Painted Pony announces fully-funded 2018 capital budget

CALGARY, Dec. 14, 2017 /CNW/ - Painted Pony Energy Ltd. ("Painted Pony" or the "Corporation") (TSX: PONY) announces a 2018 capital program focused on preserving financial flexibility and reducing balance sheet leverage ratios, while delivering annual average daily production volume growth of more than 45% over anticipated 2017 annual average daily production volumes. 

2018 CAPITAL BUDGET
The 2018 Painted Pony capital budget shall limit capital investment to approximately match internally generated cash flow. Continued growth in operations combined with modest capital spending plans based on strip pricing⁽¹⁾ underscores Painted Pony's commitment to cost discipline and capital efficiency. Painted Pony's Board of Directors has approved a 2018 development capital budget which consists of:

• Investing $185 million of development capital;
• Targeting year-end 2018 net debt to annualized fourth quarter cash flow ratio of approximately 1.6x – 1.7x based on consensus pricing⁽²⁾;
• Growing annual average daily production volume by over 45%;
• Increasing annual average daily liquids production by 47%, with approximately 50% of 2018 forecasted liquids volumes being condensate; and
• Carrying an inventory of eight drilled and uncompleted net wells ("DUCs") from the fourth quarter of 2017 into 2018 will combine with drilling 29 net wells and completing 31 net wells.

Hedging and Market Diversification Update:

• Hedged approximately 52% of forecasted 2018 annual average daily production volumes at a volume-weighted average price of $3.57/Mcfe; and
• Market diversification combined with hedging results in approximately 9% of total volumes expected to be sold on Station 2 spot prices during 2018.

⁽¹⁾ Strip pricing – based on December 4, 2017 strip prices including NYMEX USD$2.91/MMbtu; AECO 7A CAD$1.71/Mcf; Station 2 CAD$1.16/Mcf; WTI USD$56.25/bbl; USD/CAD Exchange $0.79

⁽²⁾ Consensus pricing -  based on sector peer 2018 average commodity price assumptions of AECO CAD$2.50/Mcf; Station 2 CAD$1.95/Mcf; WTI USD$56.00/bbl; USD/CAD Exchange $0.78

Painted Pony has been one of the highest production growth rate natural gas producers in Canada over the last four years. Our high-growth strategy was designed to accelerate the timing of capturing the value of our extensive resource base and to build a productive and operational capacity material enough to enjoy economies of scale and the resulting lower unit capital and operating expenses. A significant part of our strategy has been to make infrastructure commitments to both take-away and processing capacity. The take-away commitments we have made have allowed us to materially diversify our pricing exposure, minimizing volumes sold at western Canadian pricing hubs. Our commitments to processing capacity were necessarily significant in order to incent our midstream partner to invest in the development of new plant capacity of a scale that would be material and economic to our business. During the fourth quarter, we reached production levels that will ensure Painted Pony has productive capacity to meet take-or-pay commitments on the Townsend Plant. Having achieved that milestone allows us the flexibility to moderate our pace of growth.

Painted Pony announces a 2018 capital budget that continues our growth strategy, while preserving our financial liquidity and improving our debt metrics. The operational efficiencies gained over the last four years provide us with ability to significantly grow productive capacity while investing only our expected internally generated funds from operations. Our successful risk management program allows us to make these capital commitments with a high degree of confidence in our ability to fund our plans. Those risk management plans includes hedging on both financial and physical contracts which result in sales of approximately 52% of our projected 2018 production at an average fixed price of $3.57/Mcfe, and a diversification of market for the balance of our sales at spot prices that includes 23% on AECO, 5% on NYMEX, 3% on Dawn, 8% on Sumas, and 9% on Westcoast Station 2.

Production and Capital Efficiencies
Annual daily production volumes for 2018 are anticipated to average between 366 MMcfe/d (61,000 boe/d) and 378 MMcfe/d (63,000 boe/d) and capital spending is expected to be $185 million. 

Capital costs have come down in recent years through drilling and completions efficiencies, while well productivity has remained robust. As a result, Painted Pony has consistently achieved strong 12-month capital efficiencies.  Based on the 2018 capital budget of $185 million and annual average daily production volumes at the low-point of the guidance range of approximately 366 MMcfe/d (61,000 boe/d), calculated first-year capital efficiencies are expected to average approximately $1,500/Mcfe/d ($9,000/boe/d), which management believes is among the strongest capital efficiencies within the Canadian gas-weighted sector.

