Perpetual Energy Inc. Releases Third Quarter 2014 Financial and Operating Results and Provides First Quarter 2015 Capital Spending Guidance

CALGARY, Nov. 6, 2014 /CNW/ - (TSX:PMT) - Perpetual Energy Inc. ("Perpetual", the "Corporation" or the "Company") is pleased to report its financial and operating results for the three and nine months ended September 30, 2014. Perpetual continued to improve its financial flexibility in the third quarter with a reduction in overall debt levels achieved through the successful execution of several transactions including a senior notes offering, the monetization of future gas over bitumen ("GOB") royalty credits and disposition of a royalty interest coupled with a farm-in arrangement under the East Edson joint venture ("East Edson JV"). The Company recorded increases in production, revenues and funds flow compared to the prior year and expects growth to continue through 2014 and 2015 based on positive results from capital activities, combined with enhanced capital funding from the East Edson JV. A complete copy of Perpetual's unaudited interim consolidated financial statements and related Management's Discussion and Analysis ("MD&A") for the three and nine months ended September 30, 2014 can be obtained through the Corporation's website at www.perpetualenergyinc.com and SEDAR at www.sedar.com.

THIRD QUARTER 2014 HIGHLIGHTS

Capital Spending and Property Dispositions

• Perpetual closed the East Edson JV on July 16, 2014, which provided the Company with net proceeds of $47 million on the disposition of an overriding royalty interest on the Company's East Edson established proven producing reserves, effective July 1, 2014. The arrangement also included the grant of an additional gross overriding royalty on undeveloped lands pursuant to a farm-in agreement. The East Edson JV establishes an accelerated development plan for the area, with $70 million of capital to be drawn from a partner-held escrow account. These costs are not reported in Perpetual's exploration and development expenditures. Perpetual further committed to construct a new 30 MMcf/d gas plant and to drill, complete and tie-in approximately five additional wells for $30 million during 2015. Perpetual continues to operate all activities on the East Edson property.
  
  
• Exploration and development expenditures during the third quarter totaled $46.6 million, allocated to heavy oil development at Mannville and liquids rich natural gas activities in the greater Edson area, including primarily drilling activities at West Edson and equipment procurement and site preparation activities for the new gas plant under the East Edson JV. The new gas plant is on track to be completed and operational on or prior to third quarter 2015.
  
  
• Drilling operations included seven (6.1 net) heavy oil wells at Mannville; six (3.0 net) operated wells at West Edson and five (5.0 net) locations at East Edson, with capital for four of the East Edson wells funded by the joint venture partner. Perpetual also participated in drilling two (0.1 net) wells at West Edson operated by a third party.
  
  
• Perpetual monetized its interest in additional GOB royalty credits during the third quarter for incremental proceeds of $2.8 million, bringing total proceeds on GOB monetization transactions in 2014 to $21.3 million, after closing adjustments.
  
  
• Subsequent to the end of the quarter, Perpetual entered into an agreement to divest of non-core heavy oil properties in Mannville for proceeds of $21.6 million, subject to closing adjustments. A deposit of $3.24 million has been paid to Perpetual, with the remaining disposition proceeds due at closing which is expected to occur on November 7, 2014. The disposition will provide the Company with increased liquidity and optionality for capital investment and redemption of the 7.00 percent convertible debentures ("7.00% Debentures"), which mature in December 2015.

Production Highlights

• Total average production of 19,640 boe/d was seven percent higher than the same period in 2013 (18,274 boe/d) and marginally lower than the preceding second quarter of 2014 (20,053 boe/d). Reported production included volumes associated with the East Edson gross overriding royalty of 1,032 boe/d.
  
  
• Oil and natural gas liquids ("NGL" or "liquids") production of 3,324 bbl/d decreased by 11 percent from the second quarter of 2014 and 18 percent from the prior year, reflecting initial declines on new Mannville heavy oil wells drilled in the first quarter, reduced spending on new heavy oil drilling activity and lower reported liquids production from Edson wells related to changes in plant and liquids recovery operations.
  
