Painted Pony Announces Record Current Production, Further Gas Market Diversification, Increased Credit Facilities, and Third Quarter 2017 Financial and Operating Results

11/08/2017

CALGARY, Nov. 8, 2017 /CNW/ - Painted Pony Energy Ltd. ("Painted Pony" or the "Corporation") (TSX: PONY) is pleased to announce current production of approximately 360 MMcfe/d (60,000 boe/d), based on field estimates, the signing of a long-term natural gas supply agreement (the "Agreement") with Methanex Corporation ("Methanex"), an increase to syndicated credit facilities, and third quarter 2017 financial and operating results.

HIGHLIGHTS:
Post Third Quarter 2017

  • Achieved current production of over 360 MMcfe/d (60,000 boe/d), including over 4,700 bbls/d of liquids of which approximately 50% was condensate, based on field estimates, from October 30 to November 7, 2017;
  • Signed the Agreement with Methanex for the fixed price delivery of natural gas volumes, escalating over time, to the Methanex methanol plant in Medicine Hat, Alberta;
  • Increased syndicated credit facilities to $450 million from $400 million;
  • Drilled the Corporation's first sequential 6-well pad for $3.7 million per well (drill, complete, equip, tie-in) which is now producing over 60 MMcf/d of natural gas and over 1,300 bbls/d of liquids (50% condensate) based on field estimates;
  • Increased 2018 average fixed-price hedged volumes to 196 MMcfe/d, approximately 48% of 2018 forecast production volumes, at a volume weighted-average price of $3.44/Mcfe, including the impact of liquids contracts;

Third Quarter 2017

  • Generated funds flow from operations(2) of $29.5 million ($0.18 per share) during the third quarter of 2017, an increase of 134% compared to the third quarter of 2016;
  • Recorded net income of $14.6 million ($0.09 per share) during the third quarter of 2017, an increase of 26% over the third quarter of 2016 and the third consecutive quarter of earnings.
  • Increased average daily production volumes to 254 MMcfe/d (42,353 boe/d) during the third quarter of 2017, after voluntarily shutting in approximately 50 MMcfe/d (8,500 boe/d) due to low natural gas prices, an increase of 86% compared to total production volumes during the third quarter of 2016;
  • Increased liquids production by 222% to 3,826 bbls/d, which included 1,910 bbls/d of condensate, during the third quarter of 2017 compared to the third quarter of 2016;
  • Realized natural gas prices at a premium to reference prices, through market diversification (a 10% premium to daily AECO and an 81% premium to Station 2), and;
  • Reduced operating expenses to $0.59/Mcfe during the third quarter of 2017, an 18% reduction from second quarter of 2017 operating expenses of $0.72/Mcfe.

Current Productive Capacity
Based on field estimates, production during the period October 30 to November 7, 2017 averaged approximately 360 MMcfe/d (60,000 boe/d), including approximately 4,700 bbls/d of liquids (2,350 bbls/d of condensate and 2,350 bbls/d of NGLs; 50% propane and 50% butane).  These volumes were the result of capital spent during the first half of 2017 to bring on production volumes in anticipation of the AltaGas Townsend Facility (the "Townsend Facility") 99 MMcf/d expansion (the "Expansion"). The Expansion was completed in September 2017 and began receiving Painted Pony natural gas volumes in October 2017.  The Expansion brings the total processing capacity at the Townsend Facility to 297 MMcf/d of which Painted Pony has current committed take-or-pay volumes of 178 MMcf/d increasing to 267 MMcf/d beginning January 1, 2018.  Painted Pony has been balancing new production volumes and optimizing facility utilization with periodic production shut-ins due to commodity price weakness.  Production volumes shut-in during the third quarter averaged approximately 50 MMcfe/d (8,500 boe/d). Due to weak prices at some delivery points, Painted Pony chose to shut in approximately 130 MMcfe/d (22,000 boe/d) during the month of October 2017, but began ramping up production in late October with higher prices.

