Perpetual Energy Inc. Announces $120 Million Joint Venture in the East Edson Area and Gas Over Bitumen Royalty Credit Monetization, Reports Related Significant Positive Reserves Update and Provides Updated Guidance for 2014 and 2015
CALGARY, June 25, 2014 /PRNewswire/ - (TSX:PMT) - Perpetual Energy Inc. ("Perpetual", or the "Company") is pleased to announce that it has entered into definitive agreements with a joint venture partner (the "JV Partner") for a portion of its lands in the Edson area of West Central Alberta (the "East Edson Property"). The joint venture ("East Edson JV") will significantly accelerate Perpetual's net production and funds flow growth from the East Edson Property. Closing is expected to occur on or before July 16, 2014.
Perpetual is also pleased to announce that it has entered into a transaction to monetize its gas over bitumen royalty credits to a third party for proceeds of $20.5 million, subject to adjustments. Closing is expected on or about June 26, 2014.
The Company's independent reserve auditors, McDaniel and Associates Consultants Ltd., ("McDaniel") have re-assessed the reserves related to the East Edson Property, giving effect to the East Edson JV, and also mechanically-adjusted Perpetual's year-end 2013 reserves to an effective date of May 1, 2014. The capital injected by the East Edson JV transaction is expected to increase the operating cash flow from the East Edson Property to a level where the full development can be self-funded, thereby allowing McDaniel to substantially increase the reserve bookings to the technical level warranted. Upon closing the East Edson JV, Perpetual's Company-interest recognized booked reserves will increase by 60 percent, adding an estimated 36.3 MMboe of additional proved and probable reserves to Perpetual's corporate reserves, effective May 1, 2014 as mechanically-updated by McDaniel.
Given the significant reserve recognition associated with the Edson JV, these transactions translate into an estimated 56 percent increase in Perpetual's reserve-based net asset value ("NAV") to $4.80 per share as compared to the reserve-based NAV of $3.07 per share calculated at year-end 2013.
EAST EDSON JOINT VENTURE
Pursuant to the East Edson JV, the JV Partner will purchase a 50 percent royalty interest in Perpetual's current developed producing reserves in the East Edson area (the "Producing Royalty") for $50 million, effective July 1, 2014. Concurrently, the JV Partner will farm-in on the Wilrich Formation in certain undeveloped lands restricted to the East Edson area, contributing $70 million to drill, complete and tie-in approximately 14 wells in East Edson to earn an additional royalty (the "Drilling Royalty"). In combination, in exchange for the total acquisition and funding commitment of $120 million, the Drilling and Producing Royalties entitle the JV Partner to receive on a priority basis 5.6 MMcf/d of natural gas from the East Edson Property plus oil and associated natural gas liquids ("NGL") from July 1, 2014 to December 31, 2022 and declining thereafter at 10% per year until the Drilling Royalty and the Producing Royalty terminate on December 31, 2034. NGL yields are expected to average close to 23 bbl/MMcf for the duration of the East Edson JV. Payment for natural gas, oil and NGL volumes related to the Producing Royalty and the Drilling Royalty will be made monthly, less deductions for transportation.
As part of the East Edson JV, Perpetual has committed to spend $30 million to drill, complete and tie-in approximately five additional wells prior to December 31, 2015, substantially following the spending of the JV Partner's $70 million farm-in investment. In addition, Perpetual will construct a new gas plant at East Edson to add 30 MMcf/d of processing capacity to the East Edson area at an estimated cost of $30 million. The new plant is expected to be operational by September 1, 2015. Further to this, prior to December 31, 2022, Perpetual has committed to invest another $30 million to drill, complete and tie-in approximately 6 more wells. Perpetual will operate all East Edson JV operations and expects to have executed the farm-in operations related to approximately 14 wells prior to year-end 2014.
Perpetual has received a non-refundable deposit of $12 million which has been placed in escrow. Upon closing, an additional $18 million of the proceeds from the sale of the Producing Royalty and the $70 million of proceeds to fund the farm-in to earn the Drilling Royalty will also be placed in escrow to be dedicated to spending on the East Edson JV. The remaining proceeds of $20 million associated with the sale of the Producing Royalty are unrestricted funds for general corporate purposes and will be used to reduce outstanding bank debt.
