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Perpetual Energy Inc. releases second quarter 2010 financial and operating results and confirms August dividend

^{Published on 2010-08-10 16:16:55 - Market Wire}
 

 Second Quarter Summary - On June 30, 2010, Perpetual announced that the Corporation had completed the previously announced plan of arrangement (the "Arrangement") involving Perpetual, Paramount Energy Trust (the "Trust") and Paramount Energy Operating Corp., pursuant to which the Trust converted into the Corporation. Unitholders of the Trust voted in favor of the Arrangement at the Annual General and Special Meeting of Trust Unitholders held on June 17, 2010. Former Unitholders of the Trust received common shares of Perpetual in consideration for the cancellation of their Trust Units of the Trust on a one-for-one basis. In addition, as part of the Arrangement, the Trust was dissolved and the Corporation assumed all of the existing liabilities of the Trust, including the Trust's outstanding convertible debentures which are now convertible debentures of the Corporation. Perpetual believes that the conversion will provide the Corporation with broadened access to capital markets by eliminating the constraints of the income trust structure imposed by the trust tax legislation introduced by the federal government in 2006. In addition, Canadian taxable shareholders will benefit from what the Corporation believes to be a more tax effective treatment of their cash dividends following the conversion to a corporate structure. Shareholders may also benefit from a simplified and more efficient corporate structure. - On April 1, 2010 Perpetual closed the previously announced asset acquisition in the Edson area of Alberta ("Edson Acquisition"). The acquisition price of $123.2 million, including adjustments and a $9.5 million deposit paid in the first quarter of 2010, was funded through a combination of bank debt, the early termination of gas price hedging contracts and an issue of subscription receipts ("Subscription Receipts"). In conjunction with the Edson Acquisition, Perpetual entered into an agreement to sell to a syndicate of underwriters 10.5 million Subscription Receipts at a price of $4.75 each for gross proceeds of $50.0 million to a syndicate of underwriters. Perpetual also granted the underwriters an option to purchase up to an additional 1.6 million Subscription Receipts on the same terms as above, which was exercised resulting in total proceeds of $57.5 million prior to issue costs. On closing of the Edson Acquisition the Subscription Receipts were converted into 12.1 million common shares of Perpetual. Perpetual acquired natural gas and liquids production (80 percent natural gas) as well as extensive gathering and processing infrastructure and undeveloped lands in a desirable multi-zone part of the Alberta deep basin (the "Edson Assets"). The vendor's independent reserve evaluator assigned 34.5 Bcf of gas reserves and 1.4 MMbbls of oil and natural gas liquids ("NGL") reserves (42.9 Bcfe total) to the Edson Assets in their December 31, 2009 evaluation. The Edson Assets contributed production of 9.0 MMcfe/d to the Corporation's production figures for the current quarter. - As part of the Edson Acquisition, Perpetual negotiated a farm-in arrangement on 37 gross (31 net) sections of undeveloped Cardium rights in the area of which 22 net sections are believed by Perpetual to be prospective for light oil. The farm-in includes a two well horizontal drilling and completion commitment, each earning 50 percent of the vendor's net interest in four sections followed by a rolling option to earn the additional lands on the same basis. In addition to the 19,900 net acres of Cardium rights subject to 50 percent earning through the farm-in arrangement described above, the assets also include 13,393 net acres of undeveloped land prospective for development of Cretaceous and Jurassic tight gas sands. The first of two commitment wells was rig released during the second quarter. The second commitment well is scheduled to spud in early September. Perpetual has identified significant upside in the acquired assets through further intensified development of the Rock Creek basin-centered gas zone, and through several deep basin, gas-saturated Cretaceous zones that are prospective for horizontal development. Since closing the Edson Acquisition, Perpetual has drilled a horizontal well targeting gas and natural gas liquids in the Wilrich zone and completed three vertical wells. - Exploration, development and land expenditures totaled $34.5 million for the three months ended June 30, 2010 as compared to $7.7 million for the second quarter of 2009. The increase is due to capital spending on west central Alberta, as well as $13.8 million in expenditures by the Corporation's wholly-owned subsidiary, Warwick Gas Storage Inc. ("WGSI") on its commercial gas storage project at Warwick. Spending in west central Alberta totaled $12.4 million, comprised of the completion and tie-in of several wells drilled in the first quarter, the drilling of two wells including a horizontal Cardium oil well at Edson and undeveloped land acquisitions. Undeveloped land acquisitions in new venture