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2018 | PAINTED PONY ENERGY LTD | ANNUAL REPORT
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TSX | PONY
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18 A N N U A L
R E P O R T
Table of Contents
1
2
6
29
30
32
36
61
Financial and Operational Highlights
Message to Shareholders
Management's Discussion and Analysis
Management’s Responsibility for Financial Statements
Independent Auditors' Report
Financial Statements
Notes to Financial Statements
Corporate Information
Corporate Profile
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 “PONY”.
Annual General Meeting
Painted Pony Energy 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 9, 2019. Shareholders not attending are encouraged
to complete the voting instruction form and deliver it in accordance with
the instructions therein at their earliest convenience.
“Plowing through the Challenges”
- By Paul Van Ginkel
Cover painting "Plowing through the Challenges", oil on canvas by Paul Van Ginkel
www.paulvanginkel.com
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Financial and
Operating Highlights
Year Ended December 31
$ millions, except per share and shares outstanding
Financial
Petroleum and natural gas revenue (1)
Cash flows from operating activities
Per share - basic (3)(8)
Per share - diluted (4)(8)
Adjusted funds flow from operations (2)
Per share - basic (3)
Per share - diluted (4)
Net income and comprehensive income
Per share - basic (3)
Net income and comprehensive income - diluted
Per share - diluted (4)
Capital expenditures
Working capital (5)
Bank debt
Senior notes
Convertible debentures - liability
Net debt (6)
Total assets
Shares outstanding (millions)
Basic weighted-average shares (millions)
Fully diluted weighted-average shares (millions)
Operational
Daily production volumes
Natural gas (MMcf/d)
Natural gas liquids (bbls/d)
Total (MMcfe/d)
Total (boe/d)
Realized commodity prices before financial risk
management contracts
Natural gas ($/Mcf)
Natural gas liquids ($/bbl)
Total ($/Mcfe)
Operating netbacks ($/Mcfe) (7)
Corporate netbacks ($/Mcfe) (7)
2018
404.4
169.0
1.05
0.99
174.6
1.08
1.03
7.1
0.04
7.1
0.04
154.4
32.9
163.1
143.1
46.1
348.5
2,055.4
161.0
161.0
169.9
316.5
5,128
347.3
57,879
2.54
59.43
3.19
2.16
1.71
2017
249.2
106.9
0.76
0.74
109.2
0.78
0.76
122.4
0.87
123.2
0.85
302.6
33.0
149.2
141.6
44.9
363.9
2,031.6
161.0
140.7
144.1
235.8
3,587
257.3
42,882
2.13
50.53
2.65
2.01
1.54
Change
62 %
58 %
38 %
34 %
60 %
38 %
36 %
(94%)
(95%)
(94%)
(95%)
(49%)
— %
9 %
1 %
3 %
(4%)
1 %
— %
14 %
18 %
34 %
43 %
35 %
35 %
19 %
18 %
20 %
7 %
11 %
1. Before royalties.
2. Adjusted funds flow from operations and adjusted 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 and decommissioning expenditures. Adjusted funds flow from operations per share is calculated by dividing
adjusted funds flow from operations by the weighted average number of basic or diluted shares outstanding in the period. See “Non-GAAP Measures” in Management Discussion
and Analysis for the year ended December 31, 2018.
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 and convertible debentures.
5. Working capital is a non-GAAP measure calculated as current assets less current liabilities. See “Non-GAAP Measures” in Management Discussion and Analysis for the year
ended December 31, 2018.
6. Net debt is a non-GAAP measure calculated as bank debt, senior notes, liability portion of convertible debentures, and working capital, adjusted for the net current portion of fair
value of risk management contracts and current portion of finance lease obligation.
7. Operating netbacks is a non-GAAP measure calculated on a per unit basis as natural gas and natural gas liquids revenues, adjusted for realized gains or losses on risk
management contracts, less royalties, operating expenses and transportation expenses. Corporate netback is calculated as operating netback less finance lease expense per unit.
See “Non-GAAP Measures” and “Operating and Corporate Netbacks” in Management Discussion and Analysis for the year ended December 31, 2018.
8. Cash flows from operating activities per share - basic and diluted are non-GAAP measures calculated by dividing cash flows from operating activities by the weighted average
of basic or diluted shares outstanding in the period.