  
• Natural gas production of 97.8 MMcf/d was consistent with the preceding second quarter (97.8 MMcf/d) and 15 percent higher than 85.3 MMcf/d for the same period in 2013 as a result of increased higher heat content deep basin gas production at West Edson, production growth at East and West Edson and high capital efficiency production additions from optimization activities on conventional shallow gas assets, which have reduced annual decline rates to below five percent.

Financial Highlights

• Funds flow of $20.8 million ($0.14 per share) was 12 percent higher than the comparative third quarter of 2013 ($18.7 million), reflecting increased commodity prices, higher average production and higher average heat content gas with an increased proportion of gas produced from West Central Alberta. Lower commodity prices and lower oil and NGL production in the third quarter 2014 resulted in a decrease in funds flow compared to the preceding second quarter ($25.9 million).
  
  
• Production and operating costs of $9.77/boe were down from $9.99/boe for the second quarter of 2014 and seven percent lower than the prior year ($10.47/boe), reflecting Perpetual's ongoing cost savings initiatives as well as reduced processing charges resulting from infrastructure changes at West Edson.
  
  
• The third quarter operating netback of $18.07/boe was two percent higher than the prior year ($17.65/boe) but lower than the second quarter of 2014 ($19.97/boe), reflecting the third quarter reduction in commodity prices and increased royalty expenses with the commencement of the East Edson overriding royalty payment.
  
  
• Net income of $36.4 million in the third quarter (Q3 2013 - net loss of $6.8 million) reflected higher revenue and reduced operating expenses, and included a $33.5 million gain recorded on the disposition of the royalty interest under the East Edson JV.
  
  
• Increased AECO Monthly Index prices and higher heat content gas sales compared to 2013 were reflected in Perpetual's average natural gas price, before derivatives, of $4.35/Mcf, up 56 percent from $2.79/Mcf in the third quarter of 2013. Financial natural gas contracts had no impact on Perpetual's realized gas price for the third quarter, as settled prices were very close to average forward sales contract prices for the period.
  
  
• Perpetual's oil and NGL price, before derivatives, of $78.26/bbl in the third quarter of 2014 decreased five percent compared to the same period in 2013 due to lower West Texas Intermediate ("WTI") prices. Perpetual's realized oil and NGL price, including derivatives, of $75.10/bbl was lower than the price before derivatives due to losses recorded on financial WTI fixed price contracts.
  
  
• Significant improvements in financial flexibility have been achieved on the execution of transactions during the third quarter, resulting in the early redemption of the 7.25 percent convertible debentures ("7.25% Debentures") with a principle value of $99.9 million and the temporary repayment of the Company's bank facilities, which was undrawn at September 30, 2014.
  
  
• Perpetual's net debt of $340.5 million was $36.5 million lower than December 31, 2013 reflecting several transactions completed in the second and third quarters of 2014, including proceeds received from the East Edson JV, senior notes offering and monetization of GOB royalty credits.
  
  
• The Company's lending syndicate has completed its semi-annual review of Perpetual's borrowing base, resulting in an increase to the lending facility to $105 million effective November 5, 2014, up from $100 million.

2014 STRATEGIC PRIORITIES

Perpetual remains focused on its top five strategic priorities for 2014:

1. Reduce debt and manage downside risk;
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 the portfolio of high impact opportunities with risk-managed investment.

Debt reduction and downside risk management

• Upon closing of the East Edson JV, Perpetual received $20 million of unrestricted funds which was initially applied against outstanding bank debt. Additional proceeds of $100 million were placed in escrow to be utilized to fund drilling commitments, $70 million of which is joint venture partner funds to be drawn by Perpetual to finance the execution of activities under the farm-in arrangement. The remaining $30 million of restricted cash is attributed to Perpetual's commitments and reported within working capital.
  
