$PGH President’s Message
To our shareholders,
2015 presented some difficult and challenging times for the oil and gas business. The precipitous decline in world crude oil prices and the negative investment sentiment around the business resulted in a very challenging environment both operationally and within the equity markets. However, despite these challenging headwinds, we remained steadfast in our efforts and our teams rose to the challenge to help steward the Company through these turbulent times. We have established a strong track record of operational performance and delivering on our commitments, and in 2015, we demonstrated this once again.
We responded to the drop in oil prices by taking prudent actions at the start of the year designed to safeguard the health and wellbeing of the Company. As the year developed and the outlook for lower commodity prices persisted, we once again acted and introduced additional measures to ensure the Company remained protected. In 2015 we delivered strong operating results, notwithstanding the continued deterioration in the commodity price environment that persisted throughout the year. We successfully executed the start-up of the first commercial phase of Lindbergh, and achieved production rates from Lindbergh in excess of the 12,500 barrels per day (bbl per day) nameplate capacity. Production from Lindbergh exceeded 16,000 bbl per day for the first time during five days in early December. We continued to generate strong results from our conventional operations, achieving annual average production of 71,409 barrel of oil equivalent per day, coming in at the high end of our production guidance, despite significant asset sales and an 80 percent reduction in capital spending year over year and shut-in uneconomic production.
Protection of our financial strength and flexibility was paramount throughout the year, where we curtailed our capital spending and instituted cost management initiatives across all segments of our business. We also made the difficult decision to reduce our staffing levels by 30 percent in the year, to realign our business to the current environment and right size the organization. These cost reduction initiatives resulted in the achievement of operating and G&A expenses that were below the low end of corporate guidance and most importantly, we were able to reduce our debt position by $280 million through the use of funds flow and proceeds from our ongoing disposition program.
Consistency in funds flow performance was a key theme that emanated in 2015 despite the significant decline in commodity benchmark prices. Our strong performance was supported by our robust commodity hedging program, which generated realized cash gains of $327 million during the year, resulting in 2015 funds flow of approximately $459 million. This represented a decline of only nine percent from 2014 funds flow levels, despite a 43 percent reduction in average benchmark prices year over year. We remain well hedged in 2016 with a significant portion of our crude oil and natural gas production protected at prices well in excess of the current market prices.
We continued to build the foundations for long-term growth by delivering strong reserves performance in 2015, successfully replacing 282 percent of 2015 production with proved plus probable (2P) reserve additions, prior to the impact of dispositions and 145 percent of production net of dispositions. We were able to do this at a competitive 2P finding and development cost of $7.12 per boe including future development costs. In total, 2015 2P reserves increased two percent to 569 million barrels of oil equivalent, this in spite of significant asset divestitures in the year. The significant reserve additions came from two of our key focus areas, the Lindbergh and Groundbirch resources. These two areas represent future growth potential and value creation in the company and for our shareholders.
Looking forward into in 2016, we remain disciplined and prudent in our approach to managing our business in this low commodity price environment. In 2016 we announced the suspension of our dividend and adopted a lean capital program for the year that contemplates no development activity but will allocate some minor capital to advance long-term projects, namely at Lindbergh and Bernadet. These projects represent excellent low cost, opportunities for longer-term production growth. Our 2016 capital budget was conservatively based on the assumption of an average WTI crude oil price of US $30.00 per bbl, an AECO natural gas price of Cdn $2.40 per Mcf, WTI/WCS heavy oil differential US$12.60 per bbl and a $0.70 US/Cdn exchange rate, which represents the environment that we believe, could persist throughout the year.
We remain committed to our debt reduction initiative in 2016 and with no scheduled debt maturities in 2016, we expect to be in a position to materially reduce our outstanding debt through a combination of strong funds flow from operations supported by a substantial hedging program, disposition proceeds, and our ongoing cost reduction initiatives. We retain ample financial flexibility with our $1.0 billion committed revolving credit facility, which was renewed and extended in
PENGROWTH 2015 President's Message
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2015 resulting in a maturity date of March 31, 2019. These initiatives are expected to allow the Company to remain compliant with its debt obligations as we navigate our way through this low commodity cycle.
2015 was undoubtedly a very challenging year for the business and we acknowledge that the year was very difficult on our shareholders. We strongly believe the efforts we demonstrated in 2015 and the actions we have taken in 2016 are the appropriate ones to ensure that the Company remains financially sound and emerges from this downturn a stronger Company. We are committed to our strategy and have confidence in our ability to deliver on that strategy. We have great assets that provide us with a solid foundation and the opportunity to create long-term growth and value for our shareholders, a fact that we believe will be acknowledged by the capital markets.
On behalf of our Board of Directors, management and all of our employees, I would like to take this opportunity to thank all of our shareholders for their continued support. As well, I would like to thank our employees for their tireless dedication, commitment and support in what has been a difficult year.
Sincerely,
Derek W. Evans
President and Chief Executive Officer
February 24, 2016
