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Pengrowth Energy Corp (NYSE:PGH)

Q4 2013 Earnings Conference Call

March 3, 2014 7:00 PM ET

Executives

Derek Watson Evans – President, Chief Executive & Operating Officer

Marlon John McDougall – Chief Operating Officer

Christopher Geoffrey Webster – Chief Financial Officer

Robert William Rosine – Vice President-Business Development

Fred Kerr – Vice President of Investor Relations

Analysts

Gordon Tait – BMO Capital Markets

Patrick Bryden – Scotiabank

Steve Toth – Canaccord Genuity Corp.

Operator

Good morning, ladies and gentlemen. Welcome to Pengrowth Energy Corporation’s 2013 Fourth Quarter and Year-End Results Conference Call and Webcast.

I would now like to turn the meeting over to Mr. Derek Evans, President and Chief Executive Officer. Please go ahead.

Derek Watson Evans

Thank you, Wayne, and good morning, ladies and gentlemen. I’m Derek Evans, President and CEO of Pengrowth. Joining me today on the call are Marlon McDougall, our Chief Operating Officer; Chris Webster, our Chief Financial Officer; Bob Rosine, our Executive Vice President of Business Development, and Fred Kerr, our VP of Investor Relations.

Before we begin, I remind you that certain information presented today, may constitute forward-looking statements. Such statements reflect current expectations, estimates, projections and assumptions of the company. These forward-looking statements are not guarantees of future performance and are subject to certain risks, which could cause actual performance and financial results in the future to vary materially from those contemplated in the forward-looking statements. For additional information on these risks, see Pengrowth’s Annual Information Form under the headings Risk Factors and Forward-looking Statements.

I’ll take few minutes today and review Pengrowth’s 2013 results. But first, I want to remind shareholders about Pengrowth’s goals and our strategy to achieve those goals. We are transforming Pengrowth into a sustainable dividend paying energy producer.

Today, Pengrowth’s production is just over half oil and liquids with the balance natural gas, but our mix is about to shift decisively towards oil as we bring our new production from our Lindbergh thermal projects only a year from now. We’ve chosen thermal bitumen as our commodity of choice, because it offers long life reserves, lower declines in better capital efficiency than alternatives like natural gas or light oil. We have a strong thermal bitumen asset at Lindbergh whose prior result suggest it is one of the better thermal assets in Alberta, and we have assembled an experienced team to develop that resource.

The Lindbergh pilot continues to perform exceptionally well, with production volumes from the two well pairs at February 1, 2014 at approximately 1,900 barrels per day, with an Instantaneous Steam Oil Ratio of approximately 2. Total cumulative production from the two-well pilot has now exceeded 1.1 million barrels. Construction of Lindbergh’s first commercial phase remains on schedule and on budget, with 65% of the capital committed or spent as of March 3, 2014.

As we did last year, we laid out plans, our plans for the next five years during January in an Investor Day Presentation, which you can find on our website at www.pengrowth.com. We encourage you to review this presentation for a detailed description of what we are doing and why we are doing it.

2013 was a year of substantial accomplishments, where we did, what we said we would do, as we effectively executed on our defined strategy. On the financial side of the business in 2013, we continue to pay a monthly dividend of $0.04 per share per month. We sold over a $1 billion worth of non-core assets in a challenging disposition market at an average price of $72,000 per flowing boe. We maintained our financial flexibility by increasing our hedging, renewing our $1 billion bank facility for another four years, maintaining a balanced cash in, cash out profile for 2013, and as we entered 2014, we did it with $450 million of cash on hand.

On the asset side of the business in 2013, our Lindbergh project had another strong year. The pilot delivered another year of high rate, low steam oil ratio production. We received regulatory approval in July of 2013 for the first 12,500 barrel a day commercial phase at Lindbergh. Construction commenced on that phase in September of 2013, and in December of 2013, we submitted the Phase II application, the EIA application for an additional 17,500 barrel a day expansion.

On the conventional side of the business, we delivered top end of production guidance while spending $74 million less than forecast. This was driven by improving capital reinvestment efficiency, industry leading drilling results in the Cardium, and high grading CapEx projects to maximize funds flow from operations and short payouts.

I won’t rehash our quarterly report, which is very thorough, but I did want to make a couple of observation about our most recent results, our recent financial results. Fourth quarter 2013 average production of 77,371 boe per day exceeded our guidance of 75,000 to 77,000 boe per day and included the impacts of the planned asset divestitures carried out in 2013, the bulk of which closed early in the fourth quarter.

Full year 2013, annual average production of 84,527 boe per day also achieved in our corporate guidance of 82,000 to 84,000 boe a day and was achieved while spending $74 million less in capital expenditure than originally planned, compared to full year 2012 average annual production of 85,748 boe’s a day, 2013 average production declined by 1% primarily as a result of asset divestitures.

