Peyto Reports Q2 2015 Results and Drives Costs to New Record Lows

CALGARY, ALBERTA--(Marketwired - Aug 12, 2015) - Peyto Exploration & Development Corp. ("Peyto" or the "Company") (PEY.TO) is pleased to present its operating and financial results for the second quarter of the 2015 fiscal year. Continued improvement in operational execution, service cost savings and operating efficiency resulted in a 78% operating margin ⁽¹⁾ and a 7% profit margin ⁽²⁾. Additional highlights included:

• Production per share up 11%. Second quarter 2015 production increased 14% from 434 MMcfe/d (72,302 boe/d) in Q2 2014 to 496 MMcfe/d (82,750 boe/d) in Q2 2015. Temporary interruptible and firm service curtailments on TransCanada's ("TCPL") Nova Gas Transmission system deferred an average of 27 MMcfe/d (4,500 boe/d) in the second quarter.
  
  

• Funds from operations per share of $0.86. Generated $135 million in Funds from Operations ("FFO") in Q2 2015 down 16% (18% per share) from $162 million in Q2 2014 due to a 28% reduction in realized commodity prices, partially offset by a 30% reduction in cash costs and a 14% increase in production volumes.
  
  

• Record low cash costs of $0.82/Mcfe ($0.69/mcfe or $4.14/boe excluding royalties). Total cash costs, including $0.13/mcfe royalties, $0.31/mcfe operating costs, $0.15/mcfe transportation, $0.04/mcfe G&A and $0.19/mcfe interest, were the lowest in Company history. This 30% decrease from $1.17/mcfe in Q2 2014 was primarily due to decreased royalties and operating costs. Lower realized commodity prices, combined with these lower cash costs, resulted in a cash netback of $2.99/Mcfe ($17.95/boe) or a 78% operating margin.
  
  

• Capital investment of $117 million. A total of 34 gross wells (31.5 net) were drilled in the second quarter. In total, new wells brought on production over the last 12 months accounted for 40,290 boe/d at the end of the quarter, which, when combined with a trailing twelve month capital investment of $614 million, equates to an annualized capital efficiency of $15,250/boe/d.
  
  

• Earnings of $0.08/share, dividends of $0.33/share. Earnings of $12 million were generated in the quarter ($39 million or $0.25/share prior to a one-time charge of $28 million or $0.17/share due to the 20% increase in Alberta corporate tax rates) while dividends of $52 million were paid to shareholders. Despite the one-time charge, Q2 2015 represents the 42^nd consecutive quarter of positive earnings from which sustainable dividends are funded.
  
  

Second Quarter 2015 in Review

Peyto's plan to drill through the traditional spring breakup period, similar to last year, was successfully executed in the second quarter. The Company took advantage of mild spring breakup conditions and continued low service costs to drill 34 gross wells. Average Q2 drilling and completion costs of $3.1 million per well were 29% lower than the $4.4 million in 2014. In addition, second quarter average drilling times (from spud to rig release) for Greater Sundance Spirit River wells decreased from 22 days in 2014 to 17 days, resulting in a 23% increase in rig productivity for the 9 rigs running at the end of the quarter. These achievements have effectively reduced the cost to add new production in the quarter to less than $12,000/boe/d, resulting in an average trailing twelve month capital efficiency of $15,250/boe/d. Lower realized commodity prices in the second quarter reduced funds from operations but were partially offset by lower operating, royalty and interest costs. Production in the quarter was 4,500 boe/d lower than capability due to continued transportation curtailments and approximately 1,000 boe/d lower as a result of continued propane rejection due to weak propane prices. Transportation curtailments and propane surpluses which are driving weak propane prices are both expected to subside by Q4 2015. Despite the significant drop in commodity prices, the strong financial and operating performance delivered in the quarter resulted in an annualized Return on Capital Employed (ROCE) of 9%. Annualized Return on Equity of 10% in the quarter was reduced to 7% due to the one-time increase in deferred taxes resulting from the announced Alberta NDP government corporate tax rate increase.

1.	Operating Margin is defined as funds from operations divided by revenue before royalties but including realized hedging gains/losses.
2.	Profit Margin is defined as net earnings for the quarter divided by revenue before royalties but including realized hedging gains/losses.
Natural gas volumes recorded in thousand cubic feet (mcf) are converted to barrels of oil equivalent (boe) using the ratio of six (6) thousand cubic feet to one (1) barrel of oil (bbl). Natural gas liquids and oil volumes in barrel of oil (bbl) are converted to thousand cubic feet equivalent (Mcfe) using a ratio of one (1) barrel of oil to six (6) thousand cubic feet. This could be misleading, particularly if used in isolation as it is based on an energy equivalency conversion method primarily applied at the burner tip and does not represent a value equivalency at the wellhead.

