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PENGROWTH

value creation through the drill bit


PENGROWTH

CHAIRMAN’s message

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To our unitholders,

It is my privilege to report to our unitholders this year as Chairman of the Pengrowth Board of Directors. It has been quite a year both at Pengrowth and within the energy trust sector. In September, Pengrowth’s Founder, Mr. James Kinnear stepped down from his day-today responsibilities as Chairman and Chief Executive Officer. Jim was instrumental in the founding of Pengrowth and was a pioneer of the energy trust industry. Pengrowth has come a long way since its inception in 1988 when Jim’s original concept of Pengrowth Gas Income Fund provided investors the opportunity to participate directly in the income attributable to Canada’s oil and gas industry. I would like to take this opportunity to thank Jim, on behalf of the Board of Directors, the entire Pengrowth team, and all unitholders for his outstanding contribution to Pengrowth over the last 20 years and for establishing the Pengrowth name in the community. In recognition of his extraordinary role, Jim Kinnear was granted the designation of Chairman Emeritus by our Board of Directors. Having welcomed Mr. Derek Evans as Pengrowth’s President and Chief Operating Officer in May, we subsequently entrusted him with the role of President and Chief Executive Officer in September. Derek’s 26 years of experience in the energy sector in Western Canada make him a perfect fit to lead our team through the transition Pengrowth has embarked upon. That transition arises in large measure from the October 31, 2006, announcement by the Canadian federal government that as of January 1, 2011, it would levy a tax on distributions of publicly listed income trusts. Since the announcement of the new tax, we have witnessed an evolutionary shift in the energy trust space. Pengrowth’s diversified asset base and our team’s demonstrated capability to create value have always stood out as competitive advantages for Pengrowth. These attributes will act as our backbone as we make the shift to a more operationally focused oil and gas company. In late 2009, we introduced changes to our corporate strategy and provided clarification on Pengrowth’s future, including our intent to convert to a dividend paying corporation by January 1, 2011. Our changes in both strategy and leadership have been carefully considered and constitute deliberate responses to both the internal and external realities facing Pengrowth. 2009 has been a year of significant evolution and change for Pengrowth – in leadership and in strategy. We are looking forward with enthusiasm to the future. Thank you for your continuing support.

Sincerely, John B. Zaozirny Chairman of the Board, Pengrowth Corporation


PENGROWTH

president’s message

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Outlook

It is an honour to be writing my first annual President’s message to you. It is an exciting time to be leading Pengrowth. The challenge and opportunity to continue to expand on the legacy of the company is what attracted me to the Chief Executive Officer position.

The changes undertaken thus far have solidified Pengrowth’s position in the marketplace and we are being viewed with a fresh interest by the investment community.

It is an understatement to say that 2009 was a turbulent year economically for both the industry and the larger economy. While times of uncertainty and change are difficult they are also times of great opportunity. If companies are to remain competitive and thrive in a challenging environment, they must be fearless, clear and focused about their direction and their objectives. Timing is everything. We see two major opportunities for change at Pengrowth that will position us strongly for the future. The first is a change to our value creation strategy which will focus on creating value through the drill bit and the second is changing our corporate structure from an income trust to a corporation on or before January 1, 2011. Our new value creation strategy is centered upon moving Pengrowth away from the financial trust model where the focus had been on maximizing distributions, to an operated oil and gas company focused on reinvesting up to 50 percent of cash flow through the drill bit.

