2012 annual results A SPECTRUM OF OPPORTUNITY

Transcription

1 2012 annual results A SPECTRUM OF OPPORTUNITY

2 PERPETUAL ENERGY INC. IS A CANADIAN ENERGY COMPANY FOCUSED ON LONG-TERM VALUE CREATION THROUGH OIL AND GAS BASED EXPLORATION, DEVELOPMENT, PRODUCTION AND MARKETING. PERPETUAL HAS BUILT A SPECTRUM OF RESOURCE-STYLE OPPORTUNITIES SPANNING HEAVY OIL, LIQUIDS-rich natural gas AND BITUMEN. THESE BALANCE A BASE OF LEGACY SHALLOW GAS ASSETS. WITH A TRACK RECORD OF INNOVATION AND OPERATIONAL EXCELLENCE, PERPETUAL IS POSITIONED TO GROW AND PROSPER THROUGHOUT THE DYNAMIC CYCLES OF THE ENERGY BUSINESS. A SPECTRUM OF OPPORTUNITY At Perpetual we are focused on creating value as a diversified oil and gas based energy company. Our strategy is driven by our mantra to build a company that is built to grow, built to prosper and built to last; one with high impact potential through a spectrum of opportunities across commodities and with a number of time horizons. In the immediate, we are pursuing profitable heavy oil and liquids-rich gas plays where we have proven technical and operational excellence, and have developed large and economically attractive drilling inventories. The success Our BUSI NESS pl an drives us to be built to last of our capital investment in these plays can be seen in our growing volumes of oil and natural gas liquids ( NGL or liquids ) and the relative impact on funds flow. Over the longer term, our expansive holdings in other resource-style plays hold additional high impact potential. These are being advanced with measured investments as we increase our technical understanding, evaluate technologies and assess economic potential in light of timing, marketability, capital and commodity prices. Our spectrum of opportunity is the direct result of the four pillars of our business plan, encompassing dynamic elements to ensure long term success: Build a diversified portfolio of repeatable, high return, resource-style assets Capture material positions in potential growth opportunities and evaluate these with risk-managed investment, while investing in proven growth strategies and optimizing our legacy shallow gas asset base. Establish excellence in chosen priorities Safety is job one, matched with an accountable and low-cost culture to drive technical, operational and execution excellence. Maintain a healthy balance sheet Disciplined spending while balancing priorities is paramount, coupled with ensuring optionality to be robust through business cycles. asset management strategy Invest for growth PROVEN DIVERSIFYING GROWTH STRATEGIES Resource-style plays targeting heavy oil and liquids-rich gas Proven technical, operational and excellence execution Optimize and advance MEDIUM AND LONG TERM OPTION VALUE Vast tight gas resource play in the Viking/Colorado Extensive bitumen resources ASSET BASE TRANSFORMATION A sharp focus on asset base transformation and commodity diversification has led to an eight-fold production increase from resource-style growth assets, all oil or NGL-rich gas properties Manage risk and capitalize on commodity price cycles Actively manage commodity price, financial, technical, operational, execution and transactional risks and rewards to optimize value. These pillars guide our entrepreneurial team as we build a strong energy business. As commodity price cycles shift, we have options to pull levers to invest profitably in high quality plays throughout the complex and ever changing industry landscape. Our spectrum of opportunities sets the stage for an exciting story of growth and value creation and building a premium investment in Canada s energy sector. Tight oil and gas exploration Gas over bitumen technical solutions Maximize cash flow CASH FLOW GENERATORS Legacy shallow gas assets provide cash flow for growth and diversification Production (% of total) Tremendous upside to gas price recovery Sue Riddell Rose President and Chief Executive Officer March 15, E Shallow gas Deep basin gas NGL Oil

3 % of revenue Oil & NGL grew to contribute close to 50% of production revenue in 2012, double the previous year. While the relative growth reflects low natural gas prices, it also highlights our commodity diversification into higher netback oil and NGL. Gas storage Oil Gas Hedging NGL Oil & NGL Production Oil & NGL production (bbl/d) Oil & liquids production increased 250% in just two years, and is forecast to continue to grow in Oil and liquids now make up nearly 20 percent of total production. 4,500 25% 4,000 20% 3,500 3,000 15% 2,500 2,000 10% 1,500 Percentage of total production (%) Balance sheet Debt ($ millions) Net debt fell by $130 million in 2012 through a series of asset sales, and another disposition closed in March 2013 which reduced net debt by an additional $77.5 million. Despite low natural gas prices, Perpetual has a good measure of financial flexibility with over 80 percent of total debt termed out into 2015 and beyond. $600 $500 $400 $300 $200 Birchwavy Acquisition $130 MM Viking/Colorado Shale Office Building Sale $36 MM Elmworth Land Purchase $19 MM Montney Profound Acquisition $81 MM Deep Basin Edson Acquisition $71 MM Wilrich GOB Shut-In Reserves Sale $40 MM Capex Expansion $50 MM Wilrich/Mannville 2012 Dispositions $167 MM $75 MM debenture repayment 2013 Elmworth Sale $77.5 MM Our spectrum of opportunities sets the stage for an exciting story of grow th and value creation 1,000 5% $ E E % Oil and NGL NGL Oil Senior notes Bank debt for acquisitions New debenture issue Convertible debentures Net bank debt