Giving effect to the East Edson JV, Perpetual's production, net of the Producing Royalty volumes, will initially be reduced at the effective date of July 1, 2014, but quickly recover and surpass the pre-transaction net production rate as the two rig, joint venture funded drilling program commences in mid-July. Perpetual's production is projected to increase from the current rate of approximately 14.5 MMcf/d plus 385 bbl/d of oil and NGL (Average May 2014) to an estimated exit rate of 26 MMcf/d plus 670 bbl/d of oil and NGL gross, (21 MMcf/d plus 545 bbl/d of oil and NGL net of volumes attributable to the JV Partner royalties) at year-end 2014. Furthermore, incorporating the full effect of the East Edson JV spending, Perpetual anticipates to be producing approximately 50 MMcf/d plus 1,170 bbl/d of oil and NGL, (44 MMcf/d plus 1,035 bbl/d net of volumes attributable to the JV Partner royalties) at the start-up of the new East Edson gas plant in September 2015.
Based on proceeds of $120 million, the transaction implies approximately 8 times annualized 2014 cash flow (before tax) and $105,000 per flowing boe based on projected 2014 production, both accretive to Perpetual's current valuation.
MONETIZATION OF GAS OVER BITUMEN ROYALTY CREDITS
Perpetual has entered into definitive agreements to effectively monetize its future gas over bitumen ("GOB") royalty credits associated with the regulatory shut-in of the Legend property in northeast Alberta for $20.5 million, effective January 1, 2014. These royalty credits represent Perpetual's remaining royalty credit entitlements following pending expiries. With adjustments at closing, Perpetual will receive net proceeds of approximately $19 million. Perpetual receives GOB royalty adjustments from Alberta Energy as compensation for lost production from wells that have been shut-in or denied the right to produce as a result of bitumen conservation decisions. The monthly royalty adjustments are based on deemed production, which is calculated on a well by well basis and declines by 10 percent per year over a 10 year period. GOB royalty adjustments are recognized as revenue. Total net deemed production for the first quarter of 2014 was 19.5 MMcf/d. Approximately 2.7 MMcf/d of entitlements to royalty credits terminated on April 1, 2014 while a further 6.1 MMcf/d of entitlements to royalty credits will terminate on July 1, 2014 upon expiry of the ten year term from the date of shut-in for certain wells.
Perpetual will pay a royalty to the purchaser equal to the royalty credits earned, calculated based on the GOB formula set out in the Alberta Gas Royalty Regulations, on a monthly basis. However the Company will retain 35 percent of the revenue related to any excess of the Alberta Gas Reference Price over the January 1, 2014 price forecast of the independent reserve evaluator for any month. The gas over bitumen royalty credits are based on the following formula:
0.5 x (Shut-in "Deemed" Production x 0.8) x (Alberta Reference Price- $0.3791/GJ)
Thus far, $17 million of the proceeds for the disposition have been placed in escrow by the purchaser and the transaction is expected to close on or about June 26, 2014. Perpetual's lenders have advised that this monetization will result in a $10 million reduction in the borrowing base under its credit facility to $120 million, resulting in a net liquidity gain of $9 million.
At May 31, 2014 Perpetual also had an amount receivable for previously earned but uncollected gas over bitumen royalty credits of approximately $12.2 million. This receivable arose in periods of low gas prices where gas Crown royalties were not sufficient to absorb royalty credits earned. These amounts are now being collected with approximately $5.9 million realized in the first five months of 2014. The amount receivable does not expire. The above referenced transaction does not relate to these previously earned royalty credits or the outstanding Crown receivable.
Conditional on the closing of the East Edson JV, McDaniel has prepared an illustrative reserve report (the "Illustrative McDaniel Report"), effective May 1, 2014, which evaluates the East Edson Property pro forma for the joint venture and mechanically updates Perpetual's year-end 2013 reserves to give effect to production and first quarter 2014 drilling activities that converted undeveloped reserves recognized at year-end to developed and producing reserves. The mechanical McDaniel update does not consider further technical reserve additions related to capital activities since December 31, 2013. With the infusion of committed capital through the East Edson JV, Perpetual will record a significant increase in reserves at closing. Highlights of the reserve changes as a result of the East Edson JV and the mechanical update are as follows:
- Perpetual's total proved and probable reserves are estimated at 96.5 MMboe, an increase of 34.1 MMboe (55%) from 62.4 MMboe at year-end 2013. The Illustrative McDaniel Report reflects production of 2.3 MMboe and additions of 36.4 MMboe.
- Reserve additions also include an increase in future development capital of $412 million, $70 million of which will be funded through the East Edson JV Partner farm-in commitment.
- Reserves from Perpetual's key diversifying growth plays, liquids-rich gas in the Greater Edson area and Mannville heavy oil in Eastern Alberta, now represent 74 percent of Perpetual's total proved and probable reserves, up from 59 percent at year-end 2013. On a commodity basis, oil and natural gas liquids represent 13 percent of Perpetual's total proved and probable reserves (13 percent of proved), unchanged from year-end.