areas totaling $5.4 million and recompletion, workover and facilities construction activity in the Eastern District were also included in capital spending for the quarter. - During the second quarter, the Corporation sold non-core properties for total proceeds of $35.2 million, including $28.1 million in cash and $7.1 million in 1.3 million common shares of a publicly-traded junior exploration and production company. The shares of Trioil Resources Ltd., which were partial consideration for Perpetual's assets in the Cochrane area of southwest Alberta, provide upside exposure to the junior company's activities in the emerging light oil play at Lochend. The properties produced approximately 2.2 MMcfe/d and were assigned proved plus probable reserves of 9.4 Bcfe at December 31, 2009 by the Corporation's independent reserves evaluator. - Average production measured 165.2 MMcfe/d for the three months ended June 30, 2010, comprised of 157.7 MMcf/d of natural gas and 1,240 bbl/d of oil and natural gas liquids ("NGL") as compared to 165.5 MMcfe/d reported in the second quarter of 2009. Including deemed production related to the gas over bitumen financial solution, actual plus deemed production volumes increased four percent to 191.7 MMcfe/d. Total average production for the six months ended June 30, 2010 decreased five percent to 157.2 MMcfe/d from 166.3 MMcfe/d in the 2009 period due to the shut-in of 10.5 MMcf/d at Legend as a result of an interim shut-in order related to the gas over bitumen issue and restricted capital programs in eastern Alberta in 2009. This was partially offset by acquisitions in west central and eastern Alberta with production in excess of those non-core assets sold as part of the company's ongoing asset optimization activities. - Total operating costs decreased 13 percent to $21.8 million ($1.45 per Mcfe) for the three months ended June 30, 2010 from $25.2 million ($1.67 per Mcfe) for the same period in 2009, due to decreases in labour and repair and maintenance expenses and an increase in processing income from third parties, which are netted against operating costs. Perpetual's reduced operating costs reflect the positive results from cost reduction initiatives at all operated fields implemented to enhance competitiveness, profitability and efficiency. - Perpetual's realized natural gas price was $5.54 per Mcfe for the three months ended June 30, 2009, a 39 percent decrease from the comparable quarter in 2009. The 2009 figure included realized gains on financial instruments totaling $75.2 million as compared to gains of $19.9 million for the second quarter of 2010. Early termination gains of $12.3 million and $47.7 million are included in realized gains on financial instruments for the three months ended June 30, 2010 and 2009 respectively. The mark-to market value of the Corporation's financial and physical forward sales arrangements at August 9, 2010 is approximately $63 million. Full details of Perpetual's financial and physical forward sales arrangements are presented in management's discussion and analysis ("MD&A"). - Funds flow was $36.2 million ($0.25 per common share) for the three months ended June 30, 2010, down from $91.2 million ($0.81 per common share) for the second quarter of 2009. The decrease was caused by lower revenues related to lower realized gas prices and reduced hedging gains, partially offset by a reduction in operating costs. - Distributions payable for the second quarter of 2010 totaled $17.2 million or $0.15 per common share, comprised of $0.05 per share paid on May 17, June 15 and July 15 representing a payout ratio of 59.1 percent of funds flow in the current quarter compared to 18.9 percent for the second quarter of 2009. - While distributions up to and including the June 2010 distribution paid July 15, 2010 were deductible in computing income for tax purposes of the Corporation, dividends declared by Perpetual after the conversion date will not be deductible in determining taxable income of the Corporation. Perpetual has significant tax pools available to offset future taxable income, and does not anticipate paying cash income tax in 2010. Full details of Perpetual's tax pools are presented in the management's discussion and analysis ("MD&A"). - Perpetual recorded a net loss of $44.2 million ($0.31 per basic and diluted common share) for the second quarter of 2010 as compared to a net loss of $8.8 million ($0.08 per basic and diluted common share) for the 2009 period, due primarily to a decrease in realized gains on financial instruments, a reduction in the mark-to-market value of Perpetual's forward gas price management contracts relative to the first quarter of 2010 and higher DD&A charges, partially offset by $23.4 million in gains on asset sales during the current quarter. The forward sale contracts for 2013 natural gas delivery initiated by the Corporation in 2009 related to the gas storage project were terminated as part of the gas storage funding arrangement closed on June 16, 2010. These contracts had a mark-to-market value of $8.3 million at March 31, 2010. - Subsequent to the end of the second quarter, Perpetual closed the disposition of assets in the Cold Lake area for net proceeds of $13.8 million. 