		Three Months Ended June 30		%		Six Months Ended June 30		%
		2015	2014	Change		2015	2014	Change
Operations
Production
	Natural gas (mcf/d)	455,443	388,407	17	%	450,148	388,703	16	%
	Oil & NGLs (bbl/d)	6,843	7,568	-10	%	7,148	7,472	-4	%
	Thousand cubic feet equivalent (mcfe/d @ 1:6)	496,498	433,812	14	%	489,528	433,533	13	%
	Barrels of oil equivalent (boe/d @ 6:1)	82,750	72,302	14	%	82,172	72,256	14	%
Production per million common shares (boe/d)*		523	470	11	%	527	473	11	%
Product prices
	Natural gas ($/mcf)	3.50	4.37	-20	%	3.73	4.41	-15	%
	Oil & NGLs ($/bbl)	43.54	77.30	-44	%	40.16	78.86	-49	%
Operating expenses ($/mcfe)		0.31	0.36	-14	%	0.31	0.37	-16	%
Transportation ($/mcfe)		0.15	0.13	15	%	0.15	0.13	15	%
Field netback ($/mcfe)		3.22	4.32	-25	%	3.37	4.36	-23	%
General & administrative expenses ($/mcfe)		0.04	0.01	300	%	0.04	0.03	33	%
Interest expense ($/mcfe)		0.19	0.22	-14	%	0.20	0.22	-9	%
Financial ($000, except per share*)
Revenue		172,202	207,519	-17	%	356,014	416,837	-15	%
Royalties		5,875	17,689	-67	%	13,867	35,551	-61	%
Funds from operations		135,195	161,577	-16	%	279,837	322,362	-13	%
Funds from operations per share		0.86	1.05	-18	%	1.80	2.11	-15	%
Total dividends		52,456	43,033	22	%	103,237	79,538	30	%
Total dividends per share		0.33	0.28	18	%	0.66	0.52	27	%
	Payout ratio	39	27	44	%	37	25	48	%
Earnings		12,295	62,159	-80	%	56,808	124,288	-54	%
Earnings per diluted share		0.08	0.41	-80	%	0.36	0.81	-56	%
Capital expenditures		116,643	151,290	-23	%	254,720	330,668	-23	%
Weighted average common shares outstanding		158,117,853	153,690,808	3	%	155,996,994	152,763,770	2	%
As at June 30
End of period shares outstanding (includes shares to be issued						158,985,273	153,690,808	3	%
Net debt						934,262	880,386	6	%
Shareholders' equity						1,640,616	1,392,911	18	%
Total assets						3,178,991	2,781,258	14	%
*all per share amounts using weighted average common shares outstanding

		Three Months Ended June 30			Six Months Ended June 30
($000 except per share)		2015		2014	2015	2014
Cash flows from operating activities		134,316		152,170	260,450	298,624
	Change in non-cash working capital	(792	)	2,560	14,695	10,523
	Change in provision for performance based compensation	1,671		6,847	4,692	13,215
Funds from operations		135,195		161,577	279,837	322,362
Funds from operations per share		0.86		1.05	1.80	2.11

(1)

Funds from operations - Management uses funds from operations to analyze the operating performance of its energy assets. In order to facilitate comparative analysis, funds from operations is defined throughout this report as earnings before performance based compensation, non-cash and non-recurring expenses. Management believes that funds from operations is an important parameter to measure the value of an asset when combined with reserve life. Funds from operations is not a measure recognized by Canadian generally accepted accounting principles ("GAAP") and does not have a standardized meaning prescribed by GAAP. Therefore, funds from operations, as defined by Peyto, may not be comparable to similar measures presented by other issuers, and investors are cautioned that funds from operations should not be construed as an alternative to net earnings, cash flow from operating activities or other measures of financial performance calculated in accordance with GAAP. Funds from operations cannot be assured and future dividends may vary.

Exploration & Development

Peyto's second quarter 2015 activity was concentrated in the Spirit River group of formations including the Notikewin, Falher and Wilrich formations, and within the Greater Sundance area where both cost savings could be realized and transportation restrictions minimized. A total of 34 wells were drilled across the land base, targeting sweet, liquids rich natural gas resource plays, as shown in the following table:

	Field							Total Wells
Zone	Sundance	Nosehill	Wildhay	Ansell	Berland	Kisku/ Kakwa	Brazeau	Drilled
Cardium
Notikewin	3	1	1					5
Falher	6	1	4				1	12
Wilrich	3	2	5			1	2	13
Bluesky	2	1	1					4
Total	14	5	11			1	3	34

Amongst the 34 wells drilled, step out wells on existing Wilrich and Falher trends provided encouraging results which opened up additional development opportunities while Notikewin infill drilling successfully encountered virgin reservoir pressures and undisturbed sections of existing channels, also proving up additional future locations. Average per well production results in 2015 have significantly surpassed previous year's results with IP30 rates 23% higher for the 55 wells to date.

Both the average depth and lateral length of Peyto's horizontal wells continues to increase into 2015, as the Company attempts to develop more resource with each wellbore. As illustrated in the following table, second quarter drilling and completion costs per meter were 24% and 39% lower, respectively, as a result of both efficiency gains and service cost reductions.

	2010	2011	2012	2013	2014	2015 Q1	2015 Q2
Gross Spuds	52	70	86	99	123	31	34
Measured Depth (m)	3,762	3,903	4,017	4,179	4,251	4,416	4,289
Hz Length (m)	1,335	1,303	1,358	1,409	1,460	1,531	1,516
Drilling ($MM/well)	$2.763	$2.823	$2.789	$2.720	$2.660	$2.446	$2.045
$ per meter	$734	$723	$694	$651	$626	$555	$477
Completion ($MM/well)	$1.358	$1.676	$1.672	$1.625	$1.702	$1.440	$1.049
$ per meter	$361	$429	$416	$389	$400	$330	$245

Capital Expenditures

Capital expenditures in the second quarter of 2015 totalled $116.6 million, comprised of $59.4 million of drilling, $33.3 million of completions, $10.7 million of wellsite equipment and tie-ins, $11.8 million of facilities and pipelines, and $1.4 million in land and seismic. A total of 34 gross (31.5 net) wells were drilled in the quarter, 29 gross (27.25 net) wells completed and 30 gross (29.25 net) wells equipped and tied in. Drilling times continued to improve in the quarter, despite longer horizontal laterals for 2015, while the combination of frac sand changes and water recycling efforts reduced average completion costs.

The Swanson gas plant expansion accounted for $10 million of the $11.8 million of facility and pipeline projects completed in the quarter. This expansion will be completed by October 2015 and is expected to increase the existing plant capacity from 65 mmcf/d of sales gas to over 100 mmcf/d. Four sections of Greater Sundance land were purchased at crown sales in the quarter for an average of $164/acre while 95 square kilometers of new 3-D seismic was acquired.

