Painted Pony Grows Third Quarter Production By 38% and Announces Third Quarter Financial and Operational Results

11/05/2018

CALGARY, Nov. 5, 2018 /CNW/ - Painted Pony Energy Ltd. ("Painted Pony" or the "Corporation") (TSX: PONY) is pleased to report significant production volume growth of 38%, which includes a corresponding increase of 37% in liquids production, over the third quarter of 2017.

HIGHLIGHTS:

  • Increased third quarter 2018 average daily production by 38% to 350.0 MMcfe/d (58,330 boe/d) of which 9% was natural gas liquids, compared to 254.1 MMcfe/d (42,353 boe/d) of which 9% was natural gas liquids, during the third quarter of 2017;

  • Grew liquids production by 37% to 5,248 bbls/d, of which 45% was condensate, compared to 3,826 bbls/d during the third quarter of 2017;

  • Increased revenue from natural gas liquids by 78% to $28.6 million during the third quarter of 2018 compared to $16.1 million during the third quarter of 2017;

  • Realized an average price of $2.80/Mcfe including an average natural gas price of $2.10/Mcf, a 76% premium to the AECO (5A) daily spot price of $1.19/Mcf, during the third quarter of 2018;

  • Increased adjusted funds flow from operations to $30.3 million ($0.19 per share basic), compared to $29.7 million ($0.18 per share basic) during the third quarter of 2017; and

  • Reaffirmed syndicated credit facility at $400 million.

Patrick Ward, President and CEO of Painted Pony, in commenting on these highlights said, "We are pleased to report significant production growth of 38%, which includes a corresponding increase of 37% in liquids production, over the third quarter of 2017. Despite a challenging commodity price environment which resulted in lower index prices compared to this time last year, we posted prices significantly above AECO prices and maintained our adjusted funds flow from operations per share results.  Our strong price realizations and resulting adjusted funds flow from operations were due to our diversified transportation strategy and our risk management program which together continue to deliver top line revenue which exceeded western Canadian index pricing at both AECO and Station 2."

ENBRIDGE T-SOUTH OUTAGE 
Due to an incident which occurred on October 9, 2018, Enbridge Inc.'s ("Enbridge") T-South pipeline system ("T-South") experienced an interruption in service.  Enbridge determined that one of the two pipelines which comprise T-South had been damaged.  Enbridge returned service to the undamaged pipeline on October 11, 2018 at reduced line pressure while work continued to repair the second pipeline. Enbridge issued a press release on October 31, 2018 indicating pipeline repairs to the damaged T-South line were complete and the process of returning this pipeline to service, albeit at restricted operating pressures, was underway. 

As a result of the incident on T-South, Painted Pony natural gas production volumes totaling approximately 60 MMcf/d were impacted due to operational restrictions and voluntary, price-related shut-ins.  As a result of transportation interruptions resulting from the T-South incident, Painted Pony expects forecasted fourth quarter 2018 production volumes to be between 303 MMcfe/d (50,500 boe/d) and 312 MMcfe/d (52,000 boe/d).

Painted Pony's annual production volume guidance will be impacted by the T-South incident resulting in adjusted 2018 annual production volume guidance of 339 MMcfe/d (56,500 boe/d) and 348 MMcfe/d (58,000 boe/d) from previous guidance of between 348 MMcfe/d (58,000 boe/d) and 360 MMcfe/d (60,000 boe/d). Forecasted capital spending for 2018 will continue to approximately match internally generated adjusted funds flow from operations. 

Due to this interruption and the inability for Enbridge to transport full natural gas volumes on T-South, natural gas spot prices at Station 2 have been negatively impacted. However, pricing at the Sumas / Huntingdon sales hub on the border between the province of British Columbia and Washington state has strengthened due to the transportation interruptions on T-South.  Painted Pony has priced Sumas monthly-index sales of approximately 33 MMcf/d at an average price of USD$13.10/Mcf for the month of November and priced 20 MMcf/d for the month of December 2018 at a price of USD$9.24/Mcf. Painted Pony expects the impact from these contracts at Sumas to mitigate the effect on adjusted funds flow from operations caused by reduced volumes and lower Station 2 index prices during the fourth quarter of 2018.

