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Peyto Announces Q4 and Year End 2012 Report to Shareholders With Corrected Funds from Operations

March 6, 2013 - Calgary, Alberta

Peyto Exploration & Development Corp. (TSX: PEY) ("Peyto" or the "Company") is pleased to report operating and financial results for the fourth quarter and the 2012 fiscal year. Peyto grew production and reserves per share to record levels in 2012 while delivering a 76% operating margin(1) and a 23% profit margin(2). An 8% return on capital and an 8% return on equity were achieved despite historically low natural gas prices. Highlights for 2012 include:

-- Production per share up 17%. Annual production increased 26% or 17% per
share to 267 MMCFe/d (44,527 boe/d) in 2012 from 213 MMCFe/d (35,465
boe/d) in 2011. Q4 2012 production was also up 26% to 49,754 boe/d.
-- Reserves per share up 15%. Proved Producing ("PP"), Total Proved ("TP")
and Proved plus Probable Additional ("P+P") reserves increased 24%, 23%,
and 22% (15%, 14%, and 13% per share) to 0.9, 1.7, and 2.4 TCFe,
-- Reduced cash costs 22%. Royalties, operating costs, transportation, G&A
and interest expense totaled $1.05/MCFe ($6.30/boe) in 2012 down from
$1.35/MCFe ($8.10/boe) in 2011. Industry leading operating costs were
just $0.32/MCFe ($1.92/boe) in 2012.
-- Funds from Operations per share of $2.19. Generated $309 million in
Funds from Operations ("FFO") in 2012, down 7% from $2.36/share in 2011
despite a 27% drop in realized commodity prices.
-- Capital investments up 63%. Invested a record $452 million to build
25,700 boe/d at a cost of $17,600/boe/d and invested $166 million to
acquire Open Range Energy Corp. ("Open Range"), which produced 4,300
boe/d at year end, for a cost of $38,600/boe/d. Average cost to add new
production was $20,600/boe/d.
-- P+P FD&A half the field netback. All in FD&A cost for PP, TP and P+P
reserves was $2.22/MCFe, $2.04/MCFe and $1.68/MCFe ($10.07/boe),
respectively including changes in Future Development Capital ("FDC"),
while the average field netback was $3.46/MCFe ($20.75/boe).
-- NAV per share of $34. Net Asset Value or the Net Present Value per
share, debt adjusted (discounted at 5%) of the P+P reserves was
$20/share of developed reserves and $14/share of undeveloped reserves.
-- Earnings of $0.67/share and dividends of $0.72/share. A total of $94
million in earnings were generated and $102 million in dividends were
paid to shareholders. Cumulative dividend/distribution payments made by
Peyto to date total $1.3 Billion ($12.31/share).

2012 in Review

The year 2012 was an historic year for Peyto. With the largest capital program in the Company's history, coupled with its first major corporate acquisition, Peyto added a record 30,000 boe/d of new production. Peyto again led the industry as the lowest cost producer and with this advantage was able to generate a 23% profit margin despite natural gas prices that dropped to their lowest level in Company history. In addition to growing production and reserves per share, Peyto increased its ownership and control of processing infrastructure by 100 mmcf/d or 30%, ensuring this low cost advantage can continue in the future. Peyto's land position in the Alberta Deep Basin also grew by more than 30% resulting in the addition of 1.6 new booked horizontal drilling locations for every well drilled in 2012. Production revenues were maximized with the installation of Peyto's enhanced NGL extraction facilities at the Company's Oldman gas plant. Peyto's profitable, returns driven strategy once again delivered an attractive total return on shareholder's capital in 2012.

