Peyto Celebrates 15 Years and Record Production of 70,000 boe/d

Peyto Celebrates 15 Years and Record Production of 70,000 boe/d 
CALGARY, ALBERTA -- (Marketwired) -- 11/13/13 -- Peyto Exploration &
Development Corp. ("Peyto") (TSX:PEY) is pleased to present its
operating and financial results for the third quarter of the 2013
fiscal year. This quarter culminates 15 successful years of
delivering superior returns to shareholders through the profitable
development of long life, high value, natural gas assets in one of
the premium resource basins in North America. With an industry
leading cost structure, Peyto delivered third quarter operating
margins of 75%(1) and profit margins of 23%(2), while growing
production per share 18% year over year. Third quarter 2013
highlights included: 


 
--  Production per share up 18%. Production increased 22% (18% per share)
    from 276 MMcfe/d (46,033 boe/d) in Q3 2012 to 338 MMcfe/d (56,343 boe/d)
    in Q3 2013. Year to date average production of 340 MMcfe/d (56,623
    boe/d) is 32% higher than 2012 production of 257 MMcfe/d (42,772 boe/d).
    Current production is approximately 420 MMcfe/d (70,000 boe/d),
    exceeding the previous year-end 2013 guidance. 
    
--  Funds from operations per share up 25%. Funds from Operations ("FFO")
    grew 30% (25% per share) from $77 million in Q3 2012 to $100 million in
    Q3 2013 due to increases in both production and natural gas price. 
    
--  Industry leading cash costs of $1.07/mcfe. Total cash costs including
    royalties, operating costs, transportation, G&A and interest were
    $1.07/mcfe ($6.42/boe), up slightly from $1.00/mcfe ($6.02/boe) in Q3
    2012 primarily due to higher royalties from higher natural gas prices,
    resulting in cash netbacks of $3.22/mcfe ($19.32/boe) or a 75% operating
    margin. 
    
--  Record organic capital investment of $181 million. A total of 34
    horizontal wells were drilled in Q3 2013, a new quarterly record for
    Peyto. 
    
--  Earnings of $0.21/share, dividends of $0.24/share. Earnings of $30
    million ($105 million year-to-date) were generated in the quarter, while
    dividends of $36 million ($95 million year-to-date) were paid to
    shareholders, representing a before tax payout ratio of 36% of FFO (30%
    year-to-date). The $0.08/share monthly dividend ($0.24/share for the
    quarter) was up 33% from Q3 2012.

 
Third Quarter 2013 in Review 
The third quarter of 2013 was a challenging period for Peyto as wet
ground conditions at the start of the quarter and weak AECO natural
gas prices at the end of the quarter hindered Peyto from maximizing
production and Funds from Operations as otherwise planned. Despite
those challenges, a 10 rig drilling program was successfully executed
throughout the quarter and a record 34 horizontal wells were drilled
and brought on production. The new producing wells helped increase
production from a post breakup low of 53,500 boe/d to 60,000 boe/d,
however, production above that level was purposefully restricted to
prevent exposing unhedged flush volumes to the temporary and
artificially low Alberta natural gas prices that were prevalent in
August and September. The low Alberta (AECO) natural gas prices were
due to a short term increase in interruptible tolls on the
TransCanada Mainline and a temporary widening of the NYMEX to AECO
basis differential. Peyto elected to conduct facility and pipeline
maintenance during those low price periods in advance of the return
to normal prices in October. On average for the quarter,
approximately 2,000 boe/d was offline due to maintenance and
restrictions. Subsequent to the quarter, improved natural gas prices
along with the completion of three new facility projects have allowed
for the activation of all behind pipe production, with current
production exceeding 70,000 boe/d. Notwithstanding the volatility in
natural gas prices in the quarter, strong financial and operating
performance was delivered resulting in an annualized 12% Return on
Equity (ROE) and 10% 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.                     
                                                                            
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                                              Three Months ended            
                                                 September 30            %  
                                                   2013        2012 Change  
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Operations                                                                  
Production                                                                  
 Natural gas (mcf/d)                            300,286     244,794     23% 
 Oil & NGLs (bbl/d)                               6,295       5,236     20% 
 Thousand cubic feet equivalent (mcfe/d @       338,058     276,200     22% 
  1:6)                                                                      
 Barrels of oil equivalent (boe/d @ 6:1)         56,343      46,033     22% 
Product prices                                                              
 Natural gas ($/mcf)                               3.35        3.06      9% 
 Oil & NGLs ($/bbl)                               70.91       68.62      3% 
 Operating expenses ($/mcfe)                       0.37        0.35      6% 
 Transportation ($/mcfe)                           0.12        0.11      9% 
 Field netback ($/mcfe)                            3.49        3.29      6% 
 General & administrative expenses ($/mcfe)        0.02        0.03    (33)%
 Interest expense ($/mcfe)                         0.25        0.25      -  
Financial ($000 except per share)                                           
Revenue                                         133,573     102,042     31% 
Royalties                                         9,722       6,632     47% 
Funds from operations                            99,736      76,918     31% 
Funds from operations per share                    0.67        0.54     25% 
Total dividends                                  35,702      25,576     40% 
Total dividends per share                          0.24        0.18     33% 
 Payout ratio                                        36          33      9% 
Earnings                                         30,461      23,058     32% 
Earnings per diluted share                         0.21        0.16     31% 
Capital expenditures                            180,801     317,089    (43)%
Weighted average shares outstanding         148,758,923 142,069,408      5% 
                                                                            
As at September 30                                                          
Net debt                                                                    
Shareholders' equity                                                        
Total assets                                                                
                                                                            
 
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                                               Nine Months ended            
                                                 September 30            %  
                                                   2013        2012 Change  
----------------------------------------------------------------------------
Operations                                                                  
Production                                                                  
 Natural gas (mcf/d)                            302,711     228,982     32% 
 Oil & NGLs (bbl/d)                               6,172       4,608     34% 
 Thousand cubic feet equivalent (mcfe/d @       339,740     256,630     32% 
  1:6)                                                                      
 Barrels of oil equivalent (boe/d @ 6:1)         56,623      42,772     32% 
Product prices                                                              
 Natural gas ($/mcf)                               3.52        3.15     12% 
 Oil & NGLs ($/bbl)                               71.40       74.26     (4)%
 Operating expenses ($/mcfe)                       0.35        0.32      9% 
 Transportation ($/mcfe)                           0.12        0.12      -  
 Field netback ($/mcfe)                            3.64        3.39      7% 
 General & administrative expenses ($/mcfe)        0.03        0.05    (40)%
 Interest expense ($/mcfe)                         0.24        0.23      4% 
Financial ($000 except per share)                                           
Revenue                                         411,389     291,090     41% 
Royalties                                        30,162      21,549     40% 
Funds from operations                           312,579     219,295     43% 
Funds from operations per share                    2.10        1.57     34% 
Total dividends                                  95,197      75,415     26% 
Total dividends per share                          0.64        0.54     19% 
 Payout ratio                                        30          34    (12)%
Earnings                                        104,638      68,128     54% 
Earnings per diluted share                         0.71        0.49     45% 
Capital expenditures                            423,708     461,646     (8)%
Weighted average shares outstanding         148,730,485 139,631,290      7% 
                                                                            