Based on field estimates for both October and November and including pricing-related voluntary shut-ins during December, fourth quarter 2017 daily production volumes are expected to average between 306 MMcfe/d (51,000 boe/d) and 318 MMcfe/d (53,000 boe/d), an increase of 42% over fourth quarter 2016 volumes of 220 MMcfe/d (36,695 boe/d). Anticipated fourth quarter 2017 average daily production volumes were impacted by pricing-related voluntary shut-ins of 54 MMcfe/d (9,000 boe/d).

Improved Cash Costs
Higher 2018 annual average production volumes are expected to have a positive impact on Painted Pony's cash costs on a per unit basis. Painted Pony will continue to innovate and streamline field operations as production grows to achieve increasing levels of efficiency while delivering lower per unit operating costs.  

Lower per unit corporate cash costs from increased production volumes, innovative and diversified fixed-price contracts, and a large production base with a shallowing decline, combine to provide Painted Pony the capability of delivering production volume growth of approximately 45%.  Limiting 2018 capital spending to expected internally generated cash flow is anticipated to result in the leverage ratio improving to a forecasted 2018 year-end net debt to fourth quarter annualized cash flow ratio of between 2.1x to 2.2x, using December 4, 2017 forward strip commodity prices.

Painted Pony is well-positioned to deliver another year of growth from the Corporation's Montney assets and, similar to past years, expects to execute the 2018 capital development program focused on capital efficiency and cost discipline.

Director Resignation
Mr. David Cornhill, a member of the Board of Directors and of the Governance Committee, provided the Corporation with notice of his resignation today. Mr. Cornhill has served as a director since May 2015.

"I am pleased with the progress Painted Pony has made since the signing of the Strategic Alliance with AltaGas in 2014. The relationship has proven to be beneficial to both companies, with the strong growth in Painted Pony production and the completion of AltaGas Townsend Facility, the Townsend Gas Processing Facility – Phase 2, and the North Pine Facility. These facilities will lead to future development and will connect producers to new markets, including Asia. I believe the timing is right for me to resign from the Painted Pony Board of Directors to pursue other professional interests," said Mr. Cornhill.

The Board of Directors and the Corporation thank Mr. Cornhill for the guidance he has provided and for his commitment to Painted Pony and wish him every success in his future endeavours.

Executive Retirement
Mr. James Reimer, Vice President, Geoscience and Technology will retire effective January 31, 2018.  Mr. Reimer joined Painted Pony in May 2011 and his contributions have been a significant part of the Corporation's success during the past seven years. The Corporation and the Board of Directors thank him for his contributions and wish him all the best in his retirement.

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 the anticipated 2017 and 2018 annual average daily production volumes, the expected 2018 capital expenditure, the expected 2017 and 2018 annual average daily liquids production, the anticipated number of wells drilled in 2018, the expected volumes to be sold on Station 2 spot prices during 2018, the expected first-year capital efficiencies, the anticipated fourth quarter 2017 daily production volumes, the expected impact of the 2018 annual average production volumes on the Corporation's cash costs on a per unit basis, and the anticipated improvement of the 2018 leverage ratio.

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 2017 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: This press release makes reference to the terms "funds flow from operations", "funds flow from operations per share", "working capital deficiency", "operating netbacks", "netbacks", "cash flow" and "net debt" and "net debt to cash flow", which do not have standardized meanings prescribed by GAAP and therefore may not be comparable with the calculation of similar measures presented by other issuers.

Management uses "funds flow from operations" and "cash flow" to analyze operating performance and considers funds flow from operations and cash flow to be key measures as they demonstrate the Corporation's ability to generate the cash necessary to fund future capital investment and to repay debt. "Funds flow from operations" denotes cash flow from operating activities before the effects of changes in non-cash working capital, share unit expense and decommissioning expenditures. "Cash flow" is determined as gross natural gas and natural gas liquids revenues including realized gains on commodity risk management contracts, less the following: royalties, operating costs, transportation costs, general and administrative costs and finance expenses. Management uses "net debt" and "net debt to cash flow" 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 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 GAAP.

"Operating netbacks" or "netbacks" is used as a supplemental measure of the Corporation's profitability relative to commodity prices. Operating netbacks or netbacks are calculated on a per unit basis as natural gas and natural gas liquids revenues, adjusted for realized gains or losses on commodity risk management, less royalties, operating expenses and transportation costs. These terms should not be considered alternatives to, or more meaningful than net income (loss) and comprehensive income (loss) as determined in accordance with GAAP.

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 GAAP 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 consolidated financial results of the Corporation for the three months ended September 30, 2017.

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".

www.paintedpony.ca

SOURCE Painted Pony Energy Ltd.

Patrick R. Ward, President and CEO, [phone]; W. Derek Aylesworth, Senior Vice President and CFO, [phone]; Jason W. Fleury, Director, Investor Relations, [phone], [email protected]

Related Links

www.paintedpony.ca