4 SPOTLIGHT ON OUR PLAYS Invest for growth Conventional Heavy Oil Eastern Alberta Geographically synergistic with our shallow gas operations, technology and innovative thinking have come together to establish production from 12 Mannville heavy oil pools. Horizontal development is our operational focus while exploration continues across our 123,000 net acres, guided by extensive 3D and 2D seismic. Over 140 locations are in inventory at various stages of drill readiness. Preliminary reservoir modeling indicates that infill drilling, combined with water or polymer floods will increase oil recoveries and could add substantial value. Planning is underway to advance several enhanced oil recovery schemes. Fort McMurray LIQUIDS-RICH GAS ALBERTA DEEP BASIN Over three years we have built a large acreage position, production base, operated infrastructure and technical expertise in the greater Edson area for liquids-rich gas. The resource base has been defined for the target NGL-rich Wilrich formation using horizontal drilling and multi-stage fracture technology. Multiple years of horizontal drilling locations are in inventory; over 100 net locations for the Wilrich alone. In addition, two additional uphole horizons have horizontal development potential, and vertical multi-zone drilling targets exist across our deep basin acreage. Commodity prices are dictating the pace of development. Maximize cash flow LEGACY COnventional SHALLOW GAS EASTERN ALBERTA Grande Prairie Edson Athabasca Edmonton We have the inventory and line of sight to continue to Grow our o i l and liquids production The majority of our natural gas production still comes from a base of legacy shallow gas properties. Our focus is to maximize value by minimizing costs and pursuing low cost production and reserve additions through uphole recompletions and low exposure exploration. Excess cash flow generated is used to fund Perpetual's diversification and growth strategies. These properties are attracting minimal investment in light of low gas prices, but the upside is substantial. Every $0.50 rise in the gas price stands to generate some $10 million in annual funds flow from these legacy shallow gas properties alone. WARWICK GAS STORAGE EASTERN ALBERTA A classic example of our entrepreneurial approach, Perpetual turned a depleted gas reservoir into a commercial gas storage business, combining multiple disciplines of technical expertise with creativity to create shareholder value. Warwick is a non-depleting asset providing a diversified source of revenue. Now in its third cycle of operations, Warwick has approximately 19 Bcf of working gas capacity. Perpetual operates and manages the facility for an annual fee. Optimize and advance BITUMEN NORTHEAST ALBERTA Our bitumen lands extend over 500 net sections and contain various targets and potential recovery methods. Multiple project areas have been identified. While technical evaluations are in the early stages, significant contingent and prospective resource of more than 745 million barrels (best estimate) has been independently recognized. Evaluation of the assets and technology for development is progressing on multiple fronts. A pilot project in the Clearwater at Marten Hills is set for start-up in the first half of 2013, and a pilot in the Bluesky at Panny looks promising for Viking/colorado SHALE GAS EASTERN ALBERTA Vast tight shale gas resource overlies our eastern Alberta conventional shallow gas assets. Potential from the Viking tight sand and the Colorado shale group has been identified over 475 sections. Following detailed geotechnical, geomechanical and geophysical studies and results from two recompletion-based pilots to study fracturing methods, staged investment and evaluation are continuing in order to quantify the economic potential of this resource-style gas opportunity. Calgary DEEP BASIN Multi-zone liquids-rich gas Liquids-rich gas Tight oil and gas exploration EASTERN DISTRICT Legacy conventional shallow gas Conventional heavy oil Warwick gas storage Bitumen Viking/Colorado shale gas 4 PERPETUAL ENERGY INC.

5 2012 annual highlights 2012 STRATEGIC priorities Perpetual focused on four key strategic objectives in 2012: 1. Profitable capital investment in two chosen proven diversifying growth strategies to increase oil and NGL production; 2. Debt reduction; 3. Advancing the assessment and growing the value of other large scope, high impact resource opportunities with risk-managed investment; and 4. Managing downside risks related to commodity price volatility. Significant progress was made towards these strategic priorities, the results of which are highlighted below. DIVERSIFYING GROWTH STRATEGIES Average daily oil and NGL production increased 1,472 bbl/d to 3,448 bbl/d, a 75 percent increase from 2011 levels, driven by the Company s commodity diversification strategy; in particular, targeted heavy oil drilling in the Mannville area. This increase was despite the disposition of 744 bbl/d of oil and NGL production from non-core assets. Exploration and development capital spending was $79.7 million. Capital was preferentially directed to the Mannville heavy oil and Edson Wilrich plays to grow heavy oil and NGL production. Minimal capital for drilling or recompletions was invested in legacy shallow gas properties. A total of 44 (40.1 net) wells were drilled with 100 percent success, compared to 62 (60.5 net) wells in Mannville heavy oil Conventional heavy oil expenditures of $45.8 million were concentrated on the drilling and completion of 35 (34.3 net) horizontal wells in the Mannville play of which 30 (29.3 net) are producing oil, two (2.0 net) are shut-in, and three (3.0 net) were standing awaiting facilities and start-up operations at year end. Edson liquids-rich gas Deep basin capital spending totaled $24.9 million, focused on further delineating the potential of the Wilrich play in the greater Edson area and constructing infrastructure to establish production at West Edson. Total capital activity on the Wilrich play consisted of six (4.0 net) wells and construction of a compression facility at West Edson. During the fourth quarter of 2012 and early 2013, three (1.5 net) horizontal wells targeting the Wilrich formation were drilled and completed to more fully delineate the West Edson acreage. In addition one (1.0 net) well was drilled and completed southwest of the main Edson trend to successfully extend the Wilrich play fairway. Test rates on the wells exceeded the established type curves, ranging from 20 to 26 MMcf/d at flowing pressures higher than estimated initial pipeline flow conditions, with associated NGL of 10 to 27 bbl per MMcf. Acquisitions of $2.4 million (2011 $7.7 million) were focused on expanding Perpetual s horizontal drilling inventory in the Wilrich in the Edson area. Total production from the greater Edson area increased 15 percent over 2011 to 24.1 MMcfe/d, 19 percent NGL. Volumes are expected to continue to grow as facilities are expanded and wells drilled in the fourth quarter of 2012 are brought online. By the end of the first quarter of 2013, production is expected to be approximately 31.2 MMcfe/d. DEBT REDUCTION Total net debt was reduced 25 percent to $396.6 million on December 31, 2012 from $526.9 million at year end Net debt decreased by $130.3 million in 2012 through successful execution of the asset disposition program announced in late Disposition proceeds, net of acquisitions, of $164.8 million was offset by capital spending that exceeded funds flow to enhance the asset base transformation and commodity diversification strategy. Net bank debt outstanding was $86.6 million on a borrowing base of $130 million as of December 31, In November 2011 Perpetual announced an asset disposition program targeting proceeds of $75 to $150 million to be used to strengthen the Corporation s balance sheet and provide for the redemption of Perpetual s $74.9 million 6.50% unsecured convertible debentures (the 6.50% Debentures ). Proceeds from dispositions in 2012 totaled $167.2 million, providing additional liquidity while high-grading the Corporation s asset base. The disposed assets included approximately 13.2 MMcf/d of gas production and oil and NGL production of 744 bbl/d. On April 25, 2012, Perpetual sold a 90 percent interest in its Warwick gas storage facility ( WGS LP ) for cash proceeds of $80.9 million, recording a gain on sale of $40.6 million. At the time of the sale, Perpetual entered into a Management Services and Operations Agreement to provide management and operational services to WGS LP for an annual fee, over an initial two-year term. Perpetual repaid its $74.9 million 6.50% Debentures at maturity on June 30, On December 18, 2012, Perpetual announced the Company had entered into a definitive purchase and sale agreement, along with its partner, to jointly divest its Elmworth Montney assets for gross proceeds of $155 million, $77.5 million net to Perpetual, subject to certain closing adjustments and transaction costs. There is currently no production or cash flow from operations at the Elmworth property. This transaction closed on March 12, 2013 to further reduce net debt. Our commodity diversification strategy led to a 75 percent increase in daily oil and NGL volumes highlighting 100 percent drilling success in two key pl ays 2012 Annual Results 5