Opportunities We are encouraged by Pengrowth’s current and demonstrated ability to generate value through the drill bit. Our Carson Creek project not only demonstrates superior economic returns but clearly illustrates our capabilities in horizontal multi-stage fracturing in carbonate reservoirs. On a go forward basis, we have identified a vast number of opportunities in both the near and long term that exist within our current asset base. We had over $500 million worth of projects which were considered for funding for our 2010 budget. Each of the projects selected ensured positive economics at prices as low as U.S. $60 per bbl West Texas Intermediate (WTI) oil price, and Cdn $3 per mcf AECO natural gas price. Longer term, Pengrowth has several opportunities that hold significant potential. Our 113 net sections of undeveloped land in the Horn River basin provide Pengrowth with meaningful exposure to Canada’s largest unconventional shale gas play. We also plan to continue to drive forward on the pilot project of our 100 percent operated Steam Assisted Gravity Drainage (SAGD) project at Lindbergh. Despite the large inventory of short and long term opportunities, we have identified a medium term project gap that exists. Throughout 2010, you can expect to see our teams actively working to fill this with organic projects, such as Carson Creek, as well as executing strategic acquisitions that will supplement our inventory. This is the perfect point in the acquisition cycle to backfill our medium term inventory gap and we are encouraged by the quality and quantity of aquisition opportunities available in today’s marketplace.

We are well positioned to take advantage of acquisition opportunities with $1.2 billion of room available on our bank lines at year end 2009. We are working towards Pengrowth being the leading value creator of unconventional resource plays in the Western Canadian Sedimentary Basin (WCSB) within three years. We understand this will be a challenge but it is one we are prepared for. We also understand that our bottom line does not reside solely in our ability to create a profit. We will cultivate an empowered working environment where our employees are driven and motivated to create value for our unitholders each and every day. And we will create meaningful relationships with the people in the communities where we work. To our unitholders, and on behalf of the Pengrowth team, thank you for your continued trust in our ability to create value and execute on our vision throughout this next step in Pengrowth’s journey. It is one that I look forward to leading. Sincerely,

Derek W. Evans President and Chief Executive Officer

VA L U E C R E A T I O N S T R A T E G Y

To our UNITholders,


PENGROWTH

Value creation strategy We will be the leading value creator of unconventional resource plays in the WCSB within three years.

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Value Creation

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Acquire and develop operated resource plays in the WCSB

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Enhance financial strength and flexibility

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Be the best operator in our sector

The core principles of Pengrowth’s new value creation strategy have been driven by some recent fundamental shifts inherent to our business model. With the implementation of the Specified Investment Flow Through (SIFT) tax in 2011, the income trust structure has lost its competitive advantage and as a result, Pengrowth has committed to converting to a dividend paying corporation on or before January 1, 2011. At Focused on the Western Canadian the same time, the emerging Sedimentary Basin unconventional resource plays At Pengrowth, we believe it makes sense are positively altering our to focus on the things that we can control reinvestment alternatives and and, as part of our value creation strategy, we see a great opportunity we have focused our teams on operated, for Pengrowth to become low cost, low risk, high return projects the leading value creator of that exist in our own backyard. We aim at unconventional resource plays operating high working interest resource plays where our low cost structure can in the WCSB within three years. be applied to achieve predictable and The three pillars of our value repeatable results. Although the WCSB creation strategy encompass is maturing, we continue to maximize both of these changes and resource development by utilizing have been designed to position unconventional technologies and our Pengrowth as an operating technical skills. Our non-core assets will continue to be rationalized as part of our oil and gas company focused divestiture program. This strategy will on creating value through the allow us to focus on what we do best and drill bit. where we can create the greatest value for our unitholders. While we continue to develop our existing suite of assets, we have also refined our acquisition strategy. Pengrowth will continue to identify and execute on

acquisitions that fit our value creation model; WCSB properties which are operated, low cost, low risk and able to provide a high return on investment. In addition, we will seek potential acquisitions that have a large inventory of drilling opportunities that prove profitable even at depressed commodity prices. We will be selective in regards to any purchases we make in order to ensure we acquire assets that will create value. By taking a focused control over the aspects of our business that are within our control – operated, low cost, low risk, high return assets we will work to mitigate the influence of market instabilities.