Methanex Agreement
Subsequent to the end of the third quarter, Painted Pony entered into a long-term agreement to deliver natural gas to Methanex.  The structure of this transaction provides return certainty and price diversification for Painted Pony while providing price stability for Methanex. Painted Pony will supply the majority of the natural gas required for Methanex's existing 600,000 tonne methanol plant in Medicine Hat, Alberta for a term of 14 years.  Deliveries under the Agreement will commence in 2018 and contracted quantities will be approximately 10 MMcf/d (10,000 MMbtu/d) in 2018, increasing to approximately 50 MMcf/d (50,000 MMbtu/d) beginning in 2023. Methanex is the world's largest producer and supplier of methanol to major international markets.

In response to the signing of the Agreement, Pat Ward, President and CEO of Painted Pony remarked, "The Agreement with Methanex will yield a stable stream of cash flow to Painted Pony while providing additional market diversification for us, which will help mitigate the impact of market volatility on our realized prices.  By providing Methanex with a long-term, secure and reliable supply of natural gas volumes to their Medicine Hat plant, we believe this is truly a "win-win" arrangement for both companies."

Credit Facilities Increased
Painted Pony has secured commitments to increase the Corporation's syndicated credit facilities to $450 million from $400 million following a recent, regularly scheduled, semi-annual review.  As at September 30, 2017 Painted Pony had bank debt and a working capital deficiency of $115.2 million.

THIRD QUARTER 2017 FINANCIAL & OPERATING RESULTS
Funds Flow from Operations
Painted Pony generated funds flow from operations of $29.5 million ($0.18 per share) during the third quarter of 2017, an increase of 134% from the $12.6 million ($0.13 per share) recorded during the third quarter of 2016.

The increase in funds flow from operations was the result of an increase in average production of 86%, combined with increased per unit realized gains on commodity risk management contracts of 141%, and decreased per unit operating expenses, offset by a 4% per unit reduction in average realized commodity pricing in the quarter and increased per unit transportation costs incurred in accessing higher priced sales markets.

Increased Earnings
For the third quarter of 2017, the Corporation generated net income and comprehensive income of $14.6 million, increased by realized and unrealized gains on commodity risk management contracts and higher revenue due to increased production. This compares to a net income and comprehensive income of $11.6 million for the quarter ended September 30, 2016. Excluding unrealized gains on commodity risk management contracts, income before taxes was $6.6 million for the quarter ended September 30, 2017, compared to income before taxes of $0.1 million for the quarter ended September 30, 2016.

Production
Third quarter 2017 average daily production volumes of 254 MMcfe/d (42,353 boe/d) represents an 86% increase over third quarter 2016 production volumes of 136 MMcfe/d (22,741 boe/d).  These volumes were approximately 50 MMcfe/d (8,500 boe/d) lower than Painted Pony's productive capacity due to voluntary, pricing-related shut-ins.  During the third quarter of 2017, the entire western Canadian natural gas system experienced significant transportation bottlenecks as a result of outages caused by a combination of expansion projects and ongoing maintenance.  These outages, which led to significant pricing volatility, are largely resolved and Painted Pony expects less pricing volatility during the months of November and December 2017 and in 2018.    

Painted Pony continues to expect annual production volumes for 2017 to average between 261 MMcfe/d (43,500 boe/d) and 276 MMcfe/d (46,000 boe/d), representing a significant increase over 2016 annual average daily production volumes of 139.2 Mcfe/d (23,204 boe/d).

Operations
During the third quarter of 2017, Painted Pony drilled 16 (16.0 net) and completed 16 (16.0 net) Montney natural gas wells.