6 DOWNSIDE RISK MANAGEMENT Realized hedging gains totaled $31.5 million, as compared to $5.3 million for Perpetual had anticipated the low gas price environment in 2012 and consequently hedged the forward price of natural gas for close to 75 percent of its natural gas production through the majority of the calendar year. The average gas price before derivatives decreased 34 percent to $2.48 per Mcf from $3.77 per Mcf in 2011, in line with a 35 percent decrease in AECO Monthly Index prices. Perpetual s average natural gas price including derivatives was 39 percent higher than average market prices in 2012, but declined to $3.34 per Mcf from $3.82 per Mcf in the prior year due to the impact of lower market prices. The average oil and NGL price before derivatives decreased $9.41 per bbl to $64.26 per bbl, primarily as a result of wider Canadian heavy oil price differentials. LONGER TERM GROWTH OPPORTUNITIES Warwick Gas Storage Risk-managed investments are allowing us to build our know ledge ba se and e valuate pl ays w ith significant longer term grow th potential As part of the WGS LP sale, Perpetual retained an option, exercisable within one year of closing, to buy back from the purchaser up to a 30 percent additional ownership interest in WGS LP at the same price as the initial sale plus working capital and other adjustments, less any dividends paid, for a final ownership interest post any exercise of the buy-back option of up to 40 percent ( WGS Call Option ). Gas storage revenue decreased to $4.3 million from $14.0 million in 2011 as after the sale WGS LP revenues were no longer accounted for on a consolidated basis. After the sale, Perpetual included dividends of $0.9 million from WGS LP in cash flows from operating activities and funds flow. In the fourth quarter of 2012, WGS LP finished drilling and completed two new horizontal wells to increase the working gas capacity of the storage facility from 17 Bcf to 19 Bcf. Application has been made for delta pressuring to further increase the working gas capacity in Perpetual is in the process of evaluating alternatives for the WGS LP Call Option which will expire on April 25, The exercise of the WGS LP Call Option is predicated on the impact of recent drilling and plans for delta pressuring that will increase storage capacity, and a view to improving seasonal spreads translating into increased future cash flows from the facility. Viking / Colorado shale gas Perpetual continued to advance evaluation of the Colorado shale shallow dry gas play in eastern Alberta with risk-managed spending in Vertical recompletions were performed in several zones within the Colorado formation to assess geological, geotechnical and geophysical characteristics as they relate to hydraulic fracture growth and flow parameters. Based on our recompletion tests, and monitoring of competitor activity, an eight-well pilot project is being designed for horizontal development of the Colorado and potentially the Viking formations. The program will aim to confirm well orientation, fracture techniques and play type curves to assess the expected economic returns of this material natural gas resource. Bitumen Perpetual has advanced pilot projects to test two unique recovery technologies in its Panny and Marten Hills bitumen properties. Approval has been received for Marten Hills and is expected imminently for Panny. Both reservoirs are saturated with bitumen that is lower viscosity than typical bitumen reservoirs, and as such, will require less energy-intensive recovery methods to establish flow. Perpetual has entered into a joint venture arrangement on the Marten Hills project which is designed to test conductive heating in a thick Clearwater sand facies. The Panny pilot project will evaluate electrical heat in combination with water and potentially solvent injection in the Bluesky sand reservoir. Limited capital is required for these projects in PERPETUAL ENERGY INC.