  
• On July 23, 2014, the Company closed an 8.75 percent senior notes offering for gross proceeds of $125 million. Utilizing proceeds from the senior notes offering, Perpetual redeemed all of the outstanding 7.25% Debentures on August 25, 2014 with total principle payments of $99.9 million plus $0.5 million for accrued interest. The excess $25 million of proceeds from the senior notes offering was initially used to repay bank indebtedness and remains available to assist in the future repayment of the 7.00% Debentures or for general corporate purposes.
  
  
• During the third quarter, Perpetual executed a second transaction with a third party to monetize additional remaining future GOB royalty credits for incremental proceeds of $2.8 million, bringing net proceeds on the monetization transactions to $21.3 million.
  
  
• As at September 30, 2014, the Corporation was undrawn on its $100 million credit facility, with a working capital deficit of $5.6 million, including $24.9 million of restricted funds in escrow received from the sale of the East Edson gross overriding royalty in July 2014. The working capital deficit excludes cash remaining in escrow funded by the joint venture partner for their capital spending commitments under the East Edson JV.
  
  
• On November 5, 2014, Perpetual's borrowing base increased five percent to $105 million as a result of reserve additions driven by drilling activities at East Edson, despite adjustments related to the monetization of additional GOB royalty credits and the pending sale of non-core Mannville heavy oil assets.
  
  
• Perpetual has commodity price contracts in place for the remainder of 2014 to protect a base level of funds flow on an estimated 56 percent of forecast production from October to December of 2014 at an average price of $4.22/GJ. In addition, Perpetual has natural gas price management contracts in place for the first quarter of 2015 on 5,000 GJ/d at a price of $4.19/GJ.
  
  
• Perpetual has oil sales arrangements for 1,500 bbl/d in place from October through December 2014 protecting an average WTI index floor price of US$86.67/bbl with an average ceiling price of US$95.15/bbl. In addition, the Corporation has fixed WTI oil sales contracts for 250 bbl/d for the period October through December at US$90/bbl as a result of the trigger of a swaption call on December 31, 2013. The Corporation also has financial contracts in place for 1,000 bbl/d to fix the basis differential between the WTI and Western Canadian Select ("WCS") trading hubs at an average of US($22.63)/bbl. Further, costless collars are in place for 1,000 bbl/d in 2015, protecting a WTI floor price of Cdn$87.50/bbl with an average ceiling price of Cdn$95.50/bbl.

Edson Wilrich liquids-rich gas and East Edson JV

• Perpetual has been actively executing its planned drilling program at East Edson since closing the East Edson JV in July 2014, primarily drawing on the $70 million of farm-in funds established in the joint venture partner escrow account. Nine wells have been rig released thus far, with seven (7.0 net) horizontal wells drilled within the Northeast development area and two (2.0 net) wells terminating within the Southwest development area as defined by McDaniel and Associates Consultants Ltd. ("McDaniel") in the updated reserve report for the East Edson area dated July 14, 2014.
  
  
• Four of the nine new East Edson wells have been completed and tied in through the existing compressor station and are flowing through the Rosevear gas plant. Two of the new wells are on stream and have been producing at nearly double their respective type curves with 30 day average IP rates of close to 9 MMcf/d and 11 MMcf/d plus associated liquids. The additional two completed wells are now flowing on clean up and test. Completion, frac and testing operations are planned to be performed in the remaining five standing wells prior to year end.
  
  
• Operations are on track for six (6.0 net) additional wells to be drilled prior to year end with three drilling rigs currently active. Two (2.0 net) wells will be drilled within the same Northeast development area immediately adjacent to two of the previously drilled pads. Four (4.0 net) wells are scheduled within the Southwest development area as defined by McDaniel. Perpetual estimates the majority of the $70 million of joint venture partner escrow funds will be spent in 2014 on drilling, completion and tie-in operations as well as seismic activities related to the East Edson JV commitments.
  
