Painted Pony Grows Second Quarter Adjusted Funds Flow from Operations by 116%, Increases Second Quarter Liquids Production by 98% and Announces Operational Update

07/31/2018

CALGARY, July 31, 2018 /CNW/ - Painted Pony Energy Ltd. ("Painted Pony" or the "Corporation") (TSX: PONY) is pleased to announce second quarter 2018 financial and operating results, an operational update and director election results from the Annual General Meeting.

HIGHLIGHTS:

  • Increased adjusted funds flow from operations by 116% to $39.1 million ($0.24 per share basic), compared to $18.1 million ($0.13 per share basic) during the second quarter of 2017;

  • Increased average daily production by 48% to a 361 MMcfe/d (60,116 boe/d) of which 9% was natural gas liquids, compared to 243 MMcfe/d (40,574 boe/d) of which 7% was liquids, during the second quarter of 2017;

  • Grew liquids production by 98% to 5,514 bbls/d, of which 43% was condensate, compared to 2,779 bbls/d during the second quarter of 2017;

  • Realized an average price of $2.67/Mcfe ($16.02/boe) and an average natural gas price of $1.90/Mcf, a 61% premium to the AECO (5A) daily spot price of $1.18/Mcf during the second quarter of 2018;

  • Flow-tested one horizontal Upper Montney well on the Beg block with the final 24 hour rate averaging over 1,900 boe/d (9.5 MMcf/d of natural gas and 340 bbls/d of natural gas liquids) as press released April 17, 2018, and;

  • Flow-tested two horizontal Lower Montney wells on the South Townsend block which tested significantly above management's Townsend type curve for both natural gas, natural gas liquids and condensate as press released July 11, 2018.

Patrick Ward, President and CEO of Painted Pony, in commenting on these highlights said, "We achieved significant growth in adjusted funds flow from operations and adjusted funds flow from operations per share during a time of low commodity prices. We accomplished this through a combination of continued market diversification for our natural gas sales while continuing to increase our liquids production volumes. Our recent well results in the liquids-rich area of South Townsend show real potential to further increase our percentage liquids production in the near-future. Our overall production volumes have increased significantly year-over-year and have remained steady with first quarter 2018 production volumes.  This positions us well to achieve our 2018 production guidance of between 348 MMcfe/d (58,000 boe/d) and 360 MMcfe/d (60,000 boe/d) while spending within internally generated adjusted funds flow from operations."    

BEG AND SOUTH TOWNSEND WELLS
The Beg discovery well was drilled and completed in the Upper Montney then flow-tested during the second quarter of 2018.  The final 24 hour estimated rate of this well averaged over 1,900 boe/d including 9.5 MMcf/d of natural gas and an estimated 340 bbls/d of liquids, (60% condensate and 40% NGLs) based on well head condensate plus calculated gas plant liquids recoveries from gas analysis. Trace amounts of H2S were also detected. Although test data is preliminary, the estimated liquids to gas ratio is approximately 35 to 40 bbls/MMcf. Please see the press release dated April 17, 2018 for additional details. 

As announced in the press release dated July 11, 2018, Painted Pony drilled and completed two Lower Montney horizontal wells in the Corporation's South Townsend block. Based on the preliminary production test results, Painted Pony is optimistic about the prospectivity of liquids-rich development on the South Townsend block.  During the test period, these wells averaged production rates significantly higher than Painted Pony management's current Townsend type curve and included higher liquid yields compared to average wells in the Townsend block.

Testing of the South Townsend wells is complete, tubing has been run and production volumes are now flowing to the AltaGas Townsend Facility for processing. These wells continue to produce significantly above management's Townsend type curve. Painted Pony has shifted 2018 second half drilling and completions capital to include at least 3 (3.0 net) wells in the South Townsend area. Painted Pony expects the shift in capital spending towards South Townsend during the second half of 2018 will begin to positively impact adjusted funds flow from operations through higher liquid yields in 2019. Production and capital spending guidance remain unchanged and will approximately match adjusted funds flow from operations for 2018.

SECOND QUARTER 2018 FINANCIAL & OPERATING RESULTS
Adjusted Funds Flow from Operations
For the second quarter of 2018, adjusted funds flow from operations increased by 116% to $39.1 million ($0.24 per share basic) compared to adjusted funds flow from operations of $18.1 million ($0.13 per share basic) during the second quarter of 2017.

The increase in adjusted funds flow from operations for the second quarter of 2018 compared to the second quarter of 2017, resulted from a 48% increase in production volumes, a realized gain on risk management contracts of $18.4 million, lower per unit operating costs and general and administrative costs, partially offset by an increase in per unit transportation costs.

Operating costs for the second quarter of 2018 were $0.51/Mcfe, a decrease of $0.21/Mcfe when compared to the second quarter of 2017.  Reduced processing rates combined with increased production volumes led to this year-over-year cost reduction. 

Painted Pony's general and administrative costs averaged $0.09/Mcfe during the second quarter of 2018, compared to $0.16/Mcfe during the second quarter of 2017.  A lower staff count combined with higher production volumes led to this 44% cost reduction. 

