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Press release from Marketwire

Peyto Reports Third Quarter 2012 Results and 2013 Capital Budget

Wednesday, November 07, 2012

Peyto Reports Third Quarter 2012 Results and 2013 Capital Budget16:55 EST Wednesday, November 07, 2012CALGARY, ALBERTA--(Marketwire - Nov. 7, 2012) - Peyto Exploration & Development Corp. ("Peyto" or "the Company") (TSX:PEY) is pleased to present its operating and financial results for the third quarter of the 2012 fiscal year. With a third quarter 2012 operating margin of 75%(1) and profit margin of 23%(2), Peyto grew production per share for the twelfth consecutive quarter. Highlights of the 2012 third quarter include:Production per share up 18%. Third quarter 2012 production increased 27% (18% per share) from 218 MMcfe/d (36,390 boe/d) in Q3 2011 to 276 MMcfe/d (46,033 boe/d) in Q3 2012. Funds from operations of $0.54/share. Generated $77 million in Funds from Operations ("FFO") in Q3 2012 down 7% (13% per share) from $83 million in Q3 2011. Increased production and lower costs helped offset the 31% year over year reduction in realized commodity prices. Maintained low cash costs of $1/mcfe. Total cash costs, including royalties, operating costs, transportation, G&A and interest were $1.00/mcfe ($6.02/boe). Industry leading operating costs of $0.35/mcfe ($2.09/boe) in Q3 2012 helped contribute to cash netbacks of $3.01/mcfe ($18.08/boe) representing a 75% operating margin. Record capital investments of $317 million. To the end of the third quarter, 21,800 boe/d of new production had been added in 2012, including 4,800 boe/d resulting from the $187 million acquisition of Open Range Energy Corp. ("Open Range" or "ONR"). Excluding the acquisition, the annualized (trailing twelve month) cost to build new production has averaged $18,000/boe/d. A total of 30 gross wells were drilled during the third quarter. Earnings of $0.16/share, dividends of $0.18/share. Earnings of $23.1 million were generated in the quarter ($68.1 million year-to-date) while dividends of $25.6 million ($75.4 million year-to-date) were paid to shareholders, representing a before tax payout ratio of 33% of FFO. Third quarter 2012 in ReviewThe third quarter of 2012 was an historic time for Peyto. The acquisition of Open Range represented the first major corporate acquisition in the Company's fourteen year history. The properties that were acquired were a natural fit with Peyto's Greater Sundance core area and included strategic facility and pipeline infrastructure that can be expanded and integrated into Peyto's existing system. In addition, 99 net sections of land were included containing over 100 future drilling locations of similar quality to Peyto's existing inventory of future locations. The Peyto team quickly and efficiently integrated Open Range into its business without disrupting a very active quarter that saw 6 to 8 drilling rigs running throughout. Inclusive of the acquired properties, Peyto maintained its industry leading low cost advantage with total cash costs of $1.00/Mcfe ($6.02/boe). Peyto's total borrowing capacity was expanded to $880 million, reflecting the value of the additional properties, including the issue of $50 million of additional senior secured 10 year notes. The company maintained its financial flexibility with quarter ending net debt of $684 million or 2.2 times annualized Funds from Operations. Despite low natural gas prices, earnings of $0.16/share were generated, delivering 9% Return on Equity (ROE) and 7% Return on Capital Employed (ROCE). 1.Operating Margin is defined as funds from operations divided by revenue before royalties but including realized hedging gains/losses.2.Profit Margin is defined as net earnings for the quarter divided by revenue before royalties but including realized hedging gains/losses. Natural gas volumes recorded in thousand cubic feet (mcf) are converted to barrels of oil equivalent (boe) using the ratio of six (6) thousand cubic feet to one (1) barrel of oil (bbl). Natural gas liquids and oil volumes in barrel of oil (bbl) are converted to thousand cubic feet equivalent (Mcfe) using a ratio of one (1) barrel of oil to six (6) thousand cubic feet. This could be misleading, particularly if used in isolation as it is based on an energy equivalency conversion method primarily applied at the burner tip and does not represent a value equivalency at the wellhead.Three Months ended September 30%Nine Months ended September 30%20122011Change20122011ChangeOperationsProductionNatural gas (mcf/d)244,794194,83226%228,982181,88126%Oil & NGLs (bbl/d)5,2363,91834%4,6083,82620%Thousand cubic feet equivalent (mcfe/d @ 1:6)276,200218,33827%256,630204,83425%Barrels of oil equivalent (boe/d @ 6:1)46,03336,39026%42,77234,13925%Product pricesNatural gas ($/mcf)3.064.43(31)%3.154.58(31)%Oil & NGLs ($/bbl)68.6278.07(12)%74.2679.45(7)%Operating expenses ($/mcfe)0.350.36(3)%0.320.35(9)%Transportation ($/mcfe)0.110.13(15)%0.120.13(8)%Field netback ($/mcfe)3.294.41(25)%3.394.51(25)%General & administrative expenses ($/mcfe)0.030.04(25)%0.050.07(29)%Interest expense ($/mcfe)0.250.26(4)%0.230.26(12)%Financial ($000 except per share)Revenue102,042107,526(5)%291,090310,297(6)%Royalties6,6329,265(28)%21,54931,195(31)%Funds from operations76,91882,506(7)%219,296234,212(6)%Funds from operations per share0.540.62(13)%1.571.76(11)%Total dividends25,57623,9517%75,41571,8235%Total dividends per share0.180.18-0.540.54-Payout ratio332914%343110%Earnings23,05837,741(39)%68,128102,147(33)%Earnings per diluted share0.160.28(43)%0.490.77(36)%Capital expenditures317,089111,570184%461,646284,37362%Weighted average shares outstanding142,069,408133,061,3017%139,631,290132,954,0105%As at September 30Net debt (before future compensation expense and unrealized hedging gains)683,540526,74330%Shareholders' equity1,092,079873,58825%Total assets2,077,8901,665,97825%Three Months ended September 30Nine Months ended September 30($000)2012201120122011Cash flows from operating activities72,00479,685205,939204,403Change in non-cash working capital3,0321,8078,46422,224Change in provision for performance based compensation1,8821,0144,8937,585Funds from operations76,91882,506219,296234,212Funds from operations per share0.540.621.571.76(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 International Financial Reporting Standards ("IFRS") and does not have a standardized meaning prescribed by IFRS. 