7 2012 FINANCIAL AND OPERATING RESULTS SUMMARY Total actual and deemed production decreased 12 percent to MMcfe/d from MMcfe/d in 2011, as lower natural gas production due to dispositions, shut-ins, third party facility downtime and natural declines was partially offset by higher oil and NGL production and higher deemed production related to the full year impact of additional gas over bitumen shut-ins. Total actual production was MMcfe/d, down 15 percent from MMcfe/d in Production-related operating costs decreased six percent to $79.7 million ($1.80 per Mcfe) in 2012 as compared to $85.0 million ($1.64 per Mcfe) in 2011, primarily due to reduced labour costs and dispositions. Decreases were partially offset by increased well suspension costs and higher costs associated with Mannville oil operations. Gas storage business operating costs decreased 59 percent to $2.0 million from $5.0 million in 2011 as a result of the disposition of 90 percent of WGS LP as well as reduced power and well workover costs. Cash general and administrative ( G&A ) expense totaled $27.1 million as compared to $32.3 million for the comparable period in 2011 primarily due to reduced staffing levels, lower consulting fees and reduced information technology costs, offset by lower overhead recoveries due to reduced capital spending in Royalty expense decreased $7.9 million due to lower natural gas production volumes and lower commodity prices. The average royalty rate on oil, NGL and natural gas revenues before derivatives was 7.4 percent compared to 8.9 percent in Perpetual s royalty rate has decreased as natural gas prices decreased to lower levels on the price-adjusted sliding scale used for provincial royalty calculations. Funds flow decreased 32 percent to $49.1 million ($0.33 per Common Share) from $72.7 million ($0.49 per Common Share) for The decrease was caused primarily by lower natural gas revenues, partially offset by higher oil and NGL production, realized gains on derivatives and a decrease in royalties and G&A expenses. The Corporation recorded a net loss of $46.2 million or $0.31 per basic and diluted Common Share in 2012 as compared to a net loss of $100.2 million or $0.68 per basic and diluted Common Share in The decrease in the net loss was due to lower depletion and depreciation expense combined with increased gains on dispositions, partially offset by an increase in impairment losses related to lower forecast natural gas prices. RESERVES AND RESOURCE ESTIMATES Perpetual added 19.5 MMboe of proved and probable reserves in 2012, excluding production, net dispositions and downward technical revisions related to lower commodity price forecasts. Reserve additions and net positive technical revisions due to performance offset 2012 production of 7.4 MMboe by 265 percent. After net dispositions of 11.3 MMboe, production of 7.4 MMboe and negative revisions due to commodity prices of 6.6 MMboe in 2012, proved and probable reserves decreased just 5.8 MMboe (seven percent) from 80.8 MMboe at year end 2011 to 75.0 MMboe. Proved reserves also decreased seven percent to 36.3 MMboe at year end Including changes in future development capital ( FDC ), Perpetual realized finding and development ( F&D ) costs of $13.06 per boe on a proved and probable reserve basis. Since proceeds from dispositions exceeded exploration and development capital spending, Perpetual s realized finding, development and acquisition ( FD&A ) cost, including changes in FDC, was ($12.75) per boe on a proved and probable basis. Perpetual s reserve-based net asset value at year end 2012 was estimated at $1.84 per Common Share discounted at eight percent. Independent contingent resource assessment reports were prepared by McDaniel & Associates Consultants Ltd. ( McDaniel ) in 2011 and partially updated in the first quarter of 2013, resulting in the assignment of 1.36 billion barrels of discovered bitumen initially in place (best estimate) and 1.88 billion barrels of undiscovered bitumen initially in place (best estimate) on 27,113 acres of Perpetual s oil sands leases, primarily in the Panny Bluesky sandstone and Liege Grosmont and Leduc carbonate reservoirs. Perpetual s best estimate Contingent Resource was estimated at MMbbl at year end 2012, up 31 percent from MMbbl at December 31, Additionally, best estimate Prospective Resource increased 12 percent to MMbbl ( MMbbl). Capital spending in 2013 w i ll m irror our 2012 program with funds concentrated on growth in oil and NGL production and reserves 2012 Annual Results 7

