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PERPETUAL ENERGY INC. RELEASES THIRD QUARTER 2010 FINANCIAL AND OPERATING RESULTS, INCREASES 2010 CAPITAL BUDGET FOR LIQUIDS-RI

^{Published on 2010-11-08 19:20:45 - Market Wire}
 

 - On June 30, 2010, 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 was completed. 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. Trading of the common shares of Perpetual Energy began on July 6, 2010. 

 - Exploration, development and land expenditures totaled $27.6 million and $77.2 million for the three and nine months ended September 30, 2010 as compared to $8.2 million and $55.7 million for the comparable periods in 2009. The increased spending was primarily targeting new ventures areas and in west central Alberta, delineating several of the Company's high-impact oil and liquids-rich gas plays. - Spending in west central Alberta for the current quarter totaled $12.8 million, including drilling three new wells (2.6 net) and completion of wells in the Edson and Carrot Creek areas. - A primary focus of Perpetual's 2010 exploration program has been to determine the productivity of the Cardium formation across the Carrot Creek and Edson areas through the use of horizontal drilling and multi-stage fracture completion technologies. To date, Perpetual has participated in five (3.3 net) wells, each testing a different and independent part of the Cardium reservoir, of which two wells (1.5 net) were drilled in the current quarter. The average production per well for the first 30 days was approximately 175 BOE/d for the first four wells. The fifth and final well is currently testing. - An exploration program targeting the liquids-rich Wilrich sand was undertaken during the third quarter. Three vertical wells were re- completed and one horizontal well (1.0 net) has been drilled and put on production during the quarter. In the first 30 days, the horizontal well had an average rate of 4.3 MMcf/d raw gas and 40 bbls/MMcf of natural gas liquids and condensate. An additional three horizontal wells (3.0 net) are expected to be drilled and completed prior to year end. An expansion of the compression and gathering system from 10 MMcf/d to 30 MMcf/d has been initiated to accommodate the anticipated production growth. Perpetual anticipates that the volumes from the new wells will be placed on production later in 2010 once the facility construction is completed. A total of 40 gross (33 net) horizontal locations have been identified for further development at Edson. - During the quarter, drilling operations were completed on the first of three horizontal wells targeting liquids-rich gas in the Montney formation at Elmworth in west central Alberta. Perpetual is being carried by its partner for all costs of the drilling of the first three Elmworth wells. One horizontal well (0.5 net) has been drilled to date and is undergoing completion operations. A second horizontal well (0.5 net) is drilling in the lateral section. A multi-stage fracture stimulation has been conducted recently on the first well and during clean up the well was flowing at 7.5 MMcf/d of raw gas and associated hydrocarbon liquids. Further testing will be done in the fourth quarter to determine the ultimate deliverability and nature of the gas to liquids ratio. A third well (0.4 net) is expected to be spud prior to year end. In total at Elmworth, the Company has 78 sections of Montney rights, with 120 gross (60 net) horizontal locations identified on the north and east land blocks which comprise 40 gross sections. Additional exploration activities beyond those currently planned will be required to evaluate the prospectivity of the remaining 38 sections of land on the Company's western land block. - Perpetual was also active in eastern Alberta, drilling a total of 19 gross (18.9 net) wells, including six gross (6.0 net) shallow gas wells at Craigend, four gross (3.9 net) shallow gas wells at Birchwavy east and nine gross (9.0 net) heavy oil wells at Birchwavy east. - Facility construction proceeded as planned on the Warwick Gas Storage Inc. ("WGSI") project, totaling $23.1 million during the third quarter of 2010. Third quarter capital activity included expenditures toward the purchase and installation of compression facilities designed to allow for winter withdrawals. Overall spending on development of the gas storage reservoir and facility in the first nine months of 2010 was $46.3 million. Capital activities for the fourth quarter of 2010 are budgeted at $7 million, including funds for the completion of the facility for withdrawal and to drill, complete and tie-in one well for additional withdrawal capability. The WGSI facility is fully operational for natural gas injection, which commenced on May 1, 2010 at rates of up to 175 MMcf/d of third party natural gas. Withdrawal will commence as scheduled in the fourth quarter of 2010. 