 (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 year 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 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.---------------------------------------------------------------------------- 3 Months Ended December 31 % 2012 2011 Change----------------------------------------------------------------------------OperationsProduction Natural gas (mcf/d) 266,808 212,715 25% Oil & NGLs (bbl/d) 5,286 3,947 34% Thousand cubic feet equivalent (mcfe/d @ 1:6) 298,522 236,394 26% Barrels of oil equivalent (boe/d @ 6:1) 49,754 39,399 26%Product prices Natural gas ($/mcf) 3.45 4.21 (18)% Oil & NGLs ($/bbl) 73.01 88.04 (17)% Operating expenses ($/mcfe) 0.31 0.35 (11)% Transportation ($/mcfe) 0.11 0.12 (8)% Field netback ($/mcfe) 3.62 4.32 (16)% General & administrative expenses ($/mcfe) 0.02 0.05 (60)% Interest expense ($/mcfe) 0.32 0.35 (9)%Financial ($000, except per share)Revenue 120,310 114,263 5%Royalties 9,205 9,870 (7)%Funds from operations 90,078 80,410 12%Funds from operations per share 0.62 0.60 3%Total dividends 26,178 24,245 8%Total dividends per share 0.18 0.18 -Payout ratio (%) 28 30 (7)%Earnings 25,823 26,036 (1)%Earnings per share 0.18 0.19 (5)%Capital expenditures 156,847 94,688 66%Weighted average shares outstanding 145,449,651 133,913,301 9%As at December 31Net debt (before future compensation expense and unrealized hedging gains)Shareholders' equityTotal assets---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 12 Months Ended December 31 % 2012 2011 Change----------------------------------------------------------------------------OperationsProduction Natural gas (mcf/d) 238,490 189,653 26% Oil & NGLs (bbl/d) 4,778 3,856 24% Thousand cubic feet equivalent (mcfe/d @ 1:6) 267,160 212,789 26% Barrels of oil equivalent (boe/d @ 6:1) 44,527 35,465 26%Product prices Natural gas ($/mcf) 3.23 4.47 (28)% Oil & NGLs ($/bbl) 73.92 81.67 (9)% Operating expenses ($/mcfe) 0.32 0.35 (9)% Transportation ($/mcfe) 0.12 0.13 (8)% Field netback ($/mcfe) 3.46 4.46 (22)% General & administrative expenses ($/mcfe) 0.04 0.06 (33)% Interest expense ($/mcfe) 0.13 0.28 (54)%Financial ($000, except per share)Revenue 411,400 424,560 (3)%Royalties 30,754 41,064 (25)%Funds from operations 308,865 314,622 (2)%Funds from operations per share 2.19 2.36 (7)%Total dividends 101,593 96,068 6%Total dividends per share 0.72 0.72 -Payout ratio (%) 33 31 6%Earnings 93,951 128,183 (27)%Earnings per share 0.67 0.96 (30)%Capital expenditures 617,985 379,061 63%Weighted average shares outstanding 141,093,829 133,196,301 6%As at December 31Net debt (before future compensation expense and unrealized hedging gains) 662,461 465,391 42%Shareholders' equity 1,210,067 1,015,708 19%Total assets 2,203,524 1,800,252 22%-------------------------------------------------------------------------------------------------------------------------------------------------------- 3 Months Ended 12 Months Ended December 31 December 31($000) 2012 2011 2012 2011----------------------------------------------------------------------------Cash flows from operating activities 78,878 85,592 284,309 289,995Change in non-cash working capital 4,457 (19,139) 12,920 3,085Change in provision for performance based compensation (7,712) (8,739) (2,819) (1,154)Income tax paid on account of 2003 reassessment 1,868 - 1,868 -Performance based compensation 12,587 22,696 12,587 22,696----------------------------------------------------------------------------Funds from operations 90,078 80,410 308,865 314,622----------------------------------------------------------------------------Funds from operations per share 0.62 0.60 2.19 2.36----------------------------------------------------------------------------(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 Canadian generally accepted accounting principles ("GAAP") and does not have a standardized meaning prescribed by GAAP. 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 GAAP. Funds from operations cannot be assured and future dividends may vary. 

The Peyto Strategy

The Peyto strategy has long been one of building enduring shareholder value by focusing on generating the maximum possible returns on invested capital. This disciplined model has been tested during times of high commodity prices and record industry activity levels as well as low commodity prices and low activity levels. As with any commodity business, a focus on keeping costs low at all times yields significant advantages over the competition and contributes to generating the best return on the capital invested. Peyto has successfully executed this strategy, aggressively investing capital during opportunistic periods in the cycle while at other times restricting investment, but at all times focusing on cost control. In total, over $2.9 billion has been invested in developing producing reserves that to date have sold for over 1.75 times the total average cost to develop and produce them. The following table illustrates the profitability of the Peyto strategy with the average sales price far exceeding Peyto's historic costs of development and production.

 ----------------------------------------------------------------------------($/Mcfe) 2002 2003 2004 2005 2006 2007----------------------------------------------------------------------------Sales Price $4.78 $7.21 $7.32 $8.87 $8.76 $8.93----------------------------------------------------------------------------Cost to develop(1) ($0.84) ($1.33) ($1.60) ($2.39) ($2.95) ($2.11)Cost to produce(2) ($1.59) ($2.16) ($2.21) ($2.76) ($2.66) ($2.75)----------------------------------------------------------------------------"Profit" $2.35 $3.72 $3.51 $3.72 $3.15 $4.07Payout $1.36 $2.28 $2.81 $3.47 $3.92---------------------------------------------------------------------------- ----------------------------------------------------------------------------($/Mcfe) 2008 2009 2010 2011 2012----------------------------------------------------------------------------Sales Price $9.54 $6.75 $6.15 $5.47 $4.21----------------------------------------------------------------------------Cost to develop(1) ($2.88) ($2.26) ($2.10) ($2.12) ($2.22)Cost to produce(2) ($3.01) ($1.75) ($1.63) ($1.35) ($1.05)----------------------------------------------------------------------------"Profit" $3.65 $2.74 $2.42 $2.00 $0.94Payout $4.25 $4.03 $3.37 $1.24 $1.04---------------------------------------------------------------------------- 