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Message
to Shareholders
Despite predictions coming into 2018 of a very
challenging year, we delivered record adjusted
funds flow per share, reduced debt, cut costs,
and grew production and PDP reserves
year-over-year. We realized a natural gas
price of $2.54/Mcf in 2018 which significantly
exceeded the average natural gas price at the
main Canadian sales hub at AECO (5A) that
averaged just $1.50/Mcf for the year. Our much
higher realized natural gas price was made
possible through the market diversification
strategy we began pursuing several years
ago in response to our growing concern
about being tied to just two sales locations.
Natural gas strip prices in western Canada
remain low and that has resulted in another
year of forecasted lower capital investment by
industry, which we believe is likely to result
in lower overall natural gas production levels
from industry. We will continue to diversify
our sales points while also seeking long-term
sales contracts with large-scale end-users, as
we did with our 14 year supply contract with
Methanex Corporation.
Cold weather, slowing supply growth, and
increasing US exports have forced natural gas
storage levels well below the 5-year average in
Canada and in the US. We believe this positions
Painted Pony for better realized prices than
the AECO 5A daily spot price in 2019. It is
because of this economic backdrop that we
plan, once again, to constrain capital spending
to internally generated adjusted funds flow,
while retaining our optimism for the future of
clean, energy efficient Canadian natural gas.
We stated clearly in late 2017 that any adjusted
funds flow in excess of capital spending in
2018 would be used to reduce debt levels,
which I am pleased to report we did. We believe
2019 is not the time to grow our production,
rather it is a time to continue to ‘Plow Through
The Challenges’, as illustrated in our annual
painting on the cover of this report.
Sales Diversification
Our 2018 adjusted funds flow of $1.08 per share
was a record for us and was delivered through
a combination of increased production volumes,
capital discipline, and diversification of sales
points. We structured a sales diversification
portfolio for 2018 that included fixed price and
basis contracts, and firm transportation that
took Painted Pony natural gas to the Dawn
market in southern Ontario and to the Sumas
sales hub on the BC / Washington state border
as well as to Station 2 and AECO as well as our
contract with Methanex Corporation.
In October 2018, LNG Canada announced a
positive Final Investment Decision (“FID”)
on the construction of their West Coast LNG
project. This was a great day for Canada, for
the Canadian natural gas industry, and for
Painted Pony. With construction well under-
way in Kitimat, BC and on the Coastal GasLink
Pipeline, we continue to expect that some
portion of gas supply for LNG Canada will be
sourced by producers in British Columbia.
Long-term LNG contracts would fit into our
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day in and day out“
“ Success is the sum of
small efforts, repeated
-- Robert Collier
focus on delivery diversity and our strategy of
increasing profitability through direct sales
diversification.
Capital Expenditures
Our 2018 capital investment program totaled
approximately $154 million, which was
$21 million less than our 2018 adjusted funds
flow of $175 million. Activities included the
drilling of 22 (22.0 net) wells, the completion
of 28 (28.0 net) wells and investment into
associated facilities and infrastructure.
We stated in early 2018 that we would limit
2018 capital spending to match adjusted funds
flow and that any cash generated above our
planned capital spending would be used to
reduce debt. I am proud that through prudent
and disciplined capital spending we were able
to reduce our net-debt from the third quarter
of 2018 to the end of the fourth quarter
of 2018 by $37 million, a change of 10%.
Health, Safety and Environment
I cannot stress enough the importance
we place on the health and safety of our
employees and contractors at Painted Pony
as well as protection of the environment.
We foster a culture of safe work, making it a
top priority in all that we do. We are proud that
in 2018 we had no material incidents and zero
lost time incidents. Our total recordable injury
frequency averaged 0.70 in 2018 compared to
an industry average of 0.75. Never satisfied
with the status quo, work is ongoing to improve
our overall performance. Recent initiatives
include hazard identification and near-miss
reporting, integrity management plans for
regulatory compliance and we will soon
implement a new preventative maintenance
program. We continue to focus significant
effort on water management initiatives,
including recycling an average of 93% of water
from completions operations over the past
three years.
Reserves Growth
In 2018, we focused our capital program on
converting our Total Proved Plus Probable
reserves to Proved Developed Producing
reserves and grew this reserves category
by 19% to approximately 1.0 Tcfe. As we
continuously improve the cost effectiveness and
efficiency of operations, our average reserves
bookings per well continues to increase.
We were able to lower the cost of bringing
on future production by reducing future
development capital in both the Total Proved
Plus Probable and the Total Proved categories.
