Perpetual Energy Inc. Releases 2013 Year-End Reserves and Provides Operational Update, Commodity Price Risk Management Update and 2014 Capital Program Guidance

CALGARY, Feb. 4, 2014 /CNW/ - (TSX:PMT) - Perpetual Energy Inc. ("Perpetual", the "Corporation" or the "Company") is pleased to release a summary of the Company's year-end 2013 reserves as reported by the independent engineering firm McDaniel and Associates Consultants Ltd. ("McDaniel").

Overall, the results of Perpetual's capital investment program in 2013 were extremely positive, with reserve additions replacing production by close to 2.5 times.  The majority of the 2013 reserve additions resulted from capital spending focused on Perpetual's two key diversifying strategies; liquids-rich natural gas in the Wilrich formation in the Greater Edson area and heavy oil reserves in the Mannville area of eastern Alberta. Year-over-year reserves for these plays grew by 51 percent and now represent 59 percent of the Company's total proved and probable reserves. With the continued successful execution of the Company's asset base transformation and commodity diversification strategies, the net present value of Perpetual's reserves, discounted at eight percent, increased by close to 25 percent from McDaniel's estimate at year-end 2012, despite lower commodity price forecasts and the related negative economic reserve revisions, and the material asset disposition at Elmworth in March of 2013. Realized finding and development costs of $9.29 per boe reflect strong capital efficiencies in the Company's key focus areas of investment.

Perpetual is also pleased to provide an operational update regarding the winter capital spending program as well as guidance for full year 2014 capital budget and forecast funds flow. In addition, Perpetual's current commodity price risk management positions are summarized herein.

YEAR-END 2013 RESERVES

2013 Year-End Reserve Highlights

• Perpetual's exploration and development capital spending program resulted in the addition of 16.4 MMboe of proved and probable reserves in 2013. Reserve additions and net positive technical revisions due to performance replaced 2013 production of 6.8 MMboe by 240 percent.
• Total proved and probable reserves of 62.4 MMboe at December 31, 2013 were 17 percent lower than year-end 2012 (75.0 MMboe), reflecting net dispositions of 13.1 MMboe, production of 6.8 MMboe and negative economic revisions due to lower forecast natural gas prices of 9.1 MMboe. Proved reserves also decreased 6 percent to 34.1 MMboe at year-end 2013 from 36.3 MMboe at December 31, 2012.
• Negative economic revisions due to lower commodity prices of 1.0 MMboe of proved reserves and 8.1 MMboe of probable undeveloped reserves were recorded at year end, consisting almost exclusively of shallow natural gas reserves in the Viking formation in eastern Alberta. These negative reserve revisions also included a reduction of $97.9 million to future development capital ("FDC").
• Asset dispositions in 2013 resulted in a reduction of 13.1 MMboe of proved and probable reserves (6.8 MMboe proved) along with a $122.8 million reduction in FDC, primarily in the Elmworth area.
• At year-end 2013, reserves from Perpetual's key diversifying growth plays, liquids-rich gas in the Greater Edson area and Mannville heavy oil in eastern Alberta, represented 59 percent of Perpetual's total proved and probable reserves, up from 32 percent at year end 2012.  On a commodity basis, oil and natural gas liquids ("NGL") represented 13 percent of Perpetual's total proved and probable reserves (13 percent of proved).
• McDaniel's estimate of net present value (discounted at eight percent) of Perpetual's reserves at year end 2013 increased 24 percent ($131.1 million) from year end 2012 to $677 million. This increase in net present value was recorded despite lower commodity price assumptions and the overall reduction in reserves at year end 2013 resulting from asset dispositions, production and negative reserve revisions in the Viking formation.
• Perpetual's reserve-based net asset value ("NAV") (discounted at eight percent) at year-end 2013 is estimated at $3.07 per share, up 67 percent from $1.84 per share calculated at year-end 2012.
• Including changes in FDC, Perpetual realized finding and development costs ("F&D") of $9.29 per boe on a proved and probable reserve basis in 2013.

Reserves Disclosure

Company interest reserves included herein are before royalty burdens and including royalty interests. Reserves information is based on an independent reserves evaluation report prepared by McDaniel with an effective date of December 31, 2013 (the "McDaniel Report"), and has been prepared in accordance with National Instrument 51-101 ("NI 51-101") using McDaniel's forecast prices and costs. Complete NI 51-101 reserves disclosure including after-tax reserve values, reserves by major property and abandonment costs will be included in Perpetual's Annual Information Form ("AIF"), which will be filed in March 2014. Perpetual's reserves at year-end 2013 are summarized below.