As at September 30                                                          
Net debt                                        862,864     683,540     26% 
Shareholders' equity                          1,218,362   1,092,079     12% 
Total assets                                  2,429,125   2,077,890     17% 
                                                                            
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                                     Three Months ended   Nine Months ended 
                                        September 30        September 30    
($000)                                   2013       2012      2013      2012
----------------------------------------------------------------------------
Cash flows from operating activities  101,361     72,004   290,343   205,939
Change in non-cash working capital     (4,404)     3,790    13,586    10,070
Change in provision for performance                                         
 based compensation                     2,779      1,124     8,650     3,286
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Funds from operations                  99,736     76,918   312,579   219,295
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Funds from operations per share          0.67       0.54      2.10      1.57
----------------------------------------------------------------------------
(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 & Development 
Third quarter drilling activity focused on the Greater Sundance core
area and the many liquids rich, sweet gas resource plays currently
under development. A total of 34 wells were drilled across this land
base, targeting the prospective zones shown in the following table: 


 
                                                                      Total 
 Q3 2013                            Field                             Wells 
                                                                New         
   Zone   Sundance Nosehill Wildhay Ansell Berland Kisku/Kakwa Area  Drilled
----------------------------------------------------------------------------
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 Cardium     1        1        -      1       -         -        -      3   
Notikewin    3        1        2      3       -         -        -      9   
  Falher     5        1        2      -       -         -        -      8   
 Wilrich     3        2        2      5       -         -        -     12   
 Bluesky     2        -        -      -       -         -        -      2   
----------------------------------------------------------------------------
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Total        14       5        6      9       -         -        -     34   
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Over the last year, the Bluesky and Falher formations have
contributed the largest proportional increases in production with
increases of 190% and 80%, respectively. Currently, the Bluesky is
contributing 4,800 boe/d while the Falher is contributing 10,300
boe/d to Peyto's total production. Proven future drilling inventory
in these two formations continues to expand and Peyto anticipates a
larger percentage of future drilling activity will target these
formations.  
Capital Expenditures  
Peyto invested $86 million to drill, and $54 million to complete, 34
gross (31.6 net) horizontal wells in the quarter. In addition, $14
million was invested to install wellsite equipment and pipelines to
bring 34 gross (32.6 net) wells on production, while $24 million was
invested in the ongoing fabrication and preparation of three new
facility projects at Oldman North, Swanson and Brazeau. The balance
of the capital investments, or $3 million, was invested in the
acquisition and evaluation of new undeveloped lands. In total, $181
million of capital was invested, representing the largest quarterly
capital program in Peyto's history. 
Financial Results 
Alberta (AECO) daily natural gas prices averaged $2.31/GJ in Q3 2013,
while AECO monthly prices averaged $2.66/GJ. As Peyto commits most of
its production to the monthly price, Peyto realized a volume weighted
average natural gas price of $2.62/GJ in Q3 2013, or $2.99/mcf, prior
to a hedging gain of $0.36/mcf. This unhedged realized price was up
26% from Q3 2012 but down 22% from the previous quarter. Peyto
realized a blended oil and natural gas liquids price of $71.79/bbl in
Q3 2013, prior to a $0.88/bbl hedging loss, for its blend of
condensate, pentane, butane and propane, which represented 68% of the
$105.13/bbl average Edmonton light oil price. The current offset to
light oil price has increased due to a greater percentage of propane
and butane in Peyto's natural gas liquids blend resulting from the
Oldman deep cut facilities. Combined, Peyto's unhedged revenues
totaled $3.99/mcfe ($4.29/mcfe including hedging gains), or 152% of
the dry gas price, illustrating the benefit of high heat content,
liquids rich natural gas production. 
Royalties of $0.31/mcfe, operating costs of $0.37/mcfe,
transportation costs of $0.12/mcfe, G&A of $0.02/mcfe and interest
costs of $0.25/mcfe, combined for total cash costs of $1.07/mcfe
($6.42/boe). These industry leading total cash costs resulted in a
cash netback of $3.22/mcfe ($19.32/boe) or a 75% operating margin. 
Depletion, depreciation and amortization charges of $1.75/mcfe, along
with a provision for future tax and market based bonus payments
reduced the cash netback to earnings of $1.00/mcfe, or a 23% profit
margin.  
Net debt at the end of Q3 2013 was $862 million or 2.2 times
annualized FFO, however, financial flexibility remained strong with
over $280 million of available borrowing capacity out of a total
$1.15 billion. Subsequent to the quarter, Peyto announced that it had
priced an issuance of CND $120 million of senior unsecured notes, to
be issued by way of private placement pursuant to a note purchase
agreement. The notes have a coupon rate of 4.5% and mature in
December 2020. This issuance is expected to close in early December
2013 and will increase Peyto's total borrowing capacity to $1.27
billion. 
Marketing 
Alberta (AECO) daily natural gas price dropped from a high of
$3.81/GJ in the second quarter 2013 to a low of $1.57/GJ in the third
quarter 2013 as the basis differential to NYMEX increased
dramatically. This volatile differential was due to an increase in
short term interruptible tolls on the TransCanada mainline system. By
the end of the quarter, the basis had begun to return to normal
levels as longer term contracts were put in place allowing AECO
prices to stabilize at approximately the $3.00/GJ level. Currently,
both the AECO and NYMEX futures prices for natural gas are forecast
to rise at very modest levels as future supplies are expected to meet
growing demands.   
Approximately 63% of Peyto's (after royalty) natural gas production
had been pre-sold for Q3 2013, at an average fixed price of $3.20/GJ.
This was the result of an active hedging program which layers in
future sales in the form of fixed price swaps in order to smooth out
the volatility in natural gas price.  
Going forward, Peyto has committed to the future sale of 81,992,500
GJ of natural gas at an average price of $3.37/GJ. As at November 13,
2013, the remaining hedged volumes and prices for the upcoming years
are summarized in the following table. 


 
----------------------------------------------------------------------------
                         Future Sales               Average Price (CAD)     
----------------------------------------------------------------------------
                             GJ            Mcf           $/GJ          $/Mcf
----------------------------------------------------------------------------
2013                 13,117,500     11,498,056           3.30           3.79
2014                 61,225,000     53,666,358           3.37           3.84
2015                  7,650,000      6,705,556           3.50           3.99
----------------------------------------------------------------------------
Total                81,992,500     71,869,970           3.37           3.85
----------------------------------------------------------------------------

 
As illustrated in the following table, Peyto's hedged realized
natural gas liquids prices were up 4% year over year and 3% from the
previous quarter. 


