Alberta's Peyto Exploration Touts Limited Exposure to AECO Natural ... - Natural Gas Intelligence

Alberta’s Peyto Exploration Touts Limited Exposure to AECO Natural Gas Prices - Natural Gas Intelligence

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Alberta’s Peyto Exploration Touts Limited Exposure to AECO Natural Gas Prices

Alberta Deep Basin pure-play Peyto Exploration & Development Corp. has all but eliminated its exposure to expected weak pricing at the AECO natural gas hub for the upcoming summer, CEO Jean-Paul Lachance said.

Lachance hosted a conference call on Thursday (March 9) to discuss the gas-weighted producer’s fourth quarter and full-year 2022 results.

Lachance noted that 2022 was a volatile year for natural gas prices generally, and at Alberta’s AECO hub in particular. This was because of “the added challenge of the market disconnection that happens during the summer maintenance season, where once again prices dropped toward zero. And it’s for these very reasons that Peyto has an active hedging strategy to smooth out the volatility so we can plan our capital programs, commit to paying dividends, and continue to strengthen the balance sheet.

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“It’s also the reason why the company has a market diversification program with volumes pointed at various markets like Malin, Ventura, Dawn, Emerson and Henry Hub.”

Calgary-based Peyto accesses these markets through “various marketing, transportation or basis deals. What we don’t have, is essentially any AECO exposure this summer, as we expect to see a repeat of last summer’s maintenance program.”

In addition, starting late this year, Peyto expects to have about 10% of its gas volumes flowing to the newly constructed, 900 MW Cascade combined-cycle power plant near Edson, AB.

Peyto is contracted to supply 60,000 gigajoules/day to the plant under a 15-year supply deal.

As for the upstream, “As we move forward in 2023, we are taking a cautious approach to our capital spending in light of the fall of natural gas prices,” Lachance said.

Peyto, he said, has “built a flexible program that focuses on drilling in core areas only.” The company has deferred a higher-cost drilling program at its Whitehorse and Minehead areas for now.

“Starting out a little slower allows us to make the call to wrap up later in the year, depending on prices.”

Peyto, which reports in Canadian dollars (C$1/US 73 cents), has set a capital spending budget of $425-475 million this year, “specifically designed with flexibility in the back half of the year to adjust to changing commodity prices,” the company said. “In the meantime, Peyto will target the lower range of the capital guidance while the company’s systematic hedging and market diversification programs help secure revenues for future dividends and continued strengthening of the balance sheet.”

The company currently has 323 MMcf/d or about 60% of expected gas production hedged for this year at $4.59/Mcf, management said.

“Despite recent lower seasonal prices, the long-term outlook for natural gas remains positive as the world looks to secure safe, reliable, and affordable sources of energy that is responsibly developed,” management said. “Peyto is well positioned to provide that supply with a 24-year proven track record of low cost, profitable returns to shareholders from the Company’s low emissions intensity core assets in the Deep Basin.”

Peyto said construction is 75% complete on a 23-kilometer (14-mile), large-diameter pipeline connecting its Swanson gas processing plant to the Cascade power plant, which is slated to begin generating power later this year.

Diversification Pays Off

Peyto’s capital expenditures (capex) totaled $507 million in 2022, up 39% from 2021. The company drilled 82.4 net horizontal wells and completed 87.9, requiring capital investment of $332 million, inclusive of 2.5 net nonoperated wells.

“The company also invested $39 million to bring these wells on production using ultra low emissions electric wellsite equipment and pipeline connections,” management said.

Production averaged 630 MMcfe/d in the fourth quarter, up from 584 MMcfe/d a year earlier. Output in 4Q2022 comprised 553 MMcf/d natural gas and 12,840 b/d of natural gas liquids (NGL). Full-year 2022 production was 621 MMcfe/d, up 14% year/year.

“Peyto’s natural gas was sold in 4Q2022 at various hubs including AECO, Empress, Malin, Dawn, Ventura, Emerson 2 and Henry Hub using both physical fixed price and basis transactions to access those locations (diversification activities),” management said. “Natural gas prices were left to float on daily or monthly pricing or locked in using fixed price financial and physical swaps at those hubs.”

Peyto reported an average realized natural gas price after hedging and diversification activities of $4.62 in 4Q2022, up from $3.58 a year earlier. The corresponding average price for its NGL sales was $75.95/bbl, up from $64.71.

On the environmental front, management highlighted that “2022 marks the first year where all new well tie-ins were completed with ultra-low emissions electric separators and along with other emissions reducing projects, the company is on target to reduce methane flaring and venting intensity by the end of 2023 to 25% of 2016 levels.”

Peyto posted net income of $113 million (66 cents/share) for the fourth quarter, versus earnings of $71.7 million (42 cents) in the same period of 2021. Full-year net earnings more than doubled to a record $391 million ($2.29/share) from $152 million (92 cents) in 2021.

Fourth quarter revenue from natural gas and NGL sales was $415 million, up from $312 million a year earlier. The corresponding full-year figure rose to $1.54 billion from $912 million.

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