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 IFRS. Funds from operations cannot be assured and future dividends may vary.Exploration & DevelopmentWhile drilling at the start of the third quarter focused on the development of the more liquids-rich formations in Peyto's inventory, like the Cardium and Falher, more recent activity has shifted back to the less liquids-rich, deeper formations like the Notikewin, Wilrich and Bluesky. This is due to improving natural gas prices which result in improved economics for the deeper, drier gas zones that enjoy greater royalty incentives.At currently forecast natural gas prices, effectively all of the formations that Peyto develops within its core areas can yield similar full cycle, before tax, internal rates of return. Peyto has been nimble with its capital allocation and has quickly redirected its drilling efforts to diversify development activity amongst all of the potential targets.During the quarter Peyto acquired 17 sections of new land at crown land sales, bringing total 2012 land acquisitions to 41.3 net sections. This is in addition to the 104.2 net sections of land added through property and corporate acquisitions. All 145.5 net sections are adjacent to or within Peyto's existing core areas. In total, net of expiries, Peyto's Deep Basin land position has grown by 28% in 2012, or 134 net sections (85,600 net acres). Capital Expenditures In addition to the $187 million acquisition of Open Range, Peyto had an active quarter of drilling activity. In total, Peyto invested $130 million in the building of new assets with $59 million spent drilling 30 gross (25.8 net) wells, $35 million spent completing 24 gross (20.2 net) wells, and $11 million spent on wellsite equipment and pipelines to bring on 24 gross (20.2 net) producing wells. A further $6 million was invested to expand current facilities, while the balance or $19 million was invested in the acquisition and evaluation of new undeveloped lands. Overall, drilling times continued to shorten as rig crews became more practiced with Peyto's drilling design. In 2012, the average horizontal well has taken just 20 days to drill, down more than 30% from 30 days in 2010. At the same time, the average horizontal well length in 2012 is 109 m longer. These efficiency gains not only translate into reduced capital cost but they allow Peyto to drill more wells with fewer rigs and less technical staff.Financial Results Alberta (AECO Monthly) natural gas prices averaged $2.08/GJ in the third quarter 2012, resulting in a Peyto unhedged realized price of $2.38/mcf before hedging gains of $0.68/mcf. Meanwhile, Edmonton light oil prices averaged $82.71/bbl from which Peyto realized $68.62/bbl (or 83%) for its oil and natural gas liquids blend of Condensate, Pentane, Butane and Propane. Combined Peyto's unhedged revenues totaled $3.41/mcfe ($4.01/mcfe including hedging gains), or 164% of the dry gas price. Peyto maintained its industry leading low cash costs in the quarter, despite the integration of the higher cost Open Range production, with average royalties of $0.26/Mcfe ($1.57/boe), operating costs of $0.35/Mcfe ($2.09/boe), transportation of $0.11/Mcfe ($0.68/boe), G&A of $0.03/Mcfe ($0.18/boe) and interest of $0.25/Mcfe ($1.50/boe). These cash costs totaled $1.00/Mcfe ($6.02/boe) and were deducted from revenues to yield a cash netback of $3.01/Mcfe ($18.08/boe), or a 75% operating margin. This industry leading operating margin has now been achieved for sixteen consecutive quarters and highlights Peyto's commitment to be the lowest cost producer in the Canadian industry. Depletion, depreciation and amortization charges of $1.72/Mcfe, along with a provision for future tax and market based bonus payments, reduced the cash netback to earnings of $0.91/Mcfe or a 23% profit margin. During the quarter Peyto's syndicate of lenders increased Peyto's borrowing base to $880 million, reflecting the addition of the ONR assets. As well, on September 6, 2012, Peyto issued $50 million of senior secured notes pursuant to a note purchase and private shelf agreement with Prudential Investment Management Inc. The notes have a coupon rate of 4.88% and mature on September 6, 2022. Including this latest issue, Peyto now has $150 million of senior secured notes outstanding which rank equally with Peyto's revolving bank facility of $730 million. With quarter end net debt of $684 million, Peyto has $196 million of available borrowing capacity ensuring future financial flexibility. Marketing Approximately 49% of Peyto's natural gas production in the quarter had been pre-sold in forward sales done over the previous year at an average price of $3.23/GJ. The remaining balance of production was subject to AECO monthly spot prices that averaged $2.08/GJ. On a blended basis, Peyto's realized gas price was $2.64/GJ or $3.06/mcf, reflective of Peyto's high heat content natural gas production. The company's hedging practice of layering in future sales in the form of fixed price swaps, in order to smooth