Proved producing reserves of 21.3 MMboe comprise 62 percent (2012 - 62 percent) of the total proved reserves. Proved and probable developed reserves of 39.5 MMboe represent 63 percent (2012 - 54 percent) of the total proved and probable reserves. Total proved reserves account for 55 percent (2012 - 48 percent) of the total proved and probable reserves.

McDaniel estimates the FDC required to convert proved and probable non-producing and undeveloped reserves to proved producing reserves at $ 230.0 million. The table below summarizes the FDC estimated by McDaniel by play type to bring non-producing and undeveloped reserves to production.

Reserves Reconciliation

In 2013, Perpetual closed several asset dispositions which resulted in net proceeds of $77.8 million. The sale of the Company's undeveloped non-producing reserves in the Montney Formation at Elmworth represented the vast majority of the 13.1 MMboe of proved and probable reserve reductions related to dispositions, with a corresponding reduction in FDC of $122.8 million. Proceeds from dispositions were offset by asset acquisition costs of $6.9 million, representing the purchase of primarily undeveloped land in West Central Alberta.

Discoveries and extensions accounted for 13.3 MMboe of reserve additions and were related to capital investment activities focused on the two key diversifying strategies, Mannville heavy oil and liquids-rich gas in the Wilrich formation in the greater Edson area in west Central Alberta. At year-end 2013, reserves from the Wilrich play in the Greater Edson area and Mannville heavy oil in eastern Alberta represent 59 percent of Perpetual's total proved and probable reserves, up from 32 percent at year end 2012.  On a commodity basis, oil and NGL represent 13 percent of Perpetual's total proved and probable reserves (13 percent of proved), compared to 13 percent (14 percent of proved) at year-end 2012.

Year over year, McDaniel recorded net positive technical revisions related to performance totaling 3.1 MMboe on a proved and probable basis. These net positive technical revisions were due to improved well performance. In addition, at West Edson, the construction of a gas plant and sales pipeline and tie in of the facility to the Alliance pipeline drove a reduction in operating costs at the facility to an estimated $0.40 per Mcf. This operating cost reduction contributed significantly to the increase in future value of producing as well as undeveloped reserves recorded at West Edson. With the installation of the refrigeration plant at West Edson and the corresponding change in processing and marketing arrangements in 2013, NGL that was previously recognized as reserves now remains in the higher heat content natural gas sales stream. The McDaniel report accurately reflects the value of natural gas and NGL, however the Company estimates total net natural gas and NGL volumes recorded are close to 1 MMboe lower as a result of the change in processing and marketing.

A reduced natural gas price forecast at year-end 2013 relative to year-end 2012 resulted in net negative revisions due to economic factors of 9.1 MMboe. Included in the downward price revisions are those future projects whose return on investment is negative at the current price forecast. This included approximately 8.3 MMboe of proved and probable undeveloped reserves that were no longer viewed as economic to develop, almost exclusively representing probable undeveloped reserves in the Viking formation in eastern Alberta. The proved undeveloped Viking reserve drop also resulted in a corresponding reduction to FDC of $97.9 million. The negative economic revisions also included a 0.8 MMboe reduction in producing and non-producing reserves where existing wells are now expected by McDaniel to reach the economic limits near their end of productive life earlier due to lower future commodity price assumptions.

Estimated FDC decreased $151.8 million to $230.0 million at year-end 2013, from $381.8 million at year-end 2012. Relative to year-end 2012, additional FDC of $80.1 million is estimated to be required to develop the increased liquids-rich gas reserves in the Wilrich in the greater Edson area. This increase was offset by reductions in FDC totaling $231.9 million, primarily related to downward reserve revisions due to lower commodity prices associated with the Eastern Alberta Viking play and the Elmworth disposition. The decrease in FDC related to the Eastern Alberta Viking Play is the result of projects being deemed to be uneconomic under the current McDaniel price forecast. Perpetual believes that the underlying resource is still present and those previously identified reserves will be recognized and classified as future reserve additions if natural gas prices increase in the future and investment activities resume on these plays.

RESERVE LIFE INDEX ("RLI")

Perpetual's proved and probable reserves to production ratio, also referred to as reserve life index, was 8.6 years at year-end 2013 while the proved RLI was 5.2 years, based upon the 2014 production estimates in the McDaniel Report. The following table summarizes Perpetual's historical calculated RLI.