THIRD QUARTER 2018 FINANCIAL & OPERATING RESULTS
Adjusted Funds Flow from Operations
Painted Pony's market diversification strategy was accomplished through various firm transportation agreements which facilitated access into the Dawn, Sumas, and AECO markets. Index prices at the Dawn market averaged $3.81/Mcf during the third quarter of 2018, compared to the AECO (5A) daily index price of $1.19/Mcf during the same period. During the third quarter of 2018, Painted Pony delivered 73 MMcf/d of natural gas to the Dawn market and starting in November of 2019, Painted Pony expects to increase natural gas volumes sold into the Dawn market to 88 MMcf/d.

Adjusted funds flow from operations increased to $30.3 million ($0.19 per share basic) during the third quarter of 2018 despite weak index prices at AECO and Station 2, compared to adjusted funds flow from operations of $29.7 million ($0.18 per share basic) during the third quarter of 2017.

Operating costs for the third quarter of 2018 were $0.56/Mcfe, a decrease of $0.03/Mcfe when compared to the third quarter of 2017. Operating cost reduction initiatives combined with increased production volumes led to this year-over-year cost reduction. 

Net general and administrative expenses were $0.11/Mcfe for the third quarter of 2018, a decrease of 45%, compared to $0.20/Mcfe during the third quarter of 2017.

Painted Pony's transportation costs increased to $0.75/Mcfe during the third quarter of 2018 compared to $0.37/Mcfe during the third quarter of 2017.  The increased transportation costs were due to an increase in volumes accessing diversified pricing hubs to receive stronger pricing.  In addition to sales hub diversification, the 37% increase in liquids production volumes resulted in higher pipeline costs during the third quarter of 2018 compared to the third quarter of 2017. Painted Pony has realized incremental revenues, net of applicable transportation, of approximately $9.0 and $20.0 million for the three and nine months ended September 30, 2018, respectively, as a result of this market diversification strategy.

Production
Painted Pony increased third quarter 2018 production volumes by 38% to 350.0 MMcfe/d (58,330 boe/d) compared to the same period of 2017 when production volumes totaled 254.1 MMcfe/d (42,353 boe/d). Natural gas liquids volumes during the third quarter of 2018 increased by 37% to 5,248 bbls/d, of which 45% was high-value condensate, compared to 3,826 bbls/d during the third quarter of 2017. 

Capital Expenditures
Painted Pony invested $39.4 million of capital during the third quarter of 2018, which included drilling 7.0 net wells and completing 6.0 net wells for a combined cost of $34.3 million.  Other capital expenditures, the majority of which was related to facilities and equipment, totaled $5.1 million for the third quarter of 2018.

Capital spending for the nine months ending September 30, 2018 has totaled $135.2 million, on-track with Painted Pony's 2018 capital budget guidance of $145 million - $165 million, which is based on matching capital spending approximately with adjusted funds flow from operations. 

Pricing
Painted Pony's realized average commodity price of $2.80/Mcfe during the third quarter of 2018 includes an average realized natural gas price of $2.10/Mcf, a 76% premium to the AECO (5A) third quarter 2018 average daily spot price of $1.19/Mcf, compared to a 10% premium during the third quarter of 2017 when AECO (5A) prices were $1.45/Mcf.

During the third quarter of 2018, approximately 45% of Painted Pony's natural gas liquids volumes were condensate, which received an average price of $84.63/bbl, representing a premium of 11% to the Edmonton Par light oil price of $76.03/bbl. Natural gas liquids (butane and propane, excluding condensate) received an average price of $39.69/bbl during the third 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.  As at September 30, 2018, Painted Pony executed fixed-price risk management contracts on an additional 164 MMcf/d of natural gas and 4,400 bbl/d of NGL production for the remainder of 2018.