- McDaniel's estimate of net present value (discounted at eight percent) of Perpetual's total proved and probable reserves at May 1, 2014, giving effect to the East Edson JV transaction, the GOB monetization and mechanical adjustments, increased 21 percent ($144 million) from year-end 2013. This increase in net present value will be recorded with only a modest increase in McDaniel's commodity price forecasts effective April 1, 2014.
Company interest reserves included herein are before royalty burdens and including royalty interests. Reserves information is based on an independent reserves evaluation report prepared by McDaniel with an effective date of May 1, 2014, and is illustrative, pending closing of the East Edson JV. The Illustrative McDaniel Report has been prepared in accordance with National Instrument 51-101 ("NI 51-101") using McDaniel's forecast prices and costs. Perpetual's reserves at May 1, 2014, giving effect to the East Edson JV, are summarized below.
|Company Interest Reserves at May 1, 2014(1)(2)|
Probable Non-Producing, excluding
Gas Over Bitumen ("GOB")
|Probable Shut-in Gas over Bitumen||-||-||19,875||-||3,312|
|Total Proved and Probable||75||3,837||505,579||8,280||96,455|
|(1)||May not add due to rounding.|
|(2)||Reserve numbers reflect Illustrative McDaniel Report pro forma closing of the East Edson JV.|
The relative volume of proved and probable undeveloped reserves increased significantly as a result of the East Edson JV transaction as the technical reserves that were not deemed eligible for booking by McDaniel at year-end 2013 are now considered by McDaniel to be recoverable and eligible for booking, factoring in the dedicated development funding. The infusion of $70 million of dedicated drilling capital increases free cash flow to fund future investment in the East Edson Property. It is anticipated that the spending of the $70 million of funds in the JV Partner escrow account will be completed by the end of 2014 and is expected to convert 6.2 MMboe of proved and probable undeveloped reserves to proved and probable developed producing reserves.
McDaniel estimates the future development capital ("FDC") required to convert non-producing and undeveloped reserves to producing reserves at $642 million, up from $230 million at year-end 2013. This increase of $412 million is entirely related to the FDC required to develop the newly booked reserves at East Edson, offset by a reduction in FDC related to the Company's first quarter 2014 spending program on other assets which converted previously recognized undeveloped reserves to producing. Of this FDC, $70 million will be funded with the East Edson JV funds in escrow received from the JV Partner. The table below summarizes the FDC estimated by McDaniel by play type to bring non-producing and undeveloped reserves to production.
|Future Development Capital(1)|
|Eastern Alberta Shallow Gas||0.7||5.1||5.6||0.3||0.5||1.3||13.5|
|Mannville Heavy Oil||2.6||7.2||-||-||-||-||9.8|
|Greater Edson Wilrich (2)||100.0||92.0||68.2||66.3||54.7||236.0||617.2|
|Deep Basin Other||-||1.1||-||-||-||-||1.1|
|(1)||May not add due to rounding.|
|(2)||Includes $70 million of East Edson JV Partner capital funding.|
NET ASSET VALUE
The following net asset value table shows what is normally referred to as a "produce-out" NAV calculation under which the Company's reserves would be produced at forecast future prices and costs. The value is a snapshot in time and is based on various assumptions including commodity prices and foreign exchange rates that vary over time. It should not be assumed that the NAV represents the fair market value of Perpetual's shares. The calculations below do not reflect the value of the Company's prospect inventory to the extent that the prospects are not recognized within the NI 51-101 compliant Illustrative McDaniel Report, except to the extent that value is captured in the independent estimate of the fair market value of lands with no reserves assigned.
|Net Asset Value(1)(2)|
|($ millions, except as noted)||Undiscounted||5%||8%||10%|
|Total Proved and Probable Reserves(3)||1,462||994||823||732|
|Fair Market Value of Undeveloped Land(4)||170||170||170||170|
|Warwick Gas Storage(5)||28||28||28||28|
|Net Bank Debt(2,6,)||(18)||(18)||(18)||(18)|
|Edson JV Funds on Hand||70||70||70||70|
Estimate of Additional Future Abandonment
and Reclamation Costs(7)
|Shares Outstanding (million) - basic||148||148||148||148|
|NAV per Share ($/Share)||8.81||5.87||4.80||4.22|
As at May 1, 2014, pro forma adjustments related to the future closing
of the East Edson JV
and monetization of GOB royalty credits (See "Monetization of Gas Over Bitumen Royalty
Financial information is per Perpetual's April 30, 2014 internal
unaudited consolidated financial
Reserve values per Illustrative McDaniel Report as at May 1, 2014,
including GOB royalty credits
not yet received and excluding GOB royalty credits monetized.