  
• Including the start-up of the first two new wells, production at East Edson is currently averaging over 25 MMcf/d, plus associated liquids estimated at approximately 20 to 25 bbl per MMcf. As part of the joint venture, a gross overriding royalty of an estimated 5.6 MMcf/d, plus associated liquids, is payable to the joint venture partner on a monthly basis.
  
  
• Perpetual has submitted applications for all required regulatory approvals for the new East Edson gas plant at 10-3-52-17W5. Perpetual committed to construct the new 30 MMcf/d gas plant prior to September 2015 as part of the joint venture arrangement. All equipment has been ordered and construction costs are expected to be on budget, incorporating an enhanced design for the refrigeration plant and several pipeline components to accommodate 60 MMcf/d to facilitate future expansion. Lease construction for the gas plant has begun as planned during the fourth quarter of 2014.
  
  
• At West Edson, ten (5.0 net) operated wells have been drilled since the beginning of 2014. Eight (4.0 net) wells had been completed, tested and tied-in by the end of the third quarter. Early production from each of the eight wells has met or exceeded the West Edson type curve, including three wells (1.5 net) which targeted areas of potential reservoir pressure depletion to help assess the optimal spacing and development plan for the Wilrich resource at West Edson. The remaining two (1.0 net) operated standing wells were completed in October, with both wells testing inline on initial clean up at rates above the West Edson type curve of 14 to 19 MMcf/d at flowing pressures in excess of West Edson line pressures. Tie-in operations will be complete during the fourth quarter of 2014 to maintain high heat content gas sales production at full capacity at current average levels of 63.5 MMcf/d (31.75 MMcf/d net), plus associated C5+, for the remainder of 2014.
  
  
• Drilling operations at West Edson will continue through to year end as Perpetual plans to spend an additional $7.5 million during the fourth quarter 2014, including the drilling operations on the second well of the two well pad and completion and tie-in of both wells as described above. Fourth quarter capital spending also includes drilling operations on another two-well pad to maintain production levels into 2015.

Mannville heavy oil

• Exploration and development spending of $9.6 million at Mannville during the third quarter of 2014 included the drilling and completion of seven (6.1 net) horizontal heavy oil wells.
  
  
• Expansion of the Mannville water handling and injection project continues with five wells converted to injection during the third quarter along with the installation and conversion of related pipelines and facilities. The Company began to inject in more of the converted wells and reactivated an existing injection well during the third quarter, with plans to convert one additional well and bring all five converted wells on injection in the fourth quarter.
  
  
• Capital spending for the balance of 2014 will be allocated to the completion of new wells drilled as well as ongoing projects to expand the waterflood pilot in the Mannville I2I pool and begin pressure maintenance through waterflood on two additional pools in the Mannville area.

Shallow gas

• Third quarter capital expenditures of $1.0 million on Eastern Alberta shallow gas assets included the continuation of a recompletion and workover program that will proceed through to the end of 2014. Perpetual continues to forecast an average payout of less than six months for these shallow gas optimization projects.

High impact opportunities

• Regulatory approval of the pilot project to assess the proprietary LEAD (Low-Pressure Electro-Thermal Assisted Drive) technology was received on July 24, 2014. Project planning and full scale development scoping continued on Perpetual's bitumen recovery pilot project in the Bluesky formation at Panny during the quarter. Perpetual is proceeding to execute the first phase of the LEAD pilot project, with expected capital investment of $5 million during fourth quarter 2014 and first quarter 2015. This initial phase of the pilot will evaluate the electrical heater technology and its reservoir impact through cyclical heating and production stages. Phase 1 of the pilot is expected to provide valuable information to better assess the technical and commercial parameters of the LEAD technology and further refine the next phase of the pilot.
  