NET PRESENT VALUE ("NPV") OF RESERVES SUMMARY

Perpetual's oil, natural gas and NGL reserves were evaluated by McDaniel using McDaniel's product price forecasts effective January 1, 2014 prior to provision for financial natural gas price hedges, income taxes, interest, debt service charges and general and administrative expenses. The following table summarizes the NPV of funds flows from recognized reserves at January 1, 2014, assuming various discount rates. It should not be assumed that the discounted future net funds flows estimated by McDaniel represent the fair market value of the potential future production revenue of the company.

At an eight percent discount factor,  proved producing reserves comprise 38 percent (2012 - 41 percent) of the total proved and probable value, while proved and probable producing reserves represent 51 percent (2012 - 56 percent) of the total proved and probable value. Total proved reserves account for 55 percent (2012 - 52 percent) of the proved and probable value.

FAIR MARKET VALUE OF UNDEVELOPED LAND

Perpetual's independent third party estimate of the fair market value of its undeveloped acreage by region for purposes of the net asset value calculation is based on recent Crown land sale activity adjusted for tenure and other considerations and is as follows:

The fair market value of Perpetual's undeveloped land at year-end 2013 is estimated by an external land consultant at $179.9 million, an increase of $19.2 million relative to year-end 2012. This was primarily a result of increased land values in West Central Alberta, as estimated utilizing the results of Crown land sale activity in 2013.

ABANDONMENT AND RECLAMATION COSTS

In addition to the abandonment cost estimates provided by McDaniel inclusive in their reserve assessment, Perpetual compiles annually a detailed internal estimate of the Corporation's total future asset retirement obligation based on net ownership interest in all wells, facilities and pipelines, including estimated costs to abandon the wells, facilities and pipelines and reclaim the sites, and the estimated timing of the costs to be incurred in future periods. Pursuant to this evaluation, the estimated cost of future asset retirement obligations related to Perpetual's proved and probable reserves and other liabilities, net of the estimated salvage value of facilities and equipment and discounted at eight percent is $60 million as at December 31, 2013.

The McDaniel Report includes an undiscounted amount of $45 million ($25 million, discounted at eight percent), with respect to expected future well abandonment costs related specifically to proved and probable reserves and such amount is included in the values captioned "Total Proved and Probable Reserves" in the NPV of Reserves table (see "NPV OF RESERVES SUMMARY").

The following table presents the estimated future asset retirement obligations and estimated net salvage values at various discount rates:

NET ASSET VALUE ("NAV")

The following net asset value table shows what is normally referred to as a "produce-out" NAV calculation under which the Corporation's reserves would be produced at forecast future prices and costs. The value is a snapshot in time and is based on various assumptions including commodity prices and foreign exchange rates that vary over time. It should not be assumed that the NAV represents the fair market value of Perpetual's shares. The calculations below do not reflect the value of the Corporation's prospect inventory to the extent that the prospects are not recognized within the NI 51-101 compliant reserve assessment.

The above evaluation includes future capital expenditure expectations required to bring undeveloped reserves recognized by McDaniel that meet the criteria for booking under NI 51-101 on production. The fair market value of undeveloped land does not reflect the value of the Company's extensive prospect inventory which is anticipated to be converted into reserves and production over time through future capital investment.

FINDING AND DEVELOPMENT COSTS

Under NI 51-101, the methodology to be used to calculate F&D costs includes incorporating changes in FDC required to bring the proved undeveloped and probable reserves to production. Changes in forecast FDC occur annually as a result of development activities, acquisitions and disposition activities, undeveloped reserve revisions and capital cost estimates that reflect the independent evaluator's best estimate of what it will cost to bring the proved and probable undeveloped reserves on production.

The following table summarizes Perpetual's F&D cost after the inclusion of changes in FDC. F&D costs, including changes in FDC were $9.29 per boe on a proved and probable basis ($14.84 per boe proved) in 2013. Since net proceeds on dispositions and the reduction in future development capital exceeded exploration and development capital expenditures the calculated FD&A costs are not meaningful and therefore not presented in the table below.

OPERATIONS

Edson Wilrich Liquids-rich Gas

In the fourth quarter of 2013, Perpetual executed a single rig drilling program in West Central Alberta. Four wells (2.0 net) were rig released at West Edson and a fifth well (1.0 net) was spud at East Edson. The four West Edson wells are now completed and tied in through the West Edson facility and are performing on average at or above the type curve as recently revised by McDaniel. Operations are on track for two gross (1.0 net) additional wells to be drilled, completed and tied in prior to break up. Perpetual estimates capital of $15 million was spent in the fourth quarter of 2013 and spending in the greater Edson area in the first quarter will be $16 to $18 million.

