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Perpetual Energy Inc. Exceeds 2014 Exit Rate Target and Provides Operational, Capital Spending and Hedging Update

CALGARY, Jan. 21, 2015 /CNW/ - (TSX:PMT) - Perpetual Energy Inc. ("Perpetual", the "Corporation" or the "Company") is pleased to announce that strong natural gas production in all of the Company's key operating areas combined for a 2014 exit production rate (December average), of approximately 24,150 boe/d, exceeding Perpetual's target exit rate of 23,400 boe/d and representing 30 percent growth over the Company's 2013 exit rate. Perpetual is also pleased to announce continued positive operational performance and capital execution results in the Greater Edson area, the details of which are disclosed below.

Despite strong operational results, Perpetual has reduced its 2015 first quarter capital program by 30 percent to $45 million, down from the $64 million program announced in November 2014 in response to declining commodity prices. Spending for the remainder of 2015 will be finalized after the first quarter with a view to increased certainty on 2015 commodity prices and funds flow.  Perpetual will target capital spending for the remainder of 2015 to be largely funded by funds flow. Furthermore, Perpetual continues to target additional asset sales in 2015 to strengthen the balance sheet and enhance financial flexibility.

Reduced capital spending will preserve balance sheet strength and preserve value associated with Perpetual's heavy oil drilling inventory, while having only a modest impact on estimated average 2015 production volumes, now forecast to average 23,350 boe/d.  Heavy oil declines are expected to be offset by strong growth in liquids-rich gas production in the Greater Edson area, resulting in expected year over year total average production growth in 2015 of close to 14 percent. 

Prior to 2015, Perpetual entered into several oil price management contracts to ensure a base level of operating cash flow from its heavy oil production. To manage the downside risks associated with uncertain natural gas prices which have now arisen as a result of a prolonged period of exceptionally mild weather, Perpetual has entered into a number of natural gas price management contracts to fix the price on approximately 43 percent of forecast natural gas production for the summer of 2015.

EAST EDSON OPERATIONS UPDATE

Since closing the East Edson joint venture in July 2014, Perpetual has been actively executing its planned drilling program, primarily drawing on the $70 million of farm-in funds established in the joint venture partner escrow account. Fourteen (14.0 net) wells were rig released in 2014, with nine (9.0 net) horizontal wells drilled within the Northeast development area and five (5.0 net) wells terminating within the Southwest development area as defined by McDaniel and Associates Consultants Ltd. ("McDaniel") in the updated reserve report for the East Edson area dated July 14, 2014. Since year end 2014, one (1.0 net) additional well has been rig released and operations are underway to drill an additional two-well pad in the first quarter of 2015. To date, 12 (12.0 net) wells have been completed and tied in through the existing compressor station through to the Rosevear gas plant. Most wells are producing at or above their respective type curves resulting in a positive shift to the boundary on the southwest versus northeast development areas, thereby increasing the drilling inventory of the higher value southwest drilling locations. Completion, frac and testing operations will be performed on one standing well in late January, with the remaining four wells to be completed during 2015 as required to fill the growing processing capacity.

The majority of the $70 million of joint venture partner escrow funds was spent prior to year end 2014 on drilling, completion and tie-in operations as well as seismic activities related to the East Edson joint venture commitments. The remaining funds will be spent early in the first quarter of 2015. Perpetual's additional 2015 commitments for drilling, completion and tie-in activities under the joint venture are on track to be fully satisfied by the end of the first quarter.

Perpetual is also pleased to advise that construction of the new East Edson gas plant at 10-3-52-17W5 is well underway and on schedule for start-up on or before July 1, 2015. Perpetual committed to construct the new 30 MMcf/d gas plant prior to September 2015 as part of the joint venture arrangement. Thus far, construction costs are on budget, incorporating an enhanced design for the refrigeration plant and several pipeline components to accommodate 60 MMcf/d and to facilitate future expansion.

Production at East Edson is currently averaging over 30 MMcf/d plus associated liquids estimated at approximately 20 bbl per MMcf , with the 16-10 compressor station running at full capacity. As part of the joint venture, a gross overriding royalty of 5.6 MMcf/d, plus associated liquids, is payable to the joint venture partner on a monthly basis.

WEST EDSON OPERATIONAL UPDATE

Drilling operations were extremely active at West Edson in 2014. A total of 11 (5.5 net) wells were drilled with most wells exceeding the type curve established by McDaniel. One additional well has been rig released since year end and drilling operations on a second two-well pad will be finished prior to the end of February.  High heat content gas sales exceeded the nameplate capacity for the West Edson plant in December, averaging a gross 71.1 MMcf/d with associated C5+ liquids of 204 bbl/d for a total of 73.6 MMcfe/d. Facility throughput was 61 MMcf/d and the balance of the production was delivered directly from wellhead into the high pressure gathering system. Production will level out by the end of January with natural gas sales expected to be maintained at full capacity of 60 MMcf/d (30 MMcf/d net), plus associated C5+ liquids for 2015.

COMMODITY HEDGING

Natural Gas

With the significant weakness in natural gas prices related to mild winter weather and storage levels, Perpetual has put substantial hedges in place through to October 2015 to guard against further potential downside risk. The following tables provide a summary of natural gas contracts in place as at January 21, 2015.

Fixed price natural gas forward sales arrangements (net of related financial natural gas purchase contracts) at the AECO trading hubs:


Term

Volumes

at AECO

(GJ/d)

Average price

($/GJ)(1)

Market

prices

($/GJ)(2)

Type of contract

February 2015

82,065

2.81

2.64

Financial

February 2015

16,500

2.63

2.64

Physical

March 2015

47,500

3.01

2.63

Financial

March 2015

9,500

2.78

2.63

Physical

April 2015 – October 2015

60,000

2.53

2.63

Financial

(1) Average price calculated using weighted average price for net open contracts.

