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Edited Transcript of PEY.TO earnings conference call or presentation 2-Mar-17 4:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Peyto Exploration & Development Corp Earnings Call

Calgary Mar 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Peyto Exploration & Development Corp earnings conference call or presentation Thursday, March 2, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Darren Gee

Peyto Exploration & Development Corporation - President & CEO

* Todd Burdick

Peyto Exploration & Development Corporation - VP of Production

* David Thomas

Peyto Exploration & Development Corporation - VP of Exploration

* Kathy Turgeon

Peyto Exploration & Development Corporation - CFO

* J.P. Lachance

Peyto Exploration & Development Corporation - VP of Exploitation

* Tim Louie

Peyto Exploration & Development Corporation - VP of Land

* Lee Curran

Peyto Exploration & Development Corporation - VP of Drilling and Completions

* Scott Robinson

Peyto Exploration & Development Corporation - EVP, COO, and Director, Professional Engineer

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Presentation

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Operator [1]

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Good day ladies and gentlemen and welcome to the Peyto Exploration and Development Corporation 2017 financial results conference call.

(Operator Instructions).

Later, we will conduct a Q&A session and instructions will follow at that time.

(Operator Instructions).

As a reminder, this conference call is being recorded. I would now like to introduce your host Mr. Darren Gee, President and Chief Executive Officer. Sir, you may begin.

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Darren Gee, Peyto Exploration & Development Corporation - President & CEO [2]

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Thanks, Brian. And good morning, ladies and gentlemen. Welcome to Peyto's fourth quarter and full-year 2016 results conference call.

Before we get started today, I do want to remind everybody that all the statements made by the Company during this call today are subject to the same forward-looking disclaimer and advisory that we have set out in our fourth-quarter news release that was issued yesterday.

In the room with me today we have got all the Peyto management team. We've got Scott Robinson our Chief Operating Officer; Kathy Turgeon our CFO; Dave Thomas, VP Exploration; J.P. Lachance our VP Exploitation; we've got Tim Louise our VP Land; Lee Curran, VP Drilling and Completions; and Todd Burdick our VP of Production. We have the whole gang assembled here to talk a little bit about our year-end.

But before I get started with some general comments about the quarter and the annual results, I do want to again recognize the entire Peyto team for their efforts this year and for this fourth quarter, including all of our field personnel. We saw some tremendous volatility in natural gas prices in 2016 and of course, that required our entire team to remain very nimble in our decision-making and with our operations in the field.

Peyto, our job is to maximize profit not just productions sometimes those two things don't go together. That means we have to be cognizant to both price and cost of the react accordingly, which I think we did very successfully in 2016 to make sure we were not just incurring losses just to keep the production flowing. So on behalf of all the Peyto shareholders I just want to throw the big thank you to the entire Peyto team for that effort.

So onto our fourth-quarter and year-end results. As mentioned in the press release, we were very active in the fourth quarter with nine drilling rigs. Those were split about one-third in Brazeau and two-thirds in the greater Sundance area. All the rigs were drilling Spirit River prospects during the fourth quarter. We drilled 32 wells in total 13 Notikewin, 10 Falher, and 9 Wilrich.

Production for the quarter was growing but did fall short at the end of the quarter by our expectation by about 5%, there are few reasons for that. We had a couple of well results in Brazeau in our Notikewin play that weren't as big as we expect to be and that was mostly because I think we were hunting around for the channel as we drilled horizontally. I also think we've learned a little and we need to have some more geologic control in this play before going forward. I want to ask J.P. a question that maybe he can elaborate a little on that a little later.

We also experienced some Highline pressures on TransCanada that impacted our plant capacities. I want to dig a little deeper into that issue with Todd Burdick our VP of production. Because of the rapid increase in rig count in the fourth quarter, Canadian rig count jumped from about 120 rigs in the third quarter to 180 average in the fourth quarter.

We started to see a bit of delay in getting some of our services so there were a few completions that got pushed into January. We were hoping to get those done by the end of the year and on the stream but that didn't happen. So again, that contributed to bit of a shortfall. But definitely made sense to push them into January rather than pay a bunch more to get those services just to try and get a production target for the end of the year.