8 2013 OUTLOOK 2013 STRATEGIC PRIORITIES Perpetual is focused on five key strategic priorities for 2013: 1. Maximize value of Mannville heavy oil; 2. Position for growth of Edson liquids-rich gas; 3. Manage downside risk and reduce debt; 4. Advance and broaden the portfolio of high impact opportunities with risk-managed investment; and 5. Prepare to maximize value from shallow gas base assets in gas price recovery. CAPITAL SPENDING The Corporation s Board of Directors has approved a capital budget of up to $75 million which will be highly focused on its commodity diversification strategy. The capital spending plan incorporates a two rig development drilling program for Mannville heavy oil in the first quarter, but allows flexibility to manage spending in the second half of the year by focusing on either Mannville heavy oil or liquids-rich gas at Edson depending on commodity prices. Mannville heavy oil Through the first quarter of 2013, 19 (18.7 net) heavy oil wells have been drilled in the Mannville area, with an additional six to eight (5.3 to 7.0 net) wells planned prior to spring break up. Depending on commodity prices, up to 12 (11.3 net) additional Mannville heavy oil wells are planned in the second half of 2013, including infill drilling in the Mannville I2I pool to prepare for the potential implementation of an enhanced recovery scheme in the Sparky formation in Edson liquids-rich gas Our debt reduction strategy is well on track for 2013 with a $77.5 million reduction through the Elmworth propert y sale i n March 2013 First quarter 2013 activity has been focused on completion and tie in of the fourth quarter 2012 drilling program. Perpetual and its partner are continuing to increase the production capability of the West Edson area. Expansion of the West Edson compressor station from its current 10 MMcf/d to 30 MMcf/d of gross capacity (50 percent net to Perpetual) is underway as planned. Construction is in progress on a trunk pipeline system through the West Edson acreage to bring on production from new wells in the first quarter of Two of the three new wells have commenced production at restricted rates, with the third well scheduled to be tied in prior to the start-up of the expanded compressor station in mid-march. In early March, Perpetual entered into rich gas premium agreements with Aux Sable Canada and an interconnection agreement with Alliance Canada to allow access to a premium market in the mid-west United States. Further to these arrangements, Perpetual and its partner will enhance the West Edson compressor station with the installation of refrigeration and other related components to produce sales quality gas. In addition, a sales pipeline will be constructed beginning in the second quarter of 2013 to tie-in to the Alliance pipeline system. Start-up of the gas plant and sales pipeline is expected to commence prior to November 1, These actions are expected to alleviate uncertainty with respect to natural gas processing and NGL transportation and extraction capacity for development of the West Edson reserves, reduce operating costs, improve run times and provide competitive netbacks for NGL. Depending on commodity prices and West Edson plant and sales gas pipeline construction timelines, Perpetual has plans in place to drill two to six (1.0 to 3.5 net) wells in the deep basin during the second half of 2013, primarily targeting the Wilrich formation at West Edson. DEBT REDUCTION On March 12, 2013, Perpetual closed the previously announced sale of its Elmworth property for net proceeds to Perpetual of $77.5 million, subject to certain closing adjustments and transaction costs. Upon closing, net bank debt is estimated to be approximately $21 million, reflecting funds flow and capital program spending to date since year end Proforma for the disposition and the remaining planned first quarter 2013 capital spending program, and assuming the current forward markets for commodity prices, Perpetual expects to exit the first quarter of 2013 with net bank debt of $35 to $40 million. Although there was no lending value associated with the Elmworth property, upon closing of the Elmworth sale, Perpetual s lenders have limited availability under the credit facility to $110 million, pending conclusion of the annual borrowing base review which is underway and expected to be completed by April 30, Perpetual will continue to pursue dispositions in Proceeds from any potential divestitures will be utilized to strengthen the balance sheet and to enhance the Corporation s ability to pursue further investment opportunities, depending upon the outlook for commodity prices at that time. In addition, incremental transactions will provide added optionality for managing the Corporation s longer term debt obligations. 8 PERPETUAL ENERGY INC.

9 DOWNSIDE RISK MANAGEMENT Multiple financial forward sales contracts have been executed to manage commodity price risk for both oil and natural gas in Perpetual has entered into a financial forward sale arrangement for 10,000 GJ per day at AECO at a fixed price of $3.80 per GJ for the 2013 calendar year, representing nine percent of forecast actual and deemed gas production. In addition, price management contracts for 2,250 bbl/d of oil and NGL production are in place with collars protecting an average West Texas Intermediate ( WTI ) floor price of $US per bbl with offsetting ceiling prices averaging $US per bbl, representing 55 percent of forecast oil and NGL production. To further manage risk on heavy oil price differentials, the WTI to Western Canadian Select ( WCS ) price differential has been fixed on 1,000 bbl/d at $US (23.75). Perpetual actively monitors market opportunities to manage commodity price risk and reward on an ongoing basis. FUNDS FLOW The following table reflects Perpetual s projected funds flow for 2013 at various commodity price levels. These sensitivities incorporate monthly settlement of existing derivatives, average daily production of 4,100 bbl/d of oil and NGL, 82.8 MMcf/d of natural gas, operating expense of $86 million, cash G&A expenses of $24 million and an interest rate on long-term bank debt of 5.4 percent Projected funds flow (1) (2) ($ millions) AECO Gas Price ($/GJ) WCS oil price ($/bbl) $3.00 $3.25 $3.50 $3.75 $4.00 $ $ $ $ (1) The current settled and forward average AECO, WTI and WCS differential prices for 2013 as of March 11, 2013 were $3.28 per GJ, $US per bbl and $US (23.23) per bbl respectively. $US to $CDN exchange rate assumed at par. (2) These are non-gaap measures. Strengthening of natural gas prices stands to increase our funds flow substantially with a 50 cent price rise gener at i ng an additional $15 million annually 2012 Annual Results 9