As part of the third quarter operations, Painted Pony was active in the Company's high-productivity Montney sweet spot at Blair. Six new Upper Montney wells situated in the liquids-rich fairway of the Blair core area were completed on the 17-G pad.  This was the first time Painted Pony has completed six wells sequentially in a continuous operation on a single pad. These six wells were tied in during October after being cleaned up and flow-tested earlier in the third quarter. They are currently producing, based on field estimates, through permanent facilities at a rate of over 60 MMcf/d and over 1,300 bbls/d of liquids, of which approximately 50% is condensate.  The total drill, complete, equip and tie-in cost for the six wells was $22.4 million ($3.7 million per well). Painted Pony realized significant capital cost savings on this pad, by moving to lower intensity completions, combined with overall efficiencies associated with a sequential 6-well operation. The lower intensity completions incorporated shorter average lateral well lengths, reduced proppant load and lower water usage, but are delivering initial production volumes which are consistent with established type curves for the area.

Market Diversification and Risk Management
Painted Pony has continued in the third quarter of 2017, and subsequent to the end of the third quarter, to lever its significant portfolio of firm transportation into financial and physical contracts in order to mitigate the risks associated with potential commodity price volatility. During the third quarter of 2017 and subsequent to quarter-end, Painted Pony increased average quarterly 2018 hedged production volumes to 196 MMcfe/d at a volume weighted-average price of $3.44/MMcfe, including the impact of liquids hedges. Consequently, a large component of Painted Pony's exposure to volatility in commodity pricing for the balance of 2017 and in 2018 has been mitigated by these contracts.

As a result of Painted Pony's long-term market diversification strategy, Painted Pony has reduced exposure to western Canadian pricing hubs for the remainder of 2017 and in 2018. This is reflected in the 81% price premium that Painted Pony realized relative to Station 2 and a 10% premium relative to daily AECO during the third quarter of 2017. In 2018, the firm transportation portfolio, including firm transportation to Dawn and Sumas, are expected to continue these significant price premiums. In addition to contracting for long term transportation which provides physical access to markets outside of British Columbia and Alberta, Painted Pony strives to contract supply directly to end users in order to build long term stable markets for its production. Taking advantage of Painted Pony's growing firm transportation portfolio to optimize revenue and to develop secure markets are key components of Painted Pony's market strategy to support production growth.

Capital Expenditures
Painted Pony's capital expenditures for the third quarter of 2017 totaled $85.6 million, consistent with the Corporation's budget expectations. Capital expenditures during the fourth quarter of 2017 are expected to total approximately $74 million. Painted Pony continues to expect full-year 2017 spending will total approximately $314 million.

Term Debt Financing
On August 23, 2017 Painted Pony closed the previously announced transaction with Magnetar Capital to issue a total of $200 million of term debt consisting of $150 million of senior unsecured notes and $50 million of unsecured subordinated convertible debentures. Painted Pony received $188.8 million of cash, net of financing fees, which was used to repay bank debt and fund the Corporation's capital program. This financing is part of an overall balance sheet strategy to extend the maturity terms of Painted Pony's debt profile, reduce the Corporation's reliance on borrowing base credit facilities while improving overall financial liquidity and flexibility. 

Future Development Plans
Painted Pony's future growth targets and the pace of development are balanced with financial prudence.  In these volatile commodity price markets, when setting corporate production growth targets, Painted Pony evaluates a number of factors including the forward curve, near-term spot prices, the portfolio of fixed-price financial and physical contracts, service cost environment as well as other fixed and variable operating costs.  Access to the recently expanded Townsend Facility combined with additional Painted Pony owned processing facilities provides significant flexibility to manage the Corporation's production volumes in response to market conditions. The 2018 capital budget is expected to be released in December, 2017.

Conference Participation
Painted Pony is pleased to announce that it will be participating in the GMP FirstEnergy Energy Growth Conference taking place on November 15, 2017 at The Ritz-Carlton Hotel located at 181 Wellington Street West, Toronto, Ontario. Mr. Pat Ward, President and CEO, will be presenting on Wednesday, November 15, 2017 at 9:15am (ET) in Salon III at The Ritz-Carlton Hotel.

