cash expenses exceeded revenues during the second quarter of 2016, resulting in a negative funds flow from operations of $1.9 million. Despite a diligent focus on cost reductions in all areas of operations and administration, reduced revenues resulting from lower commodity prices and declining production more than offset reduced costs during the quarter.

  • Perpetual recorded net income of $64.9 million in the second quarter of 2016 including a gain of $81.5 million recorded on completion of the Securities Swap as well as a $21.4 million gain on the change in fair value of TOU shares held by the Company. These gains were partially offset by a loss for the disposition of WGS LP of $6.1 million.

2016 STRATEGIC PRIORITIES

Perpetual's activities during the second quarter were concentrated on its top four strategic priorities for 2016, which include:

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

In light of continuing depressed commodity prices, Perpetual continues to prioritize liquidity management and preservation of its balance sheet through debt reduction, restricted capital spending and a focus on reducing costs and maximizing efficiencies in administration and operations. Reduced spending in all aspects of the business, including operating, financing and administrative costs, will continue throughout 2016 in order to establish a sustainable cost structure in this low commodity price environment.

Reduce debt and restore cash flow

  • Perpetual's focus on debt reduction during the second quarter of 2016 resulted in a decrease in net debt of $120.3 million (81 percent) since March 31, 2016 for a total decrease of $174.8 million (86 percent) in the first half of 2016. The $120.3 million reduction in debt was realized through a combination of transactions during the second quarter of 2016 to generate additional liquidity in the short term and improve the Company's balance sheet for long term financial sustainability.

  • In April 2016, Perpetual announced the Securities Swap to give holders of senior notes an opportunity to exchange their senior notes for TOU shares owned by Perpetual on the basis of 21 TOU shares for each $1,000 principal amount of the 8.75% senior notes due March 15, 2018 (the "2018 Senior Notes") and 20 TOU shares for each $1,000 principal amount of the 8.75% senior notes due July 23, 2019 (the "2019 Senior Notes"). Between the periods of April 27, 2016 and May 25, 2016, $214.4 million face value of senior notes were swapped, including $114.0 million of outstanding 2018 Senior Notes and $100.4 million of outstanding 2019 Senior Notes through the exchange of 4.4 million TOU shares with a fair market value of $130.5 million ($29.64 per share) and a cash payment of $3.9 million for accrued interest. All senior notes tendered to the Securities Swap were exchanged for TOU shares. Perpetual recorded a gain on the Securities Swap of $81.5 million.

  • At June 30, 2016, Perpetual had $60.6 million face value of senior notes remaining, consisting of $36.0 million 2018 Senior Notes and $24.6 million 2019 Senior Notes. Annual interest savings associated with the $214.4 million of senior notes cancelled is $18.8 million, with close to $9.5 million in estimated savings through the remainder of 2016.

  • Dispositions during the second quarter generated total cash proceeds of $20.5 million at closing on the sale of the Company's 30 percent partnership interest in WGS LP along with surrounding buffer lands and associated wells and infrastructure.

  • Concurrent with the announcement of the Securities Swap in April 2016, Perpetual entered into a new margin loan with more favorable terms including a lower interest rate, higher loan to value ratio and extended maturity to April 30, 2017. The new margin loan, together with available cash on hand, was utilized to repay the previous $42 million margin loan, facilitating the release of 4.4 million TOU shares which were used to execute the Securities Swap. The new margin loan is fully drawn at $10.6 million and is secured by a pledge of 0.8 million TOU shares.

  • Despite the provision for no interim scheduled review until October 2016, in April 2016 Perpetual's lenders completed a discretionary review of Perpetual's borrowing base triggered by lower actual and future commodity prices than previously forecast which resulted in a reduction to the credit facility from $20 million to $6 million. Pursuant to the closing of the Securities Swap and the disposition of Perpetual's 30 percent interest in WGS LP in May 2016, the Lenders also required Perpetual to pledge a $2.0 million cash deposit to be held as security in favor of the $6 million working capital facility. The reduced credit facility expires on October 31, 2016 and is effectively being used to support outstanding letters of credit totaling $5.6 million.

  • General and administrative expenses were reduced by nine percent to $3.7 million in the second quarter of 2016 from $4.1 million in 2015 through reduced consulting fees and savings related to modified work schedules, elimination of annual bonuses, staff reductions and cost cutting in all areas of administration.

  • Perpetual has natural gas commodity price contracts in place to provide downside protection on an estimated 69 percent of forecasted natural gas production for the remainder of 2016.

  • Perpetual has oil sales contracts in place on 1,000 bbl/d with a floor price at WTI of USD$43.50/bbl for the remainder of 2016; providing downside protection on close to 63 percent of forecast oil and liquids production.