1. Cost to develop is the PDP FD&A

2. Cost to produce is the total cash costs including Royalties, Operating costs, Transportation, G&A and Interest.

3. Payout is the annual distribution or dividend in $/mcfe of production.

In total, over $1.3 billion in profit has been returned to shareholders. As illustrated above, these payments have come from the ongoing profitable development and production of reserves. The success and sustainability of the Peyto strategy continues to be evident.

Capital Expenditures

Peyto deployed a record amount of capital in 2012, with an exploration and development program comprising $452 million and a corporate acquisition costing $166 million, after associated dispositions.

The 2012 exploration and development program was 19% larger than the 2011 program making it the largest in the Company's 14 year history. In total, $338 million was invested into the drilling and completion of 86 gross (76 net) horizontal wells, while $47 million was invested into pipelines and wellsite equipment to bring those wells on production. An additional $11 million was invested into expanding Peyto's natural gas processing capacity while $26 million was invested in the Oldman plant enhanced liquids extraction facility.

Peyto spent $29 million adding to its extensive inventory of profitable, high quality drilling locations with a minor property acquisition in the Sundance area and the successful purchase of 72 new sections of crown land at an average price of $232/acre.

On August 14, 2012, Peyto closed the acquisition of Open Range for an effective total capital cost of $187.2 million. The acquisition was conducted pursuant to a plan of arrangement with Peyto exchanging 0.0723 Peyto shares for each Open Range share (5.4 million Peyto shares total) and assuming $75 million in net debt (inclusive of transaction costs). On December 1, 2012, Peyto disposed of some minor non-core Open Range assets in the Waskahigan area for total proceeds of $20.9 million, which effectively reduced the cost of the acquisition to $166.3 million.

The following table summarizes the increased capital expenditures for the fourth quarter and 2012 year.

 ---------------------------------------------------------------------------- Three Months ended Twelve Months ended Dec. 31 Dec. 31($000) 2012 2011 2012 2011----------------------------------------------------------------------------Land 5,206 5,910 10,770 21,002Seismic 612 1,245 1,741 2,859Drilling - Exploratory & Development 123,778 77,570 337,988 279,446Production Equipment, Facilities & Pipelines 48,015 10,644 84,482 72,079Acquisition of Open Range Energy Corp. - - 187,187 -Property Acquisitions 75 527 17,841 5,581Dispositions (16,969) (1,208) (17,646) (1,906)(Gains) Losses on Dispositions (3,870) (1,126) (4,378) (1,634)----------------------------------------------------------------------------Total Capital Expenditures 156,847 93,562 617,985 377,427---------------------------------------------------------------------------- 


Peyto was successful growing reserves and values in all categories in 2012. The following table illustrates the change in reserve volumes and Net Present Value ("NPV") of future cash flows, discounted at 5%, before income tax and using forecast pricing.

 ---------------------------------------------------------------------------- % Change, debt As at December 31 adjusted 2012 2011 % Change per share(1)----------------------------------------------------------------------------Reserves (BCFe)Proved Producing 945 765 24% 10%Total Proved 1,659 1,352 23% 9%Proved + Probable Additional 2,353 1,935 22% 8% Net Present Value ($millions) Discounted at 5%Proved Producing $2,806 $2,624 7% -8%Total Proved $4,166 $3,972 5% -7%Proved + Probable Additional $5,732 $5,484 5% -6%-------------------------------------------------------------------------------------------------------------------------------------------------------- (1) Per share reserves are adjusted for changes in net debt by converting debt to equity using the Dec 31 share price of $22.99 for 2012 and share price of $24.39 for 2011. Net Present Values are adjusted for debt by subtracting net debt from the value prior to calculating per share amounts.Note: based on the InSite Petroleum Consultants ("InSite") report effective December 31, 2012. The InSite price forecast is available at For more information on Peyto's reserves, refer to the Press Releases dated February 13, 2013 and February 14, 2013 announcing the 2012 Year End Reserve Report which is available on the website at The complete statement of reserves data and required reporting in compliance with NI 51-101 will be included in Peyto's Annual Information Form to be released in March 2013. 

Performance Ratios

The following table highlights additional annual performance indicators, to be used for comparative purposes, but it is cautioned that in isolation they do not measure investment success.