Daily production at the end of the quarter peaked at over 91,000 boe/d on those days that were unaffected by transportation curtailments.

Commodity Prices

Oil prices strengthened in the second quarter 2015, while natural gas prices remained relatively flat from the previous quarter as North American supply growth continued to exceed demand. The average second quarter 2015 Alberta (AECO) daily and monthly natural gas prices were effectively the same, at $2.53/GJ down 43% from $4.43/GJ in Q2 2014. As Peyto had committed 88% of its production to the monthly price, Peyto realized a volume weighted average natural gas price of $2.53/GJ or $2.86/mcf, prior to a $0.64/mcf hedging gain.

As a result of the Company's hedging strategy, approximately 64% of Peyto's natural gas production received a fixed price of $3.41/GJ from hedges that were put in place over the previous 24 months, while the balance received the blended daily and monthly price of $2.53/GJ, resulting in an after-hedge price of $3.06/GJ or $3.50/mcf.

Peyto realized an oil and natural gas liquids price of $43.54/bbl in Q2 2015 for its blend of condensate, pentane, butane and propane, which represented 64% of the $68.50/bbl average Canadian Light Sweet posted price, as shown in the following table. The blended realized liquids price was impacted by negative propane prices in the quarter. These negative propane prices are expected to improve by Q4 2015 as surplus inventory is consumed, however, in the meantime Peyto is optimizing its plant processes to leave as much propane in the gas stream as possible in order to realize a higher price - otherwise known as propane rejection.

Commodity Prices by Component
		Three Months ended June 30			Six Months ended June 30
		2015		2014	2015		2014
Natural gas - after hedging ($/mcf)		3.50		4.37	3.73		4.41
Natural gas - after hedging ($/GJ)		3.06		3.83	3.25		3.87
AECO monthly ($/GJ)		2.53		4.43	2.66		4.47
Oil and natural gas liquids ($/bbl)
	Condensate ($/bbl)	62.36		103.73	55.14		101.57
	Propane ($/bbl)	(6.07	)	23.05	(6.25	)	30.70
	Butane ($/bbl)	22.63		59.47	26.50		54.91
	Pentane ($/bbl)	61.36		106.58	54.09		105.45
Total Oil and natural gas liquids ($/bbl)		43.54		77.30	40.16		78.86
Canadian Light Sweet postings ($/bbl)		68.50		104.18	60.61		101.99

liquids prices are Peyto realized prices in Canadian dollars adjusted for fractionation and transportation.

Financial Results

Combining realized natural gas and liquids prices, Peyto's unhedged revenues totaled $3.22/mcfe ($3.81/mcfe including hedging gains). Royalties of $0.13/mcfe, operating costs of $0.31/mcfe, transportation costs of $0.15/mcfe, G&A of $0.04/mcfe and interest costs of $0.19/mcfe, all combined for total cash costs of $0.82/mcfe ($4.91/boe). This is a new Company record and the lowest total cash costs in Peyto's 16.5 year history. These industry leading total cash costs, when deducted from realized revenues, resulted in a cash netback of $2.99/mcfe or a 78% operating margin. Operating costs were 14% lower due to lower chemical and maintenance costs, despite significantly higher property taxes and Alberta regulator fees, and Peyto expects to maintain these gains throughout 2015.

Depletion, depreciation and amortization charges of $1.78/mcfe were similar to the $1.73/mcfe charged in Q2 2014. On June 18, 2015, the Alberta NDP government announced a 20% increase to the provincial corporate income tax rate which increased the deferred income tax expense by $27.7 million to $41.1 million. This entire change was accounted for in the second quarter, reducing earnings from $38.9 million to $12.3 million. On a per unit of production basis, the one-time charge reduced earnings of $0.86/mcfe to $0.27/mcfe, or from a 23% profit margin to a 7% profit margin. Peyto expects that earnings will not be as significantly affected by the tax increase, on a go-forward basis, now that it has accounted for this one time charge.

During the quarter, Peyto announced it had closed a bought deal offering of common shares. Pursuant to the offering, the Company issued 5,037,000 common shares (including 657,000 common shares issued pursuant to the exercise in full of the over-allotment option granted to the underwriters) at a price of $34.25 per common share, for total gross proceeds of approximately $172.5 million.

In addition, Peyto announced it had issued CND $100 million of senior unsecured notes pursuant to a note purchase agreement. The notes have a coupon rate of 4.26% and mature on May 1, 2025. As the notes rank equally with Peyto's obligations under its bank facility and existing senior unsecured notes, Peyto's aggregate borrowing capacity increased by $100 million to $1.42 billion. At the end of the quarter, Peyto's net debt to annualized Q2 2015 FFO was 1.7 times.

Marketing

Peyto's practice of layering in future sales in the form of fixed price swaps, and thus smoothing out the volatility in gas prices, continued throughout the quarter. The following table summarizes the remaining hedged volumes and prices for the upcoming years as of August 12, 2015.

	Future Sales			Average Price (CAD)
	GJ	Mcf	$/GJ	$/Mcf
2015	48,035,000	42,135,965	3.34	3.81
2016	76,475,000	67,083,333	3.11	3.55
2017	12,600,000	11,052,632	2.94	3.35
Total	137,110,000	120,271,930	3.18	3.63

prices and volumes in mcf use Peyto's historic heat content premium of 1.14.

The Company targets to have approximately 65% of its natural gas production forward sold at any given time in order to improve the confidence of funding for capital planning purposes.

