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Painted Pony Announces Operational Update, Updated 2019 Capital Budget, Executive Changes, and Second Quarter Financial and Operating Results

07/31/2019

CALGARY, July 31, 2019 /CNW/ - Painted Pony Energy Ltd. ("Painted Pony" or the "Corporation") (TSX: PONY) announces an operations update, an updated 2019 capital budget, executive changes, and second quarter 2019 financial and operating results.

Painted Pony Energy Ltd. (CNW Group/Painted Pony Energy Ltd.)

HIGHLIGHTS:

  • Invested $52 million of capital during the first half of 2019 which was $4 million less than first half 2019 adjusted funds flow from operations of $56 million;

  • Delivered over 800 bbls/d of propane during the second quarter of 2019 through the Ridley Island Propane Export Terminal to markets overseas, achieving a 275% premium over the domestic market price;

  • Returned natural gas liquids yield to 9.2% of total production volumes during the second quarter of 2019 from 8.0% during the first quarter of 2019, the result of a resolution of average daily production volume liquids allocation procedures at the Townsend facility;

  • Realized natural gas prices represented a 61% premium over the AECO daily (5A) price during the second quarter of 2019, and a premium of 37% over the AECO daily (5A) price during the first six months of 2019; and

  • Estimated July production, based on field estimates, of 317 MMcfe/d (52,350 boe/d) net of 14 MMcfe/d (2,250 boe/d) of reduced production caused by voluntary, pricing related shut ins and third party pipeline constraints.

Patrick Ward, President and CEO of Painted Pony, in commenting on these highlights said, "As expected, due to ongoing pipeline maintenance in western Canada, the second quarter of this year has delivered low natural gas prices.  Capital discipline remains a key focus for us as we continue to limit net capital investment to adjusted funds flow from operations. Increasing the average lateral length of some of our wells from our standard 1,850 meters to approximately 2,750 meters has resulted in capital efficiencies improving by approximately 15%. Discussions continue with large industrial customers for the delivery of natural gas on long term contracts. We are also contemplating asset dispositions while continuing to build a portfolio of physical and financial marketing contracts to maximize Painted Pony's natural gas price realizations. Despite recent natural gas pricing weakness during the second quarter of 2019, the forward price for natural gas in the coming fall and winter has started to improve. We believe that conditions could be right for natural gas pricing in western Canada to begin improving late in 2019 and into 2020."

OPERATIONAL UPDATE
Painted Pony's July production volumes, based on field estimates, averaged approximately 314 MMcfe/d (52,350 boe/d).  This field estimate is net of 14 MMcfe/d (2,250 boe/d) of shut in production volumes due to pricing and third party infrastructure related issues. Two wells are awaiting equipping and tie-in before they are brought on as production.

AltaGas has scheduled down time of approximately five days at the Townsend facility during August 2019 which is expected to impact third quarter 2019 average daily production volumes by approximately 12 MMcfe/d (2,000 boe/d). Painted Pony will continue to regulate discretionary production volumes in response to low natural gas prices by shutting in production.

Painted Pony continues to pursue the merits of the 'shake and bake' methodology, a process whereby a delay is imposed before initiating the flow back and testing process on new wells. In addition to lower capital costs associated with reduced water flow back, the 30 and 90 day cumulative recoveries appear to exceed that of wells which commence immediate flow back.  Painted Pony will continue to monitor the longer term performance of these wells while optimizing the process for maximum capital efficiency.

As part of ongoing efforts to reduce greenhouse gas emissions while improving capital efficiencies, Painted Pony recently began using wellhead natural gas to assist in some completion operations. By substituting clean-burning, natural gas for a portion of the diesel fuel required to power completion operations, Painted Pony has reduced the average cost of completions by over $100,000 per well while maintaining well performance.