out the volatility in natural gas price, continued throughout the quarter. By the end of the third quarter Peyto had committed to the future sale of 59,695,000 gigajoules (GJ) of natural gas at an average price of $3.15/GJ or $3.68/mcf, based on Peyto's historical heat content. The following table summarizes the remaining hedged volumes and prices for the upcoming years, effective September 30, 2012:Future SalesAverage Price (CAD)GJMcf$/GJ$/Mcf201213,875,00011,858,974$3.18$3.72201338,730,00033,102,564$3.17$3.7120147,090,0006,059,829$3.03$3.55Total59,695,00051,021,368$3.15$3.69As illustrated in the following table, Peyto's realized natural gas liquids prices(1) were down 12% year over year and 4% from the previous quarter.Three Months ended September 30Three Months ended June 302012201120122011Condensate ($/bbl)89.8593.6390.1498.66Propane ($/bbl)19.6047.0018.6142.96Butane ($/bbl)58.2165.2861.1066.52Pentane ($/bbl)93.1698.1693.4499.76Total Oil and NGLs ($/bbl)68.6278.0771.2784.06(1)Liquids prices are Peyto realized prices in Canadian dollars adjusted for fractionation and transportation.Peyto's hedging practice with respect to Propane and Butane also continued in the quarter and by the end of the third quarter Peyto had committed to the future sale of 186,000 bbls of Propane and Butane at an average price of $51.12USD/bbl. The following table summarizes the hedged volumes and prices for the upcoming years.PropaneButaneFuture Sales (bbls)Average Price ($USD/bbl)Future Sales (bbls)Average Price ($USD/bbl)201248,000$37.3045,000$65.88201348,000$37.3045,000$65.88Total96,000$37.3090,000$65.88As at September 30, 2012, Peyto had committed to the future sale of 204,400 barrels of oil and natural gas liquids at an average price of $54.62 USD per barrel and 59,695,000 gigajoules (GJ) of natural gas at an average price of $3.15 per GJ. Had these contracts been closed on September 30, 2012, Peyto would have realized a gain in the amount of $2.9 million.ONR Acquisition Update On August 14, 2012 Peyto closed the acquisition of Open Range Energy Corp. for an effective total capital cost of $187.2 million. The acquisition was conducted pursuant to a plan of arrangement with Peyto exchanging 0.0723 Peyto shares for each Open Range share (5.4 million shares total) and assuming the $75 million in net debt (inclusive of transaction costs). Integration of the Open Range asset base was concluded shortly after closing and drilling activity commenced on former ONR lands on September 17, 2012. So far, 5 wells have been drilled and 1 gross (0.6 net) well brought on production which has maintained production from the acquired lands at 5,100 boe/d. For the quarter, the ONR acquisition contributed production for 47 days or approximately 2,600 boe/d of average production. Activity Update Peyto currently has 8 drilling rigs running, which will increase to 9 by mid-November, out of approximately 90 natural gas directed rigs in the Western Canadian Sedimentary Basin (WCSB) making Peyto one of the busiest natural gas drillers in Canada. This counter cyclical strategy to invest in natural gas when most of the industry is not, allows Peyto improved purchasing power for services, materials and labor which lowers absolute development costs and improves shareholder returns. This strategy has resulted in Peyto building over 18,000 boe/d of new production since the start of 2012 at industry leading capital efficiencies of less than $18,000/boe/d. The new volume additions combined with acquired volumes of 4,700 boe/d and base production of 28,300 boe/d equates to current production of 51,000 boe/d. In addition, Peyto has 7 gross (6.5 net) wells that are drilled but waiting on completion, and 5 gross (4.0 net) wells completed but waiting on tie in, which represents approximately 6,000 boe/d of behind pipe production. In the past, Peyto has not had this much productive capacity waiting on completion and tie in operations but recent pad drilling techniques, which significantly reduce rig move costs, have delayed wellsite access for completions and pipelining operations. The economic benefit of reduced drilling costs significantly outweighs the short term delay in production additions. The company remains on track to exit 2012 at approximately 57,000 boe/d.The enhanced liquids recovery project at Peyto's Oldman gas plant, which was originally scheduled to be completed by October 1, 2012, is now expected to be completed and operational by the end of November. An unexpected delay in the delivery of a major component and subsequent construction delays has set the project back eight weeks. Upon completion, it is expected that the Oldman liquid yield will increase from 25 bbl/mmcf to 40 bbl/mmcf, principally from improved Propane and Butane recoveries.2013 BudgetThe Board of Directors has approved a preliminary 2013 budget which includes a capital program expected to range between $450 and $500 million. This record level of investment anticipates that 8 drilling rigs will remain active throughout the year, developing several of the stacked formations within Peyto's Deep Basin core areas. As with past years, it is forecast that over 80% of the capital will be directed to well-related activity including drilling, completions, wellsite equipment and pipelines. In addition, both facility expansion and additional liquids recovery ("deep cut") projects will account for 15% of the total capital. The remaining capital will be directed to new land acquisitions and seismic evaluation.A total of 100 gross, 85 net wells are forecast to be drilled in 2013 from over 1,000 locations in Peyto's existing inventory. This is expected to result in the addition of between 25,000 to 29,000 boe/d of new production and assumes