 - A horizontal well and four vertical recompletions at Edson, targeting the Wilrich formation; - Two additional horizontal wells at Carrot Creek and one additional farm-in well at Edson, evaluating the Cardium development potential; and - Horizontal drilling and multi-stage fracture completions at Elmworth, where a partner is fulfilling its obligation to evaluate Perpetual's large Montney acreage position with a three well program. 

 Average AECO Monthly Index Gas Price July to December 2010 ($/GJ) Funds flow outlook $4.00 $5.00 $6.00 ------------------------------------------------------------------------- Oil and natural gas production (MMcfe/d) 150 150 150 Realized gas price ($/Mcfe)(1) 5.57 6.20 6.83 Funds flow ($millions)(2) 70 81 90 Per Share ($/Unit/month) 0.079 0.092 0.102 Payout ratio (%)(2) 64 54 49 Ending net bank debt ($ millions)(2) 256 245 236 Ending net debt ($millions)(2) 533 522 513 Ending total net debt to funds flow ratio (times)(3) 2.8 2.6 2.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Perpetual's weighted average forward price on an average of 30,000 Mcf/d for the period July 1 to December 31, 2010 is $7.94 per Mcf. The current forward average AECO price for July to December 2010 is $4.39 per Mcf. (2) These are non-GAAP measures; see "Significant accounting policies and non-GAAP measures" in management's discussion and analysis. (3) Calculated as ending total net debt (including convertible debentures and the gas storage funding arrangement) divided by estimated annual funds flow. The Trust's convertible debt is classified as long term with $75 million maturing in 2012 and the remainder maturing in 2015. 