Focused on Financial strength & flexibility As we have seen throughout 2009, a company’s financial position is of utmost importance in ensuring both its flexibility and its sustainability. At Pengrowth, we have taken proactive steps to enhance our financial strength, ensuring we have the flexibility required should the right growth acquisition opportunity present itself in


PENGROWTH

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the marketplace. We have a strong balance sheet and ample access to credit and debt markets to support both our acquisition strategy as well as our development program. As part of this financial strategy, we have reduced our monthly distributions to $0.07 and are committed to reinvesting a higher portion of our cash flow toward our capital expenditures versus prior years. We have committed to a sustainable business model where distributions plus capital expenditures do not exceed cash flow. We have also hedged a portion of our production for 2010 and 2011 in order to add an additional measure of cash flow stability in support of our capital and distribution programs. In October of 2009, when we first unveiled our value creation strategy, we targeted significant debt reduction over an 18 month time frame. With our successful equity issue of $285 million in the fourth quarter of 2009 and numerous smaller but significant initiatives, we have reduced debt by $470 million and currently have $1.2 billion of available credit capacity. At present,

there are no immediate capital strains on our balance sheet and we plan to use any proceeds from potential dispositions to further reduce our debt position. Our 2010 capital program was created with sustainability in mind. It is flexible, scalable and responsive to potential uncertain commodity prices and market conditions. We have announced our intention to convert to a dividend paying corporation on or before January 1, 2011. With Pengrowth’s availability of approximately $2.9 billion worth of tax pools, our conversion to a corporate entity will occur with little or no impact to our ability to distribute the same level of cash to our unitholders.

proven ability to develop resources, support our decision to increase our level of capital reinvestment as part of our value creation strategy. By focusing on repeatable, predictable unconventional resource plays, our knowledge base will become specialized and we will become better at what we do.

Increasing Capex & Maintaining Financial Flexibility Simple Payout Ratio: Distributions ÷ Cash Flow Total Payout Ratio (Distribitions+Capex) ÷ Cash Flow

Focused on Operations To Pengrowth, being the best operator not only means possessing the lowest total cost structure and finding and development costs, but the ability to focus on being an everyday low cost operator. Pengrowth’s strategic review of the best opportunities for value creation within our existing asset base, coupled with Pengrowth’s

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PENGROWTH

Value Creation Assets We have identified a vast number of opportunities available to us in both our short and long term inventory of projects. Meanwhile, we will be actively working to fill our medium term inventory gap.

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High Quality and Diversified Asset Base Pengrowth’s asset base includes large-scale, long life resources including working interests in six of the nine largest original-oil-in-place pools in the WCSB. At present, our production portfolio is evenly balanced between natural gas and crude oil and liquids with a reserve life of over 10 years on a proved plus probable basis. We have a substantial inventory of current well locations and an undeveloped land base totalling approximately 860,000 net acres, which is approximately 41 percent of our total net lands. Our focus is to develop projects that represent excellent low cost, low risk drilling opportunities that will provide reserve replacement for Pengrowth for a significant period of time.

Pengrowth Land Pengrowth Projects

HORN RIVER

ALBERTA SASKATCHEWAN Fort St. John Fort McMurray

BRITISH COLUMBIA

Grande Prairie

JUDY CREEK CARSON CREEK

Edmonton

Red Deer

Halifax Prince Albert

LINDBERGH

Lloydminster

Saskatoon

OLDS Calgary JENNER Medicine Hat

Regina

Lethbridge WEYBURN

CANADA USA

NOVA SCOTIA

SABLE ISLAND


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In Southern Alberta, Pengrowth has a significant inventory of low cost shallow gas drilling locations that are targeted for development. Looking forward, we plan on continuing to advance our SAGD project at our Lindbergh property. A pilot project is planned for 2012 with full commercial production anticipated by 2016. There are an estimated 194 million barrels of oil at Lindbergh, based on our 100 percent working interest in this project. Pengrowth

Production (2009 Average)......................79,518 boe/d Production Mix.........................................50% liquids Operated Production............................................ 66% Drill Inventory.............................. ~750 net locations Reserves P+P (Dec. 31, 2009)................295.7 mmboe Reserve Life Index...................................... 10.6 Years Undeveloped Land..........................860,000 Net Acres Annual Average Production boe per day

Proved Plus Probable Reserves mmboe

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79,518

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also has a substantial operated presence in Canada’s largest shale gas play in the Horn River basin in north-eastern British Columbia where our 113 net sections of land include prospects in both the Muskwa and Evie shale deposits. In addition to our existing assets, we will be looking to fill our medium term inventory gap with both unconventional organic opportunities as well as strategic acquisitions within existing or new core areas.