Painted Pony will be undertaking a series of presentations to institutional investors while at this conference in addition to meetings with investors in the US following the conference. Interested parties are invited to view the current Painted Pony investor presentation at:

http://paintedpony.ca/investors/dashboard/default.aspx

FINANCIAL HIGHLIGHTS




Three months ended
September 30,

Nine months ended
September 30,

($ millions, except per share and shares outstanding)

2017

2016

Change

2017

2016

Change

Financial







Petroleum and natural gas revenue(1)

50.0

28.0

79%

181.4

56.4

222%

Cash flow from operating activities

29.6

10.3

187%

79.5

22.8

249%


Per share - basic(3)

0.18

0.10

80%

0.59

0.23

157%


Per share - diluted(4)

0.18

0.10

80%

0.59

0.23

157%

Funds flow from operations(2)

29.5

12.6

134%

72.3

29.1

148%


Per share - basic(3)

0.18

0.13

38%

0.54

0.29

86%


Per share - diluted(4)

0.18

0.12

50%

0.53

0.29

83%

Net income (loss) and comprehensive income (loss)

14.6

11.6

26%

85.3

(24.1)

—%


Per share - basic(3)

0.09

0.12

(25)%

0.64

(0.24)

—%


Per share - diluted(4)

0.09

0.11

(18)%

0.63

(0.24)

—%

Capital expenditures

85.6

50.5

70%

240.1

152.9

57%

Working capital deficiency (5)

21.5

36.6

(41)%

21.5

36.6

(41)%

Bank debt

93.8

172.1

(45)%

93.8

172.1

(45)%

Senior notes

141.3

—%

141.3

—%

Convertible debentures - liability

44.6

—%

44.6

—%

Net debt (6)

336.4

202.5

66%

336.4

202.5

66%

Total assets

1,809.3

1,290.2

40%

1,809.3

1,290.2

40%

Shares outstanding (millions)

161.0

100.1

61%

161.0

100.1

61%

Basic weighted-average shares (millions)

161.0

100.1

61%

133.9

100.1

34%

Fully diluted weighted-average shares (millions)

164.7

101.1

63%

135.1

100.1

35%

Operational







Daily production volumes








Natural gas (MMcf/d)

231.2

129.3

79%

218.2

106.0

106%


Natural gas liquids (bbls/d)

3,826

1,189

222%

3,254

1,013

221%


Total (MMcfe/d)

254.1

136.4

86%

237.8

112.0

112%


Total (boe/d)

42,353

22,741

86%

39,626

18,674

112%

Realized commodity prices








Natural gas ($/Mcf)

1.59

1.97

(19)%

2.33

1.56

49%


Natural gas liquids ($/bbl)

45.70

41.67

10%

47.55

40.18

18%


Total ($/Mcfe)

2.14

2.23

(4)%

2.79

1.84

52%

Operating netbacks ($/Mcfe)(7)

2.12

1.74

22%

2.01

1.50

34%

1.

Before royalties.

2.

Funds flow from operations and funds flow from operations per share (basic and diluted) are non-GAAP measures used to represent cash flow from operating activities before the effects of changes in non-cash working capital, share unit expense and decommissioning expenditures.  Funds flow from operations per share is calculated by dividing funds flow from operations by the weighted average number of basic or diluted shares outstanding in the period. See "Non-GAAP Measures".

3.

Basic per share information is calculated on the basis of the weighted average number of shares outstanding in the period.

4.

Diluted per share information reflects the potential dilutive effect of stock options and convertible debentures.

5.

Working capital deficiency is a non-GAAP measure calculated as current assets less current liabilities. See "Non-GAAP Measures".

6.

Net debt is calculated as bank debt, senior notes, liability portion of convertible debentures, and working capital deficiency, adjusted for the net current portion of fair value of risk management contracts and current portion of finance lease obligation.

7.

Operating netbacks is a non-GAAP measure calculated on a per unit basis as natural gas and natural gas liquids revenues, adjusted for realized gains or losses on commodity risk management, less royalties, operating expenses and transportation costs. See "Non-GAAP Measures" and "Operating Netbacks".