 - Average actual and deemed production for the three months ended September 30, 2010 increased three percent year over year from 169.9 MMcf/d to 175.6 MMcfe/d. Average actual production measured 151.0 MMcfe/d for the three months ended September 30, 2010 as compared to 152.4 MMcfe/d reported in the same period of 2009. Total average production for the nine months ended September 30, 2010 decreased four percent to 155.2 MMcfe/d from 161.6 MMcfe/d in the 2009 period due to the Legend shut-in and non-core property dispositions in 2009, partially offset by the increase in production associated with the Profound, Ukalta and Edson acquisitions and subsequent development of the west central assets. - Total operating costs decreased 11 percent to $24.9 million ($1.79 per Mcfe) for the three months ended September 30, 2010 from $27.9 million ($1.99 per Mcfe) for the same period in 2009, due to decreases in repair and maintenance expenses and property taxes. Included in operating costs are expenses related to the operation of the WGSI facility, which totaled $0.9 million for the third quarter. Excluding gas storage expenses, operating costs decreased 14 percent to $1.71 per Mcfe for the third quarter of 2010. Perpetual's reduced operating costs reflect the positive results from cost reduction initiatives at all operated fields implemented to enhance competitiveness, profitability and efficiency. - The Corporation's realized gas price was $6.18 per Mcfe for the three months ended September 30, 2010, an 18 percent decrease from the comparable quarter in 2009. The 2009 figure included realized gains on financial instruments totaling $56.3 million as compared to gains of $29.4 million for the current period. 

 - Funds flow decreased to $46.1 million ($0.32 per share) from $59.6 million ($0.49 per share) for the third quarter of 2009 primarily due to lower revenues due to lower realized gains on financial instruments and higher royalty expenses for the current quarter, partially offset by a reduction in operating costs and an increase in gas over bitumen royalty adjustments in the current period. Funds flow netbacks for the quarter decreased 22 percent to $3.31 per Mcfe from $4.25 per Mcfe in the third quarter of 2009. - The Corporation reported a net loss of $1.7 million ($0.01 per basic and diluted common share) for the three months ended September 30, 2010 as compared to a net loss of $44.7 million ($0.36 per basic and per diluted common share) for the 2009 period. The lower net loss is due to an increase in unrealized gains on financial instruments and $6.2 million in gains on non-core property dispositions, partially offset by higher depletion, depreciation and amortization charges and lower funds flows for the current quarter. - Net bank debt was reduced by $38.6 million during the third quarter of 2010 to $256.9 million from $295.5 million at June 30, 2010. 

 - Dividends payable for the third quarter of 2010 totaled $0.15 per common share, comprised of $0.05 per share paid on August 16, September 15 and October 15, representing a payout ratio of 47.3 percent of funds flow as compared to 30.7 percent for the third quarter of 2009. 

 - Perpetual had an 89 percent ownership interest in Severo Energy Corp. ("Severo"), a private company engaged in oil and gas exploration in Canada. The remaining 11 percent was owned by employees of Severo, Perpetual and several private investors. On October 4, 2010, the Corporation's wholly-owned subsidiary, Perpetual Operating Trust ("POT"), successfully acquired all of the issued and outstanding shares of Severo (the "Acquisition") not already owned by POT. Following the Acquisition, all of the assets and undertakings of Severo Energy Corp., Severo Acquisitions Ltd. and Severo Energy Partnership were transferred to POT. Since the Corporation has retained control of Severo, the results, assets and liabilities of this entity have been included in Perpetual's financial statements. - As current and forward gas prices have reached what the Company believes to be unsustainably low levels over the past several weeks the Company has bought back the majority of its forward sale positions, crystallizing gains of $37 million related to in-the-money hedges for future periods. The mark-to-market value of the Corporation's remaining physical forward sales arrangements at November 8, 2010 is approximately $6.2 million. As a result of the above activities, Perpetual's net bank debt currently stands at approximately $225 million. A reconciliation of realized gains on financial instruments to date in 2010 is as follows: Realized gains on financial instruments ($ millions) ------------------------------------------------------------------------- Realized gains for the nine months ended September 30, 2010 105.6 Settlement of October and November 2010 natural gas financial hedging contracts 12.0 Early termination gains realized on December 2010 - March 2012 financial hedging contracts 36.6 ------------------------------------------------------------------------- Realized gains on financial instruments to date in 2010 154.2 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 