 
----------------------------------------------------------------------------
                                Three Months ended September 30           Q2
                                           2013             2012        2013
----------------------------------------------------------------------------
Condensate ($/bbl)                        95.96            85.70       92.44
Propane ($/bbl) - incl.                                                     
 hedging                                  24.70            18.70       23.70
Butane ($/bbl) - incl. hedging            49.72            55.52       48.12
Pentane ($/bbl)                           99.44            88.87      100.37
----------------------------------------------------------------------------
Total Oil and NGLs ($/bbl)                70.91            68.62       68.08
----------------------------------------------------------------------------

 
Peyto's hedging practice with respect to propane also continued in
the quarter and as of November 13, 2013, Peyto had committed to the
future sale of 248,424 bbls of propane at an average price of
$38.14USD/bbl. As at November 13, 2013, the remaining hedged volumes
and prices for the upcoming years are summarized in the following
table. 


 
----------------------------------------------------------------------------
                                                Propane                     
----------------------------------------------------------------------------
                           Future Sales (bbls)      Average Price ($USD/bbl)
----------------------------------------------------------------------------
2013                                    56,364                        $36.24
2014                                   192,060                        $38.70
----------------------------------------------------------------------------
Total                                  248,424                        $38.14
----------------------------------------------------------------------------

 
Prices for propane contracts listed above are in USD at Conway. The
price Peyto realizes is less: i) a market-basis differential from
Conway to Edmonton, ii) currency exchange, and iii) a pipeline and
fractionation fee to get to Peyto's plant gate price.  
Activity Update 
Peyto has been very busy of late with the recent commissioning of
three new facility projects and the activation of 25 new wells in the
last eight weeks which has contributed to the production growth from
60,000 boe/d to 70,000 boe/d.  
At Brazeau River, Peyto constructed and activated the first 10 mmcf/d
of process capacity to accommodate the initial three wells that were
waiting to be brought on production. The second 10 mmcf/d of capacity
wil
l be commissioned over the next two weeks for an additional three
wells that will be drilled in the fourth quarter. Peyto anticipates
this facility will be further expanded in 2014 to 40 mmcf/d.  
At Peyto's Swanson gas plant in the Ansell area, an additional 30
mmcf/d of process capacity was added, bringing total capacity to 50
mmcf/d. This plant was processing just under 5 mmcf/d a year ago and
is now processing over 45 mmcf/d. This new capacity is now able to
process incremental volumes from the southern end of Peyto's Ansell
lands that were connected with a 50 km, 10" gathering line earlier
this year. Peyto plans to further expand the Swanson plant in
mid-2014 with 15 mmcf/d of additional compression.  
Finally, on November 10th, Peyto commissioned a new gas plant at
Oldman North which has initial compression capacity of 30 mmcf/d but
with process capacity of 50 mmcf/d. Peyto expects this initial
capacity to be full by year end and further compression can be added
in 2014 to match total capacity. This plant will play a vital role in
Peyto's ongoing development of the Upper Falher and Bluesky plays in
Greater Sundance.  
Since the end of the quarter, Peyto has drilled 9 gross (8.3 net)
wells and brought on production 14 gross (12.6 net) wells. There are
12 additional wells planned from now until the end of the year to
round out this year's drilling program at 99 gross (93.5 net) wells.
Peyto anticipates that it will now exit 2013 with 71,000 boe/d of
production on total capital expenditures of $565 million. 
Drilling and completion activity during the past few months has
provided encouraging cost and well performance results. By combining
even faster drilling times, longer horizontal laterals, most recently
as long as 2160m, as well as higher frac density, Peyto has been able
to achieve even better performance for minimal additional cost.
Production performance over the next several quarters will help
determine the success of these changes in achieving greater overall
returns. 
2014 Budget  
The Board of Directors has approved a preliminary 2014 budget which
includes a capital program that is expected to range between $575 and
$625 million. This would be the largest capital program in the
company's history and involves drilling between 110 and 125 wells
(100 to 115 net to Peyto's working interest). It is anticipated that
this record level of activity would utilize 9 to 10 drilling rigs to
develop the many stacked formations in Peyto's Deep Basin core areas.
Peyto plans to have a higher level of rig activity in summer months
than in winter to reduce costs associated with heating and to take
advantage of reduced service rates in summer. As in past years, it is
projected that over 80% of the total capital investment would be
directed to the well-related activity of drilling, completions,
wellsite equipment, and pipelines.  
The 110 to 125 wells will be selected from Peyto's inventory of over
1,300 locations, and are expected to add between 32,000 to 35,000
boe/d of new working interest production, for a cost of less than
$18,000/boe/d. This capital efficiency is consistent with that
achieved over the last four years and is not dependent on
improvements to historical efficiency that may come as a result of
additional innovation in drilling and completion technology. A
portion of this new production will offset an internally forecast 34%
base decline, while a portion will grow overall 2014 production to a
forecast exit level between 78,500 and 81,500 boe/d.  
Facility expansions at the Oldman North, Swanson and Brazeau gas
plants, in order to accommodate the production growth, are expected
to account for 10% of the budget, while acquisition of new drilling
opportunities will make up the balance. Today, total company gas
processing capacity is 510 mmcf/d of natural gas and associated
liquids. With the 2014 planned expansion projects, Peyto expects to
exit 2014 with close to 600 mmcf/d of owned and operated processing
capacity. Peyto does not anticipate installing any additional liquids
extraction facilities in 2014. Considering the limitations in NGL
fractionation capacity and under forecast propane and butane prices,
higher returns are currently being generated drilling new wells than
through facility modification projects. 
Natural gas prices in Alberta are currently forecast to average
approximately $3.30/GJ, which, adjusted for an historic NGL and heat
content premium of 150% and combined with Peyto's current hedge
position and industry leading cash costs of $1/Mcfe ($6/boe), would
yield cash netbacks of $23-$24/boe and give Peyto the ability to fund
the dividend and majority of the 2014 capital program. The balance of
the capital program can be funded from available bank lines and
working capital, while still maintaining Peyto's balance sheet
strength and a conservative level of debt. 
Outlook  
The demand for natural gas is expected to continue to increase in
North America, as both Canada and the US pursue increased coal to gas
switching for power generation, increased industrial consumption
(including oil sands), eventual LNG exports, and the adoption of
natural gas as a transportation fuel. At the same time, the industry
is expected to meet this demand with growing supplies from
unconventional tight gas and shale gas sources. This is causing the
current and futures price for natural gas, both in Canada (AECO) and
the US (NYMEX), to trade at a constrained level, disconnected from
the energy equivalence of crude oil.  
In reality, there are only a select few operators in a few basins in
North America that have demonstrated true profitability at current
market prices and an ability to consistently increase supply. The
Deep Basin in Alberta is one of those few basins with Peyto being one
of the most active and profitable operators. Insulated by an industry
leading, low cost advantage, and with an abundant and growing
inventory of profitable drilling ideas, Peyto remains well positioned
to continue generating superior returns for shareholders into 2014
and beyond.  
Conference Call and Webcast  
A conference call will be held with the senior management of Peyto to
answer questions with respect to the 2013 third quarter on Thursday,
November 14th, 2013, at 9:00 a.m. Mountain Standard Time (MST), or
11:00 a.m. Eastern Standard Time (EST). To participate, please call
1-866-225-2055, or for those outside North America or in the Toronto
area call 1-416-340-2220. The conference call will also be available
on replay by calling 1-800-408-3053 (North American Toll Free) or
1-905-694-9451 (for those outside North America or local in Toronto)
using passcode 9185851. The replay will be available at 11:00 a.m.
MST, 1:00 p.m. EST Thursday, November 14th, 2013 until 11:00 am MST
on Thursday, November 21st, 2013. In addition to telephone access,
the conference call can be accessed through the internet at
http://www.gowebcasting.com/4974. 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/Q32013MDandA.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. 
Darren Gee, President and CEO 
November 13, 2013 
Certain 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, curre
ncy 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. 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 Balance Sheet (unaudited)                                         
(Amount in $ thousands)                                                     
                                                                            