Activity Update

The 2015 drilling program is growing new production with record capital efficiency, however, total company production continues to be frustrated by TCPL take-away capacity constraints. TCPL is the primary shipper of natural gas throughout the province of Alberta and across Canada, and Peyto transports all of its natural gas to the final point of sale through their system. Delays in TCPL's integrity verification, ongoing pipeline and compressor maintenance, and the recent failure of two Alberta mainline compressors have all extended the timeline for return to normal take-away capacity levels until October 2015. Peyto's current production is approximately 80,000 boe/d with an additional 11,000 boe/d of production off line due to restrictions. The latest projections from TCPL are for gradual increases in system capacity over August and September with a larger step up in October. Peyto remains optimistic that production will return to full capability for the normally higher gas price winter months of November and December. In addition, Peyto is rejecting approximately 1,200 boe/d of propane into the gas stream due to negative liquid propane prices.

Drilling and completion costs continue to remain low with realized reductions of approximately 30% as compared to 2014. Aggregate well production results for the new 2015 wells, continue to exceed the per-well average production results of all prior years. These two achievements are combining to preserve Peyto's return expectations in a lower commodity price environment. As a result, the Company increased the drilling activity to 10 active drilling rigs at the start of the third quarter which, when combined with the reduced drilling time, is effectively the same as running 12 rigs a year ago. Six rigs are working throughout the Greater Sundance area, two rigs are working in Brazeau and two rigs are working in the Ansell/Minehead areas. Peyto is currently the 3^rd most active gas driller in Alberta with 10 of the 78 gas drilling rigs running. The previous 2015 capital budget between $575 and $625 million remains the same although it is expected that approximately 6 more wells will now be drilled with this same capital investment.

A 5th compressor at Brazeau was installed and commissioned in July taking the facility capacity up to 50 MMcf/d in preparation for second half growth. An additional compressor is being fabricated and can be installed before year end to increase capacity to 60 MMcf/d.

The Swanson Gas Plant expansion has been purposely delayed by one month to an October start-up. With the continuation of TCPL system constraints, the construction schedule has been relaxed to save costs while sliding completion out a few weeks. Since the end of June 2015, all equipment has been moved to the plant site and is being connected.

Additionally, major turnarounds have already occurred at the Kakwa and Galloway plants, coinciding with periods of low TCPL capacity. These plants will not need any extended maintenance outages again until 2020. The finally facility turnaround for 2015 will occur at the Oldman plant, coinciding with a planned TCPL outage in August.

Outlook

Peyto's track record of superior returns is based on a counter cyclical investment strategy whereby the Company aggressively builds long life, low risk assets at times when the rest of the industry cannot. This is made possible by preserving a low cost structure that ensures profitability even during low commodity prices. Currently, the majority of the industry is reducing capital budgets and cutting drilling programs due to low commodity prices and strained balance sheets. Peyto, however, is taking full advantage of its reduced costs, both capital and operating, to accelerate investment and deliver profitable returns to shareholders. Key to ensuring the future success of this strategy is to remain lean and nimble, allowing Peyto to react quickly as the investment environment changes.

Peyto's outlook for the balance of 2015 remains positive. The Company is enjoying a lower cost structure than ever before and minimal competition for future opportunities. At the same time, the outlook for natural gas prices and increased revenues has improved from earlier this year.

Conference Call and Webcast

A conference call will be held with the senior management of Peyto to answer questions with respect to the 2015 second quarter financial results on Thursday, August 13th, 2015, at 9:00 a.m. Mountain Daylight Time (MDT), or 11:00 a.m. Eastern Daylight Time (EDT). To participate, please call 1-416-340-2218 (Toronto area) or 1-866-223-7781 for all other participants. Shareholders and interested investors are encouraged to ask questions about Peyto and its most recent results. Alternatively, questions can be submitted to info@peyto.com or by calling Jim Grant, Investor Awareness at (403) 451-4102.

The conference call will also be available on replay by calling 1-905-694-9451 (Toronto area) or 1-800-408-3053 for all other parties, using passcode 5173650. The replay will be available at 11:00 a.m. MDT, 1:00 p.m. EDT Thursday, August 13th, 2015 until midnight EDT on Thursday, August 20th, 2015. The conference call can also be accessed through the internet at http://www.gowebcasting.com/6633. After this time the conference call will be archived on the Peyto Exploration & Development website at www.peyto.com.

Management's Discussion and Analysis

A copy of the second quarter report to shareholders, including the MD&A, audited financial statements and related notes, is available at http://www.peyto.com/news/Q22015MDandA.pdf and will be filed at SEDAR, www.sedar.com at a later date.

Shareholders are encouraged to visit the Peyto website at www.peyto.com where there is a wealth of information designed to inform and educate investors. A monthly President's Report can also be found on the website which follows the progress of the capital program and the ensuing production growth, along with video and audio commentary from Peyto's senior management.

Darren Gee, President and CEO

August 12, 2015

Certain information set forth in this document and Management's Discussion and Analysis, including management's assessment of Peyto's future plans and operations, capital expenditures and capital efficiencies, contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond these parties' control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the lack of availability of qualified personnel or management, stock market volatility and ability to access sufficient capital from internal and external sources. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. Peyto's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits Peyto will derive there from. In addition, Peyto is providing future oriented financial information set out in this press release for the purposes of providing clarity with respect to Peyto's strategic direction and readers are cautioned that this information may not be appropriate for any othepurpose. Other than is required pursuant to applicable securities law, Peyto does not undertake to update forward looking statements at any particular time.