that similar capital efficiencies to the past four years of $17,500/boe/d can also be successfully achieved in 2013. A portion of this new production will offset an internally forecast 34% base decline, while a portion will grow overall 2013 production to a forecast exit level between 62,000 boe/d and 67,000 boe/d.AECO natural gas prices in 2013 are currently forecast to average approximately $3.40/GJ, up almost 50% from average 2012 levels. This price, combined with oil prices forecast to average $90/bbl and Peyto's industry leading low cash costs of $1/Mcfe ($6/boe), would result in strong cash netbacks and the ability to fund the dividend and the majority of the 2013 capital program. The balance of the capital program can be funded from available bank lines, working capital and equity, while still maintaining a strong balance sheet.Outlook The remainder of 2012 and full year 2013 is forecast to be one of the most active periods in Peyto's history. It comes at a time when the rest of the Canadian industry is not focused on developing natural gas resources as most plays do not provide an economic return at current prices. The number of active, natural gas directed drilling rigs in Canada is clear evidence of that fact. Peyto's unique low cost structure in combination with its focused, returns driven strategy allows the company to take a very counter cyclical approach which has delivered superior total returns to shareholders in the past. Fortunately, Peyto's current inventory of profitable drilling opportunities has never been greater. The company's financial flexibility, quality asset base and strong balance sheet position Peyto to be opportunistic in this environment. As always, capital investments will only be pursued if return objectives can be met. Conference Call and Webcast A conference call will be held with the senior management of Peyto to answer questions with respect to the 2012 third quarter on Thursday, November 8th, 2012, at 9:00 a.m. Mountain Standard Time (MST), or 11:00 a.m. Eastern Standard Time (EST). To participate, please call 1-800-734-8592. The conference call will also be available on replay by calling 1-800-633-8284 (North American Toll Free) or 1-402-997-9140 (for those outside North America) using passcode 21608617. The replay will be available at 11:00 a.m. MST, 1:00 p.m. EST Thursday, November 8th, 2012 until 11:00 am MST on Thursday, November 15th, 2012. In addition to telephone access, the conference call can be accessed through the internet at http://events.digitalmedia.telus.com/peyto/110812/index.php. After this time the conference call will be archived on the Peyto Exploration & Development website at www.peyto.com.Management's Discussion and Analysis Management's Discussion and Analysis of this third quarter report is available on the Peyto website at http://www.peyto.com/news/Q32012MDandA.pdf. A complete copy of the third quarter report to shareholders, including the Management's Discussion and Analysis, and Financial Statements is also available at www.peyto.com and will be filed at SEDAR, www.sedar.com, at a later date. Shareholders and interested investors are encouraged to visit the Peyto website where there is a wealth of information designed to educate and inform. Darren GeePresident and CEO November 7, 2012Certain 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 other purpose. Any "financial outlook" or "future oriented financial information" in this press release, as defined by applicable securities legislation has been approved by management of Peyto. Such financial outlook or future oriented financial information is provided for the purpose of providing information about management's current expectations and plans relating to the future. Readers are cautioned that reliance on such information may not be appropriate for other purposes. 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 Consolidated Balance Sheet (unaudited)(Amount in $ thousands)September 30 2012December 31 2011AssetsCurrent assetsCash-57,224Accounts receivable57,77153,829Due from private placement (Note 7)-9,740Financial derivative instruments (Note 9)8,31638,530Prepaid expenses2,3423,99168,429163,314Long-term financial derivative instruments (Note 9)-6,304Prepaid capital18,6731,414Property, plant and equipment, net (Note 4)1,990,7881,629,2202,009,4611,636,9382,077,8901,800,252LiabilitiesCurrent liabilitiesAccounts payable and accrued liabilities120,020110,483Dividends payable (Note 7)8,6338,278Provision for future performance based compensation (Note 8)7,6074,321136,260123,082Long-term financial derivative instruments (Note 9)5,396-Long-term debt (Note 5)615,000470,000Provision for future performance based compensation (Note 8)2,8411,235Decommissioning provision (Note 6)63,77238,037Deferred income taxes162,542152,190849,551661,462Shareholders' equityShareholders' capital (Note 7)1,013,100889,115Shares to be issued (Note 7)-9,740Retained earnings75,60282,889Accumulated other comprehensive income (Note 7)3,37733,9641,092,0791,015,7082,077,8901,800,252Approved by the Board of Directors Michael MacBeanDarren GeeDirectorDirector Peyto Exploration & Development Corp.Condensed Consolidated Income Statement (unaudited)(Amount in $ thousands) Three months ended September 30 Nine months ended September 302012201120122011RevenueOil and gas sales86,82799,829240,927282,893Realized gain on hedges15,2147,69750,16327,404Royalties(6,632)(9,265)(21,549)(31,195)Petroleum and natural gas sales, net95,40998,261269,541279,102ExpensesOperating8,8437,15722,74719,672Transportation2,9002,5528,1517,087General and administrative7598413,3693,795Future performance based compensation (Note 8)1,8821,0144,8937,585Interest6,3525,20516,48614,336Accretion of