 

ADVISORIES

Currency: All amounts referred to in this press release are stated in Canadian dollars unless otherwise specified.

Boe Conversions: Barrel of oil equivalent ("boe") amounts have been calculated by using the conversion ratio of six thousand cubic feet (6 Mcf) of natural gas to one barrel of oil (1 bbl). Boe amounts may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf to 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of oil as compared to natural gas is significantly different from the energy equivalent of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.

Mcfe Conversions: Thousands of cubic feet of gas equivalent ("Mcfe") amounts have been calculated by using the conversion ratio of one barrel of oil (1 bbl) to six thousand cubic feet (6 Mcf) of natural gas. Mcfe amounts may be misleading, particularly if used in isolation. A conversion ratio of 1 bbl to 6 Mcf is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of natural gas as compared to oil is significantly different from the energy equivalent of 1:6, utilizing a conversion on a 1:6 basis may be misleading as an indication of value.

Forward-Looking Information: This press release contains certain forward-looking information within the meaning of Canadian securities laws. Forward-looking information relates to future events or future performance and is based upon the Corporation's current internal expectations, estimates, projections, assumptions and beliefs. All information other than historical fact is forward-looking information. Words such as "plan", "expect", "intend", "believe", "anticipate", "estimate", "may", "will", "potential", "proposed" and other similar words that indicate events or conditions may occur are intended to identify forward-looking information. In particular, this press release contains forward looking information relating to the sales estimates, the deliveries under the Methanex Agreement, the price volatility in the fourth quarter of 2017, the expected annual production volumes for 2017, the expected revenue exposure to Station 2 in 2018, the expected realized natural gas price for the remainder of 2017, the expected full-year 2017 capital expenditure, and the release of the 2018 capital spending plan.

Forward-looking information is based on certain expectations and assumptions including but not limited to future commodity prices, currency exchange rates interest rates, royalty rates and tax rates; the state of the economy and the exploration and production business; the economic and political environment in which the Corporation operates; the regulatory framework; anticipate timing and results of capital expenditures; the sufficiency of budgeted capital expenditures to carry out planned operations; operating, transportation, marketing and general and administrative costs; drilling success, production rates, future capital expenditures and the availability of labor and services. With respect to future wells, a key assumption is the validity of geological and technical interpretations performed by the Corporation's technical staff, which indicate that commercially economic volumes can be recovered from the Corporation's lands. Estimates as to average annual and exit production assume that no material unexpected outages occur in the infrastructure the Corporation relies upon to produce its wells, that existing wells continue to meet production expectations and that future wells scheduled to come on production in the remainder of 2017 meet timing and production rate expectations.

Undue reliance should not be placed on forward-looking information, as there can be no assurance that the plans, intentions or expectations on which they are based will occur. Although the Corporation's management believes that the expectations in the forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. As a consequence, actual results may differ materially from those anticipated.

Forward-looking information necessarily involves both known and unknown risks associated with oil and gas exploration, production, transportation and marketing. There are risks associated with the uncertainty of geological and technical data, operational risks, risks associated with drilling and completions, environmental risks, risks of the change in government regulation of the oil and gas industry, risks associated with competition from others for scarce resources and risks associated with general economic conditions affecting the Corporation's ability to access sufficient capital. Additional information on these and other risk factors that could affect operational or financial results are included in the Corporation's most recent Annual Information Form and in other reports filed with Canadian securities regulatory authorities.

Forward-looking information is based on estimates and opinions of management at the time the information is presented. The Corporation is not under any duty to update the forward-looking information after the date of this press release to revise such information to actual results or to changes in the Corporation's plans or expectations, except as required by applicable securities laws.

Any "financial outlook" contained in this press release, as such term is defined by applicable securities laws, is provided for the purpose of providing information about management's current expectations and plans relating to the future. Readers are cautioned that reliance on such information may not be appropriate for other purposes

Non-GAAP Measures: This press release makes reference to the terms "funds flow from operations", "funds flow from operations per share", "working capital deficiency", "operating netbacks", "netbacks", "cash flow" and "net debt" and "net debt to cash flow", which do not have standardized meanings prescribed by GAAP and therefore may not be comparable with the calculation of similar measures presented by other issuers.