In addition to the 'shake and bake' of wells and the use of natural gas in completion operations, Painted Pony is also utilizing longer lateral technology to maximize capital efficiencies. Two wells in Daiber were drilled during the first half of 2019 with lateral sections of approximately 2,750 meters or 50% longer than Painted Pony's standard lateral well length of 1,850 meters. Total well capital costs combined with expected production volumes are anticipated to deliver a 15% improvement in capital efficiency. During the third quarter of 2019, Painted Pony is drilling a three well pad in Blair with lateral sections which are designed to be over 3,200 meters or 75% longer than Painted Pony's standard 1,850 meters.  These three longer wells are expected to replace five standard length wells that would otherwise be needed for the same volume recovery. The net effect of these longer laterals is expected to deliver total capital savings on this project of approximately $5 million.  Upon further testing and verification, Painted Pony expects to deploy this longer lateral design more broadly across the Corporation's asset base.

2019 CAPITAL BUDGET UPDATE
Consistent with Painted Pony's focus on capital discipline, the Corporation has reduced planned capital spending levels for 2019 to ensure Painted Pony maintains its current financial flexibility in the current low commodity price environment.  The low natural gas price environment combined with Painted Pony's commitment to 2019 capital spending within 2019 adjusted funds flow from operations prompted this adjustment. Painted Pony has reduced the 2019 expected capital spending range from $95 to $110 million to $80 to $95 million, a reduction of approximately $15 million or 15% from the midpoint of previous 2019 spending guidance to the midpoint of the updated 2019 spending guidance.

As a result of reduced capital spending and shut in volumes to-date combined with anticipated shut ins during the second half of 2019, daily production volumes for 2019 are now expected to average 294 MMcfe/d (49,000 boe/d) to 306 MMcfe/d (51,000 boe/d) compared to previous 2019 average daily production guidance of between 324 MMcfe/d (54,000 boe/d) and 336 MMcfe/d (56,000 boe/d).  This updated guidance does not include any outages relating to voluntary, pricing related shut ins or unplanned third party facility or pipeline disruptions during the second half of 2019. This change in 2019 production guidance represents a reduction of 9%, using the midpoint of updated 2019 production guidance  compared to the midpoint of the previous 2019 production guidance.

SECOND QUARTER 2019 FINANCIAL & OPERATING RESULTS

Production
During the second quarter of 2019, Painted Pony averaged  daily production volumes of 294 MMcfe/d (48,978 boe/d), a decrease of 19% compared to the second quarter of 2018 when production volumes averaged  361 MMcfe/d (60,116 boe/d). Low natural gas prices during the second quarter of 2019 resulted in pricing related, voluntary shut ins of approximately 32 MMcfe/d (5,300 boe/d), combined with third party infrastructure maintenance and expansion related shut ins of approximately 11 MMcfe/d (1,900 boe/d), making total shut in volumes for the second quarter approximately 43 MMcfe/d (7,200 boe/d).

Second quarter 2019 natural gas liquids volumes of 4,508 bbls/d were 9.2% of total average daily production volumes, which was an increase from first quarter 2019 natural gas liquids yield of 8.0% and was consistent with second quarter 2018 natural gas liquids yield of 9.2%.  As announced previously in Painted Pony's first quarter 2019 financial and operating results press release on May 1, 2019, the facility operator at the Townsend facility has amended the liquids allocation procedure which improved liquids production bringing Painted Pony's liquids allocations back to historical levels.

Adjusted Funds Flow from Operations
For the second quarter of 2019, adjusted funds flow from operations was $9 million ($0.06 per share basic) compared to adjusted funds flow from operations of $39 million ($0.24 per share basic) during the second quarter of 2018. Adjusted funds flow from operations for the first half of 2019 was $56 million ($0.35 per share basic) compared to $86 million ($0.53 per share basic) in the  first half of 2018.

The decrease in adjusted funds flow from operations for the second quarter of 2019 compared to the second quarter of 2018 is a result of lower production volumes, and a 13% decrease in realized natural gas prices (including realized gains on physical hedges).

Total operating expenses of $15 million during the second quarter of 2019 were approximately 12% lower than total operating expenses of $17 million during the second quarter of 2018.