Fourth quarter 2013 funds flow from operations was approximately $106 million, which would represent $56 million decline from the third quarter of 2013 funds flow of $162 million, a dramatic lightening of light and heavy oil differentials experienced in November and December significantly reduced revenue and funds flow in the quarter. Lower productions volumes resulting from the asset divestitures were also our contributing factor.

Full year 2013 funds flow of $561 million was $22 million higher than the full year 2012 funds flow by $539 million, or $539 million. Funds flows were bolstered by higher realized prices for natural gas, offset by increased operating expenses and a higher realized losses on commodity risk management activities.

Fourth quarter operating expenses – our fourth quarter of 2013 operating expenses decreased $16 million compared to the third quarter of 2013 mainly due to a decrease in electrical power costs, the absence of operating costs on disposed properties, as well as lower subsurface costs, significantly higher power costs were the main driver behind the 11% increase in operating expenses in 2013 compared to 2012.

As power constitutes a significant commodity of our operating expense, Pengrowth has taken steps to mitigate the impacts of swings in power prices by hedging approximately 78% of our 2014 expected power consumption at prices well below the average coal prices experienced in 2013.

On the reserve side in 2013, Pengrowth replaced 211% of 2013 production with organic proved plus probable reserve additions including revisions of 65 million boe. Our 2P proved plus probable reserve life index increased to 17.4 years at year-end 2013 and 18% increase from year-end 2012 due primarily to increased reserves at Lindbergh.

Pengrowth’s 2013 Finding and Development costs was $21.96 million per boe including changes in FDC or future development costs for proved plus probable reserves.

In summary, 2013 was a landmark year for Pengrowth, a year in which we set aggressive goals and achieved them we disposed of approximately $1 billion of non-core assets to fully fund the first commercial phase of the Lindbergh project received regulatory approval and began construction of the first phase in September.

We enhanced the capital efficiency of our non-thermal business and finished the year strongly with production exceeding guidance spending $74 million less than budgeted and with $450 million of cash in the bank.

In 2014, our primary objectives will be to get Lindbergh on stream, on time and on budget, maintain our current dividend, while protecting our balance sheet and continuing to invest efficiently in our non-thermal oil projects.

This is an exciting time for Pengrowth, we go into 2014, with a differentiated logical strategy to become a sustainable growing dividend paying thermal oil producer and a plan to get there, a plan that indicates that significant cash flow growth is eminent. We look forward to informing about that story as it unfolds over the coming months, including our various quarterly reports and mid-year reserve update for Lindbergh.

We’d now be happy to answer any questions you may have. Operator do we have any questions in the queue.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. (Operator Instructions) Our first question is from Gordon Tait from BMO Capital Markets. Please go ahead.

Gordon Tait – BMO Capital Markets

Good morning. Derek could just maybe highlight the two or three most significant kind of construction items left to complete before the Lindbergh start-up and maybe sort of what things you are looking for with each one of those little components to ensure that you still remain on time and on budget?

Derek Watson Evans

Sure, Gordon, let me turn that question over to Marlon Mcdougall.

Marlon John McDougall

Yes, good morning, Gordon. If I would break Lindbergh down the central processing facility would be the biggest components from a construction perspective then I think, I would talk about the interconnecting well or pipelines from the wells to the central processing facility. And thirdly, I would be looking at the drilling and completion of the wells.

So as you know at the central processing facility and where we talked about fairly extensively all of the major components have been ordered and 90% of them are on site at this point in time, so we feel very strongly that the central processing facility itself is in good shape we are in the mechanical construction phase or another words, we are bolting things together and finishing the wiring and instrumentation.

On the drilling side, we’re about 50% complete on the drilling. So we’ve got one pad, where we have drilled 14 well pairs, pardon me, 7 well pairs, 14 wells in total. The completion rig has set up half of the wells for initial steaming. On the second pad, we’re about 50% complete on the drilling. And on the third pad, we are just drilling surface hole right now.

So there is probably three months to four months worth of drilling and completion activity still in front of us. And there is a significant amount of activity to install the pipelines that will join the well-pads to the central processing facility.

Gordon Tait – BMO Capital Markets

And has this weather or this really cold winter, is that affecting the progress up there at all?

Derek Watson Evans

Not in a significant way the CPF, we aren’t doing any stick building in the field. So as you can appreciate the skids arrive on the back of trucks and the crane picks them up and puts them in place and they get bolted together. So we don’t have a significant number of welders or pipe fitters in the field doing workout in the – out in the 30 to 40 below weather. So that has not hampered us and also remember that we are located right off of the major highways, so it’s not an access issue from a weather or snow perspective.