Management uses "funds flow from operations" and "cash flow" to analyze operating performance and considers funds flow from operations and cash flow to be key measures as they demonstrate the Corporation's ability to generate the cash necessary to fund future capital investment and to repay debt. "Funds flow from operations" denotes cash flow from operating activities before the effects of changes in non-cash working capital, share unit expense and decommissioning expenditures. "Cash flow" is determined as gross natural gas and natural gas liquids revenues including realized gains on commodity risk management contracts, less the following: royalties, operating costs, transportation costs, general and administrative costs and finance expenses. "Funds flow from operations per share" is calculated using the basic and diluted weighted average number of shares for the period. These terms should not be considered an alternative to, or more meaningful than, cash flows from operating activities as determined in accordance with GAAP as an indicator of the Corporation's performance.

Management uses "working capital deficiency", "net debt" and "net debt to cash flow" as useful supplemental measures of the liquidity of the Corporation. Working capital deficiency is calculated as current assets less current liabilities. "Net debt" is calculated as bank debt, senior notes, liability portion of convertible debentures and working capital deficiency, adjusted for the current portion of fair value of risk management contracts and current portion of finance lease obligation. These terms should not be considered alternatives to, or more meaningful than, current and long-term debt as determined in accordance with GAAP.

"Operating netbacks" or "netbacks" is used as a supplemental measure of the Corporation's profitability relative to commodity prices. Operating netbacks or netbacks are calculated on a per unit basis as natural gas and natural gas liquids revenues, adjusted for realized gains or losses on commodity risk management, less royalties, operating expenses and transportation costs. These terms should not be considered alternatives to, or more meaningful than net income (loss) and comprehensive income (loss) as determined in accordance with GAAP.

Management of the Corporation believes these measures are useful supplemental measures of the net position of current assets and current liabilities of the Corporation and the profitability relative to commodity prices. Readers are cautioned, however, that these measures should not be construed as alternatives to other terms such as current and long-term debt or comprehensive income determined in accordance with GAAP as measures of performance. The Corporation's method of calculating these non- GAAP measures may differ from other companies, and accordingly, may not be comparable to similar measures used by other entities.  Please see the "Non-GAAP Measures" section of the Corporation's management's discussion and analysis of the consolidated financial results of the Corporation for the three months ended September 30, 2017.

ABOUT PAINTED PONY
Painted Pony is a publicly-traded natural gas company based in Western Canada.  The Corporation is primarily focused on the development of natural gas and natural gas liquids from the Montney formation in northeast British Columbia.  Painted Pony's common shares trade on the TSX under the symbol "PONY".

SOURCE Painted Pony Energy Ltd.

Patrick R. Ward, President and CEO, (403) 475-0440; W. Derek Aylesworth, Senior Vice President and CFO, (403) 475-0440; Jason Fleury, Director, Investor Relations, (403) 776-3261, ir@paintedpony.ca, www.paintedpony.ca

Emergency Phone: 1-888-775-0440

PAINTED PONY ENERGY LTD.

Suite 1800, 736 – 6th Avenue SW Calgary, AB T2P 3T7 P: 403 475-0440 F: 403 238-1487 TF: 1-866-975-0440 E: info@paintedpony.ca

24-HOUR EMERGENCY CONTACT

Call 1-888-775-0440 to report concerns regarding any of Painted Pony’s field operations. This is for EMERGENCIES ONLY and does not connect to Painted Pony’s head office.

PAINTED PONY ENERGY LTD.

Suite 1800, 736 – 6th Avenue SW Calgary, AB T2P 3T7 P: 403 475-0440 F: 403 238-1487 TF: 1-866-975-0440 E: info@paintedpony.ca