                                                    September 30 December 31
                                                            2013        2012
----------------------------------------------------------------------------
Assets                                                                      
Current assets                                                              
Cash                                                         191           -
Accounts receivable                                       60,067      85,677
Due from private placement (Note 6)                            -       3,459
Financial derivative instruments (Note 8)                  3,313      10,254
Prepaid expenses                                          11,815       4,150
----------------------------------------------------------------------------
                                                          75,386     103,540
----------------------------------------------------------------------------
                                                                            
Prepaid capital                                                -       3,714
Property, plant and equipment, net (Note 3)            2,353,829   2,096,270
----------------------------------------------------------------------------
                                                       2,353,829   2,099,984
----------------------------------------------------------------------------
                                                                            
----------------------------------------------------------------------------
                                                       2,429,215   2,203,524
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
Liabilities                                                                 
Current liabilities                                                         
Accounts payable and accrued liabilities                 143,036     164,946
Income taxes payable                                           -       1,890
Dividends payable (Note 6)                                11,901       8,911
Provision for future performance based compensation                         
 (Note 7)                                                 11,326       2,677
----------------------------------------------------------------------------
                                                         166,263     178,424
----------------------------------------------------------------------------
                                                                            
Long-term debt (Note 4)                                  780,000     580,000
Long-term derivative financial instruments (Note 8)           91       2,532
Provision for future performance based compensation                         
 (Note 7)                                                  4,958          59
Decommissioning provision (Note 5)                        52,370      58,201
Deferred income taxes                                    207,171     174,241
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                                                       1,044,590     815,033
----------------------------------------------------------------------------
                                                                            
Equity                                                                      
Share capital (Note 6)                                 1,130,069   1,124,382
Shares to be issued (Note 6)                                   -       3,459
Retained earnings                                         84,688      75,247
Accumulated other comprehensive income (Note 6)            3,605       6,979
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                                                       1,218,362   1,210,067
----------------------------------------------------------------------------
                                                       2,429,215   2,203,524
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
                                                                            
Peyto Exploration & Development Corp.                                       
Condensed Income Statement (unaudited)                                      
(Amount in $ thousands)                                                     
                                                                            
                                 Three months ended       Nine months ended 
                                       September 30            September 30 
                                   2013        2012        2013        2012 
----------------------------------------------------------------------------
Revenue                                                                     
Oil and gas sales               124,248      86,827     401,137     240,927 
Realized gain on hedges                                                     
 (Note 8)                         9,325      15,214      10,252      50,163 
Royalties                        (9,722)     (6,632)    (30,162)    (21,549)
----------------------------------------------------------------------------
Petroleum and natural gas                                                   
 sales, net                     123,851      95,409     381,227     269,541 
----------------------------------------------------------------------------
                                                                            
Expenses                                                                    
Operating                        11,656       8,843      32,204      22,747 
Transportation                    3,879       2,900      11,334       8,151 
General and administrative          701         759       2,899       3,369 
Future performance based                                                    
 compensation (Note 7)            4,451       1,882      13,548       4,893 
Interest                          7,880       6,352      22,
212      16,486 
Accretion of decommissioning                                                
 provision (Note 5)                 393         284       1,130         773 
Depletion and depreciation                                                  
 (Note 3)                        54,277      43,772     159,189     122,546 
Gain on disposition of                                                      
 assets                               -        (363)          -        (508)
----------------------------------------------------------------------------
                                 83,237      64,429     242,516     178,457 
----------------------------------------------------------------------------
Earnings before taxes            40,614      30,980     138,711      91,084 
----------------------------------------------------------------------------
                                                                            
Income tax                                                                  
Deferred income tax expense      10,153       7,922      34,073      22,956 
                                                                            
----------------------------------------------------------------------------
Earnings for the period          30,461      23,058     104,638      68,128 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
                                                                            
----------------------------------------------------------------------------
Earnings per share (Note 6)                                                 
Basic and diluted                 $0.21      $ 0.16      $ 0.71      $ 0.49 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
----------------------------------------------------------------------------
Weighted average number of                                                  
 common shares outstanding                                                  
 (Note 6)                                                                   
Basic and diluted           148,758,923 142,069,048 148,730,485 139,631,290 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
                                                                            
Peyto Exploration & Development Corp.                                       
Condensed Statement of Comprehensive Income (unaudited)                     
(Amount in $ thousands)                                                     
                                                                            
                                 Three months ended       Nine months ended 
                                       September 30            September 30 
                                   2013        2012        2013        2012 
----------------------------------------------------------------------------
Earnings for the period          30,461      23,058     104,638      68,128 
Other comprehensive income                                                  
Change in unrealized gain on                                                
 cash flow hedges                 3,676      (6,812)      5,752       9,381 
Deferred tax recovery             1,412       5,507       1,125      10,195 
Realized (gain) on cash flow                                                
 hedges                          (9,325)    (15,214)    (10,252)    (50,163)
----------------------------------------------------------------------------
Comprehensive income             26,224       6,539     101,263      37,541 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
 

 
                                                                            
Peyto Exploration & Development Corp.                                       
Condensed Statement of Changes in Equity (unaudited)                        
(Amount in $ thousands)                                                     
                                                                            
                                                         Nine months ended  
                                                               September 30 
                                                           2013        2012 
----------------------------------------------------------------------------
Share capital, beginning of period                    1,124,382     889,115 
----------------------------------------------------------------------------
Common shares issued                                          -     112,187 
Common shares issued by private placement                 5,742      11,952 
Common shares issuance costs (net of tax)                   (55)       (154)
----------------------------------------------------------------------------
Share capital, end of period                          1,130,069   1,013,100 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
                                                                            
                                                                            
----------------------------------------------------------------------------
Common shares to be issued, beginning of period           3,459       9,740 
----------------------------------------------------------------------------
Common shares issued                                     (3,459)     (9,740)
----------------------------------------------------------------------------
Common shares to be issued, end of period                     -           - 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
                                                                            
                                                                            
----------------------------------------------------------------------------
Retained earnings, beginning of period                   75,247      82,889 
----------------------------------------------------------------------------
Earnings for the period                                 104,638      68,128 
Dividends (Note 6)                                      (95,197)    (75,415)
----------------------------------------------------------------------------
Retained earnings, end of period                         84,688      75,602 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
                                                                            
                                                                            
----------------------------------------------------------------------------
Accumulated other comprehensive income, beginning of                        
 period                                                   6,979      33,964 
----------------------------------------------------------------------------
Other comprehensive loss                                 (3,374)    (30,587)
------------------------------------------------
----------------------------
Accumulated other comprehensive income, end of                              
 period                                                   3,605       3,377 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
                                                                            