Peyto Exploration & Development Corp.
Condensed Balance Sheet (unaudited)
(Amount in $ thousands)
	June 30 2015	December 31 2014
Assets
Current assets
Accounts receivable	72,564	98,699
Due from private placement (Note 6)	-	5,625
Derivative financial instruments (Note 8)	58,422	93,387
Prepaid expenses	32,434	20,386
	163,420	218,097
Long-term derivative financial instruments (Note 8)	-	11,677
Property, plant and equipment, net (Note 3)	3,015,571	2,897,291
	3,015,571	2,908,968
	3,178,991	3,127,065
Liabilities
Current liabilities
Accounts payable and accrued liabilities	111,775	192,312
Dividends payable (Note 6)	17,485	16,906
Provision for future performance based compensation (Note 7)	12,917	8,225
	142,177	217,443
Long-term debt (Note 4)	910,000	925,000
Provision for future performance based compensation (Note 7)	1,410	1,024
Long-term derivative financial instruments (Note 8)	108	-
Decommissioning provision (Note 5)	112,556	100,815
Deferred income taxes	372,123	330,847
	1,396,197	1,357,686
Equity
Share capital (Note 6)	1,467,260	1,292,398
Shares to be issued (Note 6)	-	5,625
Retained earnings	127,498	173,927
Accumulated other comprehensive loss (Note 6)	45,859	79,986
	1,640,617	1,551,936
	3,178,991	3,127,065

See accompanying notes to the financial statements.

Peyto Exploration & Development Corp.
Condensed Income Statement (unaudited)
(Amount in $ thousands except earnings per share amount)
	Three months ended June 30				Six months ended June 30
	2015		2014		2015		2014
Revenue
Oil and gas sales	145,555		230,995		296,781		470,415
Realized gain (loss) on hedges (Note 8)	26,647		(23,476	)	59,233		(53,578	)
Royalties	(5,875	)	(17,689	)	(13,867	)	(35,551	)
Petroleum and natural gas sales, net	166,327		189,830		342,147		381,286
Expenses
Operating	14,117		14,059		28,006		29,289
Transportation	6,638		5,100		13,216		10,244
General and administrative	1,673		582		3,509		2,138
Future performance based compensation (Note 7)	979		9,803		5,078		18,399
Interest	8,703		8,512		17,579		17,252
Accretion of decommissioning provision (Note 5)	616		476		1,127		974
Depletion and depreciation (Note 3)	80,252		68,410		160,933		137,262
	112,978		106,942		229,448		215,558
Earnings before taxes	53,349		82,888		112,699		165,728
Income tax
Deferred income tax expense	41,054		20,729		55,891		41,440
Earnings for the period	12,295		62,159		56,808		124,288
Earnings per share (Note 6)
Basic and diluted	$0.08		$0.41		$0.36		$0.81
See accompanying notes to the financial statements.

Peyto Exploration & Development Corp.
Condensed Statement of Comprehensive Income (Loss) (unaudited)
(Amount in $ thousands)
	Three months ended June 30				Six months ended June 30
	2015		2014		2015		2014
Earnings for the period	12,295		62,159		56,808		124,288
Other comprehensive income
Change in unrealized (loss) gain on cash flow hedges	(21,712	)	14,942		(46,749	)	(64,971	)
Deferred tax (expense) recovery	6,363		(9,694	)	12,622		2,846
Realized (gain) loss on cash flow hedges	(26,647	)	23,476		(59,233	)	53,578
Comprehensive (loss) income	(29,701	)	90,883		36,552		115,741
See accompanying notes to the financial statements.

Peyto Exploration & Development Corp.
Condensed Statement of Changes in Equity (unaudited)
(Amount in $ thousands)
	Six months ended June 30
	2015		2014
Share capital, beginning of period	1,292,398		1,130,069
Common shares issued by private placement	7,732		6,997
Equity offering	172,517		160,480
Common shares issuance costs (net of tax)	(5,387	)	(5,162	)
Share capital, end of period	1,467,260		1,292,384
Shares to be issued, beginning of period	5,625		6,245
Shares issued	(5,625	)	(6,245	)
Shares to be issued, end of period	-		-
Retained earnings, beginning of period	173,927		86,975
Earnings for the period	56,808		124,288
Dividends (Note 6)	(103,237	)	(79,538	)
Retained earnings, end of period	127,498		131,725
Accumulated other comprehensive income, beginning of period	79,986		(22,651	)
Other comprehensive loss	(34,127	)	(8,547	)
Accumulated other comprehensive income (loss), end of period	45,859		(31,198	)
Total equity	1,640,617		1,392,911
See accompanying notes to the financial statements.

Peyto Exploration & Development Corp.
Condensed Statement of Cash Flows (unaudited)
(Amount in $ thousands)
		Three months ended June 30				Six months ended June 30
		2015		2014		2015		2014
Cash provided by (used in)
operating activities
Earnings		12,295		62,159		56,808		124,288
Items not requiring cash:
	Deferred income tax	41,054		20,729		55,891		41,440
	Depletion and depreciation	80,252		68,410		160,933		137,262
	Accretion of decommissioning provision	616		476		1,127		974
	Long term portion of future performance based compensation	(693	)	2,956		386		5,183
Change in non-cash working capital related to operating activities		792		(2,560	)	(14,695	)	(10,523	)
		134,316		152,170		260,450		298,624
Financing activities
Issuance of common shares		172,517		-		180,249		167,477
Issuance costs		(7,342	)	-		(7,380	)	(6,883	)
Cash dividends paid		(51,902	)	(39,960	)	(102,657	)	(76,070	)
Increase (decrease) in bank debt		(205,000	)	65,000		(115,000	)	(50,000	)
Issuance of senior unsecured notes		100,000		-		100,000		-
		8,273		25,040		55,212		34,524
Investing activities
Additions to property, plant and equipment		(116,643	)	(151,290	)	(254,720	)	(330,668	)
Change in prepaid capital		(1,255	)	(9,143	)	(13,879	)	(349	)
Change in non-cash working capital relating to investing activities		(24,691	)	(16,777	)	(47,063	)	(2,131	)
		(142,589	)	(177,210	)	(315,662	)	(333,148	)
Net increase (decrease) in cash		-		-		-		-
Cash, beginning of period		-		-		-		-
Cash, end of period		-		-		-		-
The following amounts are included in cash flows from operating activities:
	Cash interest paid	5,189		5,130		14,648		13,460
	Cash taxes paid	-		-		-		-

See accompanying notes to the financial statements

Peyto Exploration & Development Corp.