 ---------------------------------------------------------------------------- 2012 2011 2010 2009 2008 2007----------------------------------------------------------------------------Proved Producing FD&A ($/mcfe) $2.22 $2.12 $2.10 $2.26 $2.88 $2.11 RLI (yrs) 9 9 11 14 14 13 Recycle Ratio 1.6 1.9 2.0 1.8 2.3 2.8 Reserve Replacement 284% 230% 239% 79% 110% 127%----------------------------------------------------------------------------Total Proved FD&A ($/mcfe) $2.04 $2.13 $2.35 $1.73 $3.17 $1.57 RLI (yrs) 15 16 17 21 17 16 Recycle Ratio 1.7 1.9 1.8 2.3 2.1 3.7 Reserve Replacement 414% 452% 456% 422% 139% 175% Future Development Capital ($MM) $1,318 $1,111 $741 $446 $222 $169----------------------------------------------------------------------------Proved plus Probable Additional FD&A ($/mcfe) $1.68 $1.90 $2.19 $1.47 $3.88 $1.56 RLI (yrs) 22 22 25 29 23 21 Recycle Ratio 2.1 2.1 1.9 2.8 1.7 3.7 Reserve Replacement 527% 585% 790% 597% 122% 117% Future Development Capital ($MM) $2,041 $1,794 $1,310 $672 $390 $321---------------------------------------------------------------------------- -- FD&A (finding, development and acquisition) costs are used as a measure of capital efficiency and are calculated by dividing the capital costs for the period, including the change in undiscounted future development capital ("FDC"), by the change in the reserves, incorporating revisions and production, for the same period (eg. Total Proved ($618+$207)/(1,659-1,352+98) = $2.04/mcfe or $12.24/boe).-- The reserve life index (RLI) is calculated by dividing the reserves (in boes) in each category by the annualized average production rate in boe/year (eg. Proved Producing 157,491/(49.754x365) = 8.7). Peyto believes that the most accurate way to evaluate the current reserve life is by dividing the proved developed producing reserves by the actual fourth quarter average production. In Peyto's opinion, for comparative purposes, the proved developed producing reserve life provides the best measure of sustainability.-- The Recycle Ratio is calculated by dividing the field netback per MCFe, before hedging, by the FD&A costs for the period (eg. Proved Producing (($3.46)/$2.22=1.6). The recycle ratio is comparing the netback from existing reserves to the cost of finding new reserves and may not accurately indicate investment success unless the replacement reserves are of equivalent quality as the produced reserves.-- The reserve replacement ratio is determined by dividing the yearly change in reserves before production by the actual annual production for the year (eg. Total Proved ((1,659-1,352+98)/98) = 4.14). 

Value Creation/Reconciliation

In order to measure the success of all of the capital invested in 2012, it is necessary to quantify the total amount of value added during the year and compare that to the total amount of capital invested. As requested, Insite has run last year's reserve evaluation with this year's price forecast to remove the change in value attributable to both commodity prices and changing royalties. This approach isolates the value created by the Peyto team from the value created (or lost) by those changes outside of their control. Since the capital investments in 2012 were funded from a combination of cash flow, debt and equity, it is necessary to include the change in debt and the change in shares outstanding to determine if the change in value is truly accretive to shareholders.

At year end 2012, Peyto's estimated net debt had increased by $196.8 million to $662.4 million while the number of shares outstanding had increased by 10.3 million shares to 148.7 million shares. The change in debt includes all of the capital expenditures, as well as acquisitions, and the total fixed and performance based compensation paid out during the year.

Based on this reconciliation of changes in BT NPV, the Peyto team was able to create $963 million of Proved Producing, $1.36 billion of Total Proved, and $2.0 billion of Proved plus Probable Additional undiscounted reserve value, with a $618 million capital investment. The ratio of value creation to capital expenditure is what Peyto refers to as the NPV recycle ratio, which is simply the undiscounted value addition, resulting from the capital program, divided by the capital investment. For 2012, the Proved Producing NPV recycle ratio is 1.6. Refer to the value reconciliation table in the February 14, 2013 Reserve Press Release for additional details on the value creation determination.

Performance Measures

There are a number of performance measures that are used in the oil and gas industry in an attempt to evaluate how profitably capital has been invested. Peyto believes that the value analysis and reconciliation presented above is the best determination of profitability as it compares the value of what was created relative to what was invested. This is because the NPV of an oil and gas asset takes into consideration the reserves, the production forecast, the future royalties and operating costs, future capital and the current commodity price outlook. In 2012, the Proved Producing NPV recycle ratio was 1.6 times. This means for each dollar invested, the Peyto team was able to create 1.6 new dollars of Proved Producing reserve value. The average NPV Recycle Ratio over the last 5 years is 3.0 times for undiscounted future values or 2.2 times for future values discounted at 10%. The historic NPV recycle ratios are presented in the following table.