  
• Completion activities commenced on the Company's non-operated Waskahigan Duvernay horizontal well during the third quarter to evaluate the future development potential of Perpetual's Duvernay acreage. The horizontal evaluation well (35 percent net working interest after completion) has been completed with 14 frac stages and is currently awaiting flow back which will follow after a planned soak period of up to two months. Tie-in activities are proceeding with an expected testing and production start-up date early in the first quarter of 2015.

OUTLOOK

Remainder of 2014

Perpetual's success in advancing its top strategic priorities thus far in 2014 has established a foundation for accelerated growth in production, reserves, and funds flow along with improved financial liquidity. Dispositions, combined with the issuance of the $125 million of high yield notes have temporarily eliminated bank debt, providing increased financial flexibility and certainty with respect to the repayment of maturing convertible debentures. To this end, Perpetual intends to provide notice to the Trustee for the early redemption with cash of $25 million of the outstanding $60 million 7.00% Debentures on December 31, 2014.

Perpetual has increased its capital expenditure program for the fourth quarter 2014 and expects to report full year 2014 spending between $124 and $128 million. Additional fourth quarter spending includes accelerated East Edson drilling and completion activities utilizing an estimated $20 million of restricted cash held in Perpetual's escrow account, as well as expedited equipment and construction costs for the new East Edson gas plant to drive an earlier start-up date prior to September 1, 2015.

Closing of the joint venture arrangement in July 2014 is accelerating the development of the Corporation's East Edson asset. In addition to the reported capital, the Company is on track to execute close to $70 million in committed farm-in development spending prior to the end of 2014, utilizing the balance of the joint venture partner's funds from escrow. Currently three rigs are drilling at East Edson where ten (10.0 net) new wells are expected to be rig released during the fourth quarter. Another $4 million is forecast to be spent in the fourth quarter on equipment and lease construction activities for the new 30 MMcf/d East Edson gas plant. All required permits and approvals have been received and construction is on track for a graduated plant start-up in the third quarter of 2015.

At West Edson, Perpetual plans to spend $7.5 million during the fourth quarter, incorporating associated costs to finish drilling operations, complete and tie-in the two well pad currently in clean up and flow testing operations, and drill two (1.0 net) additional horizontal Wilrich wells prior to year end. Based on strong initial test results above the type-curve, new production is expected to maintain throughput above the nameplate plant capacity of 60 MMcf/d (30 MMcf/d net) by utilizing bypass operations for leaner wells.

At Mannville, fourth quarter spending will primarily be directed to water handling and injection projects to expand the waterflood pilot in the Mannville I2I pool and step up pressure maintenance through waterflood on two additional pools.

The fourth quarter capital program also includes modest expenditures to continue to build on the success to date in maximizing value and mitigating production declines on the Corporation's legacy shallow gas assets through facility optimization projects, workovers and uphole recompletions. High capital efficiency projects have arrested the annual decline in conventional base shallow gas assets to approximately five percent.

The table below summarizes expected capital spending and drilling activities in accordance with Perpetual's 2014 strategic priorities for the remainder of 2014.

With production increases now materializing as a result of the accelerated development spending at East Edson, and giving effect to the non-core Mannville heavy oil disposition effective October 1, 2014, Perpetual expects to exit 2014 at a production rate of 23,400 boe/d, with full year 2014 production averaging between 20,100 boe/d to 20,500 boe/d. Based on these assumptions and the current forward market for commodity prices, Perpetual forecasts 2014 funds flow of $82 million. Incorporating the assumptions outlined above, the following table shows Perpetual's estimated 2014 funds flow based on actual results to September 30 and using various commodity prices for the fourth quarter of 2014:

2015 Outlook

In 2015, the Company will continue to focus on growing funds flow, strengthening its balance sheet, and optimizing and transforming its asset base. Perpetual's top five key strategic priorities for 2015 are:

1. Grow greater Edson liquids-rich gas production, cash flow, inventory, reserves and value;
2. Optimize value of Mannville heavy oil;
3. Refine elements of production growth strategy for 2017 to 2020;
4. Maximize value of shallow gas; and
5. Reduce debt and improve debt/cash flow ratio.