So all that meant that we exited the year at 105, not the 110 were thinking that we got to. But really the effect on the returns on the capital that we were investing ultimately isn't very significant. So that's really what we are focused on is maximizing that profit and that return number.

On the financial side for the quarter came in pretty much as expected. We maintain very strong operating margins of 76%, which was also the average operating margin for the year.

We generated about CAD145 million in fund from operations, spend CAD129 million in capital, and threw off about CAD38 million in earnings in the quarter. Notably royalties were a bit up in the quarter on stronger liquids prices but otherwise our cash costs were still at the very bottom of the industry. So that's just a quick summary on the quarter.

On the year-end total, you know, it really was an volatile year from a quality price perspective. We had to hold some of our production off-line during the periods when gas price was really low, dipped a couple of times, less than CAD0.50/Mcfe. We still have had about 25% or so of our gas on the spot market during the year, so when gas dropped below our replacement costs, we were not about to just throw it away like many of our competitors did, so we it shut in, that was the smarter thing to do.

At the same time, I think we had some very attractive service costs, so we try to do as much as we could to take full advantage of that, keep on drilling and keep on building. But as a result to both those decisions, I think we ended up with a much better net back, cash net back than many of our peers in our industry. We added new producing reserves and production at very attractive costs PDP FD&A at CAD1.44. I think we have to go back to 2003 to find a year when we did it for less. So that net back and those F&D costs, drove a recycle ratio of about 1.8 times, which is very similar to what we have had over the last couple of years.

In our capital efficiency or the cost to add new production at just 10,800 of flowing, which is the lowest we have ever achieved. So that was very nice to see especially in a year when commodity prices were so volatile.

On the financial side for the year, total cash costs of CAD0.76 in MCFe were the lowest we've ever gotten to, which was a huge accomplishment for the team. Then with some prudent hedging we realized the price of about 3.18 in Mcfe so that drove pretty nice cash net backs of about 1450 of BOE. So filled some solid net backs throughout the year.

In total, we generated about CAD550 million funds from operations and CAD112 million of earnings on this capital program of CAD469 million. All and all, I think a pretty successful year all things considered.

I do want to take a few moments and start the call here and since we have the entire Peyto management team in room, I wanted to provide a little bit of additional color on a couple of those items. So maybe I can start off by hitting up Todd Burdick our VP of Production. Todd, this sales line pressure issue, we've seen some pretty big swings in PCPL in our Alberta or nova gas transmission system in terms of air pressures. Can you talk a little bit about what the range of line pressures we have seen and the impact to our fine capacity? And then, what have we done to try to mitigate this problem going forward?

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Todd Burdick, Peyto Exploration & Development Corporation - VP of Production [3]

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Sure, Darren. In the greater Sundance area, we have six gas plants that for the most part are built right on or very close to the NGTL corridor. When we designed and built those plans we design final compression stage that delivers the process gas onto the system around historical operating pressures. Those pressures consistently averaged 6500 to 6700 KPA range. Over the past 18 to 24 months we have started to see frequent increases that see the system pressure rapidly rise by up to 1100 KPA. These pressure swings can happen quickly and last hours or in many cases can persist for a few days.

There are three plants that have been affected by these pressure events. The ones being the Nosehill, Oldman, and Oldman North facilities. These 3 plants typically run at or close to capacity and it requires more horsepower to move the same volume of gas at a higher pressure so when these pressure spikes exceed the amount of horsepower we have available the facility is unable to move as much gas. The impact of production has been as high as 3000 BOE a day.

Over the past 2.5 months we've been taking steps to alleviate this problem. In December we made some piping modifications and repositioned our sales EFD valves at the Nosehill gas plant. So now were able to deliver the full flank capacity of pressures right up to the TCPL meter station contract pressure.