Capital Expenditures
Capital spending for the first half of 2019 totaled $52 million and included drilling 8 (8.0 net) Montney natural gas wells and completing 8 (8.0 net) Montney natural gas wells.  First half capital spending of $52 million was approximately $4 million less than adjusted funds flow from operations generated during the first half of 2019 of $56 million, consistent with previous capital spending guidance of limiting capital spending to adjusted funds flow from operations.

Painted Pony invested $15 million of capital during the second quarter of 2019. This spending included drilling and completion costs of $9 million which included the spudding of a well and completion operations on 3 wells, associated facilities and infrastructure spending of $5 million, and other miscellaneous capital items totaling $1 million.

Pricing
During the second quarter of 2019 Painted Pony's realized commodity prices benefited from risk management contracts that delivered an $11 million realized gain ($0.43/Mcfe). Inclusive of this gain, Painted Pony's second quarter 2019 operating netback was $1.26/Mcfe, a decrease of 35% over the operating netback of $1.95/Mcfe during the second quarter of 2018.

Painted Pony currently has access to multiple sales hubs as part of a long term sales point diversification strategy, including the Dawn, Sumas and Nymex markets, to receive a premium over the AECO (5A) benchmark price. These markets continue to provide incremental operating netbacks to Painted Pony. This is evidenced by Painted Pony realizing an average natural gas sales price of $1.66/Mcf during the second quarter of 2019 representing a 61% premium over the AECO daily (5A) price of $1.03/Mcf.

EXECUTIVE APPOINTMENT
Painted Pony is pleased to announce a key addition to the executive leadership team with the upcoming appointment of Mr. Mike Backus as Vice President, Operations and Development, effective September 1, 2019.

Mr. Backus is a professional engineer with over 22 years of multi-disciplinary experience in the energy industry both domestically and internationally.  A graduate of the University of Saskatchewan with a Bachelor of Science in Engineering (with distinction) and a Bachelor of Commerce (Accounting - with distinction), Mr. Backus most recently held the position of Vice President, Canadian Operations at CNOOC (formerly Nexen) and before that Vice President, Operations where he was responsible for CNOOC's UK North Sea operations portfolio.  Prior to these positions, Mr. Backus held the position of Corporate Treasurer as well as previous roles in corporate planning, investor relations, reservoir engineering and drilling operations.

EXECUTIVE DEPARTURE
Mr. Rick Kessy, Chief Operating Officer, has advised Painted Pony's Board of Directors and executive team that he will be leaving the Corporation, effective August 30, 2019. The Corporation and the Board of Directors thank Mr. Kessy for his contributions to Painted Pony and wish him all the best in his future endeavours.

CONFERENCE PARTICIPATION
Painted Pony is pleased to announce that it will be participating in EnerCom's "The Oil & Gas Conference" taking place on August 12 and 13, 2019 at The Westin Denver Downtown located at 1672 Lawrence Street in Denver, Colorado. Mr. Patrick Ward, President and CEO, will be presenting on Tuesday, August 13, 2019 at 4.00 pm (MDT) in Confluence C at The Westin Denver Downtown in Denver, Colorado.

In addition to Mr. Ward'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)

2019

2018

Change

2019

2018

Change


Financial









Petroleum and natural gas revenue(1)

59.1

87.7

(33)

%

166.8

188.5

(12)

%

Cash flows from operating activities

22.3

35.7

(38)

%

76.0

87.3

(13)

%


Per share - basic (3)(8)

0.14

0.22

(38)

%

0.47

0.54

(13)

%


Per share - diluted (4)(8)

0.13

0.21

(38)

%

0.45

0.51

(13)

%

Adjusted funds flow from operations(2)

9.1

39.1

(77)

%

55.6

85.6

(35)

%


Per share - basic (3)

0.06

0.24

(77)

%

0.35

0.53

(35)

%


Per share - diluted(4)

0.05

0.23

(77)

%

0.33

0.50

(35)

%

Net loss and comprehensive loss - basic and diluted

(14.7)

(33.2)