10 FINANCIAL AND OPERATING HIGHLIGHTS Three months ended December 31 Year ended December 31 ($CDN thousands, except volume and per Share amounts) % change % change Financial Revenue (1) (2) 52,156 62,431 (16) 207, ,591 (17) Funds flow (2) 11,158 11,586 (4) 49,087 72,679 (32) Per Common Share (2) (3) (33) Cash flow provided by operating activities 17,375 5, ,599 56,580 (14) Per Common Share (2) (3) (13) Net loss (52,879) (42,998) 23 (46,178) (100,227) (54) Per Common Share (3) (0.36) (0.29) 24 (0.31) (0.68) (54) Dividends declared ,865 (100) Per Common Share (4) (100) Payout ratio (%) (2) (100) Total assets 721,104 1,016,694 (29) 721,104 1,016,694 (29) Net bank debt outstanding (2) (5) 86, ,996 (39) 86, ,996 (39) Senior notes, measured at principal amount 150, , , ,000 - Convertible debentures, measured at principal amount 159, ,897 (32) 159, ,897 (32) Total net debt (2) 396, ,893 (25) 396, ,893 (25) Total equity 36,062 77,251 (53) 36,062 77,251 (53) Capital expenditures Exploration and development 21,185 38,269 (45) 79, ,214 (43) Gas storage (100) 51 11,207 (100) Acquisitions, net of dispositions (6,923) (2,746) 152 (164,763) (33,953) 385 Other (76) (63) Net capital expenditures 14,285 35,947 (60) (84,768) 117,056 (172) Common Shares outstanding (thousands) End of year 147, , , ,966 - Weighted average 147, , , ,694 - Operating Production Natural gas (MMcf/d) (6) (30) (23) Oil and NGL (bbl/d) (6) 3,536 2, ,448 1, Total (MMcfe/d) (6) (23) (15) Gas over bitumen deemed production (MMcf/d) (7) (8) Average daily (actual and deemed MMcfe/d) (6) (7) (20) (12) Per Common Share (cubic feet equivalent/d/share) (3) (21) (13) Average prices Natural gas before derivatives ($/Mcf) (8) (11) (34) Natural gas including derivatives ($/Mcf) (8) (13) Oil and NGL before derivatives ($/bbl) (8) (21) (13) Oil and NGL including derivatives ($/bbl) (8) (23) (18) 10 PERPETUAL ENERGY INC.

11 Three Months Ended December 31 Year Ended December 31 ($CDN thousands, except volume and per Share amounts) % change % change Reserves (Mboe) Proved (9) (10) 36,278 39,175 (7) 36,278 39,175 (7) Proved and probable (9) (10) 75,048 80,784 (7) 75,048 80,784 (7) Per Common Share (Mboe/Share) (12) (7) (7) Estimated present value before tax ($ millions) (11) Proved (39) (39) Proved and probable (32) (32) Land (thousands of net acres) Total land holdings 2,911 3,313 (12) 2,911 3,313 (12) Undeveloped land holdings 1,590 1,849 (14) 1,590 1,849 (14) Drilling (wells drilled gross/net) Gas 4/2.5 5/5.0 (20)/(50) 8/5.5 16/15.5 (50)/(65) Oil 1/1.0 10/10.0 (90)/(90) 36/ /34.0 3/2 Gas storage 2/0.2 -/- 200/20 2/0.2 3/3.0 (33)/(93) Service -/- -/- -/- -/- 1/1.0 (100)/(100) Oil sands evaluation -/- -/- -/- -/- 7/7.0 (100)/(100) Dry -/- -/- -/- -/- -/- -/- Total (excluding gas storage) 5/3.5 15/15.0 (67)/(77) 44/ /60.5 (29)/(34) Success rate 100/ /100 -/- 100/ /100 -/- (1) Revenue includes realized gains and losses on derivatives and call option premiums received. (2) This is a non-gaap measure; please refer to non-gaap measures included in the MD&A. (3) Based on weighted average Common Shares outstanding for the period. (4) Based on Common Shares outstanding at each dividend payment date. (5) Net bank debt is measured as at the end of the period and includes net working capital (deficiency), excluding short-term derivative assets and liabilities related to the Corporation s hedging activities, the current portion of convertible debentures, assets and liabilities held for sale and the share based payment liability. Total net debt includes senior notes and convertible debentures, measured at principal amount. (6) Production amounts are based on the Corporation s interest before deduction of royalties. (7) Deemed production describes all gas shut-in or denied production pursuant to a decision report, corresponding order or general bulletin of the Alberta Energy and Utilities Board ( AEUB ), or through correspondence in relation to an AEUB ID 99-1 application. This deemed production is not actual gas sales but represents shut-in gas that is the basis of the gas over bitumen financial solution received monthly from the Alberta Crown as a reduction of other royalties payable. See Gas over bitumen royalty adjustments in the MD&A. (8) Perpetual s commodity hedging strategy employs both financial forward contracts and physical commodity delivery contracts at fixed prices or price collars. (9) As evaluated by McDaniel in accordance with National Instrument See Reserves included in the MD&A. (10) Reserves are presented on a company interest basis, including working interest and royalty interest volumes but before royalty burdens. (11) Discounted at ten percent using McDaniel s forecast pricing. Reserves at various other discount rates are located in the Reserves section of the MD&A. Estimated present value amounts should not be taken to represent an estimate of fair market value. (12) Based on Common Shares outstanding at period end Annual Results 11