VA L U E C R E A T I O N S T R A T E G Y

Pengrowth’s short term focus will be on the continued development of our core interests in the Swan Hills and Judy Creek carbonate reef platform where, at our Carson Creek project, we have developed industry leading expertise in horizontal drilling and multi-stage fracturing of tight carbonate reservoirs. Additional focus will be on growing our coalbed methane production in the Horseshoe Canyon formation, where we have identified numerous drilling locations.


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empowering people We will be a team-based and high performance environment with an extraordinary culture of excellence, empowerment and innovation. In short, we want to create an environment where potential team members are lining up at the door to get inside.

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Pengrowth’s team members are our most valuable assets. Our management team strives to create an environment where each and every one of our team members is excited to come to work and works hard everyday to achieve their personal and professional goals. We encourage our employees to be the very best they can be. When new team members bring their skills to Pengrowth, they’re joining a company that values talent, innovation and an entrepreneurial spirit as the core focus of its growth strategy. Pengrowth’s high-performance and fastpaced environment rewards innovation and

initiative while providing a clear and open channel of communication among team members and senior leadership. Members of Pengrowth’s team are empowered to execute on their great ideas and transform their individual creativity into outlets that enhance Pengrowth’s competitive position and value in the marketplace. We encourage and support the professional development of each of the members of our team. We watch each other grow, help each other understand and celebrate our successes. Most importantly, we have fun doing what we do best, everyday.


PENGROWTH

COMMUNITY INVOLVEMENT We will make a positive impact in everyone and everything we touch. We work hard to establish meaningful partnerships with organizations that align with our corporate values and our team members are making active contributions through volunteering their own time.

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Giving Back Where We Live and Work

Pengrowth in the Community

General Hospital purchase leading edge healthcare equipment.

Throughout our history, Pengrowth has worked hard to establish meaningful partnerships with organizations and communities in which we work and operate in. Pengrowth provides funding for community partners in areas of education, health, leadership development, significant community need, youth and sports. We prefer to partner with organizations that develop life-long skills, including character development, leadership training and mentoring and sustainable values in sportsmanship, honesty, fair play and hard work.

Pengrowth is proud of the many ways our team members give back to their community.

Pengrowth recently stepped up in support of the 2009 United Way Campaign in Calgary. In a year when the need in Calgary was greater than ever, Pengrowth employees stepped up their support of the 2009 United Way Campaign raising an excess of $100,000 – more than double our previous year’s total – which was matched by the company dollar-for-dollar.

Pengrowth has been a long time supporter of the Calgary Health Trust’s Rockyyiew Invitational Golf Tournament – one of Canada’s most successful fundraising events. Since 2006, funds raised have contributed to the purchase of advanced technology for the Southern Alberta Urology Centre of Excellence. In the past 17 years, Pengrowth has helped raise more than $7 million for the express purpose of helping Calgary’s Rockyview

In September, 34 team members joined our Vice President, Geosciences to spend the afternoon preparing the grounds at Easter Seals Camp Horizon, which provides children and adults who have physical disabilities and serious illness with the opportunity to challenge themselves, build self-esteem, gain independence and create lasting friendships. Late last year, a number of Pengrowth team members volunteered at the “Calgary’s Bravest Men Youth Forum”. More than 1,700 students attended the dynamic presentation by Canadian Football League superstar Michael “Pinball” Clemons, which centered on self esteem, mutual respect and growing up with dignity. Going forward, our community involvement programs will continue to be centered upon engaging our employees with members of our communities.


PENGROWTH

Measuring our impact Pengrowth’s bottom line does not reside solely in our ability to create a profit. We work very hard to be a good neighbour, an environmentally responsible partner and a valued member of every community where we operate. The actions we take today have an immediate effect tomorrow and long into the future.