Notes to Condensed Financial Statements (unaudited)

As at June 30, 2015 and 2014

(Amount in $ thousands, except as otherwise noted)

1. Nature of operations

Peyto Exploration & Development Corp. ("Peyto" or the "Company") is a Calgary based oil and natural gas company. Peyto conducts exploration, development and production activities in Canada. Peyto is incorporated and domiciled in the Province of Alberta, Canada. The address of its registered office is 1500, 250 - 2^nd Street SW, Calgary, Alberta, Canada, T2P 0C1.

These financial statements were approved and authorized for issuance by the Audit Committee of Peyto on August 11, 2015.

2. Basis of presentation

The condensed financial statements have been prepared by management and reported in Canadian dollars in accordance with International Accounting Standard ("IAS") 34, "Interim Financial Reporting". These condensed financial statements do not include all of the information required for full annual financial statements and should be read in conjunction with the Company's consolidated financial statements as at and for the years ended December 31, 2014 and 2013.

Significant Accounting Policies

(a) Significant Accounting Judgments, Estimates and Assumptions

The timely preparation of the condensed financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies, if any, as at the date of the financial statements and the reported amounts of revenue and expenses during the period. By their nature, estimates are subject to measurement uncertainty and changes in such estimates in future years could require a material change in the condensed financial statements.

Except as disclosed below, all accounting policies and methods of computation followed in the preparation of these financial statements are the same as those disclosed in Note 2 of Peyto's financial statements as at and for the years ended December 31, 2014 and 2013.

Standards issued but not yet effective

In July 2014, the IASB completed the final elements of IFRS 9 "Financial Instruments." The Standard supersedes earlier versions of IFRS 9 and completes the IASB's project to replace IAS 39 "Financial Instruments: Recognition and Measurement." IFRS 9, as amended, includes a principle-based approach for classification and measurement of financial assets, a single 'expected loss' impairment model and a substantially-reformed approach to hedge accounting. The Standard will come into effect for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. IFRS 9 will be applied by Peyto on January 1, 2018 and the Company is currently evaluating the impact of the standard on its financial statements.

In May 2014, the IASB issued IFRS 15 "Revenue from Contracts with Customers," which replaces IAS 18 "Revenue," IAS 11 "Construction Contracts," and related interpretations. The standard is required to be adopted for fiscal years beginning on or after January 1, 2018, with earlier adoption permitted. IFRS 15 will be applied by Peyto on January 1, 2018 and the Company is currently evaluating the impact of the standard on Peyto's financial statements.

3. Property, plant and equipment, net

Cost
At December 31, 2014	3,800,736
Additions	254,720
Decommissioning provision additions	10,614
Prepaid capital	13,879
At June 30, 2015	4,079,949
Accumulated depletion and depreciation
At December 31, 2014	(903,445	)
Depletion and depreciation	(160,933	)
At June 30, 2015	(1,064,378	)
Carrying amount at December 31, 2014	2,897,291
Carrying amount at June 30, 2015	3,015,571

During the three and six month periods ended June 30, 2014, Peyto capitalized $1.8 million and $3.8 million (2014 - $2.4 million and $4.8 million) of general and administrative expense directly attributable to exploration and development activities.

4. Long-term debt

	June 30, 2015	December 31, 2014
Bank credit facility	490,000	605,000
Senior unsecured notes	420,000	320,000
Balance, end of the period	910,000	925,000

As at June 30, 2015, The Company has a syndicated $1.0 billion extendible unsecured revolving credit facility with a stated term date of April 26, 2017. The bank facility is made up of a $30 million working capital sub-tranche and a $970 million production line. Borrowings under the facility bear interest at Canadian bank prime or US base rate, or, at Peyto's option, Canadian dollar bankers' acceptances or US dollar LIBOR loan rates, plus applicable margin and stamping fees. The total stamping fees range between 50 basis points and 215 basis points on Canadian bank prime and US base rate borrowings and between 150 basis points and 315 basis points on Canadian dollar bankers' acceptance and US dollar LIBOR borrowings. The undrawn portion of the facility is subject to a standby fee in the range of 30 to 63 basis points.

On May 1, 2015, Peyto issued CDN $100 million senior unsecured notes pursuant to a note purchase agreement. The notes were issued by way of private placement and rank equally with Peyto's obligations under its bank facility. The notes have a coupon rate of 4.26% and mature on May 1, 2025. Interest is paid semi-annually in arrears.

Peyto is subject to the following financial covenants as defined in the credit facility and note purchase agreements:

• Long-term debt plus the average working capital deficiency (surplus) at the end of the two most recently completed fiscal quarters adjusted for non-cash items not to exceed 3.0 times trailing twelve month net income before non-cash items, interest and income taxes;

• Long-term debt and subordinated debt plus the average working capital deficiency (surplus) at the end of the two most recently completed fiscal quarters adjusted for non-cash items not to exceed 4.0 times trailing twelve month net income before non-cash items, interest and income taxes;

• Trailing twelve months net income before non-cash items, interest and income taxes to exceed 3.0 times trailing twelve months interest expense;

• Long-term debt and subordinated debt plus the average working capital deficiency (surplus) at the end of the two most recently completed fiscal quarters adjusted for non-cash items not to exceed 55 per cent of the book value of shareholders' equity and long-term debt and subordinated debt.

