Painted Pony Energy Ltd. Annual Report 2015

Plain-text annual report

PAINTED PONY PETROLEUM LTD. 2015 A N N U A L R E P O R T TSX: PPY 2015 PAINTED PONY PETROLEUM ANNUAL REPORT 2 Table of Contents 1 2 4 27 28 29 33 55 Financial and Operational Highlights To Our Shareholders Management's Discussion and Analysis Management's Responsibility for Consolidated Financial Statements Independent Auditors' Report Consolidated Financial Statements Notes to Consolidated Financial Statements Corporate Information Corporate Profile Annual General Meeting Painted Pony is a publicly-traded natural gas corporation 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 Toronto Stock Exchange under the symbol “PPY”. Painted Pony Petroleum Ltd. invites shareholders and interested parties to attend its Annual General Meeting to be held in the Bennett Room at the Ranchmen's Club, 710 – 13th Avenue SW, Calgary, Alberta, at 3:00 pm (Calgary time), on May 12, 2016. Shareholders not attending are encouraged to complete the form of proxy and deliver it in accordance with the instructions therein at their earliest convenience. 3 3 Cover painting "Taking the Wet Road", oil on canvas by Paul Van Ginkel (www.paulvanginkel.com). 2015 PAINTED PONY PETROLEUM ANNUAL REPORT 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT Financial and Operating Highlights Year Ended December 31 $ millions, except per share and shares outstanding Financial Petroleum and natural gas revenue (1) Funds flow from operations (2) Per share – basic (3) and diluted (4) Net loss Per share – basic (3) and diluted (4) Capital expenditures Working capital (deficiency) (5) Bank debt Total assets Shares outstanding (millions) Basic weighted-average shares (millions) Fully diluted weighted-average shares (millions) Operating Daily production volumes Natural gas (MMcf/d) Natural gas liquids (bbls/d) Crude oil (bbls/d) Total (boe/d) Total (MMcfe/d) Average Realized prices Natural gas ($/Mcf) Natural gas liquids ($/bbl) Crude oil ($/bbl) Total ($/Mcfe) Field operating netbacks ($/Mcfe) (6) Corporate netbacks ($/Mcfe) (6) 2015 81.6 31.3 0.31 (5.2) (0.05) 106.7 (4.6) 63.6 781.6 100.0 99.8 99.8 88.7 826 – 15,604 93.6 2.10 44.30 – 2.39 1.03 1.23 2014 Change 160.5 (49%) 88.9 0.97 (15.6) (0.17) 270.5 2.8 – 737.8 99.5 91.2 92.1 70.6 923 503 13,192 79.2 4.48 75.39 102.34 5.56 3.56 3.45 (65%) (68%) (67%) (71%) (61%) N/A N/A 6% 1% 9% 8% 26% (11%) N/A 18% 18% (53%) (41%) N/A (57%) (71%) (64%) 1. Before royalties. 2. Funds flow from operations and funds flow from operations per share (basic and diluted) are non-GAAP measures used to represent cash flow from operating activities before the effects of changes in non-cash working capital, deferred share unit expense and decommissioning expenditures. Funds flow from operations per share is calculated by dividing funds flow from operations by the weighted average number of basic or diluted shares outstanding in the period. See “Non-GAAP Measures”. 3. Basic per share information is calculated on the basis of the weighted average number of shares outstanding in the period. 4. Diluted per share information reflects the potential dilutive effect of stock options. 5. Working capital (deficiency) is a non-GAAP measure calculated as current assets less current liabilities. See “Non-GAAP Measures”. 6. Field operating netbacks is a non-GAAP measure calculated on a per unit basis as natural gas, crude oil and natural gas liquids revenues less royalties, operating and transportation costs. Corporate netbacks in a non-GAAP measure calculated by adjusting field operating netbacks for realized gains or losses on commodity risk management. See “Non-GAAP Measures” and “Field Operating Netbacks and Corporate Netbacks”. 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 1 Message to Shareholders Over the past five years, Painted Pony’s Montney properties have emerged as world-class natural gas assets. Painted Pony has 217 net sections of high working interest Montney rights, which contains over 300 meters (1,000 feet) of highly over-pressured, gas-saturated pay. These features, combined with Painted Pony’s successful drilling and completion program, have resulted in significant reserves growth while continuing to de-risk the resource. For the third consecutive year, technology driven well-performance improvements drove positive technical reserve revisions for both Proved plus Probable (“2P”) and Proved (“1P”) reserve additions during 2015 without requiring an increase in future development capital (“FDC”). Decreasing FDC per Mcfe, improved well production performance, and decreasing costs will continue to drive Painted Pony’s ability to grow economically in a low price environment, with a fully funded capital program. Townsend Facility Key Strategic Infrastructure A key piece of Painted Pony’s growth strategy in 2016 and beyond is the completion by AltaGas Ltd. (“AltaGas”) of a 198 MMcf per day gas processing facility at Townsend (“AltaGas Townsend Facility”) which began construction in 2015. The AltaGas Townsend Facility is being funded, built and will be operated by AltaGas as part of a Strategic Alliance (“Strategic Alliance”) between Painted Pony and AltaGas which was formed in 2014. Painted Pony has reserved all of the firm capacity under a take-or-pay agreement. AltaGas has indicated the AltaGas Townsend Facility is on track to be in service by mid-2016, which is earlier than was originally anticipated. This will allow Painted Pony to start processing natural gas in September 2016 as budgeted. The AltaGas Townsend Facility will ramp up over the following 2 months and will be flowing at projected volumes of 150 MMcf/d by November 2016. The AltaGas Townsend Facility provides key liquids-rich natural gas processing infrastructure, clearing the path for increased development of Painted Pony’s liquid-rich Townsend acreage. In addition to this key piece of infrastructure, the Strategic Alliance delivers long-term marketing optionality for Painted Pony’s rapidly growing natural gas and natural gas liquids production. Lastly, this Strategic Alliance allows Painted Pony to allocate capital into higher rate of return resource development activities. 