Transportation costs increased during the second quarter of 2018 due to diversification into the Dawn, Sumas and AECO markets as well as higher liquids volumes. This diversification continues to provide incrementally higher operating netbacks, $1.95/Mcfe in the second quarter of 2018 compared to $1.81/Mcfe during the second quarter of 2017, despite the impact of lower natural gas prices on Painted Pony's revenue.  Average natural gas prices in the AECO market decreased 58% to $1.18/Mcf during the second quarter of 2018 from $2.78/Mcf during the second quarter of 2017.

Production
Painted Pony increased second quarter 2018 production volumes by 48% to 361 MMcfe/d (60,116 boe/d) compared to the same period of 2017 when production volumes totaled 243 MMcfe/d (40,574 boe/d). Natural gas liquids volumes during the second quarter of 2018 increased by 98% to 5,514 bbls/d, of which 43% was high-value condensate, compared to 2,779 bbls/d during the second quarter of 2017. 

Capital Expenditures
Painted Pony invested $17.6 million of capital during the second quarter of 2018, which included drilling and completion costs of $10.6 million, associated facilities and infrastructure spending of $4.6 million, and other miscellaneous capital items totalling $2.4 million.

Capital spending for the first half of 2018 totaled $95.7 million, on-track with Painted Pony's 2018 capital budget guidance of $145 million - $165 million.

The planned capital program for the remainder of 2018 is currently anticipated to include drilling 8 (8.0 net) Montney horizontal wells, of which at least 3 (3.0 net) are expected to be drilled in the Lower Montney of the South Townsend area, and 12 (12.0 net) completions.

Pricing
Painted Pony's realized average commodity price of $2.67/Mcfe ($16.02/boe) during the second quarter of 2018 includes an average realized natural gas price of $1.90/Mcf, a 61% premium to the AECO (5A) second quarter 2018 average daily spot price of $1.18/Mcf, compared to a 5% discount during the second quarter of 2017.

During the second quarter of 2018, approximately 43% of Painted Pony's natural gas liquids volumes were condensate, which received an average price of $90.05/bbl, representing a premium of 3% to the WTI reference price. Natural gas liquids (butane and propane, excluding condensate) received an average price of $40.24/bbl during the second quarter of 2018. 

Risk Management
Painted Pony actively mitigates commodity price volatility through financial hedging contracts, direct-to-customer physical sales, and sales market diversification.  The completion of the Towerbirch natural gas pipeline expansion at Groundbirch allows Painted Pony production volumes to access markets east of British Columbia. Specifically, this expansion at Groundbirch increased natural gas volumes into the AECO market and beyond by 130 MMcf/d compared to the second half of 2017. Of the increased 130 MMcf/d into the AECO market in Alberta production volumes of 73 MMcf/d continued to travel east and were sold into the Dawn market in southern Ontario during the second quarter of 2018. By November 1, 2019, natural gas production volumes sold into the Dawn market are expected to reach approximately 88 MMcf/d. 

2018 GUIDANCE AFFIRMED
Painted Pony's remains committed to a 2018 capital program that approximates internally generated adjusted funds flow from operations amid ongoing weakness of natural gas prices in western Canada.  Based on adjusted funds flow from operations actuals to-date and current strip prices, Painted Pony anticipates 2018 capital expenditures of $145 - $165 million will provide annual average daily production volumes of between 348 MMcfe/d (58,000 boe/d) and 360 MMcfe/d (60,000 boe/d) for 2018. 

ELECTION OF DIRECTORS
In respect of the annual general meeting of holders of common shares ("Shareholders") of the Corporation held on May 10, 2018 (the "Meeting"), Shareholders elected each of the nominees proposed by management as set forth in the information circular of the Corporation dated March 21, 2018.  The results of the voting on the election of directors is set forth below.

Director Nominee


Outcome of Vote


Percentage
of Votes For


Percentage
of Votes Withheld

Kevin D. Angus


Passed


83.89%


16.11%

Paul J. Beitel


Passed


98.41%


1.59%

Glenn R. Carley


Passed


83.82%


16.18%

Joan E. Dunne


Passed


80.83%


19.17%

Nereus L. Joubert


Passed


83.92%


16.08%

Lynn Kis


Passed


98.64%


1.36%

Arthur J. G. Madden


Passed


98.59%


1.41%

George W. Voneiff


Passed


98.50%


1.50%

Patrick R. Ward


Passed


98.81%


1.19%

 

Each of the directors elected at the meeting will hold office until the close of the next annual meeting of shareholders of the Corporation or until his or her successor is duly elected or appointed pursuant to the by-laws of the Corporation. 

Detailed voting results for all resolutions considered by shareholders at the meeting are contained in the report of voting results, which was filed on SEDAR under Painted Pony's profile at www.sedar.com.