 ----------------------------------------------------------------------------Value Creation Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, 2012 2011 2010 2009 2008 2007 2006----------------------------------------------------------------------------NPV0 Recycle Ratio Proved Producing 1.6 2.4 3.5 5.4 2.1 4.7 2.9 Total Proved 2.2 4.7 6.1 18.9 2.5 5.5 2.9 Proved + Probable Additional 3.2 6.6 10.3 27.1 2.2 3.8 3.8---------------------------------------------------------------------------- -- NPV0 (net present value) recycle ratio is calculated by dividing the undiscounted NPV of reserves added in the year by the total capital cost for the period (eg. Proved Producing ($963/$618) = 1.6). 

Quarterly Review

Activity in the fourth quarter of 2012 included the drilling of 28 gross (27.2 net) horizontal wells, the completion of 33 gross (29.6 net) wells and the installation of wellsite equipment and tie in of 34 gross (30.4 net) wells. Capital expenditures in Q4 totaled $156.8 million with $78 million spent on drilling, $47 million on completions, and $22 million on wellsite equipment and pipelines. Installation of the enhanced liquids extraction facilities at the Oldman gas plant was responsible for the majority of the $25 million invested in facilities. In the quarter, 30.5 sections of new land was purchased at crown land sales for $5.2 million or $267/ac.

On December 1, 2012 Peyto disposed of some minor non-core Open Range assets in the Waskahigan area for total proceeds of $20.9 million reflected in the previous capital summary as a disposition and gain on disposition.

Production for Q4 2012 was up 26% from Q4 2011 to 49,754 boe/d including 299 mmcf/d of natural gas and 5,286 bbl/d of oil and natural gas liquids. Fourth quarter production was less than expected, however, due to an unanticipated outage at Peyto's Oldman gas processing facility. The cause of the outage was a faulty piece of equipment installed during the new Oldman Deep Cut plant expansion. The defective equipment prevented the operation of approximately two thirds, or 80 mmcf/d, of the processing capacity at the facility. This equipment has been repaired and the impacted processing capacity was brought back online on January 7, 2013 with the Deep Cut plant operation commencing January 25, 2013. Approximately 10,700 boe/d of net production was offline for the final 13 days in December.

Peyto's natural gas price in the fourth quarter 2012 of $3.45/mcf was 18% lower than the previous year, while the realized oil and natural gas liquids price of $73.01/bbl was 17% lower. These prices combined for a realized price of $4.38/mcfe including $0.13/mcfe of realized hedging gain. Q4 2012 total cash costs of $1.10/mcfe included $0.34/mcfe for royalties, $0.31/mcfe for operating costs, $0.11/mcfe for transportation, $0.02/mcfe for G&A and $0.32/mcfe for interest. Realized prices less cash costs resulted in cash netbacks for the quarter of $3.28/mcfe or a 75% operating margin.

Peyto incurred a one-time tax charge of $1.9 million or $0.12/mcfe in the quarter due to the reassessment of Peyto's 2003 Alberta income tax return. The reassessment related to the treatment of the payout of stock options for income tax purposes upon conversion to an income trust in 2003. The federal reassessment was paid to Canada Revenue Agency in 2008, however, the Alberta Government subsequently reassessed the 2003 Alberta income tax return in January, 2013 which was paid in the same month and accrued as a one-time charge in the 2012 financial results.


The current natural gas price outlook is substantially better than this time last year. Although storage volumes are at the high end of historical levels, growing demand and flat to declining North American natural gas supply is supporting prices at $3.00/GJ CND$ and $3.50/MMBTU US$. With current supplies matching demand, weather should continue to play a significant role in future prices. In addition, natural gas is playing an increasing role for summer power generation, particularly in light of the current projections for decreased hydro power this coming spring and ongoing retirement of coal fired power plants.

Natural gas liquids prices have, in general, remained substantially higher than the equivalent price in gaseous form. Recent industry trends to extract more Propane and Ethane from the natural gas production have increase supplies and filled available liquefied petroleum gas ("LPG") fractionation plant capacity. This has put significant downward pressure on the price for these specific products which will likely continue for the near future. The majority of Peyto's LPG is under long term contract for transportation and fractionation.

Approximately 50% of Peyto's natural gas production in the fourth quarter had been pre-sold in forward sales done over the previous year at an average price of $3.17/GJ. The remaining balance of production was subject to AECO monthly spot prices that averaged $2.90/GJ. On a blended basis, Peyto's realized gas price was $3.04/GJ or $3.45/mcf, reflective of Peyto's high heat content natural gas production.