Since 2016, Painted Pony proactively expanded into new markets as part of a long-term sales point diversification strategy. This strategy included contracting new and expanded firm transportation into the markets of AECO, Dawn, Sumas and Nymex as well as direct-to-customer sales in Alberta and BC with the goal of accessing premium prices which would surpass index pricing at Station 2.  These markets continue to provide incremental adjusted funds flow from operations despite higher transportation costs. During the third quarter of 2018, Painted Pony realized an increase of 32% in natural gas prices compared to the third quarter of 2017, despite AECO (5A) benchmark prices being 18% lower when compared to the third quarter of 2017.

$400 MILLION CREDIT FACILITIES REAFFIRMED
In conjunction with the semi-annual borrowing base review, on November 2, 2018, Painted Pony received confirmation that the Corporation's syndicated credit facilities have been maintained at $400 million.  This syndicated credit facility includes a $350 million extendable revolving facility and a $50 million operating facility.  There are no financial covenants applicable on this $400 million facility. As at September 30, 2018, Painted Pony had $172.9 million in bank debt.

FINANCIAL AND OPERATIONAL HIGHLIGHTS





Three months ended
September 30,

Nine months ended
September 30,

($ millions, except per share and shares outstanding)

2018

2017

Change

2018

2017

Change

Financial







Petroleum and natural gas revenue(1)

90.2


50.0


80

%

278.7


181.4


54

%

Cash flow from operating activities

33.3


29.6


13

%

120.6


79.5


52

%


Per share - basic (3)(8)

0.21


0.18


17

%

0.75


0.59


27

%


Per share - diluted (4)(8)

0.20


0.18


11

%

0.71


0.59


20

%

Adjusted funds flow from operations(2)

30.3


29.7


2

%

115.9


73.6


57

%


Per share - basic (3)                                              

0.19


0.18


6

%

0.72


0.55


31

%


Per share - diluted(4)

0.18


0.18


%

0.68


0.54


26

%

Net income (loss) and comprehensive income (loss)

(13.8)


14.6


%

(55.4)


85.3


%


Per share - basic (3)

(0.09)


0.09


%

(0.34)


0.64


%


Per share - diluted(4)

(0.09)


0.09


%

(0.34)


0.63


%

Capital expenditures

39.4


85.6


(54)

%

135.2


240.1


(44)

%

Working capital deficiency (5)

37.7


21.5


75

%

37.7


21.5


75

%

Bank debt

172.9


93.8


84

%

172.9


93.8


84

%

Senior notes

142.7


141.3


1

%

142.7


141.3


1

%

Convertible debentures - liability

45.8


44.6


3

%

45.8


44.6


3

%

Net debt (6)

385.1


336.4


14

%

385.1


336.4


14

%

Total assets

2,011.2


1,809.3


11

%

2,011.2


1,809.3


11

%

Shares outstanding (millions)

161.0


161.0


%

161.0


161.0


%

Basic weighted-average shares (millions)

161.0


161.0


%

161.0


133.9


20

%

Fully diluted weighted-average shares (millions)

169.9


164.7


3

%

169.9


135.1


26

%

Operational







Daily production volumes








Natural gas (MMcf/d)

318.5


231.2


38

%

325.5


218.2


49

%


Natural gas liquids (bbls/d)

5,248


3,826


37

%

5,457


3,254


68

%


Total (MMcfe/d)

350.0


254.1


38

%

358.2


237.8


51

%


Total (boe/d)

58,330


42,353


38

%

59,707


39,626


51

%

Realized commodity prices before financial risk
     management contracts






Natural gas ($/Mcf)

2.10


1.59


32

%

2.13


2.33


(9)

%


Natural gas liquids ($/bbl)

59.21


45.70


30

%

60.13


47.55


26

%


Total ($/Mcfe)

2.80


2.14


31

%

2.85


2.79


2

%

Operating netbacks ($/Mcfe)(7)

1.72


2.12


(19)

%

1.94


2.01


(3)

%



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 forecasted fourth quarter 2018 production volumes, the estimated 2018 annual production volume guidance, the anticipated 2018 capital budget guidance, the impact to adjusted funds flow from operations from the fixed price contracts, and the expected natural gas volumes sold into the Dawn market.

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" and "cash flow from operations per share" are calculated using the basic and diluted weighted average number of shares 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.

1200, 520 3 Avenue SW Calgary, Alberta T2P 0R3 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.

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