(2) Market prices are based on forward prices as of market close on January 21, 2015.


Crude Oil

The following tables provide a summary of crude oil contracts in place as at January 21, 2015.

Costless collar oil sales arrangements in Cdn$:

Term

Volumes (bbl/d)

Floor price (Cdn$/bbl)

Ceiling

price (Cdn$/bbl)

Market

prices (Cdn$/bbl)(1)

Type of contract

January 2015 – December 2015

500

87.50

95.25

63.41

Collar

January 2015 – December 2015

500

87.50

95.75

63.41

Collar

(1) Market prices are based on forward WTI oil prices and a forward foreign exchange rate of 1.24 Cdn$:US$ as of market close on January 21, 2015.



Basis differential contracts between WTI and WCS trading:

Term

Volumes (bbl/d)

WTI-WCS

differential

(US$/bbl)(1)

Market

prices

(US$/bbl)(2)

Type of contract

February - December 2015

1,000

(16.88)

(14.56)

Financial

(1) WTI-WCS differential price calculated using weighted average price for net open contracts; contracts settle at WTI index less a fixed basis amount.

(2) Market prices are based on forward WTI-WCS differential prices as of market close on January 21, 2015.


Sold oil call options with monthly expiry over the contract term:

Term

Volumes at WTI

(bbl/d)

Strike price

(US$/bbl WTI)

Market prices

(US$/bbl

WTI)(1)

Type of contract

January 2016 – December 2016(2)

500

106.00

$57.38

Knock out call

January 2016 – December 2016(3)

1,000

104.25

$57.38

Knock out call

(1) Market prices are based on forward WTI oil prices as of market close on January 21, 2015.

(2) If WTI index settles above US$106.00/bbl in any month, the contract is settled at US$97.00/bbl for that month.

(3) If WTI index settles above US$104.25/bbl in any month, the contract is settled at US$95.40/bbl for that month.

2015 CAPITAL BUDGET AND OUTLOOK

In light of significant commodity price weakness, Perpetual has reduced its first quarter capital expenditure budget from the previously announced $65 million to $45 million. Nearly $42 million will be directed to the drilling of six wells (4.5 net) in west central Alberta, with three (1.5 net) at West Edson and three (3.0 net) at East Edson coupled with plant construction activities. All heavy oil drilling has been deferred until oil prices recover, although $1.3 million will be expended on advancing the Mannville waterflood. Strategic spending at Panny to advance the LEAD pilot project has been reduced to include only capital required to drill the observation wells associated with the pilot scheme, estimated at $1.2 million.

Capital activity for the remainder of the year will be assessed as the year progresses with the intention that spending will be largely funded by the $6 million remaining in the East Edson Perpetual escrow account and from funds flow. The reduction in drilling in first quarter 2015 will not materially impact 2015 gas production as the wells drilled to date have generally exceeded the type curves and provide the same production capability as originally budgeted. Further, variations in capital spending for the final three quarters of 2015 are not expected to materially affect average production or annual funds flow.

Incorporating the assumptions outlined above, the following table shows Perpetual's estimated 2015 funds flow using various commodity prices:

Projected 2015 funds flow(2) ($ millions)

AECO gas price ($/GJ)(1)

WTI price

 (US$/bbl)(1)


$2.50

$3.00

$3.50

$4.00

$4.50

$40.00

6.0

19.9

33.7

47.7

61.8

$50.00

11.2

25.1

38.9

52.8

66.9

$60.00

16.4

30.2

44.1

58.0

72.1

$70.00

21.6

35.4

49.3

63.2

77.3

$80.00

26.8

40.6

54.4

68.4

82.5

(1) The current settled and forward average AECO and WTI prices for 2015 as of January 21, 2015 were $2.74 per GJ and US$51.14 per bbl, respectively.

(2) Funds flow is a non-GAAP measures. Please refer to "Non-GAAP Measures" below.


Forward-Looking Information

Certain information regarding Perpetual in this news release including management's assessment of future plans and operations may constitute forward-looking statements under applicable securities laws. The forward-looking information includes, without limitation, statements regarding prospective drilling and operational activities and capital expenditures; forecast production and production type; forecast and realized commodity prices; expected funding, allocation and timing of capital expenditures; projected use of funds flow and anticipated funds flow; planned drilling and development and the results thereof; and commodity prices. Various assumptions were used in drawing the conclusions or making the forecasts and projections contained in the forward-looking information contained in this press release, which assumptions are based on management analysis of historical trends, experience, current conditions, and expected future developments pertaining to Perpetual and the industry in which it operates as well as certain assumptions regarding the matters outlined above. Forward-looking information is based on current expectations, estimates and projections that involve a number of risks, which could cause actual results to vary and in some instances to differ materially from those anticipated by Perpetual and described in the forward looking information contained in this press release. Undue reliance should not be placed on forward-looking information, which is not a guarantee of performance and is subject to a number of risks or uncertainties, including without limitation those described under "Risk Factors" in Perpetual's Annual Information Form and MD&A for the year ended December 31, 2013 and those included in other reports on file with Canadian securities regulatory authorities which may be accessed through the SEDAR website (www.sedar.com) and at Perpetual's website (www.perpetualenergyinc.com). Readers are cautioned that the foregoing list of risk factors is not exhaustive. Forward-looking information is based on the estimates and opinions of Perpetual's management at the time the information is released and Perpetual disclaims any intent or obligation to update publicly any such forward-looking information, whether as a result of new information, future events or otherwise, other than as expressly required by applicable securities laws.

Non-GAAP Measures

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

Volume Conversions

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

About Perpetual

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

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

SOURCE Perpetual Energy Inc.

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