In the Total Proved Plus Probable category
alone, we were able to reduce the future
development capital requirements by over
$650 million, and over $300 million in
Total Proved reserves. This is a significant
accomplishment as larger reserve bookings per
well means fewer wells needed to develop the
same amount of reserves. Our recycle ratio is
a great measure of our ability to invest capital
efficiently. Our recycle ratio is calculated by
dividing the annual corporate netback of
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35%
Growth in Annual
Average Daily
Production Volumes
2018 Adjusted
funds flow
$175Million
($1.08 per share basic)
$1.71/Mcfe by the annual finding, development
and acquisition cost of $0.55/Mcfe. Our Proved
Developed Producing recycle ratio of 3.1x is
industry leading and is proof of the robustness
of our assets in both the near and long term.
Production Growth
We delivered 35% annual production growth
over our 2017 annual average daily production
volumes, averaging 347 MMcfe/d
(57,879 boe/d) during 2018. Also notable was
the 43% increase in our average daily liquids
volumes of 5,128 bbls/d in 2018, compared to
our 2017 average daily liquids volumes
of 3,587 bbls/d. We continue to face low
natural gas prices on the forward strip in
western Canada and as a result we have
decided to allow production volumes
to reduce by approximately 4% in 2019 to
preserve financial flexibility. While we are
forecasting slightly lower production volumes
this year, I think it is important to reflect
back on just how far we have come over the
past 3 years. In 2016 we generated adjusted
funds flow of $0.53 per share on 139 MMcfe/d
(23,204 boe/d) or 1.39 MMcfe/d per share. In
2018 we generated adjusted funds flow
of $1.08 per share on 347 MMcfe/d
(57,879 boe/d) or 2.16 MMcfe/d per share.
I believe our production growth of over
149% and the corresponding adjusted funds
flow per share growth of 104% during the
past 3 years speaks for itself. I think our track
record of rapid production growth
is compelling for our future as demand for
western Canadian natural gas increases.
2019 and Forward
Despite the headwinds we have faced over
the past few years both in western Canadian
natural gas pricing and in the capital markets,
we remain focused on creating
shareholder value through
strong adjusted funds flow per
share growth and through the
pursuit of strategies that will
continue to produce profitability
for Painted Pony shareholders
in the coming years.
Finally, a sincere thank you to the staff and
Board of Directors at Painted Pony for another
year of jobs well done. We also would like to
thank our First Nations neighbours, the people
of BC, service providers and shareholders for
your continued support of Painted Pony Energy.
“signed”
Patrick R. Ward
President and Chief Executive Officer
March 21, 2019
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Advisories
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.
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.
Forward-Looking Information: This message to shareholders section contains certain forward-looking information and forward-looking statements within the
meaning of Canadian securities laws (collectively, “forward-looking information”). 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. Information relating to “reserves” or “resources” is forward-looking as it involves the implied assessment, based on certain estimates and
assumptions, that the reserves or resources exist in the quantities estimated and that they will be commercially viable to produce in the future. Words such as “plan”,
“expect”, “intend”, “believe”, “anticipate”, “estimate”, “may”, “will”, “could”, “potential”, and other similar words that indicate events or conditions may occur are
intended to identify forward-looking information. This message to shareholders section contains forward-looking information, including, without limitation, information
relating to: forecasted lower capital investment by industry, assumptions regarding overall natural gas production levels and realized prices, future capital spending,
forecasted production volumes, and estimates regarding the Corporation's growth.
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.
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, nor
will it, update the forward-looking information after the date of this document 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 message to shareholders section, 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 message makes reference to the terms “adjusted funds flow”, “adjusted funds flow per share”, and "corporate netback" which do not have
standardized meanings prescribed by IFRS and therefore may not be comparable with the calculation of similar measures presented by other issuers. 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 IFRS 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.
Management uses “adjusted funds flow” to analyze operating performance and considers adjusted funds flow to be a key measure as it demonstrates the Corporation’s
ability to generate the cash necessary to fund future capital investment and to repay debt. Adjusted funds flow denotes cash flow from operating activities before the
effects of changes in non-cash working capital and decommissioning expenditures. “Adjusted funds flow from operations per share” is calculated using the basic and
diluted weighted average number of shares for the period. These terms should not be considered alternatives to, or more meaningful than, cash flows from operating
activities as determined in accordance with IFRS as an indicator of the Corporation’s performance.
"Corporate netback" is used as a supplemental measure of the Corporation's profitability relative to commodity prices. Corporate netback is calculated on a per
unit basis as natural gas and natural gas liquids revenues, adjusted for realized gains or losses on risk management contracts, less royalties, operating expenses,
transportation costs and finance lease expense. This term should not be considered alternatives to, or more meaningful than net income (loss) and comprehensive
income (loss) as determined in accordance with IRFS.