ENERCOM CONFERENCE PARTICIPATION
Painted Pony is pleased to announce that it will be participating in EnerCom's "The Oil & Gas Conference" taking place on August 21 and 22, 2018 at The Westin Denver Downtown located at 1672 Lawrence Street in Denver, Colorado. Mr. Rick Kessy, Chief Operating Officer, will be presenting on Tuesday, August 21, 2018 at 1.30 pm (MDT) in Confluence A at The Westin Denver Downtown in Denver, Colorado.

In addition to Mr. Kessy's presentation, the Corporation will be undertaking a series of discussions with institutional investors while at this conference.

FINANCIAL AND OPERATIONAL HIGHLIGHTS





Three months ended June 30,

Six months ended June 30,

($ millions, except per share and shares outstanding)

2018

2017

Change

2018

2017

Change

Financial







Petroleum and natural gas revenue(1)

87.7

66.4

32%

188.5

131.4

43%

Cash flow from operating activities

35.7

18.2

96%

87.3

49.9

75%


Per share - basic (3)(8)

0.22

0.13

69%

0.54

0.42

29%


Per share - diluted (4)(8)

0.21

0.13

62%

0.51

0.42

21%

Adjusted funds flow from operations(2)

39.1

18.1

116%

85.6

43.9

95%


Per share - basic (3)

0.24

0.13

85%

0.53

0.37

43%


Per share - diluted(4)

0.23

0.13

77%

0.50

0.37

35%

Net income (loss) and comprehensive income (loss)

(33.2)

13.8

—%

(41.6)

70.7

—%


Per share - basic (3) and diluted (4)

(0.21)

0.10

—%

(0.26)

0.59

—%

Capital expenditures

17.6

57.9

(70)%

95.7

154.6

(38)%

Working capital (deficiency) (5)

(1.1)

(30.8)

(96)%

(1.1)

(30.8)

(96)%

Bank debt

184.3

235.5

(22)%

184.3

235.5

(22)%

Senior notes

142.3

—%

142.3

—%

Convertible debentures - liability

45.5

—%

45.5

—%

Net debt (6)

375.3

283.5

32%

375.3

283.5

32%

Total assets

2,010.6

1,742.8

15%

2,010.6

1,742.8

15%

Shares outstanding (millions)

161.0

161.0

—%

161.0

161.0

—%

Basic weighted-average shares (millions)

161.0

139.8

15%

161.0

120.1

34%

Fully diluted weighted-average shares (millions)

169.9

139.8

22%

169.9

120.1

41%

Operational







Daily production volumes








Natural gas (MMcf/d)

327.6

226.8

44%

329.1

211.7

55%


Natural gas liquids (bbls/d)

5,514

2,779

98%

5,563

2,963

88%


Total (MMcfe/d)

360.7

243.4

48%

362.4

229.4

58%


Total (boe/d)

60,116

40,574

48%

60,407

38,239

58%

Realized commodity prices








Natural gas ($/Mcf)

1.90

2.64

(28)%

2.14

2.75

(22)%


Natural gas liquids ($/bbl)

61.75

47.04

31%

60.56

48.76

24%


Total ($/Mcfe)

2.67

3.00

(11)%

2.87

3.16

(9)%

Operating netbacks ($/Mcfe)(7)

1.95

1.81

8%

2.04

1.94

5%

1.

Before royalties.

2.

Adjusted funds flow from operations and adjusted 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 and decommissioning expenditures.  Adjusted funds flow from operations per share is calculated by dividing adjusted 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 a non-GAAP measure 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 risk management contracts, less royalties, operating expenses and transportation costs. See "Non-GAAP Measures" and "Operating Netbacks".

8.

Cash flow from operating activities per share - basic and diluted are non-GAAP measures calculated by dividing cash flow from operating activities by the weighted average of basic or diluted shares outstanding in the period.

 

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 estimated 2018 annual average daily production volumes, the estimated rates and liquids to gas ratio of the Beg discovery well, the estimated NGL production rate and liquids to gas ratio of the Lower Montney horizontal wells, the anticipated shift of drilling and completions capital during the second half of 2018, the expected impact on adjusted funds flow from operations, the number of wells expected to be drilled and completed for the remainder of 2018, the expected natural gas production volumes sold into the Dawn market, and the anticipated 2018 capital expenditure.

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 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 2018 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 "adjusted funds flow from operations", "adjusted funds flow from operations per share", "cash flow from operations per share", "working capital deficiency", "net debt" and "operating netbacks", which do not have standardized meanings prescribed by IFRS and may not be comparable with the calculation of similar measures presented by other issuers.

Management uses "adjusted funds flow from operations" to analyze operating performance and considers adjusted funds flow from operations to be a key measure as it demonstrates the Corporation's ability to generate the cash necessary to fund future capital investment and to repay debt. Adjusted funds flow from operations denotes cash flow from operating activities before the effects of changes in non-cash working capital, and decommissioning expenditures. "Adjusted funds flow from operations per share" is calculated using the basic and diluted weighted average number of shares for the period. "Adjusted funds flow from operations per Mcfe" is calculated using the average production volumes for the period.

Management uses "working capital deficiency" and "net debt" 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 net 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 IFRS.

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

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 IFRS 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.

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.

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

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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