(56)

%

(17.3)

(41.6)

(58)

%


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

(0.09)

(0.21)

(56)

%

(0.11)

(0.26)

(58)

%

Capital expenditures

15.3

17.6

(13)

%

52.2

95.7

(45)

%

Working capital (deficiency) (5)

(20.5)

(1.1)

1,764

%

(20.5)

(1.1)

1,764

%

Bank debt

134.8

184.3

(27)

%

134.8

184.3

(27)

%

Senior notes

143.9

142.3

1

%

143.9

142.3

1

%

Convertible debentures - liability

46.8

45.5

3

%

46.8

45.5

3

%

Net debt (6)

344.2

375.3

(8)

%

344.2

375.3

(8)

%

Total assets

2,013.4

2,010.6


2,013.4

2,010.6


Shares outstanding (millions)

161.0

161.0


161.0

161.0


Basic weighted-average shares (millions)

161.0

161.0


161.0

161.0


Fully diluted weighted-average shares (millions)

169.9

169.9


169.9

169.9


Operational







Daily production volumes








Natural gas (MMcf/d)

266.8

327.6

(19)

%

283.4

329.1

(14)

%


Natural gas liquids (bbls/d)

4,508

5,514

(18)

%

4,430

5,563

(20)

%


Total (MMcfe/d)

293.9

360.7

(19)

%

310.0

362.4

(14)

%


Total (boe/d)

48,978

60,116

(19)

%

51,669

60,407

(14)

%

Realized commodity prices before financial risk management contracts





Natural gas ($/Mcf)

1.66

1.90

(13)

%

2.50

2.14

17

%


Natural gas liquids ($/bbl)

45.57

61.75

(26)

%

48.31

60.56

(20)

%


Total ($/Mcfe)

2.21

2.67

(17)

%

2.97

2.87

3

%

Operating netbacks ($/Mcfe)(7)

1.26

1.95

(35)

%

1.88

2.04

(8)

%

Corporate netbacks ($/Mcfe)(7)

0.72

1.51

(52)

%

1.36

1.61

(16)

%

 

(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. See "Non-GAAP Measures"

(7)

Operating netbacks and corporate netbacks are non-GAAP measures.  Operating netbacks are 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 expenses. Corporate netbacks are calculated as operating netback less finance lease expense per unit. See "Non-GAAP Measures" and "Operating and Corporate Netbacks"

(8)

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

 

DEFINITIONS AND 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 expected natural gas pricing, estimated July 2019 production volumes, expected impact to third quarter 2019 average daily production volumes, anticipated improvement in capital efficiency, expected use of longer lateral design on wells and related capital savings, 2019 expected capital spending, anticipated shut ins during the second half of 2019, and expected 2019 daily production volumes.

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 2019 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: Press releases may make reference to the terms "adjusted funds flow from operations", "adjusted funds flow from operations per share", "cash flow from operations per share", "adjusted funds flow from operations per Mcfe", "income (losses) before income taxes and unrealized gains (losses) on risk management contracts", "working capital deficiency", "net debt", "operating netbacks" and "corporate netback", which do not have standardized meanings prescribed by IFRS and therefore 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" 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.  These terms should not be considered alternatives to, or more meaningful than, cash flows from operating activities as determined in accordance with IFRS as an indicator of the Corporation's performance.

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.

Management uses "income (loss) before taxes and unrealized gains (losses) on risk management contracts" to analyze the ongoing operational activities of the Corporation before taking into account taxes and the non-cash effects of changes in the fair value of risk management contracts. This term should not be considered an alternative to, or more meaningful than income before taxes as determined in accordance with IFRS as an indicator of the Corporation's performance.

"Operating netback" and "corporate netback" are 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. Corporate netback is calculated on a per unit basis as operating netback per unit less finance lease expense per unit.  These terms should not be considered alternatives 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.  Please see the "Non-GAAP Measures" section of the Corporation's management's discussion and analysis of the financial results of the Corporation for the period ended June 30, 2019.

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.

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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

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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