                                                                            
----------------------------------------------------------------------------
Total equity                                          1,218,362   1,092,079 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
                                                                            
Peyto Exploration & Development Corp.                                       
Condensed Statement of Cash Flows (unaudited)                               
(Amount in $ thousands)                                                     
                                                                            
The following amounts are included in cash flows from operating activities: 
----------------------------------------------------------------------------
                                 Three months ended       Nine months ended 
                                       September 30            September 30 
                                   2013        2012        2013        2012 
----------------------------------------------------------------------------
Cash provided by (used in)                                                  
operating activities                                                        
Earnings                         30,461      23,058     104,638      68,128 
Items not requiring cash:                                                   
  Deferred income tax            10,153       7,922      34,073      22,956 
  Depletion and depreciation     54,277      43,772     159,189     122,546 
  Accretion of                                                              
   decommissioning provision        393         284       1,130         773 
  Long term portion of                                                      
   future performance based                                                 
   compensation                   1,673         758       4,899       1,606 
Change in non-cash working                                                  
 capital related to                                                         
 operating activities             4,404      (3,790)    (13,586)    (10,070)
----------------------------------------------------------------------------
                                101,361      72,004     290,343     205,939 
----------------------------------------------------------------------------
Financing activities                                                        
Issuance of common shares             -           -       5,742      11,952 
Issuance costs                        -        (170)        (73)       (205)
Cash dividends paid             (35,702)    (25,251)    (92,206)    (75,060)
Increase (decrease) in bank                                                 
 debt                            30,000      70,000     200,000      (5,000)
Repayment of Open Range bank                                                
 debt                                 -     (72,000)          -     (72,000)
Issuance of long term notes           -      50,000           -     150,000 
----------------------------------------------------------------------------
                                 (5,702)     22,579     113,463       9,687 
----------------------------------------------------------------------------
Investing activities                                                        
Additions to property, plant                                                
 and equipment                 (180,801)   (129,902)   (423,708)   (274,459)
Change in prepaid capital             -       4,581       3,714     (17,259)
Gain on disposition of                                                      
 assets                               -        (363)          -        (508)
Change in non-cash working                                                  
 capital related to                                                         
 investing activities            69,822      31,101      16,379      19,376 
----------------------------------------------------------------------------
                               (110,979)    (94,583)   (403,615)   (272,850)
----------------------------------------------------------------------------
Net increase (decrease) in                                                  
 cash                           (15,320)          -         191     (57,224)
Cash, beginning of period        15,511           -           -      57,224 
----------------------------------------------------------------------------
Cash, end of period                 191           -         191           - 
----------------------------------------------------------------------------
                                                                            
                                                                            
----------------------------------------------------------------------------
Cash interest paid                9,407       7,544      23,920      15,979 
Cash taxes paid                       -           -       1,890           - 
----------------------------------------------------------------------------

 
Peyto Exploration & Development Corp. 
Notes to Condensed Financial Statements (unaudited) 
As at September 30, 2013 and 2012  
(Amount in $ thousands, except as otherwise noted) 
1. Nature of operations  
Peyto Exploration & Development Corp. ("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. 
Effective December 31, 2012, Peyto completed an amalgamation with its
wholly-owned subsidiary Open Range Energy Corp. pursuant to section
184(1) of the Business Corporations Act (Alberta). Following the
amalgamation, Peyto does not have any subsidiaries. 
These financial statements were approved and authorized for issuance
by the Audit Committee of Peyto on November 12, 2013. 
2. Basis of presentation  
The condensed 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 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 consolidated financial statements as
at and for the years ended December 31, 2012 and 2011. 
Significant Accounting Policies  
(a) Significant Accounting Judgments, Estimates and Assumptions  
The timely preparation of the condensed 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 financial statements. 
Except as disclosed below, all accounting policies and methods of
computation followed in the preparation of these financial
 statements
are the same as those disclosed in Note 2 of Peyto's consolidated
financial statements as at and for the years ended December 31, 2012
and 2011.  
(b) Recent Accounting Pronouncements  
Certain new standards, interpretations, amendments and improvements
to existing standards were issued by the International Accounting
Standards Board (IASB) or International Financial Reporting
Interpretations Committee (IFRIC) that are mandatory for accounting
periods beginning January 1, 2013 or later periods. The affected
standards are consistent with those disclosed in Peyto's consolidated
financial statements as at and for the years ended December 31, 2012
and 2011.  
Peyto adopted the following standards on January 1, 2013: 
IFRS 10 - Consolidated Financial Statements; supercedes IAS 27
"Consolidation and Separate Financial Statements" and SIC-12
"Consolidation - Special Purpose Entities". This standard provides a
single model to be applied in control analysis for all investees
including special purpose entities. This standard became applicable
on January 1, 2013. Peyto adopted the standard on January 1, 2013,
with no impact on Peyto's financial position or results of
operations. 
IFRS 11 - Joint Arrangements; requires a venturer to classify its
interest in a joint arrangement as a joint venture or joint
operation. Joint ventures will be accounted for using the equity
method of accounting, whereas joint operations will require the
venturer to recognize its share of the assets, liabilities, revenue
and expenses. This standard became applicable on January 1, 2013.
Peyto adopted the standard on January 1, 2013, with no impact on
Peyto's financial position or results of operations. 
IFRS 12 - Disclosure of Interests in Other Entities; establishes
disclosure requirements for interests in other entities, such as
joint arrangements, associates, special purpose vehicles and
off-balance-sheet vehicles. The standard carries forward existing
disclosure and also introduces significant additional disclosure
requirements that address the nature of, and risks associated with,
an entity's interests in other entities. This standard became
effective for Peyto on January 1, 2013. Peyto adopted the standard on
January 1, 2013, with no impact on Peyto's financial position or
results of operations. 
IFRS 13 - Fair Value Measurement; defines fair value, sets out a
single IFRS framework for measuring fair value and requires
disclosure about fair value measurements. IFRS 13 applies to
accounting standards that require or permit fair value measurements
or disclosure about fair value measurements (and measurements, such
as fair value less costs to sell, based on fair value or disclosure
about those measurements), except in specified circumstances. IFRS 13
became applicable on January 1, 2013. Peyto adopted the standard on
January 1, 2013, with no impact on Peyto's financial position or
results of operations. 
3. Property, plant and equipment, net  


 
----------------------------------------------------------------------------
Cost                                                                        
----------------------------------------------------------------------------
At December 31, 2012                                              2,483,008 
----------------------------------------------------------------------------
  Additions                                                         416,747 
----------------------------------------------------------------------------
At September 30, 2013                                             2,899,755 
----------------------------------------------------------------------------
                                                                            
Accumulated depreciation                                                    
----------------------------------------------------------------------------
At December 31, 2012                                               (386,737)
----------------------------------------------------------------------------
  Depletion and depreciation                                       (159,189)
----------------------------------------------------------------------------
At September 30, 2013                                              (545,926)
----------------------------------------------------------------------------
                                                                            