At the Oldman complex where the two plants are located, 11 kilometers west of the TCPL station, we are currently installing more pipe to minimize the impact of these increased pressure events. this solution along with the work done at Nosehill will allow us to flow unconstrained during these high pressure events. We are hopeful that an NGTL looping project currently underway in the immediate vicinity of these three plants will reduce the magnitude of the pressure swings. However, if they continue to contract prep volumes above the capacity they have presently built and have advertised the build going forward, the pressures on the system will continue to increase and if that is the case, we need to investment more capital to install compression. We have completed the engineering on those projects and are poised to quickly bring those projects to the field that is required.

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Darren Gee, Peyto Exploration & Development Corporation - President & CEO [4]

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Okay, thanks. I hope you don't have to invest too much more capital to an deal with the higher pressures.

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David Thomas, Peyto Exploration & Development Corporation - VP of Exploration [5]

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But it just goes back to-- you emphasize over the year-- TransCanada really needs to respond to the system constraints that have plagued the industry for the last two years. Todd outline the details of it but it's a systemic problem and they are aware of it and look forward to some action on that front to increase takeaway.

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Darren Gee, Peyto Exploration & Development Corporation - President & CEO [6]

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When did that looping -

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Todd Burdick, Peyto Exploration & Development Corporation - VP of Production [7]

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We expect in November that the line will be in service.

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Darren Gee, Peyto Exploration & Development Corporation - President & CEO [8]

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Okay.

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Todd Burdick, Peyto Exploration & Development Corporation - VP of Production [9]

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Construction is underway.

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Darren Gee, Peyto Exploration & Development Corporation - President & CEO [10]

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Is that going to affect our Service in the interim? Are they scheduling any downtime?

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Todd Burdick, Peyto Exploration & Development Corporation - VP of Production [11]

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We haven't seen anything.

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Darren Gee, Peyto Exploration & Development Corporation - President & CEO [12]

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Good. I did have a question here for Kathy Turgeon. We've had a couple of changes in our business over the year-end. One of them is the new Alberta carbon, tax which some people like to call the hot air tax. Of course we've got this new modernize royalty regime that is brought into place. Both of them are pushing a lot of additional administration onto the individual E&P companies so that ends up being maybe a manpower requirement.

First off we have to track and file. The question came up, is there any financial implication to some of these changes? So Kathy, can you talk for minute of about these two changes to our business and can we see anything material in terms of our operating costs or royalty burden as a result of this?

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Kathy Turgeon, Peyto Exploration & Development Corporation - CFO [13]

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Sure, Darren. Let me just start with the last part first. We don't expect material changes to either our operating costs structure or to the loyalty burden on our new wells. Peyto has applied to and has received all the necessary extensions under the climate change leadership act.

Like all other Albertans, we do have to pay the carbon levy on unmarked fuels so our trucking costs are slightly impacted. However, many of the strategies for cost control that we've adopted or are in the process of adopting, such as multi pack drilling, the new liquids pipeline to eliminate trucking and production, and working with our suppliers to use marked fuel where possible have the added benefit of minimizing the carbon levy impact, which I a reiterate is not significant for us.

From an administrative point of view, both of the programs require monthly reporting, which is rather onerous. In the case of the royalty framework it is actually double reporting. Year one we report budget and drilling and completion costs and then year two we go back and report actuals but we're actually still waiting to see what the reporting for the royalty framework will look like as the government has not yet ruled out the system.

Both January and February data are supposed to be reported by the end of March unless the government has further delays. So, depending on this level of detail, we will drive the complexity and process design and reporting that we have to implement.

We have already designed and implemented the carbon levy reporting process and we filed our first return at the end of February. We estimate right now that it will require about one full-time equivalent position to capture, compile, review and report the data. At a time when cost containment is paramount, it is disappointing that these additional costs are being added to the industry with no benefit, really.

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Darren Gee, Peyto Exploration & Development Corporation - President & CEO [14]

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I think we are project for the government, great.

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Todd Burdick, Peyto Exploration & Development Corporation - VP of Production [15]

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Green Light bulbs [ Laughter ].