 ------------------------------------------------------------------------- Fourth Quarter 2010 Average AECO Monthly Index Gas Price - Funds Flow Outlook October to December 2010 ($/GJ) ------------------------------------------------------------------------- $3.00 $4.00 $5.00 ------------------------------------------------------------------------- Oil and natural gas production (MMcfe/d) 142 142 142 ------------------------------------------------------------------------- Realized gas price ($/Mcfe)(1) 7.24 7.50 7.75 ------------------------------------------------------------------------- Funds flow from Warwick Gas Storage 3 3 3 ------------------------------------------------------------------------- Total funds flow ($millions)(2)(4) 58 66 73 ------------------------------------------------------------------------- Per Share ($/Share/month) 0.133 0.151 0.167 ------------------------------------------------------------------------- Payout ratio (%)(2) 27 24 22 ------------------------------------------------------------------------- Ending net bank debt ($millions)(2)(3) 245 237 230 ------------------------------------------------------------------------- Convertible debentures outstanding ($millions) 235 235 235 ------------------------------------------------------------------------- Gas storage funding arrangement liability ($millions)(4) 42 42 42 ------------------------------------------------------------------------- Ending net debt ($millions)(2)(3)(4)(5) 522 514 507 ------------------------------------------------------------------------- Ending net bank debt to funds flow ratio (times)(5) 1.1 0.9 0.7 ------------------------------------------------------------------------- Ending total net debt to funds flow ratio (times)(5) 2.3 1.9 1.7 ------------------------------------------------------------------------- (1) Perpetual's weighted average forward price on an average of 10,000 GJ/d for December 2010 is $7.75 per GJ. The current settled and forward average AECO price for October to December 2010 is $3.52 per GJ. (2) These are non-GAAP measures; see "Significant accounting policies and non-GAAP measures" in management's discussion and analysis. (3) Assumes fourth quarter capital spending of $35 million for exploration and development and $7 million for Warwick gas storage. (4) The gas storage funding arrangement reflects a future delivery obligation of 8 Bcf of natural gas to the counterparty in the first quarter of 2014. (5) Calculated as ending net debt (including convertible debentures and the gas storage funding arrangement) divided by annualized funds flow. The Corporation's convertible debt is classified as long term with $75 million maturing in 2012 and the remainder maturing in 2015. 

 - The drilling of three gross (3.0 net) wells targeting the liquids- rich Wilrich sand in the Edson area of west central Alberta; - The drilling of three gross (1.8 net) horizontal wells targeting oil in the Cardium formation in the greater Pembina area; - Tie-in operations for the Elmworth Montney play to establish production from the three Montney evaluation wells; and - The drilling of 10 gross (10 net) oilsands evaluation wells in northeast Alberta as part of the process of quantifying and evaluating Perpetual's significant heavy oil/bitumen landholdings at Liege, Hoole and Panny. 