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Carrying amount at December 31, 2012                              2,096,270 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Carrying amount at September 30, 2013                             2,353,829 
----------------------------------------------------------------------------
----------------------------------------------------------------------------

 
During the three and nine month periods ended September 30, 2013,
Peyto capitalized $2.8 million and $6.9 million (2012 - $2.3 million
and $4.8 million) of general and administrative expense directly
attributable to production and development activities.  
4. Long-term debt  


 
----------------------------------------------------------------------------
                                      September 30, 2013   December 31, 2012
----------------------------------------------------------------------------
Bank credit facility                             630,000             430,000
Senior unsecured notes                           150,000             150,000
----------------------------------------------------------------------------
Balance, end of the period                       780,000             580,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------

 
As at September 30, 2013, the Company had a syndicated unsecured $1.0
billion extendible revolving credit facility with a stated term date
of April 26, 2015. The bank facility is made up of a $30 million
working capital sub-tranche and a $970 million production line. The
facilities are available on a revolving basis for a two year period.
Outstanding amounts on this facility will bear interest at rates
ranging from prime plus 0.8% to prime plus 2.25% determined by the
Company'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.  
On January 3, 2012, Peyto issued CDN $100 million of senior unsecured
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 is paid
semi-annually in arrears.  
On September 6, 2012, Peyto issued CDN $50 million of senior
unsecured 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
is paid semi-annually in arrears.  
Upon the issuance of the senior unsecured 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,
2013. 
Total interest expense for the three and nine month periods ended
September 30, 2013 was $
7.9 million and $22.2 million (2012 - $6.4
million and $16.5 million) and the average borrowing rate for the
period was 4.1% and 4.2% (2012 - 4.6% and 4.4%).  
5. 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 ceases 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, 2012                                           58,201 
----------------------------------------------------------------------------
New or increased provisions                                           6,853 
Accretion of decommissioning provision                                1,130 
Change in discount rate and estimates                               (13,814)
----------------------------------------------------------------------------
Balance, September 30, 2013                                          52,370 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
Current                                                                   - 
Non-current                                                          52,370 
----------------------------------------------------------------------------
----------------------------------------------------------------------------

 
Peyto has estimated the net present value of its total
decommissioning provision to be $52.4 million as at September 30,
2013 ($58.2 million at December 31, 2012) based on a total future
undiscounted liability of $145.4 million ($127.9 million at December
31, 2012). At September 30, 2013 management estimates that these
payments are expected to be made over the next 50 years with the
majority of payments being made in years 2041 to 2062. The Bank of
Canada's long term bond rate of 3.07 per cent (2.36 per cent at
December 31, 2012) and an inflation rate of two per cent (two per
cent at December 31, 2012) were used to calculate the present value
of the decommissioning provision. 
6. Share capital  
Authorized: Unlimited number of voting common shares 
Issued and Outstanding 


 
                                                       Number of            
                                                          Common     Amount 
Common Shares (no par value)                              Shares          $ 
----------------------------------------------------------------------------
Balance, December 31, 2011                           137,960,301    889,115 
----------------------------------------------------------------------------
Common shares issued                                   4,628,750    115,024 
Common shares issued for acquisition                   5,404,007    112,187 
Common shares issued by private placement                525,655     11,952 
Common share issuance costs (net of tax)                       -     (3,896)
----------------------------------------------------------------------------
Balance, December 31,2012                            148,518,713  1,124,382 
----------------------------------------------------------------------------
Common shares issued by private placement                240,210      5,742 
Common share issuance costs (net of tax)                       -        (55)
----------------------------------------------------------------------------
Balance, September 30, 2013                          148,758,923  1,130,069 
----------------------------------------------------------------------------
----------------------------------------------------------------------------

 
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 $112.2 million (net of issuance costs) ($20.76 per share)
in relation to the closing of a corporate acquisition. 
On December 11, 2012, Peyto closed an offering of 4,628,750 common
shares at a price of $24.85 per common share, receiving proceeds of
$110.0 million (net of issuance costs). 
On December 31, 2012, Peyto completed a private placement of 154,550
common shares to employees and consultants for net proceeds of $3.5
million ($22.38 per share). These common shares were issued January
7, 2013. 
On March 19, 2013, Peyto completed a private placement of 85,660
common shares to employees and consultants for net proceeds of $2.2
million ($26.65 per share). 
Per share amounts 
Earnings per share or unit have been calculated based upon the
weighted average number of common shares outstanding for the three
and nine month periods ended September 30, 2013 of 148,758,923 and
148,730,485 (2012 - 142,069,048 and 139,631,290). There are no
dilutive instruments outstanding. 
Dividends 
During the three and nine month periods ended September 30, 2013,
Peyto declared and paid dividends of $0.24 per common share and $0.64
per common share, totaling $35.7 million and $95.2 million (2012 -
$0.18 and $0.54, $25.6 million and $75.4 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 8.  
7. Future performance based compensation  
Peyto awards performance based compensation to employees annually.
The performance based compensation is comprised of reserve and market
value based components. 
Reserve based component 
The 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.
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 option valuation model were:  


 
                                            September 30,     September 30, 
                                                     2013              2012 
----------------------------------------------------------------------------
Share price                               $22.58 - $30.44   $18.83 - $24.75 
Exercise price                            $18.41 - $22.08   $12.06 - $24.37 
Expected volatility                               0% - 23%          0% - 32%
Option life                                    0.25 years        0.25 years 
Dividend yield                                          0%                0%
Risk-free interest rate                              1.19%             1.08%
----------------------------------------------------------------------------

 
8. Financial instruments  
Financial instrument classification and measurement 
Financial instruments of the Company carried on the condensed balance
sheet are carried at amortized cost with the exception of cash and
financial derivative instruments, specifically fixed price contracts,
which are carried at fair value. There are no significant differences
between the carrying amount of financial instruments and their
estimated fair values as at September 30, 2013. 
The Company's areas of financial risk management and risks related to
financial instruments remained unchanged from December 31, 2012. 
The fair value of the Company's cash and financial derivative
instruments are quoted in active markets. The Company classifies the
fair value of these transactions according to the following
hierarchy. 


 
--  Level 1 - quoted prices in active markets for identical financial
    instruments. 
--  Level 2 - quoted prices for similar instruments in active markets;
    quoted prices for identical or similar instruments in markets that are
    not active; and model-derived valuations in which all significant inputs
    and value drivers are observable in active markets. 
--  Level 3 - valuations derived from valuation techniques in which one or
    more significant inputs or value drivers are unobservable. 