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Making a Difference We have an excellent operating and safety record and are strongly committed to protecting the health and safety of our team members and the public, preserving the quality of the environment and supporting valued community groups and initiatives. Our goal is to minimize or eliminate our environmental footprint in any and all

of our activities. We strive not only to leave the land in a better condition than we found it, but hope that our support of the communities in which we operate strengthens and creates enduring and long-lasting benefits as well.

Environment During 2009, the Pengrowth Olds Operations team reduced the amount of fuel gas consumed in the Olds Field. The team developed a better understanding of fuel gas consumption by implementing a measurement program that actively monitors how much fuel gas is used on a daily basis. By capitalizing on these results, the Olds team met the requirements of one of the year’s Key Performance Indicators;

Employee Injury Frequency Employee lost time injuries per 200,000 hours worked

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reducing fuel gas consumption by 10 percent. In 2009, the fuel gas savings led to a reduction in greenhouse gas (GHG) emissions by an estimated 3,804 tonnes of CO2 equivalent.

Health and Safety We strive to ensure that every person at every job-site arrives home safely at the end of each day. Pengrowth team members recognize that working together is critical to our response in an emergency. Our hard work and focus on health and safety in 2009 can be demonstrated by the fact that Pengrowth had zero lost time incidents recorded. In 2009 Pengrowth’s Olds team conducted an Emergency Response Plan (ERP) exercise to ensure our readiness to respond to an emergency situation. The purpose of each exercise is to improve communication and response time. Learnings from the exercise included using site specific ERP maps to quickly determine roadblock locations and two-way radios in each field truck to improve command centre communications. Pengrowth conducts four large-scale ERP exercises each year. Additional smaller scale “Table Talk Exercises” and “Man-Down Drills” also take place monthly in all operating areas. Our team becomes more effective, efficient and safe with every drill and exercise we conduct and this helps strengthen our commitment to an incident-free workplace.


Operating Netbacks

Activities per Trust Unit

$/boe

General and Administrative Costs $ Millions

$ per trust unit

65.0

25.38

2.09

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Includes management fees

Development Capital

Long Term Debt

Reserves per Debt

Expenditures

$ Millions

Adjusted Units

$ Millions

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* Excludes convertible debentures

ABBREVIATIONS bbl barrel bcf billion cubic feet boe* barrels of oil equivalent gj gigajoule mbbls thousand barrels mmbbls million barrels mboe* thousand barrels of oil equivalent

0.74

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1,065.15*

211.5*

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* Total before drilling credits

STOCK EXCHANGE LISTINGS mmboe* million barrels of oil equivalent mmbtu million British thermal units mcf thousand cubic feet mmcf million cubic feet mwh mega watt hour tcf trillion cubic feet *6 mcf of gas =1 barrel of oil equivalent

The Toronto Stock Exchange: Symbol: PGF.un The New York Stock Exchange: Symbol: PGH

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Cash Flow from Operating

PENGROWTH

Pengrowth Energy Trust is an oil and gas operating company, structured as a trust, with a focus on creating value through the drill bit by drilling operated, low cost, low risk, repeatable opportunities in the Western Canadian Sedimentary Basin (WCSB). Pengrowth’s operations include production from a number of conventional and unconventional assets and are evenly balanced between oil and liquids and natural gas. Future growth opportunities include the development of conventional oil and natural gas production, heavy oil, shale gas and coalbed methane as well as the addition of production through acquisitions. Pengrowth’s trust units trade on the Toronto Stock Exchange under the symbol PGF.un and on the New York Stock Exchange under the symbol PGH.


PENGROWTH HEAD OFFICE 2100, 222 Third Avenue SW Calgary Alberta, T2P 0B4 Canada

Phone 403.233.0224 Fax 403.265.6251 www.pengrowth.com INVESTOR RELATIONS For investor relations enquiries, please contact:

Investor Relations, Calgary Phone 403.265.6251 Toll Free 888.744.1111 Fax 403.693.8889 investorrelations@pengrowth.com


Pengrowth Corporate Story 2009