Capital spending for the first quarter of 2015 is expected to be $64 million, with an estimated $13 million funded from Perpetual's East Edson JV escrow account. Expenditures will be focused as detailed in the table below:

In West Central Alberta, operations will be focused on drilling three (1.5 net) wells at West Edson to maintain sales of high heat content gas at over 30 MMcf/d net plus associated liquids. In East Edson, development drilling will continue with four (4.0 net) additional wells planned to maintain gas sales through the existing 16-10 compressor at over 28.5 MMcf/d plus associated liquids and ensure ample supply to fill the new plant at start-up in the third quarter of 2015. Development and exploration in Mannville for heavy oil will continue with the drilling of up to five (4.7 net) wells and additional waterflood implementation activities. Additionally, capital will be directed to winter-only access assets in northeast Alberta. Approximately $4 million net is allocated to implement phase 1 of a pilot project for extraction of low viscosity bitumen at Panny to evaluate the impact of electrical heat stimulation on the Bluesky reservoir and assess multiple operational parameters. Additionally, high return facility optimization projects, well workovers and uphole recompletions as well as abandonment activities will be undertaken to maximize value from shallow gas assets.

Spending for the remainder of 2015 will be finalized after the first quarter with a view to increased certainty on 2015 commodity prices and funds flow as well as operations and drilling performance, particularly in the greater Edson area. Perpetual will target full year 2015 capital spending to be largely funded by 2015 cash flow. Furthermore, Perpetual continues to target additional asset sales in 2015 with funds to be utilized to strengthen the balance sheet and enhance financial flexibility.

Forward-Looking Information

Certain information regarding Perpetual in this news release including management's assessment of future plans and operations and including the information contained under the heading "Outlook", "Remainder of 2014" and "2015 Outlook" may constitute forward-looking statements under applicable securities laws. The forward-looking information includes, without limitation, statements regarding capital expenditure levels for 2014, prospective drilling and operational activities; forecast production and production type; forecast and realized commodity prices; expected funding, the potential redemption of a portion of the outstanding convertible debentures and the timing thereof, allocation and timing of capital expenditures; projected use of funds flow and anticipated funds flow; planned drilling and development and the results thereof; expected dispositions, anticipated proceeds therefrom and the use of proceeds therefrom; and commodity prices. 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 Annual Information Form and MD&A for the year ended December 31, 2013 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 laws.

Volume Conversions

Barrel of oil equivalent ("boe") may be misleading, particularly if used in isolation. In accordance with National Instrument 51-101 ("NI 51-101"), a conversion ratio for natural gas of 6 Mcf:1bbl has been used, which is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. In addition, utilizing a conversion on a 6 Mcf:1 bbl basis may be misleading as an indicator of value as the value ratio between natural gas and crude oil, based on the current prices of natural gas and crude oil, differ significantly from the energy equivalency of 6 Mcf:1 bbl.

Non-GAAP Measures

This news release contains financial measures that may not be calculated in accordance with generally accepted accounting principles in Canada ("GAAP"). Readers are referred to advisories and further discussion on non-GAAP measures contained in the "Advisories - Non-GAAP Measures" section of management's discussion and analysis.

About Perpetual

Perpetual Energy Inc. is a Canadian energy company with a spectrum of resource-style opportunities spanning heavy oil, NGL and bitumen along with a large base of shallow gas assets. Perpetual's shares and convertible debentures are listed on the Toronto Stock Exchange under the symbol "PMT", and "PMT.DB.E", respectively. Further information with respect to Perpetual can be found at its website at www.perpetualenergyinc.com.

The Toronto Stock Exchange has neither approved nor disapproved the information contained herein.

SOURCE Perpetual Energy Inc.