Quarterly Review
Peyto Energy invested CAD13 million into drilling and connecting new Deep basin gas wells in the first quarter of 2009. Drilling and completions accounted for CAD10.5 million, while wellsite equipment and pipelines accounted for CAD2.3 million. Additional seismic data and land was acquired for CAD0.2 million, making up the balance of the capital expenditures.
On March 3, 2009 the Alberta government announced a new royalty incentive program that became effective April 1, 2009 and included both new drilling royalty credits and new production royalty relief. This announcement caused Peyto Energy to halt new well spuds and new production startups until the program became effective in order to capture the available incentives. For this reason, activity in January and February 2009 made up over 90% of the capital spending.
In the first quarter, the trust drilled 6 gross (5.5 net, 91% working interest) gas wells, completed 7 gross (6.5 net) gas zones and brought 3 gross (3 net) zones on production. Production for the quarter averaged 114,128 mcfe/d (19,021 boe/d) down from 122,048 mcfe/d (20,342 boe/d) in first quarter of 2008.
Transportation and operating costs in the first quarter 2009 were effectively flat from a year earlier at CAD0.11/mcfe (CAD0.69/boe) and CAD0.44/mcfe (CAD2.66/boe) respectively. Reduced methanol prices were primarily responsible for maintaining operating costs at this level despite a decline in production. Royalties to the province of Alberta totaled CAD8.3 million in the quarter, representing 11% of sales or CAD0.81/mcfe (CAD4.84/boe).
Natural gas prices for the first quarter 2009 averaged CAD7.68/mcf, after hedging gains of CAD1.53/mcf, while liquids prices averaged CAD44.46/boe. The high heat content, premium gas price that Peyto Energy achieved, elevated by hedging gains, combined with its low operating costs, transportation and royalty expense resulted in field netbacks of CAD6.27/mcfe (CAD37.62/boe) for the quarter or an 82% operating margin.
Peyto Energy underwent its annual bank review in the quarter and after the engineering appraisal reaffirmed the high value of the reserve assets, the trust’s banking syndicate extended the CAD550 million revolving credit facility. Net debt for the quarter remained manageable at CAD490.6 million.
Activity Update
Peyto Energy tied in two gross wells between April 1, 2009 and spring breakup but was unable to commence any drilling operations in that time. The economic impact of the new three point royalty incentive program has been reviewed and although it is not expected it will have a significant influence on the future drilling strategies of the trust, it will provide additional economic return for new wells drilled within the program.
It is anticipated that the capital program for the balance of 2009 will be achieved with two drilling rigs commencing operations after breakup. Activity will be spread throughout Peyto Energy’s core operational areas and include several exploratory ideas as well as an evaluation of the potential for horizontal multi-stage fracture technology.
So far, production for the second quarter has averaged 111.5 mmcfe/d. Peyto Energy is continuously monitoring individual wells for their ability to generate positive funds flow during this period of low natural gas prices. By operating over 97% of production and having low operating costs, Peyto Energy ensures that its gas wells are making money even when many others are not.
Marketing
The current global economic recession and reduced energy demand has created excess supply in North American natural gas. Fears that surplus international LNG might find its way to North America are exacerbating the situation. This has caused Alberta spot natural gas prices to drop to levels not experienced since 2002.
While there is much speculation on when prices will recover, Peyto Energy has, as of March 31 2009, committed to the forward sale of 15,670,000 gigajoules (GJ) of natural gas at an average price of CAD7.94/GJ or CAD9.29/mcf (representing a 17% premium heat content). Had these contracts been closed on March 31, 2009, the trust would have realized a gain of CAD37.8 million.
The trust continues to forward sell small portions of production, up to 24 months into the future, to secure prices for upcoming distributions and capital programs. This strategy has worked successfully in the past to smooth out much of the volatility in natural gas prices caused by periods of excess supply or demand.