The Company's hedging practice of layering in future sales in the form of fixed price swaps, in order to smooth out the volatility in natural gas price, continued throughout the quarter and into 2013. The following table summarizes the remaining hedged volumes and prices for the upcoming years, effective March 6, 2013:

 ---------------------------------------------------------------------------- Future Sales Average Price (CAD)---------------------------------------------------------------------------- GJ Mcf $/GJ $/Mcf---------------------------------------------------------------------------- 2013 54,842,500 46,873,932 $3.20 $3.74 2014 27,575,000 23,568,376 $3.24 $3.79---------------------------------------------------------------------------- Total 82,417,500 70,442,308 $3.21 $3.76---------------------------------------------------------------------------- 

As illustrated in the following table, Peyto's annual realized natural gas liquids prices(1) were approximately 10% lower on a year over year basis, due primarily to realized Propane prices which were 45% lower than the price realized in 2011.

 ---------------------------------------------------------------------------- Three Months ended Twelve Months ended Dec. 31 Dec. 31 2012 2011 2012 2011----------------------------------------------------------------------------Condensate ($/bbl) 91.22 101.08 94.78 94.47Propane ($/bbl) 25.58 46.03 24.12 44.00Butane ($/bbl) 63.38 67.46 64.05 63.41Pentane ($/bbl) 94.34 104.03 98.93 96.63---------------------------------------------------------------------------- 

 (1) Liquids prices are Peyto realized prices in Canadian dollars adjusted for fractionation and transportation. 

Peyto's hedging practice with respect to propane and butane also continued throughout the fourth quarter. The following table summarizes the hedged volumes and prices for the upcoming years, effective March 6, 2013.

 ---------------------------------------------------------------------------- Propane Butane---------------------------------------------------------------------------- Future Sales Average Price Future Sales Average Price (bbls) ($USD/bbl) (bbls) ($USD/bbl)----------------------------------------------------------------------------2013 213,972 $33.95 15,345 $65.88---------------------------------------------------------------------------- 

Activity Update

Peyto has continued its record level of activity into the first quarter of 2013. Nine rigs are drilling and four completions crews are following behind the drilling rigs. To the end of February, 17 gross (16.9 net) wells have been rig released and 14 gross (13.2 net) wells have been brought on production.

Current production is approximately 57,000 boe/d which includes 4,300 boe/d of new additions since early January. Over 5,000 boe/d of production awaits tie-in of 8.0 net wells that have been completed but are not yet onstream.

Over the first two months of 2013, two compressor expansion projects were completed. An additional 10 MMcf/d of compression was added to the Nosehill Plant taking the facility capacity to 120 MMcf/d. In addition, another 10 MMcf/d of compression was added to the Wildhay Plant taking it to a capacity of 70 MMcf/d.

Three plant construction projects are in the early stage of equipment fabrication with field work anticipated for the summer of 2013 and start-ups ranging from late summer to fall. The first project is a 30 MMcf/d addition to the Swanson Plant (taking it to 60 MMcf/d) for the accommodation of Ansell area growth volumes. In addition to the plant expansion, a 50 km strategic pipeline from Ansell to Swanson is currently under construction with targeted completion after breakup. The second project is a new Oldman North Plant to be located adjacent to the existing 125 MMcf/d Oldman Plant and initially designed for 40 MMcf/d. This plant will handle ongoing Cardium and Falher horizontal well development. A third new facility is planned for mid-fall for a new step-out area of Wilrich development that is presently undergoing early stage delineation drilling.

The Oldman Deep Cut facility built at the end of 2012 was successfully brought online in mid-January. The plant is currently running just below its 80 MMcfd raw gas capacity as some final re-compression tuning occurs for the four new compressors. The overall Oldman LPG recovery level has increased from a pre-Deep Cut level of 1,600 bbl/d to a present level of 2,400 bbl/d at the current -75 degrees C operating level for the Deep Cut train. With continued tuning of the re-compression, throughput will be brought up and chilling will be dropped towards the -80 degrees C design level to realize the full 2,600 bbl/d of LPG.

As in most past years, Peyto tentatively plans to shut down its drilling operations over spring break-up which is contemplated to occur from early April to mid-May and resume its drilling program with nine rigs. Post break-up drilling will focus in the traditional Greater Sundance area with volumes filling the new Oldman North Plant, the Ansell area with volumes pipelined to the expanded Swanson Plant, and with some additional Northern Cardium drilling. The $450 to $500 million capital program is on pace and it is expected that target 2013 exit production levels of 62,000 to 67,000 boe/d will be reached.

2013 Outlook

2013 is forecast to be the most active in the Company's history. It also comes at a time when the majority of natural gas producers in North America are challenged by low natural gas prices and high costs, rendering many plays uneconomic. Over its history, Peyto has maintained a unique low cost advantage that allows the Company to profitably grow its asset base, despite lower commodity prices, taking advantage of lower service and material costs. In effect, Peyto can be "greedy when others are fearful" and capture new opportunities when others are cutting capital budgets and rationalizing assets. This prevailing economic condition is forecast to continue throughout 2013 allowing Peyto the opportunity to deliver the same superior total returns to shareholders as in the past. Peyto's expertise in the Alberta Deep Basin will serve it well in this regard. The company's financial flexibility, quality asset base and strong balance sheet position Peyto to continue to be opportunistic. As always, capital investments will only be pursued if Peyto's high return objectives can be met.