decommissioning provision284192773658Depletion and depreciation (Note 4)43,77230,987122,54690,863Gain on disposition of assets (Note 4)(363)-(508)(818)64,42947,948178,457143,178Earnings before taxes30,98050,31391,084135,924Income taxDeferred income tax expense7,92212,57222,95633,777Earnings for the period23,05837,74168,128102,147Earnings per share (Note 7)Basic and diluted$0.16$0.28$0.49$0.77Weighted average number of common shares outstanding (Note 7)Basic and diluted142,069,048133,061,301139,631,290132,954,410Peyto Exploration & Development Corp.Condensed Consolidated Statement of Comprehensive Income(unaudited)(Amount in $ thousands) Three months ended September 30 Nine months ended September 302012201120122011Earnings for the period23,05837,74168,128102,147Other comprehensive income (loss)Change in unrealized gain (loss) on cash flow hedges(6,812)8,3949,38118,825Deferred tax recovery (expense)5,507(103)10,1952,408Realized (gain) loss on cash flow hedges(15,214)(7,697)(50,163)(27,404)Comprehensive Income (Loss)6,53938,33537,54195,976Peyto Exploration & Development Corp.Condensed Consolidated Statement of Changes in Equity (unaudited)(Amount in $ thousands) Nine months ended September 3020122011Shareholders' capital, beginning of period889,115755,831Common shares issued112,187-Common shares issued by private placement11,95217,150Common shares issuance costs (net of tax)(154)(75)Common shares issued pursuant to DRIP-1,973Common shares issued pursuant to OTUPP-2,889Shareholders' capital, end of period1,013,100777,768Common shares to be issued, beginning of period9,74017,285Common shares issued(9,740)(17,285)Common shares to be issued--Common shares to be issued, end of period--Retained earnings, beginning of period82,88950,774Earnings for the period68,128102,147Dividends (Note 7)(75,415)(71,823)Retained earnings, end of period75,60281,098Accumulated other comprehensive income, beginning of period33,96420,893Other comprehensive income (loss)(30,587)(6,171)Accumulated other comprehensive income (loss), end of period3,37714,722Total shareholders' equity1,092,079873,588Peyto Exploration & Development Corp.Condensed Consolidated Statement of Cash Flows (unaudited)(Amount in $ thousands) Three months ended September 30 Nine months ended September 302012201120122011Cash provided by (used in) operating activitiesEarnings23,05837,74168,128102,147Items not requiring cash:Deferred income tax7,92212,57222,95633,777Depletion and depreciation43,77230,987122,54690,863Accretion of decommissioning provision284192773658Change in non-cash working capital related to operating activities(3,032)(1,807)(8,464)(22,224)72,00479,685205,939205,221Financing activitiesIssuance of common shares--11,9524,727Issuance costs(170)-(205)(99)Cash dividends paid(25,251)(23,951)(75,060)(67,241)Increase (decrease) in bank debt70,00035,000(5,000)135,000Repayment of Open Range bank debt(72,000)-(72,000)-Issuance of long term notes50,000-150,000-22,57911,0499,68772,387Investing activitiesAdditions to property, plant and equipment(94,583)(93,451)(272,850)(275,870)Net increase (decrease) in cash-(2,717)(57,224)1,738Cash, Beginning of Period-12,34957,2247,894Cash, End of Period-9,632-9,632The following amounts are included in cash flows from operating activities:Cash interest paid7,5445,20515,97913,746Cash taxes paid----Peyto Exploration & Development Corp.Notes to Condensed Consolidated Financial Statements(unaudited)As at September 30, 2012 and 2011 (Amount in $ thousands, except as otherwise noted)1. Nature of operationsPeyto Exploration & Development Corp. and its wholly subsidiary Open Range Energy Corp. ("Open Range"), (collectively "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 - 2nd Street SW, Calgary, Alberta, Canada, T2P 0C1.These financial statements were approved and authorized for issuance by the Audit Committee of Peyto on November 6, 2012.2. Basis of presentationThe condensed consolidated 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 consolidated 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 Financial Statements for the year ended December 31, 2011.The timely preparation of the condensed consolidated 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 consolidated financial statements.All accounting policies and methods of computation followed in the preparation of these condensed consolidated financial statements are the same as those disclosed in Note 2 of Peyto's audited Financial Statements as at and for the years ended December 31, 2011 and 2010. Any reference to "Peyto" or the "Company" throughout these financial statements refers to the Company and its subsidiary. All inter-entity transactions have been eliminated.3. Corporate AcquisitionOn August 14, 2012, Peyto completed the acquisition, by plan of arrangement, of all issued and outstanding common shares of Open Range. The total consideration of approximately $187.2 million paid for by the issuance of 5.4 million shares and the assumption of Open Range's long-term debt and working capital deficiency ($193.6 million was allocated to Property, plant & equipment). Transaction costs of approximately $0.6 million are included in the financial statements.The Open Range properties are a natural fit with Peyto's Greater Sundance core area. Open Range's plant and pipeline infrastructure complements Peyto's existing core assets and accesses other proven Peyto lands adjacent to the main Sundance area. This will allow for the accelerated development of the Peyto step-out areas.