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Kathy Turgeon, Peyto Exploration & Development Corporation - CFO [16]

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Individual.

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Darren Gee, Peyto Exploration & Development Corporation - President & CEO [17]

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Thanks, Kathy. J.P., I mentioned earlier that you were going to talk a little bit. Can you maybe elaborate a little bit on our Q4 drilling program? The well that we drilled in the development area and some of the step out areas. And you also may be talk a little bit of color on the results for Q4 and what that means for the line up?

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J.P. Lachance, Peyto Exploration & Development Corporation - VP of Exploitation [18]

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Sure, Darren. Our current Q4 drilling program consisted of a predominately development program in the Sundance area, while we drill a lot more step out wells as you refer to them in the Brazeau area.

Our Sundance program largely met our expectations with results that were consistent with the past. Brazeau we're following up with some great results on our [Notikewin] in place earlier in the year. But had mixed results in Q4 as you mentioned. As a group they have underperformed our expectations for sure.

In week two of the lineup for the first half of the year, have slightly lower mix of exploratory or riskier type wells than last year. But where we are stepping out on trends that we see seismically we are drilling vertical stratigraphic first, which are carefully positioned on back plays like our Cardium to lower the risk and confirm the presence of thickness of [sands]. Before we plug back and reenter them with a horizontal. This can take a little longer and cost a little more. But It should pay off in the long run with improved economic results.

So far this strategy appears to be working and we're very encouraged with the results that we have drilled so far this way in 2017. We do have a lot of wells right now at various points of completion or ties.

This is partially related to our continued focus on cost control and drilling from pads. But we also have drilled a few wells a little farther away from our infrastructure that we are excited to get on stream. Some will take a little longer to get on as we build out that infrastructure.

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Darren Gee, Peyto Exploration & Development Corporation - President & CEO [19]

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Okay. Great. Looks like we have a good lineup for the first half of the year.

We've got Dave Thomas our VP Exploration here. Dave, one of the questions I could a lot is about Peyto's inventory there's a lot of great understanding about how we build out inventory over time and how we've done such a good job with such a small land base.

I thought I'd ask this question, that I get all the time. We added to our prospect inventory last year. We've made several small acquisitions. We did some trail land sales.

So that obviously adds to our inventory. So I guess the question would be how much of the 2016 drilling program is targeting these new areas and maybe how much of it is on the old inventory that we had pre-existing prior to some of these new land out? And what is the split? And then maybe secondly, does gas price or the change in gas price that we've seen dramatically here in the last couple months, does that change our drilling lineup looks for the year?

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David Thomas, Peyto Exploration & Development Corporation - VP of Exploration [20]

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Darren, the new lands we added in 2016 were mostly in the greater Sundance area but some down in Brazeau. About 145 to160 wells we have planned for 2017, 32 are scheduled to be drilled on the lands, which we acquired just last year in 2016. That's in the neighborhood of 20% of our 2017 drilling program.

I should also point out that these 32 locations include 23 development locations in greater Sundance. The remaining 120 to 130 locations plan for 2017 will come from our existing inventory, which at year-end 2016 included 1,290 Spirit River and Blue Sky locations of which 724 were recognized as both locations and are independent reserves support.

The main point of mentioning this is to reemphasize that our inventory is never stagnant. We're constantly adding to it and the new location added our a mix, that can such as the land that we acquired in 2016, they can include a very high proportion of development opportunities close in to our existing infrastructure.

But as to the second part of your question, Peyto will not be keen to produce on hedge values into a low price market and will modify our drilling plans accordingly. But we are well hedged as you well know and we also have a substantial portfolio of both the Cardium locations we can insert into our plans if we need to emphasize the liquids portion of the program little bit more.

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Darren Gee, Peyto Exploration & Development Corporation - President & CEO [21]

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How does that work, Dave? We bought new land. Most people would think that would not fall under the pure development category just because new lands would be expected to be further away from the infrastructure, maybe more step out, more exploratory in nature but you're talking about we are buying individual layers within developed areas that we didn't own before that we are now developing? Or?