2015 Reserves Significant Growth and Exceptionally Low Costs We are very pleased with our 2015 reserve additions as well as the extremely low costs through which these reserves were added. We believe that the 2015 reserve report further underscores both the enormous potential of this high quality asset and the efficiency of Painted Pony’s operations. During 2015, Painted Pony increased 2P reserves by 57% to 4.6 Tcfe (768 MMboe) and increased 1P reserves by 175% to 2.0 Tcfe (337 MMboe) as of the end of 2015. We are proud to report that as a result of this growth, 2P reserves per share increased to 46.1 Mcfe/share (7.7 Boe/share) from 29.5 Mcfe/share (4.9 Boe/share) at the end of 2014. The estimated net present value of 2P reserves at year end 2015, when discounted at 10%, increased by 12% to $2.9 billion over year end 2014. What makes this so remarkable, is that this increase in value was accomplished despite significantly lower commodity price assumptions. Painted Pony’s 2P reserve additions replaced 2015 average daily production of 15,604 boe/d by more than 5,000%. Our Corporation has a reserve life index (“RLI”) of 140 years on a 2P basis and 61 years on a 1P basis, based on fourth quarter 2015 annualized production of 15,043 boe/d. Both statistics underscore the deep underlying value of our assets. We look forward to reducing this RLI and bringing significant value forward as we ramp up production volumes in the second half of 2016 and carry that forward into 2017 and beyond. Another meaningful feature of our 2015 reserves report is the value created from continued improvements in well productivity. By applying advanced drilling and completion technologies, Painted Pony generated positive 2P technical revisions of 864 Bcfe (144 MMboe). 2 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT Painted Pony posted strong recycle ratios of 7.5 times on a 2P basis and 1.5 times on a 1P basis, which are calculated using an average corporate netback (revenue and realized hedging gains less royalties, operating expenses and transportation costs,) of $1.23/Mcfe divided by the Finding & Development (“F&D”) costs, including changes in FDC, of $0.16 per Mcfe on a 2P basis, $0.84/Mcfe on a 1P basis. Despite volatile commodity prices during 2015, these recycle ratios were among the best in the industry and are a noteworthy achievement. Strategic Transportation Pipeline Access Supports Increasing Production Volumes An important part of Painted Pony’s growth is the ability to transport products to market. We have developed a number of strategies to accomplish this goal, most notably is the definitive agreement with Spectra Energy (“Spectra”) which Painted Pony signed in 2015 for an incremental 220 MMcf/d of firm capacity, bringing the total firm capacity of Painted Pony to 266 MMcf/d on the T-North pipeline system beginning in November 2016. This contract provides long-term natural gas transportation for Painted Pony’s growing British Columbia production base with connections to both Station 2 and Sunset Creek. The Sunset Creek sales point is strategically relevant as it gives Painted Pony the opportunity for direct exposure to AECO pricing, creating a diversity of sales options. In support of this, Painted Pony signed an agreement with TransCanada Pipelines (“TransCanada”) in January 2016 to participate in the Towerbirch Expansion Project, which will provide us with 130 MMcf/d of firm transportation service. This allows Painted Pony to divert approximately 50% of capacity on Spectra’s T-North directly into AECO. This will diversify Painted Pony’s direct sales point access into a more robust natural gas sales hub. We anticipate completion of the Towerbirch Expansion Project in November 2017. We will continue to seek out new opportunities to diversify our sales options while leveraging our Strategic Relationship with AltaGas to find the best markets for our products. “Hardships often prepare ordinary people for an extraordinary destiny…” –C.S. Lewis Capital Expenditures Costs Are Down / Efficiencies Improved / Production Forecast Intact Spending in 2015 totaled $106.7 million for the year. These expenditures included $78.7 million for drilling and completions activity. During 2015, Painted Pony drilled 15 (15.0 net) wells targeting Montney natural gas, the majority of which were pre-drilled wells to supply the AltaGas Townsend Facility once it is commissioned. Spending on facilities and equipment during the year totaled $22.1 million and included wellsite facilities costs, pipeline construction costs and spending on compression and dehydration facilities. Throughout 2015, Painted Pony was proud of the well performance increase realized and the cost reductions achieved which allowed us to reduce the planned 2016 capital program from the previous estimate of $287 million to the current estimate of $197 million, while still preserving the forecasted production growth profile. This is no small task and is something of which everyone at Painted Pony is proud. Painted Pony’s focus over the past year has been on setting the stage for significant growth from our world-class assets. We believe this will add tremendous value for our shareholders now and well into the future. As I look back on our performance in 2015, I am proud of what the team at Painted Pony has achieved during a difficult time in the energy industry. We have remained focused on driving