($000s)Fair value of net assets acquiredWorking capital(1,868)Property, plant and equipment193,629Financial derivative instruments(1,132)Bank debt(72,000)Decommissioning provision(8,800)Deferred income taxes2,358Total net assets acquired112,187ConsiderationShares issued (5,404,007 shares)112,187Total purchase price112,187The above amounts are estimates, which were made by management at the time of the preparation of these condensed consolidated financial statements based on information then available. Amendments may be made as amounts subject to estimates are finalized.If Peyto had acquired Open Range on January 1, 2012, the pro-forma results of the oil and gas sales, net income and comprehensive income for the period ended September 30, 2012 would have been as follows;($000s)As Stated September 30, 2012Open Range January 1, 2012 to August 14, 2012Pro Forma September 30, 2012Oil and gas sales240,92727,756268,683Net income68,1281,13469,262Comprehensive income37,5411,13438,6754. Property, plant and equipment, netCostAt December 31, 20111,843,766Acquisitions through business combinations, net193,629Additions291,246Dispositions(768)At September 30, 20122,327,873Accumulated depletion and depreciationAt December 31, 2011(214,546)Depletion and depreciation(122,546)Dispositions7At September 30, 2012(337,085)Carrying amount at September 30, 20121,990,788Proceeds received for assets disposed of during the three and nine month periods ended September 30, 2012 were $1.0 million and $1.2 million (2011 - $nil and $1.5 million). During the three and nine month periods ended September 30 2012, Peyto capitalized $2.3 million and $4.8 million (2011 - $1.7 million and $4.4 million) of general and administrative expense directly attributable to production and development activities. 5. Long-term debtSeptember 30, 2012December 31, 2012Bank credit facility465,000470,000Senior secured notes150,000-Balance, end of the period615,000470,000Peyto has a syndicated $730 million extendible revolving credit facility with a stated term date of April 28, 2013. The bank facility is made up of a $30 million working capital sub-tranche and a $700 million production line. The facilities are available on a revolving basis for a period of at least 364 days and upon the term out date may be extended for a further 364 day period at the request of Peyto, subject to approval by the lenders. In the event that the revolving period is not extended, the facility is available on a non-revolving basis for a further one year term, at the end of which time the facility would be due and payable. Outstanding amounts on this facility will bear interest at rates ranging from prime plus 1.25% to prime plus 2.75% determined by Peyto's debt to earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) ratios ranging from less than 1:1 to greater than 2.5:1. A General Security Agreement with a floating charge on land registered in Alberta is held as collateral by the bank.On January 3, 2012, Peyto issued CDN $100 million of senior secured notes pursuant to a note purchase and private shelf 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 4.39% and mature on January 3, 2019. Interest will be paid semi-annually in arrears. On September 6, 2012, Peyto issued CDN $50 million of senior secured notes pursuant to a note purchase and private shelf 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 4.88% and mature on September 6, 2022. Interest will be paid semi-annually in arrears. Upon the issuance of the senior secured notes January 3, 2012, Peyto became subject to the following financial covenants as defined in the credit facility and note purchase and private shelf agreements:Senior Debt to EBITDA Ratio will not exceed 3.0 to 1.0 Total Debt to EBITDA Ratio will not exceed 4.0 to 1.0 Interest Coverage Ratio will not be less than 3.0 to 1.0 Total Debt to Capitalization Ratio will not exceed 0.55:1.0 Peyto is in compliance with all financial covenants at September 30, 2012.Peyto's total borrowing capacity is $880 million and Peyto's net credit facility is $730 million. Total interest expense for the three and nine month periods ended September 30, 2012 was $6.4 million and $16.5 million (2011 - $5.2 million and $14.3 million) and the average borrowing rate for the three and nine month periods was 4.6% and 4.4% (2011 - 4.4% and 4.4%). Decommissioning provision Peyto makes provision for the future cost of decommissioning wells, pipelines and facilities on a discounted basis based on the commissioning of these assets.The decommissioning provision represents the present value of the decommissioning costs related to the above infrastructure, which are expected to be incurred over the economic life of the assets. The provisions have been based on Peyto's internal estimates of the cost of decommissioning, the discount rate, the inflation rate and the economic life of the infrastructure. Assumptions, based on the current economic environment, have been made which management believes are a reasonable basis upon which to estimate the future liability. These estimates are reviewed regularly to take into account any material changes to the assumptions. However, actual decommissioning costs will ultimately depend upon the future market prices for the necessary decommissioning work required which will reflect market conditions at the relevant time. Furthermore, the timing of the decommissioning is likely to depend on when production activities cease to be economically viable. This in turn will depend and be directly related to the current and future commodity prices, which are inherently uncertain.The following table reconciles the change in decommissioning provision:Balance, December 31, 201138,037New or increased provisions9,793Provisions acquired through business combinations8,800Accretion of decommissioning provision773Change in discount rate and estimates6,369Balance, September 30, 201263,772Current-Non-current63,772Peyto has estimated the net