Grow value and scope of Greater Edson liquids-rich gas

  • Perpetual spent only $0.8 million of exploration and development capital during the second quarter of 2016, the majority of which was allocated to west central Alberta primarily for incremental costs associated with the natural gas well drilled at East Edson during the first quarter of 2016. Completion of the well is scheduled for the third quarter pending an assessment of project economics based on forward commodity prices as the year progresses.

  • Perpetual's focus on reducing costs and maximizing efficiencies in operations has resulted in a sustainable cost structure for the Company's East Edson assets. Start-up of the Company-operated gas plant in the third quarter of 2015, combined with a diligent focus on cost management is reflected in a second quarter area operating cost of $2.78/boe for East Edson production.

Maximize value potential of Eastern Alberta assets

  • Production and operating expenses associated with the Company's shallow gas assets decreased 51 percent to $5.7 million ($8.63/boe) in the second quarter of 2016 compared to $11.7 million ($14.46/boe) for the same period of 2015, reflecting the Company's diligent focus on reducing costs and maximizing efficiencies in operations, including the re-deployment of operations personnel to abandonment and reclamation projects.

  • Perpetual spent $0.9 million during the second quarter of 2016 on abandonment and reclamation projects in eastern Alberta as part of the Company's shallow gas operating cost reduction program. The majority of decommissioning expenditures relate to internal labor costs and equipment costs as the Company continued its program to redeploy operational personnel and internal resources to accelerate progress and drive efficiencies on abandonment and reclamation projects.

  • The Company continues to prioritize cost reductions on its shallow gas assets. Despite material decreases in many categories of discretionary operational spending, municipal property taxes and other annual fees represent a significant portion of fixed operating costs. 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 actual property value for the Company's mature shallow gas assets. As a result, property taxes in Eastern Alberta completely eliminate positive operating cash flow on most shallow gas properties at current commodity prices.

Advance high impact opportunities

  • Perpetual continued to advance phase 1 of its strategic low pressure electro-thermally assisted drive ("LEAD") process pilot project targeting bitumen recovery from the Bluesky formation at Panny. First production was established on flowback in the first quarter of 2016 following a successful first heating phase of the pilot which commenced in September 2015 and cycle two commenced flowback in late June after an abbreviated second heating cycle. The cyclic heat stimulation test ("CHS") thus far is yielding valuable insights regarding reservoir performance, the functionality of the electrical heating cable and other operational considerations and thus far cumulative oil recovery has exceeded expectations. High quality data continues to be gathered for refinement of a commercial development plan and economic model. Minimal additional capital during the second quarter was allocated to continue the strategic cyclic heat stimulation test. Plans to incorporate solvent testing are underway for the third cycle of the CHS.

  • Pending commodity price recovery, Perpetual's extensive land positions for resource-style plays captured in the Alberta deep basin at Columbia and the Colorado/Viking shale gas play in east-central Alberta provide considerable exposure for future exploration and development. With capital spending curtailed, planning and analysis of exploration, evaluation and development projects is ongoing on these potentially high impact opportunities.

2016 OUTLOOK

Perpetual remains focused on strengthening its balance sheet, managing liquidity and restoring positive funds flow as top priorities in the current depressed commodity price environment. The impact of the Securities Swap during the second quarter of 2016 along with the liquidity generated through asset dispositions resulted in an estimated current net debt balance of $28.3 million, net of the market value of remaining TOU shares held. Current net debt is comprised of $60.6 million in face value senior notes (2018 Senior Notes - $36.0 million; 2019 Senior Notes - $24.6 million), $21.3 million due November 16, 2016 as per the financing arrangement secured by 1.0 million TOU shares, a margin loan of $10.6 million secured by the remaining 0.8 million TOU shares due April 2017 and an estimated working capital surplus of $0.7 million, offset by the market value of the remaining 1.85 million TOU shares of approximately $63.5 million (based on a market price of $34.35 per TOU share on August 4, 2016).

The Company's Board of Directors, together with management, continue to defer material capital spending in light of depressed commodity prices. Approximately $4.5 million of capital expenditures for the remainder of 2016 will be allocated to advance heavy oil waterflood activities, strategic testing on high impact opportunities and high return abandonment and reclamation activities which will be executed primarily utilizing internal manpower and equipment. In addition, completion and tie in of the East Edson well drilled during the first quarter, is forecast to add production volumes in the third quarter but will be assessed on a project economics basis as the year progresses prior to execution.

Perpetual estimates that expenses will exceed revenues for the remainder of 2016 resulting in negative funds flow of $8 to $9 million for the second half of 2016 based on current forward commodity prices, with total oil and liquids production averaging close to 1,575 bbl/d and natural gas sales averaging approximately 78 MMcf/d. The Company will continue to pursue reductions in all areas of its cost structure in order to restore positive funds flow and will focus on sources of liquidity, including strategic asset sales, throughout the remainder of 2016.