Independent third party estimate. Undeveloped lands in the table above
refer only to lands not
assigned reserves in the McDaniel Report. Amounts have been mechanically-adjusted from
year-end 2013 to reflect the reduction in undeveloped land with no reserves assigned in the
Greater Edson area.
Reflects 30 percent interest in Warwick Gas Storage valued at
proportionate acquisition value
at April 29, 2013.
Includes bank debt, net of working capital estimated at May 1, 2014,
excluding Crown receivable
related to the GOB royalty credit not yet received, and including pro forma proceeds related to
the future closing of the Producing Royalty sale at East Edson and the monetization of GOB
Amounts are in addition to amounts in the December 31, 2013 McDaniel
report for future well
abandonment costs, net of salvage value, related to developed reserves.
|(8)||Hedging adjustments as at June 24, 2014 relative to McDaniel price forecast.|
The above evaluation includes future capital expenditure expectations required to bring undeveloped reserves recognized by McDaniel that meet the criteria for booking under NI 51-101 on production. The fair market value of undeveloped land does not reflect the value of the Company's extensive prospect inventory which is anticipated to be converted into reserves and production over time through future capital investment.
Giving effect to the East Edson JV and the monetization of gas over bitumen royalty credits, Perpetual's consolidated net debt, including $100 million of JV funds in escrow, is estimated to be $245 million after the closing of the East Edson JV anticipated on July 16, 2014.
|Capital expenditures for Q2 - Q4 of 2014||$ millions||# of Wells|
|West Central liquids-rich gas(1)||118||24 (19.0 net)|
|Mannville heavy oil||17||9 (7.8 net)|
|Shallow gas and Other||6||-|
|141||33 (26.8 net)|
|(1)||Includes spending of approximately $85 million at East Edson.|
Incorporating spending of $85 million in East Edson, as well as a planned capital program of approximately $56 million for the last three quarters of 2014 on other assets, year-end 2014 net debt is projected at $325 million, assuming the current forward market for commodity prices and existing commodity price risk management contracts as at June 24, 2014.
The following table shows Perpetual's estimated 2014 funds flow at
various commodity prices:
|Projected 2014 funds flow ($ millions)|
|AECO Gas Price ($/GJ)(1)|
Commodity price sensitivities reflect average AECO and WTI prices for
June through December 2014. The current settled and forward average
AECO and WTI prices for June to December 2014 as of June 24, 2014
were $4.42 per GJ and US$104.20 per bbl, respectively.
Adjusting for the pro forma effect of the East Edson JV transaction, Perpetual expects full year 2014 production to average 20.1 Mboe/d (19.5 Mboe/d net of the East Edson JV royalty production), with a forecast exit rate of 23.1 Mboe/d (21.9 Mboe/d, net of East Edson JV royalty production).
On a preliminary basis, the planned capital program for 2015 of approximately $120 million, including spending of the remaining funds held in escrow for the committed development of the East Edson Properties, is expected to be within Perpetual's estimated funds flow. The following table shows Perpetual's estimated 2015 funds flow at various commodity prices:
Projected 2015 funds flow ($ millions)
|AECO Gas Price ($/GJ)(1)|
The current settled and forward average AECO and WTI prices for
calendar 2015 as of June 24, 2014 were $4.00 per GJ and
US$96.95 per bbl, respectively.
Looking ahead to year-end 2015, consolidated net debt is estimated to remain flat at $325 million, and the year-end debt to trailing funds flow ratio is projected to be at 2.6 times, assuming the current market for commodity prices, the successful execution of the East Edson JV, and no acquisitions, dispositions or other changes to the Company's capital structure. 2015 production is estimated to average 24.5 Mboe/d (23.4 Mboe/d, net of East Edson JV royalty production), with an expected 2015 exit rate of 25.4 Mboe/d (24.3 Mboe/d, net of East Edson JV royalty production).
CONFERENCE CALL AND WEBCAST
Perpetual will be hosting a conference call and webcast at 9:00 a.m., Mountain Time, Thursday, June 26, 2014 to review this information. Interested parties are invited to take part in the conference call by dialing one of the following telephone numbers 10 minutes before the start time: Local area 403.451.9838; or toll free 1.888.231.8191. For a replay of this call please dial: 1.855.859.2056, passcode: 66411650 until 23:59 MT, July 3, 2014. To participate in the live webcast please visit www.perpetualenergyinc.com or http://event.on24.com/r.htm?e=814535&s=1&k=6A23377BBB75DE4E3D3BE832467646D9. The webcast will be archived and the webcast presentation will be posted on Perpetual's website shortly following the presentation. The Toronto Stock Exchange has neither approved nor disapproved the information contained herein.