 
The Company's cash and financial derivative instruments have been
assessed on the fair value hierarchy described above and classified
as Level 1. 
Fair values of financial assets and liabilities 
The Company's financial instruments include cash, accounts
receivable, financial derivative instruments, due from private
placement, current liabilities, provision for future performance
based compensation and long term debt. At September 30, 2013, cash
and financial derivative instruments are carried at fair value.
Accounts receivable, due from private placement, current liabilities
and provision for future performance based compensation approximate
their fair value due to their short term nature. The carrying value
of the long term debt approximates its fair value due to the floating
rate of interest charged under the credit facility. 
Commodity price risk management  
Peyto 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, 2013: 


 
----------------------------------------------------------------------------
Propane                                                  Monthly       Price
Period Hedged                                    Type     Volume       (USD)
----------------------------------------------------------------------------
April 1, 2013 to December 31, 2013        Fixed Price  4,000 bbl  $30.66/bbl
April 1, 2013 to December 31, 2013        Fixed Price  4,000 bbl  $32.34/bbl
April 1, 2013 to December 31, 2013        Fixed Price  4,000 bbl $34.885/bbl
April 1, 2013 to December 31, 2013        Fixed Price  4,000 bbl  $35.39/bbl
April 1, 2013 to December 31, 2013        Fixed Price  4,000 bbl  $34.44/bbl
October 1, 2013 to December 31, 2013      Fixed Price  4,000 bbl $39.774/bbl
October 1, 2013 to December 31, 2013      Fixed Price  4,000 bbl  $46.20/bbl
January 1, 2014 to March 31, 2014         Fixed Price  4,000 bbl  $37.80/bbl
January 1, 2014 to March 31, 2014         Fixed Price  4,000 bbl  $36.54/bbl
January 1, 2014 to March 31, 2014         Fixed Price  4,000 bbl $39.354/bbl
January 1, 2014 to March 31, 2014         Fixed Price  4,000 bbl  $41.37/bbl
January 1, 2014 to March 31, 2014         Fixed Price  4,000 bbl  $44.94/bbl
January 1, 2014 to December 31, 2014      Fixed Price  4,000 bbl  $35.70/bbl
January 1, 2014 to December 31, 2014      Fixed Price  4,000 bbl $37.485/bbl
----------------------------------------------------------------------------
                                                                            
----------------------------------------------------------------------------
Natural Gas                                                Daily       Price
Period Hedged                                    Type     Volume       (CAD)
----------------------------------------------------------------------------
April 1, 2012 to October 31, 2013         Fixed Price   5,000 GJ    $4.00/GJ
April 1, 2012 to October 31, 2013         Fixed Price   5,000 GJ    $4.00/GJ
April 1, 2012 to October 31, 2013         Fixed Price   5,000 GJ    $4.00/GJ
April 1, 2012 to October 31, 2013         Fixed Price   5,000 GJ    $4.00/GJ
April 1, 2012 to October 31, 2013         Fixed Price   5,000 GJ    $2.52/GJ
April 1, 2012 to March 31, 2014           Fixed Price   5,000 GJ    $3.00/GJ
May 1, 2012 to October 31, 2013           Fixed Price   5,000 GJ    $2.30/GJ
August 1, 2012 to March 31, 2014          Fixed Price   5,000 GJ    $3.00/GJ
August 1, 2012 to October 31, 2014        Fixed Price   5,000 GJ    $3.10/GJ
November 1, 2012 to October 31, 2013      Fixed Price   5,000 GJ    $2.60/GJ
November 1, 2012 to October 31, 2013      Fixed Price   5,000 GJ   $3.005/GJ
November 1, 2012 to October 31, 2013      Fixed Price   5,000 GJ    $3.00/GJ
November 1, 2012 to March 31, 2014        Fixed Price   5,000 GJ    $2.81/GJ
November 1, 2012 to March 31, 2014        Fixed Price   5,000 GJ    $3.00/GJ
November 1, 2012 to March 31, 2014        Fixed Price   5,000 GJ    $3.05/GJ
November 1, 2012 to March 31, 2014        Fixed Price   5,000 GJ    $3.02/GJ
November 1, 2012 to October 31, 2014      Fixed Price   5,000 GJ  $3.0575/GJ
January 1, 2013 to October 31, 2013       Fixed Price   5,000 GJ    $3.42/GJ
January 1, 2013 to December 31, 2013      Fixed Price   5,000 GJ   $3.105/GJ
January 1, 2013 to March 31, 2014         Fixed Price   5,000 GJ    $3.00/GJ
January 1, 2013 to March 31, 2014         Fixed Price   5,000 GJ    $3.02/GJ
April 1, 2013 to October 31, 2013         Fixed Price   5,000 GJ   $3.205/GJ
April 1, 2013 to March 31, 2014           Fixed Price   5,000 GJ   $3.105/GJ
April 1, 2013 to March 31, 2014           Fixed Price   5,000 GJ    $3.53/GJ
April 1, 2013 to March 31, 2014           Fixed Price   5,000 GJ    $3.45/GJ
April 1, 2013 to March 31, 2014           Fixed Price   5,000 GJ    $3.50/GJ
April 1, 2013 to March 31, 2014           Fixed Price   5,000 GJ    $3.08/GJ
April 1, 2013 to March 31, 2014           Fixed Price   5,000 GJ     $3.17GJ
April 1, 2013 to March 31, 2014           Fixed Price   5,000 GJ    $3.10/GJ
April 1, 2013 to October 31, 2014         Fixed Price   5,000 GJ    $3.25/GJ
April 1, 2013 to October 31, 2014         Fixed Price   5,000 GJ    $3.30/GJ
April 1, 2013 to October 31, 20
14         Fixed Price   5,000 GJ    $3.33/GJ
April 1, 2013 to October 31, 2014         Fixed Price   7,500 GJ    $3.20/GJ
April 1, 2013 to October 31, 2014         Fixed Price   5,000 GJ    $3.22/GJ
April 1, 2013 to October 31, 2014         Fixed Price   5,000 GJ    $3.20/GJ
April 1, 2013 to October 31, 2014         Fixed Price   5,000 GJ  $3.1925/GJ
April 1, 2013 to October 31, 2014         Fixed Price   5,000 GJ    $3.25/GJ
April 1, 2013 to October 31, 2014         Fixed Price   5,000 GJ    $3.30/GJ
July 1, 2013 to October 31, 2013          Fixed Price   5,000 GJ    $3.34/GJ
August 1, 2013 to March 31, 2014          Fixed Price   5,000 GJ    $3.55/GJ
November 1, 2013 to March 31, 2014        Fixed Price   5,000 GJ    $3.71/GJ
November 1, 2013 to March 31, 2014        Fixed Price   5,000 GJ    $3.76/GJ
November 1, 2013 to March 31, 2014        Fixed Price   5,000 GJ    $3.86/GJ
November 1, 2013 to March 31, 2014        Fixed Price   5,000 GJ    $4.00/GJ
November 1, 2013 to March 31, 2014        Fixed Price   5,000 GJ    $3.52/GJ
November 1, 2013 to March 31, 2014        Fixed Price   5,000 GJ  $3.1025/GJ
November 1, 2013 to March 31, 2014        Fixed Price   5,000 GJ   $3.245/GJ
November 1, 2013 to March 31, 2014        Fixed Price   5,000 GJ    $3.45/GJ
November 1, 2013 to March 31, 2014        Fixed Price   5,000 GJ  $3.3075/GJ
November 1, 2013 to October 31, 2014      Fixed Price   5,000 GJ    $3.50/GJ
November 1, 2013 to October 31, 2014      Fixed Price   5,000 GJ    $3.53/GJ
November 1, 2013 to March 31, 2015        Fixed Price   5,000 GJ  $3.6025/GJ
April 1, 2014 to October 31, 2014         Fixed Price   5,000 GJ   $3.505/GJ
April 1, 2014 to October 31, 2014         Fixed Price   5,000 GJ   $3.555/GJ
April 1, 2014 to October 31, 2014         Fixed Price   5,000 GJ    $3.48/GJ
April 1, 2014 to March 31, 2015           Fixed Price   5,000 GJ    $3.82/GJ
April 1, 2014 to March 31, 2015           Fixed Price   5,000 GJ    $3.44/GJ
April 1, 2014 to March 31, 2015           Fixed Price   5,000 GJ    $3.52/GJ
April 1, 2014 to March 31, 2015           Fixed Price   5,000 GJ  $3.4725/GJ
April 1, 2014 to March 31, 2015           Fixed Price   5,000 GJ   $3.525/GJ
April 1, 2014 to March 31, 2015           Fixed Price   5,000 GJ    $3.60/GJ
April 1, 2014 to March 31, 2015           Fixed Price   5,000 GJ    $3.27/GJ
April 1, 2014 to March 31, 2015           Fixed Price   5,000 GJ    $3.41/GJ
April 1, 2014 to March 31, 2015           Fixed Price   5,000 GJ  $3.5575/GJ
April 1, 2014 to March 31, 2015           Fixed Price   5,000 GJ   $3.465/GJ
November 1, 2014 to March 31, 2015        Fixed Price   5,000 GJ    $3.81/GJ
November 1, 2014 to March 31, 2015        Fixed Price   5,000 GJ    $3.90/GJ