Gordon Tait – BMO Capital Markets

All right, thanks.

Operator

Thank you. The following question is from Patrick Bryden from Scotiabank. Please go ahead.

Patrick Bryden – Scotiabank

Good morning gentlemen. Just wondering if we can have a quick sense for your expectation of how the pilot should progress this year as we look months-by-months for results? Thank you.

Derek Watson Evans

Sure, Pat, I’m Derek, I’m going to turn it over to Marlon and he can give you a bit of an updates on where we’re out today as well as where we expect for pilot production is going to go over here.

Marlon John McDougall

Yes, good morning, Patrick. I think from our press release you would have seen where we mentioned that we have had – so we had a few pump issues on the wells through the end of December and into January. So the production was fluctuating a fair bit over that time period, but we are back up and running and somewhere over 1,900 barrels per day. We believe that we are now at the stage in the production of those wells where we should start to see decline that will look something like about 2% per month and that should be starting to kick in here in Q1, and the wells will continue to decline through the rest of the year.

Patrick Bryden – Scotiabank

Great. And impact on SOR would be commence or rise, is that fair?

Marlon John McDougall

Yes, you would expect to see the SOR start to inch up, but remember that the API quality of the crude and the viscosity of the crude is such that the retained heat that’s in the reservoir is more than sufficient to continue to produce at higher rates. So we don’t believe that we will be needing to ramp the steam up continuously as we go forward. So although it’s going go up, we don’t think it’s going to be significant in the near-term.

Patrick Bryden – Scotiabank

Great. Thanks very much.

Operator

Thank you. The following question is from Steve Toth from Canaccord Genuity. Please go ahead.

Steve Toth – Canaccord Genuity Corp.

Yes, thanks. Hi, guys. Congrats on the quarter. Just wondering if you could give us an idea of your conventional F&D costs last year just adjusting for Lindbergh if you have those on a 1P and 2P including FDC?

Marlon John McDougall

I’m going to ask – Steve, good morning. I’m going to ask Derek, I’m going to ask Bob Rosine to give us a quick update on what you think so far today?

Derek Watson Evans

Yes, so without any FDC, the 2P was 22.98 for the organic portion, not including Lindbergh and not including acquisitions. So 2P was 22.98 and 1P was 28.02 and then including FDC, it’s 24.60 and 30.83, so 24.60 for 2P and 30.83 for 1P.

Steve Toth – Canaccord Genuity Corp.

That’s great, thanks. One more question, just looking at 2P and contingent at Lindbergh, is my calculation right that’s it’s all about 4% year-over-year?

Derek Watson Evans

Yes, and that would have partly due to mapping changes that we had when we did our midyear with the summer work and delineation. We’re doing more delineation work this year again, and that combined with the review of the pilot work that’s ongoing, which is 43 wells that we are doing this year, and we’re drilling those as we speak.

And then the reviewing the pilot again full year, midyear, as well as building in the EIA application that was submitted on December 23, we’ll do a full year, midyear reserve with valuation in Q3, and we expect to see some further additions at that point in time.

Steve Toth – Canaccord Genuity Corp.

Great, thanks. Just one more question if I may, I see you’ve started the program of the [indiscernible], can you talk about your plans there this year?

Marlon John McDougall

Steve, it’s Marlon. So [indiscernible] that’s – that would be out and if we look down the road, those lands are, what would be in the last phase of Lindbergh. So we are just starting to drill the initial core holes up there to solidify our mapping. So we are looking at and have seismic across all of that area. So now we’re just tying the seismic factors in core holes looking to continue to expand and extend our understanding of that piece of reservoir.

Steve Toth – Canaccord Genuity Corp.

That’s, great. Thanks, guys. Congrats again.

Marlon John McDougall

Thank you.

Derek Watson Evans

Thank you.

Operator

(Operator Instructions) There are no further questions registered at this time. I would like to return the meeting to Mr. Evans.

Derek Watson Evans

Thank you, Wayne, and thank you ladies and gentlemen for joining us at this early hour to review the results of 2013. As I said 2013, we thought was a great year for Pengrowth one in which we met our commitments, we did exactly what we said we were going to do. And as you can tell, we’re extremely proud of that.

I hope you can also tell that we’re extremely excited about what 2014 has in store for us and our pilot continues to perform extraordinarily well. We’re looking forward to not only having Lindbergh built on time and on budget, but first team in the fourth quarter of 2014, and first production in the first quarter of 2015.

So last year was a big year, this year is going to be equally as exciting for everybody and we look forward to keeping you informed and up to speed as the story unfolds throughout the year.

Operator

Thank you. That concludes today’s conference call. Please disconnect your lines at this time. And we thank you for your participation.

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