 FINANCIAL AND OPERATING HIGHLIGHTS ($Cdn thousands Three Months Ended Nine Months Ended except volume September 30 September 30 and per share % % amounts) 2010 2009 Change 2010 2009 Change ------------------------------------------------------------------------- Financial Revenue, including realized gains and losses on financial instruments 90,626 105,274 (14) 305,943 339,741 (10) Funds flow(1) 46,078 59,599 (23) 166,656 191,938 (13) Per common share(2) 0.32 0.49 (35) 1.19 1.66 (28) Net earnings (loss) (1,710) (44,679) (96) (8,671) 24,945 (135) Per common share(2) (0.01) (0.36) (97) (0.06) 0.22 (127) Dividends 21,806 18,324 19 62,355 57,028 9 Per common share(3) 0.15 0.15 - 0.45 0.49 (8) Payout ratio (%)(1) 47.3 30.7 54 37.4 29.7 26 ------------------------------------------------------------------------- Total assets 1,130,424 1,099,869 3 1,130,424 1,099,869 3 Net bank and other debt outstanding(4) 256,908 295,549 (13) 256,908 295,594 (13) Convertible debentures, at principal amount 234,897 230,168 2 234,897 230,168 2 Gas storage arrangement 31,703 - 100 31,703 - 100 Total net debt(4) 523,508 525,717 - 523,508 525,717 - Shareholders' equity 282,740 268,611 5 282,740 268,611 5 ------------------------------------------------------------------------- Capital expenditures Exploration and development 27,563 8,225 235 77,191 55,651 39 Gas storage 23,104 2,441 846 46,269 2,441 1,795 Acquisitions, net of dispositions (15,879) 18,723 (185) 84,906 114,376 (26) Other 101 105 (4) 375 244 54 Net capital expenditures 34,889 29,494 18 208,741 172,712 21 Common shares outstanding (thousands) End of period 146,239 123,955 18 146,239 123,955 18 Weighted average 144,969 121,452 19 139,706 115,861 21 Share Options outstanding 11,444 7,201 59 11,444 7,201 59 Shares outstanding at November 5, 2010 147,496 147,496 ------------------------------------------------------------------------- Operating Production Total natural gas (Bcfe)(7) 13.9 14.0 (1) 42.4 44.1 (4) Daily average natural gas (MMcfe/d)(7) 151.0 152.4 (1) 155.2 161.6 (4) Gas over bitumen deemed production (MMcf/d)(5) 24.6 17.5 41 25.1 18.1 39 Average daily (actual and deemed - MMcfe/d)(5) 175.6 169.9 3 180.3 179.7 - Per Share (cubic feet equivalent/d /Unit)(2) 1.21 1.40 (13) 1.29 1.55 (17) Average natural gas prices ($/Mcfe) Before financial hedging and physical forward sales(6) 4.03 3.41 18 4.53 4.29 6 Including financial hedging and physical forward sales(6) 6.18 7.51 (18) 7.09 7.69 (8) ------------------------------------------------------------------------- Land (thousands of net acres) Undeveloped land holdings 1,722 2,009 (14) 1,722 2,009 (14) ------------------------------------------------------------------------- Drilling (wells drilled gross/net) Gas 12/11.9 4/3.8 200/213 45/41.9 42/35.2 7/19 Gas Storage -/- -/- -/- 6/6 -/- 100/100 Oil 11/10.6 -/- 100/100 11/10.6 -/- 100/100 Dry -/- -/- -/- 1/1 -/- 100/100 Total 23/22.5 4/3.8 475/492 63/59.5 42/35.2 50/69 Success rate (%) 100/100 100/100 -/- 98/98 100/100 (2)/(2) ------------------------------------------------------------------------- (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 common shares outstanding at each distribution date. (4) Net debt includes net working capital (deficiency) before short-term financial instrument assets and liabilities and the current portion of convertible debentures. Total net debt includes convertible debentures measured at principal amount and the gas storage arrangement. Please refer to "Significant Accounting Policies and Non-GAAP Measures" included in management's discussion and analysis. (5) 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 its successor, the Energy Resources Conservation Board ("ERCB"), 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. (6) PET'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, PET 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. (7) Production amounts are based on the Corporation's interest before royalties.