Conference Call and Webcast

A conference call will be held with the senior management of Peyto to answer questions with respect to the 2012 fourth quarter and full year financial results on Thursday, March 7th, 2013, at 9:00 a.m. Mountain Standard Time (MST), or 11:00 a.m. Eastern Standard Time (EST). To participate, please call 1-416-340-8530 (Toronto area) or 1-877-440-9795 for all other participants. The conference call will also be available on replay by calling 1-905-694-9451 (Toronto area) or 1-800-408-3053 for all other parties, using passcode 9284446. The replay will be available at 11:00 a.m. MST, 1:00 p.m. EST Thursday, March 7th, 2013 until midnight EDT on Thursday, March 14th, 2013. The conference call can also be accessed through the internet at After this time the conference call will be archived on the Peyto Exploration & Development website at .

Management's Discussion and Analysis

A copy of the fourth quarter report to shareholders, including the MD&A, and audited financial statements and related notes is available at and will be filed at SEDAR,, at a later date.

Annual General Meeting

Peyto's Annual General Meeting of Shareholders is scheduled for 3:00 p.m. on Wednesday, June 5, 2013 at Livingston Place Conference Centre, +15 level, 222-3rd Avenue SW, Calgary, Alberta. Shareholders are encouraged to visit the Peyto website at where there is a wealth of information designed to inform and educate investors. A monthly President's Report can also be found on the website which follows the progress of the capital program and the ensuing production growth, along with video and audio commentary from Peyto's senior management.

Darren Gee, President and CEO

March 6, 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, contains forward-looking statements. In particular, but without limiting the foregoing, this news release contains forward-looking information and statements pertaining to the following: the timing of its enhanced liquids extraction project and guidance as to the capital expenditure plans of Peyto under the heading "2013 Outlook". 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, currency 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 therefrom.