present value of its total decommissioning provision to be $63.8 million as at September 30, 2012 ($38.0 million at December 31, 2011) based on a total future undiscounted liability of $131.6 million ($101.2 million at December 31, 2011). At September 30, 2012 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 2061. The Bank of Canada's long term bond rate of 2.32 per cent (2.49 per cent at December 31, 2011) and an inflation rate of two per cent (two per cent at December 31, 2011) were used to calculate the present value of the decommissioning provision.7. Shareholders' capital Authorized: Unlimited number of voting common sharesIssued and OutstandingCommon Shares (no par value)Number of Common SharesAmount $Balance, December 31, 2010131,875,382755,831Common shares issued4,899,000115,126Common share issuance costs (net of tax)-(3,854)Common shares issued by private placement906,19617,150Common shares issued pursuant to DRIP113,5271,973Common shares issued pursuant to OTUPP166,1962,889Balance, December 31, 2011137,960,301889,115Common shares issued by private placement525,65511,952Common shares issued for acquisitions5,404,007112,187Common share issuance costs (net of tax)-(154)Balance, September 30, 2012143,889,9631,013,100Peyto reinstated its amended distribution reinvestment and optional trust unit purchase plan (the "Amended DRIP Plan") effective with the January 2010 distribution whereby eligible unitholders could elect to reinvest their monthly cash distributions in additional trust units at a 5 percent discount to market price. The DRIP plan incorporated an Optional Trust Unit Purchase Plan ("OTUPP") which provided unitholders enrolled in the DRIP with the opportunity to purchase additional trust units from treasury using the same pricing as the DRIP. The DRIP and the OTUPP plans were cancelled December 31, 2010.On December 31, 2010, Peyto completed a private placement of 655,581 common shares to employees and consultants for net proceeds of $12.4 million ($18.95 per share). These common shares were issued on January 6, 2011. On January 14, 2011, 279,723 common shares (113,527 pursuant to the DRIP and 166,196 pursuant to the OTUPP) were issued for net proceeds of $4.9 million. On March 25, 2011, Peyto completed a private placement of 250,615 common shares to employees and consultants for net proceeds of $4.7 million ($18.86 per share). On December 16, 2011, Peyto closed an offering of 4,899,000 common shares at a price of $23.50 per common share, receiving proceeds of $110.1 million (net of issuance costs).On December 31, 2011 Peyto completed a private placement of 397,235 common shares to employees and consultants for net proceeds of $9.7 million ($24.52 per share). These common shares were issued on January 13, 2012.On March 23, 2012 Peyto completed a private placement of 128,420 common shares to employees and consultants for net proceeds of $2.2 million ($17.22 per share).On August 14, 2012 Peyto issued 5,404,007 common shares which were valued at $112.0 million (net of issuance costs) ($20.76 per share) in relation to the closing of a corporate acquisition (Note 3).Per share amountsEarnings per share have been calculated based upon the weighted average number of common shares outstanding for the three and nine month periods ended September 30, 2012 were 142,069,048 and 139,631,290 (2011 - 133,061,301 and 132,954,410). There are no dilutive instruments outstanding.Dividends During the three and nine month periods ended September 30, 2012, Peyto declared and paid dividends of $0.18 and $0.54 per common share or $0.06 per common share per month, totaling $25.6 million and $75.4 million (2011 - $0.18 and $0.54 per share or $0.06 per share per month, $24.0 million and $71.8 million). 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 9. 8. Future performance based compensationPeyto awards performance based compensation to employees annually. The performance based compensation is comprised of reserve and market value based components.Reserve based componentThe 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 over the three year vesting period. 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 valuation model were: September 30 2012September 30 2011Share price$18.83 - $24.75$18.83 - $19.93Exercise price$12.06 - $24.37$9.57 - $19.10Expected volatility0% - 32%25% - 31%Expected life0.25 years0.25 - 2.25 yearsRisk-free interest rate1.08%0.91%9. Risk management contractsPeyto 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 September 30, 2012:Propane Period HedgedTypeMonthly VolumePrice (USD)September 1, 2012 to March 31, 2013Fixed Price2,000 bbl$49.56/bblSeptember 1, 2012 to March 31, 2013Fixed Price2,000 bbl$44.10/bblSeptember 1, 2012 to March 31, 2013Fixed Price2,000 bbl$32.34/bblSeptember 1, 2012 to March 31, 2013Fixed Price2,000 bbl$33.60/bblSeptember 1, 2012 to March 31, 2013Fixed Price2,000 bbl$32.97/bblOctober 1, 2012 to March 31, 2013Fixed Price2,000 bbl$34.01/bblOctober 1, 2012 to March 31, 2013Fixed Price2,000 bbl$34.65/bblOctober 1, 2012 to March 31, 2013Fixed Price2,000 bbl$36.96/bblButane Period HedgedTypeMonthly VolumePrice (USD)September 1, 2012 to March 31, 2013Fixed Price2,000 bbl$80.64/bblSeptember 1, 2012 to March 31, 2013Fixed Price2,000 bbl$58.38/bblSeptember 1, 2012 to March 31, 2013Fixed Price2,000 bbl$60.06/bblSeptember 1, 2012 to March 31, 2013Fixed Price2,000 bbl$60.06/bblOctober 1, 2012 to March 31, 2013Fixed Price2,000 bbl$66.36/bblCondensate Period HedgedTypeMonthly VolumePrice (USD)August 1, 2012 to December 31, 2012Fixed Price200 bbl$90.00/bblIso-Butane Period HedgedTypeMonthly VolumePrice (USD)September 1, 2012 to March 31, 2013Fixed Price1,000 bbl$82.32/bblSeptember 1, 2012 to March 31, 2013Fixed