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David Thomas, Peyto Exploration & Development Corporation - VP of Exploration [22]

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It can be a real mix there and for the lands closer into the greater Sundance area that is often the case. We're successful in acquiring some of the acreage perhaps below the Cardium that we didn't have control of before. And due to the positioning of our infrastructure, these locations are often very economic for us to drill and we slot them right into our program and can drilled them very, very, very quickly.

It's not a surprise to me to say that 20% of our drilling program for 2017 is based on land. We just recently had -- and we typically don't have that big land bank we sit on for ages and ages, we are usually on top of the land that we know we can tie-in quickly, very fast.

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Darren Gee, Peyto Exploration & Development Corporation - President & CEO [23]

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So a bit of a just-in-time-line strategy?

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David Thomas, Peyto Exploration & Development Corporation - VP of Exploration [24]

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It's - for the stuff that's close in, we can slot that in and it's a little bit harder, I should point out. The last year or so, the timelines that are imposed on us by the regulatory environments here have grown. We used to be able to react extremely fast and now these timelines are being pushed out by several months.

I think we believe we're still nimble, perhaps more so than many of our other competitors. But I think we've lost a little bit of that edge, which we enjoyed when the regulatory environment was, perhaps, not so cumbersome.

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Darren Gee, Peyto Exploration & Development Corporation - President & CEO [25]

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Yes, so hopefully some changes there at the [EER] will help bring some of that efficiency back to the table. Thanks, Dave

So speaking of land, Tim, as our VP of land, you do a lot of analysis on landfill activity. Obviously that is going on both in Alberta where we are, you look at BC two, just wondering if you could provide some comments and some color on land sale activity over the two provinces over the last little while and maybe also what Peyto's participation has been in the land sales prices we've paid to get some of the crown land that we have picked up in recent years?

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Tim Louie, Peyto Exploration & Development Corporation - VP of Land [26]

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For sure, Darren. To be fair with the comparison of land fill activity between Alberta and BC which is only discuss at public offerings within Alberta where petroleum and natural gas rights are involved, so in other words figures for oil dispositions should be excluded. Historically, Alberta has always tendered more acres annually at Crown Land Fills versus BC.

This should be no surprise given the province wide oil and gas activity within Alberta versus BC activity been constrained mostly to the Northeast corner of the province. Plus there are 23 to 24 land sales annually for Alberta compared to 12 sales per year for British Columbia.

With Alberta disposing of more acres you would assume that Alberta would collect more Bonus revenue than BC. The most part that has been true with the exception of three years from 2007 to 2009 where the annual take from BC sales surpassed Alberta's.

The historic high mark for BC was in 2008 when industry spent CAD2.6 billion primarily for the Montney and Horn River plays. The all-time high for Alberta was in 2011 for CAD3.5 billion was collected. The primary players creating this type of expenditure would be in the Duvernay and Montney.

Over the last two years both provinces have had experience significant decreases to the annual land sale revenue as a direct result of low commodity prices. In 2016, both provinces encountered historic lows. Alberta collected CAD136 million where as BC only collected CAD15 million. It's interesting to note that for the data I analyzed since 2000 the average dollar per acre acquisition cost has always been higher for BC compared to Alberta.

With respect to Peyto's participation at Alberta Crown Land sales, we've always remained an active purchaser. Over the past five years, Peyto has spent CAD36.3 million at crown sales to acquire over 134,000 acres which equates to 210 section.

You have to remember that Peyto is not a company that has acquired exploratory land for the sake of having yellow squares on the map. As Dave alluded to in his discussion, Peyto acquires land where we have identified drill able locations.

Where does this leave Peyto with respect to acquisition of future? Despite the low commodity prices, Peyto is still able to compete effectively at crown sales due to our low-cost structure. We had a good start to the year with the acquisition of 33 sections or just over 21,000 acres at crown sales thus far and will continue to work on asset deals as well in order to supplement growing inventory.

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Darren Gee, Peyto Exploration & Development Corporation - President & CEO [27]

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Thanks, Tim. That's good color on land sales. I have just got a couple more questions, I wanted to hit on.