down costs and improving efficiencies to deliver strong returns for shareholders. Our goal for 2016 is to keep our momentum moving forward and to continue delivering the kind of strong per share metrics and operational excellence that shareholders have come to expect. The commitment of our staff and Directors has been key to the success of Painted Pony in the past and will continue to be in the future. I wish to thank everyone for their hard work and I look forward to their continued contributions in 2016 and beyond. I would also like to thank our shareholders, service suppliers, government agencies, First Nations groups and all other stakeholders for their continued support of Painted Pony. “signed” Patrick R. Ward President and Chief Executive Officer March 2, 2016 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 3 4 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 5 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT6 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 7 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT8 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 9 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT10 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 11 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT12 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 13 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT14 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 15 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT16 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 17 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT18 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 19 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT20 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 21 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT22 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 23 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT24 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 25 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT26 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 27 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT28 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 29 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT30 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 31 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT32 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 33 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT34 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 35 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT36 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 37 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT38 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 39 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT40 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 41 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT42 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 43 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT44 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 45 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT46 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 47 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT48 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 49 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT50 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 51 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT52 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT 53 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORTNotes 54 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT Corporate Information DIRECTORS Glenn R. Carley Independent Director and Chairman of the Board Compensation Committee Nominating Committee Governance Committee Kevin D. Angus Independent Director Reserves Committee (Chair) Compensation Committee David W. Cornhill Director Governance Committee Nereus L. Joubert Independent Director Governance Committee (Chair) Nominating Committee (Chair) Audit Committee Lynn Kis Independent Director Reserves Committee Arthur J. G. Madden Independent Director Audit Committee (Chair) Reserves Committee Patrick R. Ward Director Peter A. Williams Independent Director Compensation Committee (Chair) Audit Committee OFFICERS Patrick R. Ward President and Chief Executive Officer John H. Van de Pol Senior Vice President & Chief Financial Officer Edwin S. (Ted) Hanbury Senior Vice President, Engineering Tonya L. Fleming Vice President, General Counsel & Corporate Secretary Bruce G. Hall Vice President, Land Stuart W. Jaggard Vice President & Controller L. Barry McNamara Vice President, Corporate Development & Marketing James D. Reimer Vice President, Geoscience & Technology STOCK EXCHANGE LISTING The Toronto Stock Exchange Trading symbol for Common Shares: PPY AUDITORS KPMG LLP BANKERS The Toronto-Dominion Bank The Bank of Nova Scotia Alberta Treasury Branches Canadian Imperial Bank of Commerce HSBC Bank Canada Wells Fargo Bank, N.A. Canadian Branch EVALUATION ENGINEERS GLJ Petroleum Consultants Ltd. REGISTRAR AND TRANSFER AGENT TMX Equity Transfer Services Inc. HEAD OFFICE 1800, 736 - 6 Ave SW Calgary, Alberta T2P 3T7 403.475.0440 T F 403.238.1487 TOLL FREE 1.866.975.0440 info@paintedpony.ca E W www.paintedpony.ca R E T N U H / R U H T R A : N G I S E D 55 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT PAINTED PONY PETROLEUM LTD. 1800, 736 - 6 Ave SW Calgary, Alberta T2P 3T7 403.475.0440 T F 403.238.1487 TOLL FREE 1.866.975.0440 info@paintedpony.ca E W www.paintedpony.ca 1 1 2015 PAINTED PONY PETROLEUM ANNUAL REPORT 2015 PAINTED PONY PETROLEUM LTD ANNUAL REPORT

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