Based on the strong performance of existing wells in the area, positive reserve revisions were recorded by McDaniel at West Edson for both existing producing wells as well as future wells to be developed. McDaniel now estimates the type curve well in the West Edson area will recovery 5.6 Bcfe per well on a proved and probable basis and forecasts a net present value discounted at 10 percent for future wells at $10.7 million per well. McDaniel has recorded reserves under NI 51-101 parameters for 14.1 net locations. Perpetual has an additional 11 net prospective sections for the Wilrich at West Edson with no reserves yet recognized by McDaniel.  In 2014, the Company will focus on technical analysis to further quantify the gas in place in the Wilrich formation at West Edson to define the optimal development scenario and well spacing.

Production at West Edson has exceeded the stated plant capacity of 30 MMcf/d gross (50% working interest), averaging approximately 37 MMcf/d gross (18.5 MMcf/d net) in December and January. Peak daily deliverability thus far of 71.0 MMcf/d gross (35.5 MMcf/d net) has been achieved, as recent new high pressure wells bypass compression and flow directly to sales as they are brought onstream.

Beyond the first quarter, plans are in place to execute a continuous single rig drilling program after break up and install additional plant and compression equipment at West Edson to bring plant capacity to 60 MMcf/d plus associated C5+ liquids (50% working interest). This level of drilling activity is expected to keep the West Edson plant at full capacity and ramp up exit production to match the expanded facility capability prior to year-end 2014. Total second through fourth quarter capital spending in the Greater Edson area is budgeted at $22 to $26 million.

Mannville Heavy Oil

Activities are ongoing in a continuous one rig winter drilling program of 15 (13.7 net) heavy oil wells, 5 (5.0 net) of which were drilled in December 2013. Planned capital expenditures in the first quarter of 2014 are estimated at $11 million, with production from new wells ramping up late in the quarter. While the program is primarily a continuation of downspacing in existing pools, three exploratory wells are targeting to further delineate future drilling inventory. To date, positive results on the first (1.0 net) exploratory well, currently flowing at 140 bbl/d of oil with 20% water cut, has confirmed economic rates from a new pool and identified seven new locations for future development.

A waterflood pilot in the Mannville I2I pool (67% working interest) was successfully started up in December 2013. Reservoir modeling suggests positive impacts to decline rates in producing wells offsetting the pilot injectors could be seen within 6 months. Additional infill drilling in the I2I pool is included in the first quarter 2014 drilling program in order to prepare to expand waterflood operations in the pool prior to year-end 2014.

Capital expenditures for the remainder of 2014 for Mannville heavy oil are estimated at $12 to $15 million, targeting up to 13 (9.3 net) wells to be drilled, completed and tied in after break up.

Shallow Gas

Capital program activities are underway in Perpetual's legacy conventional shallow gas pools to maximize value and mitigate base production declines. Capital expenditures of $5 million are planned for the first quarter, primarily targeting high return facility optimization projects, well workovers and uphole recompletions in winter-only access areas in northeast Alberta. Depending on the outlook for natural gas prices, up to an additional $5 million has been budgeted to optimize shallow gas properties for the remainder of 2014. Also, capital activities could include a small pilot project evaluating drilling and completion techniques to define the technical and economic potential of the Colorado shallow shale gas resource in east central Alberta.

COMMODITY PRICE RISK MANAGEMENT

With recent strength in natural gas prices following the depletion of storage levels caused by cold winter weather throughout much of North America, Perpetual has entered into a number of forward sale transactions to help manage commodity price risk and protect a base level of 2014 cash flow. Financial and physical forward natural gas sales arrangements at the AECO trading hub as at February 3, 2014 are now as follows:

Perpetual also has in place the following oil sales arrangements, to reduce exposure to fluctuations in the WTI index:

In addition, the Corporation has sold oil call options exercisable and expiring as follows:

OUTLOOK

Perpetual's strategic priorities for 2014 are as follows:

1. Reduce debt and manage downside risks;
2. Grow Edson liquids-rich gas production, reserves, cash flow, inventory and value;
3. Maximize value of Mannville heavy oil;
4. Maximize cash flow from shallow gas; and
5. Advance and broaden portfolio of high impact opportunities with risk-managed investment.

Perpetual is targeting capital spending in 2014 to be fully funded by 2014 funds flow. The Company's Board of Directors has approved a $70 to $80 million capital budget for full calendar year 2014. First quarter spending is on track to be approximately $32 to $34 million. The table below summarizes the capital plans in accordance with Perpetual's 2014 Strategic Priorities.