Maybe, Lee, I was hoping maybe you could comment on some of the improvements we've seen in drilling performance. I had a slide in our corporate presentation that looked at the drill curve that has evolved over time has made some big gains there. But I suppose some of that technology, some of that practice, maybe you could comment on, the horizon, what are we looking at? Is there anything new coming down the pipe in terms of new technology or something that could effectively change the drill curve for cheaper, faster wells?

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Lee Curran, Peyto Exploration & Development Corporation - VP of Drilling and Completions [28]

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Sure, Darren. Certainly, we've had a lot of practice having drilled over 700 horizontal wells since 2009. Looking back to that era, our Spirit River horizontals in the Sundance field occupied an average of 34 drilling days with a cost of above of CAD3.2 million. Back then, that was certainly considered top sell performance relative to our competitors and today we are accomplishing the same drills with on average longer latches in 15 days to 17 days and at a cost of about CAD1.7 million.

Similarly in Brazeau, our performance gains have been equally noteworthy. Our program there began in 2013 where our Spirit River horizontals were taking about 35 days at a cost of nearly CAD4 million in comparison to our recent round of equivalent drills in under18 days and a cost of CAD2 million.

Now although we incorporate continual stream of applicable new technologies, things like drill bit designs and mud motor advancements and education tools and a list that could really run on and on, we are always very analytical prior to implementing any new tooling simply because it is something new on the shelf and available to us. The fact of the matter being the bulk of our performance gains have been and are expected to be, in the future, a direct result of our experience.

As mentioned previously, we've had a lot of practice and being an active operator through the past couple of years where most of the industry was stagnant we've gotten very good at execution where less active players may have remained static in performance. Throwing a heap of capital toward high costs new technology simply to shape days does not always actually equate this to saving money.

Take for example drilling rigs. There tends to be much discussion around the latest generations of AC drilling rigs complete with walking systems and bells and whistles. For the most part, with some minor tweaks to things like pumping the horsepower and Top Drive systems, we utilize the same conventional rigs that we've been using since the beginning of all of this.

For that matter, our top-performing rig in the field has been in the Peyto fleet since 2009. The capital to construct these latest generation drilling rigs is nearly double that of a conventional Peyto style rig. For that, given a contractor should anticipate a substantial pay rate uplift to warrant that double investment.

Our primary focus is and will continue to be on execution. We will keep a mindful eye of new technologies as they come to offer. But we're going to focus on those that will help enhance our reliability.

Simply put, fancy new pair skates and a CAD300 hockey stick on a young hockey player is not going to make him tomorrow's Connors McDavid. Although applying right technology at the right time is critical, we have proven those gains to be more about our operational focus.

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Darren Gee, Peyto Exploration & Development Corporation - President & CEO [29]

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Are you saying I can't buy a better game? That is how I'm overcoming my lack of talent.

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Lee Curran, Peyto Exploration & Development Corporation - VP of Drilling and Completions [30]

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Is spent too much on golf clubs.

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Darren Gee, Peyto Exploration & Development Corporation - President & CEO [31]

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Yes. [ Laughter ]. I want to ask one more question here before we open up the lines to the listeners. We had a question, come in overnight about our hedging practice. That has changed a little bit. The future shift has changed dramatically.

The question that came in overnight, and maybe I'll ask this to Scott Robinson our COO is Scott, there's been a big change in the for forward curve, it's gone from a contango curve to a backwardative curve where the prices are not climbing any more and now it looks like its falling. How does that affect our hedging strategy and are we going to change the way that we're hedging going forward?

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Scott Robinson, Peyto Exploration & Development Corporation - EVP, COO, and Director, Professional Engineer [32]

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It doesn't really change anything. To be honest, maybe I'll just talk about our strategy just to reiterate how it fits in. Expanding to what Dave is talked about in the confidence in our program, our strategy to hedges has been paramount to us over the past and it is going to continue to be so.