 FINANCIAL AND OPERATING HIGHLIGHTS ($Cdn thousands Three Months Ended Six Months Ended except volume June 30 June 30 and per share % % amounts) 2010 2009 Change 2010 2009 Change ------------------------------------------------------------------------- Financial Revenue, including realized gains and losses on financial instruments and call option premiums 83,979 137,094 (39) 215,319 234,197 (8) Funds flow(1) 36,162 91,186 (60) 120,580 132,341 (9) Per common share(2) 0.25 0.81 (69) 0.89 1.17 (24) Net earnings (loss) (44,211) (8,835) 400 (6,961) 69,625 (110) Per common share(2) (0.31) (0.08) 288 (0.05) 0.62 (108) Distributions 21,382 17,240 24 40,549 38,704 5 Per common share(3) 0.15 0.15 - 0.30 0.34 (12) Payout ratio (%)(1) 59.1 18.9 213 33.6 29.2 15 ------------------------------------------------------------------------- Total assets 1,149,486 1,208,605 (5) 1,149,486 1,208,605 (5) Net bank and other debt outstanding(1) 257,197 318,518 (19) 257,197 318,518 (19) Convertible debentures, at principal amount 234,897 236,034 - 234,897 236,034 - Gas storage arrangement(7) 31,569 - 100 31,569 - 100 Total net debt(1) 523,663 554,552 (6) 523,663 554,552 (6) Shareholders' equity 294,786 310,626 (5) 294,786 310,626 (5) ------------------------------------------------------------------------- Capital expenditures Exploration and development 20,684 7,749 167 49,584 47,398 5 Gas storage 13,787 - 100 23,209 - 100 Acquisitions, net of dispositions 78,838 89,687 (12) 100,785 96,279 5 Other 174 105 66 274 244 12 Net capital expenditures 113,483 97,541 16 173,852 143,921 21 ------------------------------------------------------------------------- Common shares outstanding (thousands) End of period 143,623 118,877 21 143,623 118,877 21 Weighted average 142,118 113,071 26 134,797 113,019 19 Share Options and Bonus Rights outstanding 8,692 9,722 (11) 8,692 9,722 (11) Shares outstanding at August 5, 2010 144,532 144,532 ------------------------------------------------------------------------- Operating Production Total natural gas (Bcfe)(6) 15.0 15.1 (1) 28.5 30.1 (5) Daily average natural gas (MMcfe/d)(6) 165.2 165.5 - 157.2 166.3 (5) Gas over bitumen deemed production (MMcf/d)(4) 26.5 18.1 46 26.4 18.5 43 Average daily (actual and deemed - MMcfe/d)(4) 191.7 183.6 4 183.6 184.8 (1) Per common share (cubic feet equivalent/d/ share)(2)(4) 1.35 1.62 (17) 1.29 1.63 (21) Realized natural gas prices ($/Mcfe) Before financial hedging and physical forward sales(5) 4.19 3.89 8 4.78 4.66 3 Including financial hedging and physical forward sales(5) 5.54 9.10 (39) 7.54 7.78 (3) ------------------------------------------------------------------------- Land (thousands of net acres) Undeveloped land holdings 2,046 1,984 3 2,046 1,984 3 ------------------------------------------------------------------------- Drilling (wells drilled gross/ net) 100/ (32)/ Gas 2/2 -/- 100 26/22.9 38/31.4 (27.0) Gas storage injection/ 100/ 100/ withdrawal 2/2 -/- 100 9/9 -/- 100 100/ Dry -/- -/- -/- 1/1 -/- 100 100/ Total 4/4 -/- 100 36/32.9 38/31.4 (5)/5 Success 100/ rate (%) 100/100 -/- 100 97/96 95/95 2/1 ------------------------------------------------------------------------- (1) These are non-GAAP measures. Please refer to "Significant Accounting Policies and Non-GAAP Measures" included in management's discussion and analysis. (2) Based on weighted average common shares outstanding for the period. (3) Based on shares outstanding at each distribution date. In future periods Perpetual will be paying dividends instead of distributions. (4) The deemed production volume describes all gas shut-in or denied production pursuant to a decision report, corresponding order or general bulletin of the Alberta Energy and Utilities Board ("AEUB"), or through correspondence in relation to an AEUB ID 99-1 application. This deemed production volume is not actual gas sales but represents shut-in gas that is the basis of the gas over bitumen financial solution which is received monthly from the Alberta Crown as a reduction against other royalties payable. (5) Perpetual's commodity hedging strategy employs both financial forward contracts and physical natural gas delivery contracts at fixed prices or price collars. In calculating the Corporation's natural gas price before financial and physical hedging, Perpetual assumes all natural gas sales based on physical delivery fixed-price or price collar contracts during the period were instead sold at AECO monthly index. (6) Production amounts are based on Perpetual's interest before royalties. (7) As Perpetual has an obligation to repay the gas storage arrangement through the delivery of 8 Bcf of natural gas in the first quarter of 2013, it is included in the Corporation's net debt.