Independent Reserves Evaluation: GLJ Petroleum Consultants ("GLJ"), independent qualified reserves evaluators of Calgary, Alberta, prepared a reserves estimation
and economic evaluation of the Corporation's oil and natural gas properties effective December 31, 2018, which is contained in a report dated March 5, 2019
(the "2018 Reserves Report"). GLJ prepared reserves estimations and economic evaluations of the Corporation's reserves effective December 31, 2018. The 2018
Reserves Report and the prior reserves evaluation were prepared in accordance with the standards contained in the Canadian Oil & Gas Evaluation Handbook and
National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities, which were in effect at the time of the evaluation.
Reserves Categories: Reserves means estimated remaining quantities of oil and natural gas and related substances anticipated to be recoverable from known
accumulations, as of a given date, based on the analysis of drilling, geological, geophysical and engineering data; the use of established technology; and specified
economic conditions, which are generally accepted as being reasonable. Reserves are classified according to the degree of certainty associated with the estimates:
• Proved Reserves are those reserves that can be estimated with a high degree of certainty to be recoverable. It is likely that the actual remaining
quantities recovered will exceed the estimated proved reserves; and
• Probable Reserves are those additional reserves that are less certain to be recovered than proved reserves. It is equally likely that the actual remaining
quantities recovered will be greater or less than the sum of the estimated proved plus probable reserves.
Each of the reserves categories (proved, probable and possible) may be divided into developed and undeveloped categories:
• Developed Reserves are those reserves that are expected to be recovered from existing wells and installed facilities or, if facilities have not been
installed, that would involve a low expenditure (e.g. when compared to the cost of drilling a well) to put the reserves on production. The developed
category may be subdivided into producing and non-producing.
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2018 | PAINTED PONY ENERGY LTD | ANNUAL REPORT
Corporate
Information
BOARD OF DIRECTORS
Glenn R. Carley
Chairman of the Board
Independent Director
Compensation and HR Committee
Nominating Committee
Governance Committee
Audit and Risk Committee
Kevin D. Angus
Independent Director
Compensation and HR Committee (Chair)
Paul J. Beitel
Director
Joan E. Dunne
Independent Director
Audit and Risk Committee (Chair)
Reserves and HSE Committee
Nereus L. Joubert
Independent Director
Governance Committee (Chair)
Nominating Committee (Chair)
Compensation and HR Committee
Lynn Kis
Independent Director
Reserves and HSE Committee (Chair)
Audit and Risk Committee
Arthur J. G. Madden
Independent Director
Audit and Risk Committee
Governance Committee
Nominating Committee
George W. Voneiff
Director
Reserves and HSE Committee
Patrick R. Ward
Director
President and Chief Executive Officer
DESIGN: ARTHUR / HUNTER
OFFICERS
Patrick R. Ward
President and Chief Executive Officer
Stuart W. Jaggard
Chief Financial Officer
Richard W. Kessy
Chief Operating Officer
Edwin (Ted) S. Hanbury
Senior Vice President, Strategic Projects
Tonya L. Fleming
Vice President, General Counsel and Corporate Secretary
L. Barry McNamara
Vice President, Development and Marketing
STOCK EXCHANGE LISTING
The Toronto Stock Exchange
Trading symbol for Common Shares: PONY
AUDITORS
KPMG LLP
BANKERS
The Toronto-Dominion Bank
The Bank of Nova Scotia
Alberta Treasury Branches
Canadian Imperial Bank of Commerce
Royal Bank of Canada
HSBC Bank Canada
Wells Fargo Bank, N.A. Canadian Branch
EVALUATION ENGINEERS
GLJ Petroleum Consultants Ltd.
REGISTRAR AND TRANSFER AGENT
TSX Trust Company
HEAD OFFICE
Suite 1200, 520 – 3rd Avenue SW
Calgary, Alberta T2P 0R3
T 403.475.0440 F 403.238.1487
TOLL FREE 1.866.975.0440
info@paintedpony.ca
E
W www.paintedpony.ca
PAINTED PONY ENERGY LTD.
Suite 1200, 520 – 3rd Avenue SW
Calgary, Alberta T2P 0R3
T 403.475.0440 F 403.238.1487
TOLL FREE 1.866.975.0440
E
info@paintedpony.ca
W www.paintedpony.ca
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2018 | PAINTED PONY ENERGY LTD | ANNUAL REPORT
2018 | PAINTED PONY ENERGY LTD | ANNUAL REPORT
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