 
As at September 30, 2013, Peyto had committed to the future sale of
240,000 barrels of propane at an average price of $37.32 US per
barrel and 75,645,000 gigajoules (GJ) of natural gas at an average
price of $3.36 per GJ. Had these contracts been closed on September
30, 2013, Peyto would have realized a gain in the amount of $3.2
million.  
Subsequent to September 30, 2013 Peyto entered into the following
contracts: 


 
----------------------------------------------------------------------------
Propane                                                  Monthly       Price
Period Hedged                                    Type     Volume       (USD)
----------------------------------------------------------------------------
April 1, 2014 to September 30, 2014       Fixed Price  4,000 bbl  $41.79/bbl
October 1, 2014 to December 31, 2014      Fixed Price  4,000 bbl  $42.84/bbl
----------------------------------------------------------------------------
Natural Gas                                                Daily       Price
Period Hedged                                    Type     Volume       (CAD)
----------------------------------------------------------------------------
November 1, 2013 to March 31, 2014        Fixed Price   5,000 GJ    $3.25/GJ
December 1, 2013 to March 31,2014         Fixed Price   5,000 GJ    $3.50/GJ
April 1, 2014 to October 31, 2014         Fixed Price   5,000 GJ   $3.335/GJ
April 1, 2014 to October 31, 2014         Fixed Price   5,000 GJ    $3.10/GJ
April 1, 2014 to March 31, 2015           Fixed Price   5,000 GJ    $3.43/GJ
April 1, 2014 to March 31, 2015           Fixed Price   5,000 GJ    $3.54/GJ
April 1, 2014 to March 31, 2015           Fixed Price   5,000 GJ   $3.335/GJ
April 1, 2014 to March 31, 2015           Fixed Price   5,000 GJ    $3.25/GJ
April 1, 2014 to March 31, 2015           Fixed Price   5,000 GJ    $3.25/GJ
----------------------------------------------------------------------------

 
9. Commitments  
Following is a summary of Peyto's contractual obligations and
commitments as at September 30, 2013.  


 
                             2013    2014    2015    2016    2017 Thereafter
----------------------------------------------------------------------------
Note repayment(1)               -       -       -       -       -    150,000
Interest payments(2)            -   6,830   6,830   6,830   6,830     18,785
Transportation              4,107  17,290  16,044  11,692   8,027     10,957
 commitments                                                                
Operating leases              592   2,392   1,228     712     360          -
----------------------------------------------------------------------------
Total                       4,699  26,512  24,102  19,234  15,217    179,742
----------------------------------------------------------------------------
(1) Long-term debt repayment on senior unsecured notes                      
(2) Fixed interest payments on senior unsecured notes                       

 
10. Subsequent events  


 
1.  On November 4, 2013, Peyto announced that it had priced an issuance of
    CDN $120 million of senior unsecured notes. The notes will be issued by
    way of private placement pursuant to a note purchase agreement and will
    rank equally with Peyto's obligations under its bank facility and
    existing note purchase and private shelf agreement. The notes have a
    coupon rate of 4.5% and mature in December 2020. Interest will be paid
    semi-annually in arrears. Closing of the private placement is expected
    to occur in early December, 2013. 
    
2.  On October 31, 2013, Peyto was named as a party to a statement of claim
    received with respect to transactions between Poseidon Concepts Corp.
    and Open Range Energy Corp. Management is currently assessing the nature
    of this claim, in conjunction with their legal advisors. 
    
 
Officers                                                                    
  Darren Gee                               Tim Louie                        
  President and Chief Executive Officer    Vice President, Land             
                                                                            
  Scott Robinson                                                            
  Executive Vice President and Chief       David Thomas                     
  Operating Officer                        Vice President, Exploration      
                                                                            
  Kathy Turgeon                                                             
  Vice President, Finance and Chief        Jean-Paul Lachance               
  Financial Officer                        Vice President, Exploitation     
                                                                            
  Stephen Chetner                                                           
  Corporate Secretary                                                       
                                                                            
Directors                                                                   
  Don Gray, Chairman                                                        
  Stephen Chetner                                                           
  Brian Davis     
                                                          
  Michael MacBean, Lead Independent Director                                
  Darren Gee                                                                
  Gregory Fletcher                                                          
  Scott Robinson                                                            
                                                                            
Auditors                                                                    
  Deloitte LLP                                                              
                                                                            
Solicitors                                                                  
  Burnet, Duckworth & Palmer LLP                                            
                                                                            
Bankers                                                                     
  Bank of Montreal                                                          
  Union Bank, Canada Branch                                                 
  Royal Bank of Canada                                                      
  Canadian Imperial Bank of Commerce                                        
  The Toronto-Dominion Bank                                                 
  Bank of Nova Scotia                                                       
  HSBC Bank Canada                                                          
  Alberta Treasury Branches                                                 
  Canadian Western Bank                                                     
                                                                            
Transfer Agent                                                              
  Valiant Trust Company                                                     
                                                                            
Head Office                                                                 
  1500, 250 - 2nd Street SW                                                 
  Calgary, AB                                                               
  T2P 0C1                                                                   
  Phone: 403.261.6081                                                       
  Fax: 403.451.4100                                                         
  Web: http://www.peyto.com/                                                
  Stock Listing Symbol: PEY.TO                                              
  Toronto Stock Exchange                                                    

Contacts:
Peyto Exploration & Development Corp.
1500, 250 - 2nd Street SW
Calgary, AB T2P 0C1
403.261.6081
403.451.4100 (FAX)
www.peyto.com