12 MANAGEMENT S DISCUSSION AND ANALYSIS The following is management s discussion and analysis ( MD&A ) of Perpetual Energy Inc. s ( Perpetual or the Corporation ) operating and financial results for the year ended December 31, 2012 as well as information and estimates concerning the Corporation s future outlook based on currently available information. This discussion should be read in conjunction with the Corporation s audited consolidated financial statements and accompanying notes for the years ended December 31, 2012 and The Corporation s audited consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles ("GAAP") which require publicly accountable enterprises to prepare their financial statements using International Financial Reporting Standards ( IFRS ). Readers are referred to the advisories regarding forecasts, assumptions and other forward-looking information contained in the Forward Looking Information section of this MD&A. The date of this MD&A is March 11, Mcf equivalent ( Mcfe ) and barrel of oil equivalent ( boe ) may be misleading, particularly if used in isolation. In accordance with National Instrument ( NI ), a conversion ratio for oil of 1 bbl: 6 Mcf has been used, which is based on an energy equivalency conversion method primarily applicable at the burner tip and does not necessarily represent a value equivalency at the wellhead. For natural gas, gigajoules ( GJ ) are converted to Mcf at a conversion ratio of GJ: 1 Mcf. NON-GAAP MEASURES Payout ratio Payout ratio refers to dividends measured as a percentage of funds flow for the period and is used by management to analyze funds flow available for development and acquisition opportunities as well as overall sustainability of dividends. Funds flow does not have any standardized meaning prescribed by GAAP and therefore payout ratio may not be comparable to the calculation of similar measures for other entities. Operating and funds flow netbacks Management uses cash flow from operating activities before changes in non-cash working capital, gas over bitumen royalty adjustments not yet received (received), settlement of decommissioning obligations and certain exploration and evaluation ( E&E ) costs described below ( funds flow ), funds flow per Common Share and annualized funds flow to analyze operating performance and leverage. Operating and funds flow netbacks do not have any standardized meaning as prescribed by GAAP and therefore may not be comparable to the calculation of similar measures for other entities. Operating and funds flow netbacks should not be viewed as an alternative to funds flow from operations, net earnings (loss) per Common Share or other measures of financial performance calculated in accordance with GAAP. Funds flow is reconciled to its closest GAAP measure, cash flow from operating activities, as follows. Funds flow GAAP reconciliation For the three months ended December 31 For the year ended December 31 ($ thousands, except per Common Share amounts) Cash flow from operating activities 13,527 5,902 48,599 56,580 Exploration and evaluation costs (1) (241) ,917 Expenditures on decommissioning obligations 217 (1,867) 1,825 2,514 Gas over bitumen royalty adjustments not yet received (received) (1,335) (281) (275) 564 Changes in non-cash operating working capital (1,010) 6,872 (1,162) 9,104 Funds flow 11,158 11,586 49,087 72,679 Funds flow per Common Share (2) (1) The Corporation charges exploratory dry hole costs, geological and geophysical costs, lease rentals on undeveloped properties and the cost of expired leases to earnings or loss in the period incurred. To make reported funds flow in this MD&A more comparable to industry practice the Corporation reclassifies dry hole costs, geological and geophysical costs and expired leases from operating to investing activities in the funds flow reconciliation. (2) Based on weighted average Common Shares outstanding for the period. Revenue, including realized gains (losses) on derivatives Revenue, including realized gains (losses) on derivatives, includes call option premiums received and is used by management to calculate the Corporation s net realized commodity prices taking into account monthly settlements on financial forward sales, collars and foreign exchange contracts. These contracts are put in place to protect Perpetual s funds flows from potential volatility in commodity prices, and as such any related realized gains or losses are considered part of the Corporation s realized price. Revenue, including realized gains (losses) on derivatives, does not have any standardized meaning as prescribed by GAAP and should not be reviewed as an alternative to revenue or other measures calculated in accordance with GAAP. Net debt and net bank debt Net bank debt is measured as long-term bank debt including net working capital (deficiency) excluding short-term derivative assets and liabilities related to the Corporation s hedging activities, the current portion of convertible debentures, restricted cash and liabilities related to Perpetual s stock option plan. Net debt includes seven-year senior unsecured notes ( Senior Notes ) and convertible debentures, measured at principal amount. Net bank debt and net debt are used by management to analyze leverage. Net bank debt and net debt do not have any standardized meaning prescribed by GAAP and therefore these terms may not be comparable with the calculation of similar measures for other entities. 12 PERPETUAL ENERGY INC.

13 Total capitalization Total capitalization is equal to net debt plus market value of issued equity and is used by management to analyze leverage. Total capitalization as presented does not have any standardized meaning prescribed by GAAP and therefore it may not be comparable with the calculation of similar measures for other entities. Total capitalization is not intended to represent the total funds from equity and debt received by the Corporation. CORPORATE Perpetual is an oil and natural gas exploration and production company headquartered in Calgary, Alberta. Building from its legacy shallow gas asset base in eastern Alberta, the Corporation has successfully transitioned its asset base from primarily shallow gas production to a diversified, resource-style platform for growth. Perpetual currently has liquids-rich natural gas assets in the deep basin of west central Alberta, heavy oil production in eastern Alberta, oil sands leases in northern Alberta and an interest in a natural gas storage business to complement its shallow gas production and resource base. The Corporation was focused on four key strategic objectives in 2012: 1. Profitable capital investment in two chosen proven diversifying growth strategies to increase oil and natural gas liquids ( NGL or liquids ) production; 2. Debt reduction; 3. Advance assessment and grow value of other large scope, high impact resource opportunities with risk-managed investment; and 4. Manage downside risks related to commodity price volatility. FOURTH QUARTER SUMMARY Successful execution of a purposeful asset base transformation and commodity diversification strategy has positioned the Corporation to better manage commodity price volatility. Significant progress has been made with respect to the Corporation s key strategic objectives and is described in further detail throughout this MD&A. Operational highlights for the fourth quarter of 2012 include: The Corporation executed a $21.2 million capital program focused on Wilrich drilling in the Edson area where the Corporation drilled four (2.5 net) horizontal wells. Additionally, one (1.0 net) horizontal well was drilled in the Mannville area of eastern Alberta. Additional spending during the fourth quarter included completion and tie-in of third quarter heavy oil exploration and development wells in the Mannville area. Development activity in these areas will continue throughout Oil and NGL production increased by 42 percent from the fourth quarter of 2011 to 3,536 bbl/d, representing 19 percent of total production as compared to 11 percent in the same period in Perpetual entered into a non-binding definitive purchase and sale agreement, along with its partner, to jointly divest its Elmworth Montney assets for gross proceeds of $155.0 million, $77.5 million net to Perpetual, subject to certain closing adjustments and transaction costs. This transaction is expected to close during the first quarter of The proceeds will further enhance financial flexibility by reducing the Corporation s net debt in Realized gains on derivatives totaled $7.7 million for the fourth quarter, which included gains on natural gas price risk management contracts, crystallized gains on gas and oil forward contracts and call option premiums received. Perpetual had an average of 92,600 GJ/d of natural gas sales economically hedged for the fourth quarter at an average price of $3.15/GJ Annual Results 13