Financial and Operating Highlights

Three Months Ended June 30

Six Months Ended June 30

(Cdn$ thousands except as noted)


2016

2015

 % Change

2016

2015

 % Change

Financial








Oil and natural gas revenue


16,501

32,129

(49)

41,195

73,933

(44)

Funds flow (1)


(1,852)

2,635

(170)

(1,804)

4,156

(143)


Per share (1) (2)


(0.04)

0.35

(111)

(0.04)

0.56

(107)

Net earnings (loss)


64,925

104,121

(38)

97,689

71,404

37


Per share – basic (2)


1.25

13.94

(91)

2.00

9.59

(79)


Per share – diluted (2)


1.23

13.29

(91)

1.91

9.21

(79)

Total assets


477,438

845,812

(44)

477,438

845,812

(44)

Net bank debt outstanding (1)


9,915

63,402

(84)

9,915

63,402

(84)

Senior notes, at principal amount


60,573

275,000

(78)

60,573

275,000

(78)

TOU share financial arrangement, at carrying amount


21,162

-

-

21,162

-

-

Convertible debentures, at principal amount


-

34,878

(100)

-

34,878

(100)

Period end balance of marketable securities


(62,830)

(253,260)

(75)

(62,830)

(253,260)

(75)

Total net debt (1)


28,820

120,020

(76)

28,820

120,020

(76)

Capital expenditures









Exploration and development (4)


833

13,174

(94)

5,642

61,558

(91)


Dispositions, net of acquisitions


(20,052)

(21,097)

(5)

(26,518)

(21,083)

26


Other


464

280

66

484

301

61


Net capital expenditures


(18,755)

(7,643)

145

(20,392)

40,776

(150)

Common shares outstanding (thousands)(3)








End of period


52,469

7,619

589

52,469

7,619

589

Weighted average - basic


52,140

7,468

598

48,856

7,448

556

Weighted average - diluted


52,904

7,879

571

51,169

7,884

549

Operating








Average production









Natural gas (MMcf/d) (5)


85.2

86.0

(1)

91.7

103.1

(11)


Oil (bbl/d) (5)


1,073

1,766

(39)

1,124

1,904

(41)


NGL (bbl/d) (5)


682

522

(31)

759

617

23


Total (boe/d)


15,959

16,621

(4)

17,169

19,703

(13)

Average prices









Natural gas, before derivatives ($/Mcf)


1.37

2.80

(51)

1.84

2.92

(37)


Natural gas, including derivatives ($/Mcf)


1.85

3.10

(40)

2.55

3.13

(19)


Oil, before derivatives ($/bbl)


38.47

52.35

(27)

29.91

44.35

(33)


Oil, including derivatives ($/bbl)


39.17

65.22

(40)

36.42

52.07

(30)


NGL ($/bbl)


34.71

38.64

(10)

31.75

37.21

(15)

Drilling (wells drilled gross/net)









Gas


                -/-

                  -/-


         1/1.0

             6/4.5



Oil


                -/-

                  -/-


              -/-

                  -/-



Observation


                -/-

                  -/-


              -/-

             2/2.0



Total


                -/-

                  -/-


         1/1.0

             8/6.5



Success rate (%)


      100/100

        100/100


    100/100

        100/100


(1)

These are non-GAAP measures. Please refer to "Non-GAAP Measures" in this News Release.

(2)

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

(3)

Common shares and per share amounts have been retroactively adjusted to reflect the consolidation of outstanding common shares on the
basis of 20 common shares to one common share at March 24, 2016.

(4)

Exploration and development costs include geological and geophysical expenditures.

(5)

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 and including the information contained under the heading "2016 Outlook" may constitute forward-looking statements under applicable securities laws. The forward-looking information includes, without limitation, statements regarding capital expenditure levels for 2016, prospective drilling activities; forecast production, forecast levels of debt, production type, operations, funds flows, and timing thereof; facility construction and pilot project plans and timing thereof; forecast and realized commodity prices; expected cost savings and the impact of cost savings initiatives, expected funding, allocation and timing of capital expenditures; 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; expected interest savings from securities swap, and commodity prices. 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 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 Annual Information Form and 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 laws.

Also included in this press release are estimates of Perpetual's 2016 net debt, which is based on the various assumptions as to production levels, including estimated average production of approximately 14,575 boe/d for 2016, capital expenditures, and other assumptions including current forward commodity price assumptions. To the extent any such estimate constitutes a financial outlook, it was approved by management and the Board of Directors of Perpetual on August 4, 2016 and is included to provide readers with an understanding of Perpetual's anticipated funds flows based on the capital expenditure and other assumptions described herein and readers are cautioned that the information may not be appropriate for other purposes.

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 are listed on the Toronto Stock Exchange under the symbol "PMT". 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 Office


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