Uncertainties in Estimating Reserves
There are numerous uncertainties inherent in estimating quantities of crude oil, natural gas and NGL reserves and the future funds flows attributed to such reserves. The reserve and associated funds flow information set forth above are estimates only. In general, estimates of economically recoverable crude oil, natural gas and NGL reserves and the future net funds flows therefrom are based upon a number of variable factors and assumptions, such as historical production from the properties, production rates, ultimate reserve recovery, timing and amount of capital expenditures, marketability of oil and natural gas, royalty rates, the assumed effects of regulation by governmental agencies and future operating costs, all of which may vary materially. For those reasons, estimates of the economically recoverable crude oil, NGL and natural gas reserves attributable to any particular group of properties, classification of such reserves based on risk of recovery and estimates of future net revenues associated with reserves prepared by different engineers, or by the same engineers at different times, may vary. The Company's actual production, revenues, taxes and development and operating expenditures with respect to its reserves will vary from estimates thereof and such variations could be material.
Perpetual's aggregate proved and probable reserves are reported in barrels of oil equivalent (boe). Boe may be misleading, particularly if used in isolation. In accordance with NI 51-101 a boe conversion ratio for natural gas of 6 Mcf: 1 boe has been used, which is based on an energy equivalency conversion method primarily applicable at the burner tip and does not necessarily represent a value equivalency at the wellhead. As the value ratio between natural gas and crude oil based on the current prices of natural gas and crude oil is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.
Certain information regarding Perpetual in this news release including management's assessment of future plans and operations may constitute forward-looking statements under applicable securities laws. The forward looking information includes, without limitation those statements included under the heading "Outlook", anticipated benefits of the East Edson JV and gas over bitumen royalty credit monetization transaction and the anticipated closing dates of such transactions and amounts and allocation of capital spending; statements regarding estimated reserves and production and timing thereof; prospective drilling, forecast average production; completions and development activities; infrastructure expansion and construction; estimated FDC required to convert proved and probable non-producing and undeveloped reserves to proved producing reserves; anticipated effect of commodity prices on reserves; estimates of gross recoverable gas sales; estimated net asset value; prospective oil and natural gas liquids production capability; projected realized natural gas prices and funds flow; projected ending net debt levels; estimated asset retirement obligations; anticipated effect of commodity prices on future development capital and reserves; commodity prices and foreign exchange rates; and gas price management. Various assumptions were used in drawing the conclusions or making the forecasts and projections contained in the forward-looking information contained in this press release, which assumptions are based on management analysis of historical trends, experience, current conditions and expected future developments pertaining to Perpetual and the industry in which it operates as well as certain assumptions regarding the matters outlined above. Forward-looking information is based on current expectations, estimates and projections that involve a number of risks, which could cause actual results to vary and in some instances to differ materially from those anticipated by Perpetual and described in the forward-looking information contained in this press release. Undue reliance should not be placed on forward-looking information, which is not a guarantee of performance and is subject to a number of risks or uncertainties, including without limitation those described under "Risk Factors" in Perpetual's MD&A for the year-ended December 31, 2013 and those included in other reports on file with Canadian securities regulatory authorities which may be accessed through the SEDAR website (www.sedar.com and at Perpetual's website www.perpetualenergyinc.com). Readers are cautioned that the foregoing list of risk factors is not exhaustive. Forward-looking information is based on the estimates and opinions of Perpetual's management at the time the information is released and Perpetual disclaims any intent or obligation to update publicly any such forward-looking information, whether as a result of new information, future events or otherwise, other than as expressly required by applicable securities law.
Also included in this press release are estimates of Perpetual's
consolidated net debt after giving effect to the East Edson JV and 2014
and 2015 funds flow, which are based on the various assumptions as to
production levels, including estimated average production of 20.1
Mboe/d for 2014 and 24.500 Mboe/d for 2015, capital expenditures, and
other assumptions (including price assumptions for natural gas and oil
disclosed in this news release and an exchange rate assumption of
(US/CAD) $0.925 for 2014 and 2015. To the extent any such estimate
constitutes a financial outlook, it was approved by management and the
Board of Directors of Perpetual on June 24, 2014 and is included to
provide readers with an understanding of Perpetual's anticipated funds
flows based on the capital expenditure and other assumptions described
herein and readers are cautioned that the information may not be
appropriate for other purposes.
SOURCE Perpetual Energy Inc.