Peyto is in compliance with all financial covenants at June 30, 2015.

Total interest expense for the three and six month periods ended June 30, 2015 was $8.7 million and $17.6 million (2014 - $8.5 million and $17.3 million) and the average borrowing rate for the period was 3.7% and 3.6% (2014- 4.2% and 4.3%).

5. Decommissioning provision

The following table reconciles the change in decommissioning provision:

Balance, December 31, 2014	100,815
New or increased provisions	11,478
Accretion of decommissioning provision	1,127
Change in discount rate and estimates	(864	)
Balance, June 30, 2015	112,556
Current	-
Non-current	112,556

Peyto has estimated the net present value of its total decommissioning provision to be $112.6 million as at June 30, 2015 ($100.8 million at December 31, 2014) based on a total future undiscounted liability of $233.72 million ($178.5 million at December 31, 2014). At June 30, 2015 management estimates that these payments are expected to be made over the next 50 years with the majority of payments being made in years 2040 to 2064. The Bank of Canada's long term bond rate of 2.31 per cent (2.33 per cent at December 31, 2014) and an inflation rate of two per cent (two per cent at December 31, 2014) were used to calculate the present value of the decommissioning provision.

6. Share capital

Authorized: Unlimited number of voting common shares

Issued and Outstanding

Common Shares (no par value)		Number of Common Shares	Amount $
Balance, December 31, 2014		153,690,808	1,292,398
	Common shares issued by private placement	230,465	7,732
	Equity offering	5,037,000	172,517
	Common share issuance costs, (net of tax)	-	(5,387)
Balance, June 30, 2015		158,958,273	1,467,260

Earnings per common share has been determined based on the following:

	Three Months ended June 30		Six Months ended June 30
	2015	2014	2015	2014
Weighted average common shares basic and diluted	158,117,853	153,690,808	155,996,994	152,763,770

On December 31, 2014, Peyto completed a private placement of 168,920 common shares to employees and consultants for net proceeds of $5.6 million ($33.30 per share). These common shares were issued January 7, 2015.

On March 25, 2015, Peyto completed a private placement of 61,545 common shares to employees and consultants for net proceeds of $2.1 million ($34.25 per common share).

On April 16, 2015, Peyto completed a public offering for 5,037,000 common shares at a price of $34.25 per common share, for net proceeds of $165.2 million.

Dividends

During the three and six month periods ended June 30, 2015, Peyto declared and paid dividends of $0.33 and $0.66 per common share ($0.11 per common share for the months of January to June 2015), totaling $52.0 million and $103.0 million respectively (2014 - $0.28 and $0.52 ($0.08 per common share per month for January to April and $0.10 per common share for the months of May and June), totaling $42.9 million and $79.5 million respectively).

Comprehensive income

Comprehensive income consists of earnings and other comprehensive income ("OCI"). OCI comprises the change in the fair value of the effective portion of the derivatives used as hedging items in a cash flow hedge. "Accumulated other comprehensive income" is an equity category comprised of the cumulative amounts of OCI.

Accumulated hedging gains

Gains and losses from cash flow hedges are accumulated until settled. These outstanding hedging contracts are recognized in earnings on settlement with gains and losses being recognized as a component of net revenue. Further information on these contracts is set out in Note 8.

7. Future performance based compensation

Peyto awards performance based compensation to employees annually. The performance based compensation is comprised of reserve and market value based components.

Reserve based component

The reserves value based component is 4% of the incremental increase in value, if any, as adjusted to reflect changes in debt, equity, dividends, general and administrative costs and interest, of proved producing reserves calculated using a constant price at December 31 of the current year and a discount rate of 8%.

Market based component

Under the market based component, rights with a three year vesting period are allocated to employees. The number of rights outstanding at any time is not to exceed 6% of the total number of common shares outstanding. At December 31 of each year, all vested rights are automatically cancelled and, if applicable, paid out in cash. Compensation is calculated as the number of vested rights multiplied by the total of the market appreciation (over the price at the date of grant) and associated dividends of a common share for that period.

The fair values were calculated using a Black-Scholes valuation model. The principal inputs to the option valuation model were:

	June 30, 2015	June 30, 2014
Share price	$30.53-$32.27	$22.58-$40.10
Exercise price	$21.70-$33.68	$19.91-$31.75
Expected volatility	21.9%	0%-26%
Option life	0.50 years	0.50 years
Dividend yield	0%	0%
Risk-free interest rate	0.49%	1.09%

8. Financial instruments

Financial instrument classification and measurement

Financial instruments of the Company carried on the condensed balance sheet are carried at amortized cost with the exception of cash and financial derivative instruments, specifically fixed price contracts, which are carried at fair value. There are no significant differences between the carrying amount of financial instruments and their estimated fair values as at June 30, 2015.

The Company's areas of financial risk management and risks related to financial instruments remained unchanged from December 31, 2014.

The fair value of the Company's cash and financial derivative instruments are quoted in active markets. The Company classifies the fair value of these transactions according to the following hierarchy.

• Level 1 - quoted prices in active markets for identical financial instruments.

• Level 2 - quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and value drivers are observable in active markets.

• Level 3 - valuations derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

The Company's cash and financial derivative instruments have been assessed on the fair value hierarchy described above and classified as Level 1.

Fair values of financial assets and liabilities

The Company's financial instruments include cash, accounts receivable, financial derivative instruments, due from private placement, current liabilities, provision for future performance based compensation and long term debt. At June 30, 2015, cash and financial derivative instruments are carried at fair value. Accounts receivable, due from private placement, current liabilities and provision for future performance based compensation approximate their fair value due to their short term nature. The carrying value of the long term debt approximates its fair value due to the floating rate of interest charged under the credit facility.