Price1,000 bbl$60.48/bblSeptember 1, 2012 to March 31, 2013Fixed Price1,000 bbl$62.58/bblSeptember 1, 2012 to March 31, 2013Fixed Price1,000 bbl$62.58/bblNatural Gas Period HedgedTypeDaily VolumePrice (CAD)April 1, 2011 to October 31, 2012Fixed Price5,000 GJ$4.05/GJApril 1, 2011 to October 31, 2012Fixed Price5,000 GJ$4.15/GJApril 1, 2011 to October 31, 2012Fixed Price5,000 GJ$4.10/GJApril 1, 2011 to October 31, 2012Fixed Price5,000 GJ$4.00/GJApril 1, 2011 to March 31, 2013Fixed Price5,000 GJ$4.055/GJApril 1, 2011 to March 31, 2013Fixed Price5,000 GJ$3.80/GJJune 1, 2011 to March 31, 2013Fixed Price5,000 GJ$4.17/GJJune 1, 2011 to March 31, 2013Fixed Price5,000 GJ$4.10/GJJune 1, 2011 to March 31, 2013Fixed Price5,000 GJ$4.10/GJNovember 1, 2011 to March 31, 2013Fixed Price5,000 GJ$4.00/GJApril 1, 2012 to December 31, 2012Fixed Price5,000 GJ$3.3125/GJApril 1, 2012 to December 31, 2012Fixed Price5,000 GJ$3.395/GJApril 1, 2012 to October 31, 2013Fixed Price5,000 GJ$4.00/GJApril 1, 2012 to October 31, 2013Fixed Price5,000 GJ$4.00/GJApril 1, 2012 to October 31, 2013Fixed Price5,000 GJ$4.00/GJApril 1, 2012 to October 31, 2013Fixed Price5,000 GJ$4.00/GJApril 1, 2012 to March 31, 2013Fixed Price5,000 GJ$2.20/GJApril 1, 2012 to March 31, 2013Fixed Price5,000 GJ$2.31/GJApril 1, 2012 to October 31, 2013Fixed Price5,000 GJ$2.52/GJApril 1, 2012 to March 31, 2014Fixed Price5,000 GJ$3.00/GJMay 1, 2012 to October 31, 2013Fixed Price5,000 GJ$2.30/GJJune 1, 2012 to October 31, 2012Fixed Price5,000 GJ$1.83/GJJuly 1, 2012 to October 31, 2012Fixed Price5,000 GJ$2.32/GJJuly 1, 2012 to October 31, 2012Fixed Price5,000 GJ$2.35/GJAugust 1, 2012 to December 31, 2012Fixed Price12,500 GJ$1.95/GJAugust 1, 2012 to December 31, 2012Fixed Price5,000 GJ$2.23/GJAugust 1, 2012 to March 31, 2014Fixed Price5,000 GJ$3.00/GJAugust 1, 2012 to October 31, 2014Fixed Price5,000 GJ$3.10/GJNovember 1, 2012 to October 31, 2013Fixed Price5,000 GJ$2.60/GJNovember 1, 2012 to October 31, 2013Fixed Price5,000 GJ$3.005/GJNovember 1, 2012 to October 31, 2013Fixed Price5,000 GJ$3.00/GJNovember 1, 2012 to March 31, 2014Fixed Price5,000 GJ$2.81/GJNovember 1, 2012 to March 31, 2014Fixed Price5,000 GJ$3.00/GJNovember 1, 2012 to March 31, 2014Fixed Price5,000 GJ$3.05/GJNovember 1, 2012 to March 31, 2014Fixed Price5,000 GJ$3.02/GJNovember 1, 2012 to October 31, 2014Fixed Price5,000 GJ$3.0575/GJJanuary 1, 2013 to December 31, 2013Fixed Price5,000 GJ$3.105/GJJanuary 1, 2013 to March 31, 2014Fixed Price5,000 GJ$3.00/GJJanuary 1, 2013 to March 31, 2014Fixed Price5,000 GJ$3.02/GJApril 1, 2013 to March 31, 2014Fixed Price5,000 GJ$3.105/GJAs at September 30, 2012, Peyto had committed to the future sale of 204,400 barrels of oil and natural gas liquids at an average price of $54.62 USD per barrel and 59,695,000 gigajoules (GJ) of natural gas at an average price of $3.15 per GJ or $3.68 per mcf. Had these contracts been closed on September 30, 2012, Peyto would have realized a gain in the amount of $2.9 million. If the AECO gas price on September 30, 2012 were to increase by $1/GJ, the unrealized gain would decrease by approximately $59.7 million. An opposite change in commodity prices rates would result in an opposite impact on other comprehensive income. Subsequent to September 30, 2012 Peyto entered into the following contracts:Propane Period HedgedTypeMonthly VolumePrice (USD)January 1, 2013 to March 31, 2013Fixed Price4,000 bbl$36.12/bblApril 1, 2013 to June 30, 2013Fixed Price4,000 bbl$34.86/bblNatural Gas Period HedgedTypeMonthly VolumePrice (CAD)January 1, 2013 to October 31, 2013Fixed Price5,000 GJ$3.42/GJApril 1, 2013 to October 31, 2013Fixed Price5,000 GJ$3.205/GJApril 1, 2013 to March 31, 2014Fixed Price5,000 GJ$3.53/GJNovember 1, 2013 to October 31, 2014Fixed Price5,000 GJ$3.50/GJ10. Commitments and contingencies Peyto has contractual obligations and commitments as follows:20122013201420152016ThereafterNote repayment(1)-----150,000Interest payments(2)-6,8306,8306,8306,83025,615Transportation commitments3,19013,25912,1349,1854,4521,462Operating lease4171,6611,677522--Total3,60721,75020,64116,53711,282177,077(1)Long-term debt repayment on senior secured notes(2)Fixed interest payments on senior secured notesContingent liabilityFrom time to time, Peyto is the subject of litigation arising out of its day-to-day operations. Damages claimed pursuant to such litigation may be material or may be indeterminate and the outcome of such litigation may materially impact Peyto's financial position or results of operations in the period of settlement. While Peyto assesses the merits of each lawsuit and defends itself accordingly, Peyto may be required to incur significant expenses or devote significant resources to defending itself against such litigation. These claims are not currently expected to have a material impact on Peyto's financial position or results of operations.OfficersDarren 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 Stephen Chetner Corporate SecretaryDirectorsDon Gray, ChairmanRick Braund Stephen Chetner Brian Davis Michael MacBean, Lead Independent Director Darren Gee Gregory Fletcher Scott RobinsonAuditorsDeloitte & Touche LLPSolicitorsBurnet, Duckworth & Palmer LLP BankersBank of MontrealUnion Bank, Canada BranchRoyal Bank of CanadaCanadian Imperial Bank of CommerceHSBC Bank CanadaThe Toronto-Dominion BankAlberta Treasury BranchesCanadian Western BankTransfer AgentValiant Trust CompanyHead Office1500, 250 - 2nd Street SWCalgary, ABT2P 0C1Phone: 403.261.6081Fax: 403.451.4100Web: http://www.peyto.com/Stock Listing Symbol: PEY.TOToronto Stock ExchangeFOR FURTHER INFORMATION PLEASE CONTACT: Contact Information: Peyto Energy TrustDarren GeePresident and CEO403.261.6081403.451.4100 (FAX)www.peyto.com