Sensitivities

Perpetual estimates that 2014 funds flow will total $75 to $85 million based on current forward commodity prices with oil and liquids production averaging close to 3,400 bbl/d and natural gas sales averaging approximately 90 to 95 MMcf/d. The table below describes the sensitivity of Perpetual's 2014 forecasted funds flow to operational changes and changes in the business environment:

Additional Information
Perpetual will release its 2013 annual audited financial statements and management's discussion and analysis ("MD&A") on or about March 5, 2014.

Uncertainties in Estimating Reserves

There are numerous uncertainties inherent in estimating quantities of crude oil, natural gas and NGL reserves and the future funds flows attributed to such reserves. The reserve and associated funds flow information set forth above are estimates only. In general, estimates of economically recoverable crude oil, natural gas and NGL reserves and the future net funds flows therefrom are based upon a number of variable factors and assumptions, such as historical production from the properties, production rates, ultimate reserve recovery, timing and amount of capital expenditures, marketability of oil and natural gas, royalty rates, the assumed effects of regulation by governmental agencies and future operating costs, all of which may vary materially. For those reasons, estimates of the economically recoverable crude oil, NGL and natural gas reserves attributable to any particular group of properties, classification of such reserves based on risk of recovery and estimates of future net revenues associated with reserves prepared by different engineers, or by the same engineers at different times, may vary. The Company's actual production, revenues, taxes and development and operating expenditures with respect to its reserves will vary from estimates thereof and such variations could be material.

Unaudited financial information

Certain financial and operating information included in this press release for the quarter and year-ended December 31, 2013, such as capital expenditures, FD&A costs, funds flow and net debt are based on estimated unaudited financial results for the quarter and year then ended, and are subject to the same limitations as discussed under "Forward-Looking Information". These estimated amounts may change upon the completion of audited financial statements for the year-ended December 31, 2013 and changes could be material.

BOE Equivalents

Perpetual's aggregate proved and probable reserves are reported in barrels of oil equivalent (Boe). Boe may be misleading, particularly if used in isolation. In accordance with NI 51-101 a Boe conversion ratio for natural gas of 6 Mcf: 1 Boe has been used, which is based on an energy equivalency conversion method primarily applicable at the burner tip and does not necessarily represent a value equivalency at the wellhead. As the value ratio between natural gas and crude oil based on the current prices of natural gas and crude oil is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.

Forward-Looking Information

Certain information regarding Perpetual in this news release including management's assessment of future plans and operations may constitute forward-looking statements under applicable securities laws. The forward looking information includes, without limitation, anticipated amounts and allocation of capital spending; statements regarding estimated production and timing thereof; prospective drilling, forecast average production; completions and development activities; infrastructure expansion and construction; estimated FDC required to convert proved and probable non-producing and undeveloped reserves to proved producing reserves; anticipated effect of commodity prices on reserves; estimates of gross recoverable gas sales; estimated net asset value; prospective oil and natural gas liquids production capability; projected realized natural gas prices and funds flow; projected ending 2013 net debt; estimated asset retirement obligations; anticipated effect of commodity prices on future development capital and reserves; commodity prices and foreign exchange rates; and gas price management. Various assumptions were used in drawing the conclusions or making the forecasts and projections contained in the forward-looking information contained in this press release, which assumptions are based on management analysis of historical trends, experience, current conditions and expected future developments pertaining to Perpetual and the industry in which it operates as well as certain assumptions regarding the matters outlined above. Forward-looking information is based on current expectations, estimates and projections that involve a number of risks, which could cause actual results to vary and in some instances to differ materially from those anticipated by Perpetual and described in the forward-looking information contained in this press release. Undue reliance should not be placed on forward-looking information, which is not a guarantee of performance and is subject to a number of risks or uncertainties, including without limitation those described under "Risk Factors" in Perpetual's MD&A for the year-ended December 31, 2012 and those included in other reports on file with Canadian securities regulatory authorities which may be accessed through the SEDAR website (www.sedar.com and at Perpetual's website www.perpetualenergyinc.com). Readers are cautioned that the foregoing list of risk factors is not exhaustive. Forward-looking information is based on the estimates and opinions of Perpetual's management at the time the information is released and Perpetual disclaims any intent or obligation to update publicly any such forward-looking information, whether as a result of new information, future events or otherwise, other than as expressly required by applicable securities law. 

SOURCE Perpetual Energy Inc.