Commodity price risk management

Peyto uses derivative instruments to reduce its exposure to fluctuations in commodity prices. Peyto considers all of these transactions to be effective economic hedges for accounting purposes.

Following is a summary of all risk management contracts in place as at June 30, 2015:

Natural Gas Period Hedged	Type	Daily Volume		Price (CAD)
April 1, 2015 to March 31, 2016	Fixed Price	190,000 GJ		$2.7525/GJ - 4.05/GJ
April 1, 2015 to March 31, 2017	Fixed Price	55,000 GJ		$2.83- $3.05/GJ
April 1, 2015 to October 31, 2015	Fixed Price	80,000 GJ		$2.75- $3.91/GJ
May 1, 2015 to October 31, 2015	Fixed Price	10,000 GJ		$2.50/GJ
May 1, 2015 to March 31, 2017	Fixed Price	5,000 GJ		$2.82/GJ
June 1, 2015 to October 31, 2015	Fixed Price	5,000 GJ		$2.60/GJ
November 1, 2015 to March 31, 2016	Fixed Price	45,000 GJ		$2.78- $3.11/GJ
November 1, 2015 to March 31, 2017	Fixed Price	5,000 GJ		$2.975/GJ
April 1, 2016 to March 31, 2017	Fixed Price	40,000 GJ		$2.81- $3.00/GJ
April 1, 2016 to October 31, 2016	Fixed Price	35,000 GJ		$3.05-$ 3.43/GJ
November 1, 2016 to March 31, 2017	Fixed Price	10,000 GJ		$2.92/GJ-$ 2.95/GJ

As at June 30, 2015, Peyto had committed to the future sale of 136,435,000 gigajoules (GJ) of natural gas at an average price of $3.22 per GJ or $3.70 per mcf. Had these contracts been closed on June 30, 2015, Peyto would have realized a net gain in the amount of $58.3 million. If the AECO gas price on June 30, 2015 were to increase by $1/GJ, the unrealized gain would decrease by approximately $136.4 million. An opposite change in commodity prices rates would result in an opposite impact on other comprehensive income.

Subsequent to June 30, 2015 Peyto entered into the following contracts:

Natural Gas Period Hedged	Type	Daily Volume		Price (CAD)
November 1, 2015 to March 31, 2016	Fixed Price	15,000 GJ		$3.00/GJ to $3.045/GJ
November 1, 2015 to March 31, 2017	Fixed Price	10,000 GJ		$2.95/GJ to $2.975/GJ
April 1, 2016 to March 31, 2017	Fixed Price	15,000 GJ		$2.95/GJ to $3.01/GJ

9. Related party transactions

Certain directors of Peyto are considered to have significant influence over other reporting entities that Peyto engages in transactions with. Such services are provided in the normal course of business and at market rates. These directors are not involved in the day to day operational decision making of the Company. The dollar value of the transactions between Peyto and each of the related reporting entities is summarized below:

Director	Company	Description	2015 ($000)	2014 ($000)
Don Gray	Petrus Resources Ltd.	Chairman of the Board	14.8	129.1
Mick MacBean	NCSG Hauling & Rigging Ltd. (subsidiary of NCSG Crane and Heavy Haul) (1)	Director, NCSG Crane and Heavy Haul	543.7	-
Stephen Chetner	Burnet Duckworth & Palmer LLP	Partner	332.3	224.2

(1)	was not a related party until August 2014

10. Commitments

In addition to those recorded on the Company's balance sheet, the following is a summary of Peyto's contractual obligations and commitments as at June 30, 2015:

	2015	2016	2017	2018	2019	Thereafter
Interest payments(1)	9,193	18,385	18,385	18,385	16,190	41,835
Transportation commitments	10,686	22,186	21,638	29,676	27,403	105,441
Operating leases	1,250	1,914	1,654	1,295	1,295	9,062
Other	1,049	-	-	-	-	-
Total	22,178	42,485	41,677	49,356	44,888	156,338

(1)	Fixed interest payments on senior unsecured notes

11. Contingencies

On October 31, 2013, Peyto was named as a party to a statement of claim received with respect to transactions between Poseidon Concepts Corp. and Open Range Energy Corp. The allegations against New Open Range contained in the claim described above are based on factual matters that pre-existed the Company's acquisition of New Open Range. The Company has not yet been required to defend this action. If it is required to defend the action, the Company intends to aggressively protect its interests and the interests of its Shareholders and will seek all available legal remedies in defending the actions

Officers

Darren Gee President and Chief Executive Officer			Tim Louie Vice President, Land
Scott Robinson Executive Vice President and Chief Operating Officer			David Thomas Vice President, Exploration
Kathy Turgeon Vice President, Finance and Chief Financial Officer			Jean-Paul Lachance Vice President, Exploitation
Lee Curran Vice President, Drilling and Completions			Todd Burdick Vice President, Production
Stephen Chetner Corporate Secretary
Directors
	Don Gray, Chairman
	Stephen Chetner
	Brian Davis
	Michael MacBean, Lead Independent Director
	Darren Gee
	Gregory Fletcher
	Scott Robinson
Auditors
	Deloitte LLP
Solicitors
	Burnet, Duckworth & Palmer LLP
Bankers
	Bank of Montreal
	Union Bank, Canada Branch
	Royal Bank of Canada
	Canadian Imperial Bank of Commerce
	The Toronto-Dominion Bank
	Bank of Nova Scotia
	HSBC Bank Canada
	Alberta Treasury Branches
	Canadian Western Bank
Transfer Agent
	Valiant Trust Company
Head Office
	1500, 250 - 2nd Street SW
	Calgary, AB
	T2P 0C1
	Phone: 403.261.6081
	Fax: 403.451.4100
	Web: http://www.peyto.com/
	Stock Listing Symbol: PEY.TO
	Toronto Stock Exchange