If you look over the last 10 years the strategy has worked very, very well smoothing out the price lines and it has allowed us, it is given us the confidence to undertake capital programs; particularly this horizontal well regime. It gives us the confidence that we will get the returns from those projects. If we look at and entire or the last 10 years of hedging, we have actually made over CAD400 million in gains, which is a testament to keeping good pricing during a period and in which the field revolution is brought natural gas prices down for the period of time.

If you look at our wells, and J.P. has spoken about this in the past. We've got about a 2 to 3 year payout range on the wells. The initial year is pretty important to underpin the investment outcome and reduce the risk.

For example if we look back at this immediate year 2016 we spent about CAD360 million on the wells we drilled and we recovered about CAD110 million on the cash flow from those new wells, which was largely underpinned by our hedging program during that period last year of very, very low gas prices. We had adequate pricing in place to give us hedge gains to provide the pricing necessary to make good returns and that resulted in roughly one-third of the capital coming back to us in that year. That is consistent with the 2 to 3 year payout.

Getting the hedge program for the purpose of capital confidence is pretty key. We look forward to 2017. We have a very wholesome book as Dave alluded about three-quarters of our current production is hedged at about CAD2.60 a GJ.

Interestingly, as you pointed out and our MD&A points out that position was in a loss position at the end of year because of a very momentary high price, high strip price situation. Our book was about CAD150 million loss but through a dramatic price fall in the early part of this year we now have a book gain mark-to-market gain of about CAD40 million.

Those are interesting but that just goes to show how much volatility can occur in the months that price, which is CAD3.28 at the end of the year that has lost CAD1, in one month. Our 2017 price for the most part is locked in at CAD2.60 a GJ and that gives us the return that we want from the program that we can now continue to confidently embark on.

Those dynamics demonstrate just how valuable and consistent and unbiased hedging program is. We actually enhanced that program this year. We have extended our hedge horizon to 3 years so we're now just beginning the infancy part of making hedges in the 2020 year.

The magnitude of our hedging now, we have elevated that slightly such that when we arrive at a given season, for instance we are going to be arriving at the 2017 summer season here, we will endeavor to have ourselves three-quarter hedged and we're right about there right now. During that season, we may actually take that from 75% up to 85% over the course of the season. Solid hedging program that has served us well and that we still, even more so we believe in, and we put it in place that's systematic it's unbiased it's not speculative and it fits with exactly what we're trying to do with generating profit.

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Darren Gee, Peyto Exploration & Development Corporation - President & CEO [33]

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Yes, you bet. Alright, thanks for that color. Brian, maybe we can open it up to questions from the listeners now?

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Questions and Answers

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Operator [1]

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(Operator Instructions).

I'm showing no further questions. I would now like to turn the call back over to Darren Gee, President and Chief Executive Officer for any further remarks.

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Darren Gee, Peyto Exploration & Development Corporation - President & CEO [2]

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Thanks, Brian. I appreciate that this is an incredibly busy week and there is a lot of guys reporting so there is probably four or five conference calls going on in every office of every analyst around town.

So hopefully some of our discussion has provided a little bit of color. As always, come to the Peyto website and have a look at the Corporate Presentation, have a read of the monthly report I post every month with some additional color on our activities as they go throughout the year. We will be putting up the March monthly here right away.

Will have a busy first quarter that we will be finishing up at the end of March but that by no means, means that we are stopping. We have a rig fleet plan to drill through break-up this year, try to take advantage of some of the cost savings that we see during break-up. And then I think we're fully expecting that the industry activity is going to peel back a little bit with recognition of where the commodity prices are and that's going to give us all the more reason to take advantage of the cost structure that we have secured and push forward with the [250] level hedges that we have got that we make a good return on.

We're protected ourselves and our shareholders and a lot of the risks that presented themselves for this year, we have learned a lot over the last couple of years about where some of those risks lie and I think we are very well protected going forward. To execute this capital program we have got out in front of us. Thanks for listening in and we will the back to you with the first-quarter conference call in May, I guess. We will talk to you then.

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Operator [3]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now disconnect. Everyone have a great day. .