Perpetual Energy Inc. Releases Second Quarter 2014 Financial and Operating Results

Press Release –

Aug 7, 2014

CALGARY, Aug. 7, 2014 – (TSX:PMT) – Perpetual Energy Inc. (“Perpetual” or the “Corporation” or the “Company”) is pleased to report its financial and operating results for the three and six months ended June 30, 2014. Perpetual’s focused capital expenditure program combined with stronger commodity prices resulted in reported increases in production, revenue and funds flow compared to both the preceding first quarter of 2014 and the second quarter of 2013.  In addition, several transactions were announced in the second quarter to reduce the Company’s overall debt levels, while at the same time, increasing reserves and accelerating future funds flow growth.  A complete copy of Perpetual’s unaudited interim consolidated financial statements and related Management’s Discussion and Analysis (“MD&A”) for the three and six months ended June 30, 2014 can be obtained through the Corporation’s website atwww.perpetualenergyinc.com and SEDAR at www.sedar.com.

SECOND QUARTER 2014

Production and Operations Highlights

• Second quarter average production of 20,053 boe/d increased seven percent from the preceding first quarter of 2014 (18,794 boe/d) and was two percent higher than the prior year (Q2 2013 – 19,708 boe/d). Gas over bitumen (“GOB”) deemed production decreased 20 percent to 19.3 MMcf/d from 24.1 MMcf/d in the second quarter of 2013 as a result of annual 10 percent reductions combined with the expiration of the 10-year deemed production period for multiple wells.
• Oil and natural gas liquids (“NGL” or “liquids”) production of 3,738 bbl/d increased eight percent from the first quarter of 2014 (3,451 boe/d) reflecting production from new Mannville heavy oil wells drilled during the first quarter. Compared to the prior year, oil and NGL production decreased 15 percent, primarily due to 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 up six percent from both the preceding first quarter as well as the second quarter of 2013, reflecting production from new wells drilled at West Edson which more than offset natural declines on Perpetual’s shallow gas assets. Higher heat content deep basin gas represented 38 percent of natural gas production in the second quarter of 2014 compared to 29 percent in 2013, increasing the average heating value of total gas production to 1.11 GJ/Mcf from 1.09 GJ/Mcf.
• Exploration and development expenditures of $12.3 million were primarily related to completion of the plant expansion at West Edson and start-up of drilling programs for heavy oil at Mannville and liquids-rich gas at West Edson.
• Drilling activities in the second quarter included two (2.0 net) horizontal heavy oil wells at Mannville and one (0.5 net) horizontal well atWest Edson. Modest capital was also allocated to optimize production operations on shallow gas assets.
• Disposition proceeds of $3.0 million were realized during the quarter on the sale of a portion of the Company’s interest in certain undeveloped lands.
• Perpetual monetized its interest in remaining GOB royalty credits for proceeds of $20.5 million, subject to adjustments.

Financial Highlights

• Funds flow of $25.9 million ($0.17 per share) was 50 percent higher than both the comparative second quarter of 2013 ($17.3 million) and the preceding first quarter of 2014 ($17.4 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.
• Production and operating costs declined 18 percent to $9.99/boe in the second quarter of 2014 compared to $12.15/boe in 2013 through cost savings initiatives and reduced processing fees from changes to infrastructure at West Edson.
• The second quarter operating netback of $19.97/boe was 35 percent higher than the $14.81/boe recorded in the prior year, an increase driven by production growth, higher quality sales products, improved realized commodity prices and enhanced operating efficiencies.
• Net income of $2.5 million in the second quarter (2013 – loss of $14.8 million) reflected higher revenue and reduced operating expenses.
• Increased AECO monthly index prices and higher heat content gas sales were reflected in Perpetual’s average natural gas price, before derivatives, of $4.95/Mcf, up 35 percent from $3.68/Mcf in the second quarter of 2013. Losses on financial natural gas contracts reduced Perpetual’s realized gas revenue by $2.7 million resulting in a realized price of $4.66/Mcf for the second quarter.
• Perpetual’s second quarter oil and NGL price, before derivatives, of $83.08/bbl increased 26 percent compared to the same period in 2013 ($66.18/bbl) due to the combination of higher crude oil reference prices and an increase in the overall quality of both oil and NGL sales products.  Price improvements were realized from the delivery of higher grade oil resulting from new drying operations at the majority of the Company’s Mannville heavy oil locations, as well as higher grade NGL as a result of the change in liquid recoveries at West Edson.  Perpetual’s realized oil and NGL price, including derivatives, was impacted by net losses of $2.9 million recorded on financial WTI fixed price contracts, resulting in a realized price of $74.65/bbl.
• Total net debt of $360.0 million at June 30, 2014 was reduced by $33.8 million from $393.8 million at March 31, 2014. The reduction was driven by funds flow exceeding capital expenditures for the second quarter, combined with proceeds from dispositions and the monetization of GOB royalty credits.