14 FOURTH QUARTER 2012 RESULTS Three months ended December 31 ($Cdn thousands except volume and per share amounts) % change Financial Revenue (1) (2) 52,156 62,431 (16) Royalties 3,541 4,130 (14) Percentage of revenues Operating expenses 19,135 26,016 (26) Per Mcfe (5) Cash general and administrative expenses 9,462 10,251 (8) Per Mcfe Funds flow (2) 11,158 11,586 (4) Per share (2) (3) Cash flow from operating activities 13,527 5, Per share (2) (3) Net loss (52,879) (42,998) 23 Per share (basic and diluted) (3) (0.36) (0.29) 21 Total assets 721,104 1,016,694 (29) Net bank debt outstanding (2) 86, ,996 (37) Senior notes, at principal amount 150, ,000 - Convertible debentures, at principal amount 159, ,897 (32) Total net debt (2) 396, ,893 (24) Total equity 36,062 77,251 (51) Capital expenditures Exploration and development 21,185 38,269 (45) Gas storage (100) Dispositions, net of acquisitions (6,923) (2,746) 152 Other (76) Net capital expenditures 14,285 35,947 (60) Common Shares outstanding (thousands) End of year 147, ,966 - Weighted average 147, ,905 - Shares outstanding at March 11, ,702 Operating Daily average production Natural gas (MMcf/d) (5) (30) Oil and NGL (bbl/d) (5) 3,536 2, Total (MMcfe/d) (5) (23) Gas over bitumen deemed production (MMcf/d) (4) (8) Average daily (actual and deemed MMcfe/d) (4) (5) (20) Per Common Share (cubic feet equivalent/d/common Share) (3) (21) Average prices Natural gas before derivatives ($/Mcf) (11) Natural gas including derivatives ($/Mcf) Oil and NGL before derivatives ($/bbl) (21) Oil and NGL including derivatives ($/bbl) (23) Drilling (wells drilled gross/net) Gas 4/2.5 5/5.0 (20)/(50) Oil 1/1.0 10/10.0 (90)/(90) Total 5/3.5 15/15.0 (67)/(77) Success rate 100/ /100 -/- (1) Revenue includes realized gains (losses) on derivatives. (2) These are non-gaap measures. Please refer to Non-GAAP measures included in this MD&A. (3) Based on weighted average Common Shares outstanding for the period. (4) Please refer to Gas over bitumen royalty adjustments included in this MD&A. (5) Production amounts are based on the Corporation s interest before royalties expense. 14 PERPETUAL ENERGY INC.

15 Capital expenditures Exploration and development expenditures decreased to $21.2 million for the fourth quarter of 2012 compared to $38.3 million for Capital spending was primarily directed towards liquids-rich natural gas development in the Wilrich formation at Edson where a total of four (2.5 net) horizontal wells were drilled, and one (1.0 net) horizontal oil well was drilled in the Mannville area of eastern Alberta. This compares to a total of four (4.0 net) horizontal Wilrich wells, and nine (9.0 net) horizontal and one (1.0 net) vertical oil well drilled in the Mannville area during the fourth quarter of Drilling success was 100 percent and completion and tie in operations are ongoing in Production & pricing Oil and NGL production for the quarter increased 42 percent to 3,536 bbl/d primarily due to the success of the Mannville heavy oil drilling program in Natural gas production decreased 30 percent to 88.3 MMcf/d due to non-core asset dispositions, the preferential direction of capital spending to oil projects and natural gas declines, partially offset by the establishment of production in West Edson in the second quarter of Natural gas prices before derivatives declined 11 percent to $2.99 per Mcf due to lower AECO Monthly Index prices. Realized gas prices increased eight percent to $3.56 per Mcf, as natural gas hedging gains totaled $4.7 million, of which $1.2 million relates to crystallized gains for the fourth quarter compared to a loss of $0.6 million during the fourth quarter of The average oil & NGL price before derivatives decreased 21 percent to $62.02 per bbl from $78.84 per bbl in the fourth quarter of 2011 as a result of wider heavy oil to West Texas Intermediate ( WTI ) price differentials. Including derivatives, Perpetual realized an average oil and NGL price in the fourth quarter of $71.29 per bbl. Perpetual realized $3.0 million in gains on oil derivatives of which $2.4 million related to the sale of 2015 WTI call options. Financial Funds flow decreased four percent to $11.2 million primarily due to lower gas prices and production as well as lower oil prices offset by increased realized natural gas hedging gains, lower operating expense and increased oil and NGL production. Cash general and administrative ( G&A ) expenses decreased $0.8 million from the fourth quarter of 2011 to $9.5 million mainly due to reduced staff levels. Operating expense decreased $6.9 million to $19.1 million ($1.90 per Mcfe) primarily due to reduced labour costs and dispositions, which included the disposition of 90 percent of Warwick Gas Storage Limited Partnership ( WGS LP ) effective April 25, Decreases were partially offset by higher costs associated with Mannville oil operations. Net loss totaled $52.9 million compared to $43.0 million for the fourth quarter of 2011 primarily due to higher impairment losses due to negative reserve revisions on the Corporation s primarily undeveloped Viking reserves located in eastern Alberta which were partially offset by reduced depletion and depreciation ( D&D ) charges, unrealized gains on derivatives and gains on asset dispositions Annual Results 15