 Peyto Exploration & Development Corp.Consolidated Balance Sheet(Amount in $thousands) December 31 December 31 2012 2011----------------------------------------------------------------------------AssetsCurrent assetsCash - 57,224Accounts receivable 85,677 53,829Due from private placement (Note 7) 3,459 9,740Derivative financial instruments (Note 13) 10,254 38,530Prepaid expenses 4,150 3,991---------------------------------------------------------------------------- 103,540 163,314---------------------------------------------------------------------------- Long-term derivative financial instruments (Note 13) - 6,304Prepaid capital 3,714 1,414Property, plant and equipment, net (Note 4) 2,096,270 1,629,220---------------------------------------------------------------------------- 2,099,984 1,636,938---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 2,203,524 1,800,252-------------------------------------------------------------------------------------------------------------------------------------------------------- LiabilitiesCurrent liabilitiesAccounts payable and accrued liabilities 164,946 110,483Current income tax 1,890 -Dividends payable (Note 7) 8,911 8,278Provision for future performance based compensation (Note 11) 2,677 4,321---------------------------------------------------------------------------- 178,424 123,082---------------------------------------------------------------------------- Long-term debt (Note 5) 580,000 470,000Long-term derivative financial instruments (Note 13) 2,532 -Provision for future performance based compensation (Note 11) 59 1,235Decommissioning provision (Note 6) 58,201 38,037Deferred income taxes (Note 12) 174,241 152,190---------------------------------------------------------------------------- 815,033 661,462---------------------------------------------------------------------------- Shareholders' equityShareholders' capital (Note 7) 1,124,382 889,115Shares to be issued (Note 7) 3,459 9,740 Retained earnings 75,247 82,889Accumulated other comprehensive income (Note 7) 6,979 33,964---------------------------------------------------------------------------- 1,210,067 1,015,708---------------------------------------------------------------------------- 2,203,524 1,800,252--------------------------------------------------------------------------------------------------------------------------------------------------------Approved by the Board of Directors (signed) "Michael MacBean" (signed) "Darren Gee"Director Director Peyto Exploration & Development Corp.Consolidated Income Statement(Amount in $thousands) Year ended December 31 2012 2011----------------------------------------------------------------------------RevenueOil and gas sales 357,734 387,240Realized gain on hedges (Note 13) 53,667 37,320Royalties (30,754) (41,064)----------------------------------------------------------------------------Petroleum and natural gas sales, net 380,647 383,496---------------------------------------------------------------------------- ExpensesOperating (Note 8) 31,260 27,379Transportation 11,275 9,754General and administrative (Note 9) 3,846 4,911Market and reserves based bonus (Note 11) 12,587 22,696Future performance based compensation (Note (2,819) (1,154) 11)Interest (Note 10) 25,401 21,881Accretion of decommissioning provision (Note 1,044 840 10)Depletion and depreciation (Note 4) 172,338 130,678Gain on disposition of assets (Note 4) (4,378) (1,634)---------------------------------------------------------------------------- 250,554 215,351----------------------------------------------------------------------------Earnings before taxes 130,093 168,145---------------------------------------------------------------------------- Income taxDeferred income tax expense (recovery) (Note 34,274 35,013 12)Income tax expense (Note 12) 1,868 4,949 ----------------------------------------------------------------------------Earnings for the year 93,951 128,183-------------------------------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------Earnings per share (Note 7)Basic and diluted $ 0.67 $ 0.96-------------------------------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------Weighted average number of common shares outstanding (Note 7)Basic and diluted 141,093,829 133,196,103-------------------------------------------------------------------------------------------------------------------------------------------------------- Peyto Exploration & Development Corp.Consolidated Statement of Comprehensive Income(Amount in $thousands) Year ended December 31 2012 2011----------------------------------------------------------------------------Earnings for the year 93,951 128,183Other comprehensive incomeChange in unrealized gain (loss) on cash flow hedges 17,687 54,243Deferred tax recovery (expense) 8,995 (3,852)Realized gain on cash flow hedges (53,667) (37,320)----------------------------------------------------------------------------Comprehensive Income 66,966 141,254-------------------------------------------------------------------------------------------------------------------------------------------------------- Peyto Exploration & Development Corp.Consolidated Statement of Changes in Equity(Amount in $thousands) Year ended December 31 2012 2011----------------------------------------------------------------------------Shareholders' capital, Beginning of Year 889,115 755,831----------------------------------------------------------------------------Common shares issued 115,024 115,126Common shares issued pursuant to acquisition of Open Range Energy Corp. 112,187 -Common shares issued by private placement 11,952 17,150Common shares issuance costs (net of tax) (3,896) (3,854)Common shares issued pursuant to DRIP - 1,973Common shares issued pursuant to OTUPP - 2,889----------------------------------------------------------------------------Shareholders' capital, End of Year 1,124,382 889,115-------------------------------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------Common shares to be issued, Beginning of Year 9,740 17,285----------------------------------------------------------------------------Common shares issued (9,740) (17,285)Common shares to be issued 3,459 9,740----------------------------------------------------------------------------Common shares to be issued, End of Year 3,459 9,740-------------------------------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------Retained earnings, Beginning of Year 82,889 50,774----------------------------------------------------------------------------Earnings for the year 93,951 128,183Dividends (Note 7) (101,593) (96,068)----------------------------------------------------------------------------Retained earnings, End of Year 75,247 82,889-------------------------------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------Accumulated other comprehensive income, Beginning of Year 33,964 20,893----------------------------------------------------------------------------Other comprehensive income (loss) (26,985) 13,071----------------------------------------------------------------------------Accumulated other comprehensive income, End of Year 6,979 33,964-------------------------------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------Total Shareholders' Equity 1,210,067 1,015,708-------------------------------------------------------------------------------------------------------------------------------------------------------- Peyto Exploration & Development Corp.Consolidated Statement of Cash Flows(Amount in $thousands) Year ended December 31 2012 2011----------------------------------------------------------------------------Cash provided by (used in)Operating activitiesEarnings 93,951 128,183Items not requiring cash: Deferred income tax 34,274 35,013 Gain on disposition of assets (4,378) (1,634) Depletion and depreciation 172,338 130,678 Accretion of decommissioning provision 1,044 840Change in non-cash working capital related to operating activities (12,920) (3,085)---------------------------------------------------------------------------- 284,309 289,995----------------------------------------------------------------------------Financing activitiesIssuance of common shares 126,976 132,276Issuance costs (5,195) (5,137)Dividends (100,960) (103,615)Increase (decrease) in bank debt (40,000) 115,000Repayment of Open Range bank debt (72,000) -Issuance of long term notes 150,000 ----------------------------------------------------------------------------- 58,821 138,524----------------------------------------------------------------------------Investing activitiesAdditions to property, plant and equipment (400,354) (382,189)Dispositions of property, plant and equipment - 3,000---------------------------------------------------------------------------- (400,354) (379,189)---------------------------------------------------------------------------- ----------------------------------------------------------------------------Net increase in cash (57,224) 49,330Cash, beginning of year 57,224 7,894----------------------------------------------------------------------------Cash, end of year - 57,224---------------------------------------------------------------------------- The following amounts are included in Cash flows from operating activities:---------------------------------------------------------------------------- Cash interest paid 23,460 19,656Cash taxes paid - ----------------------------------------------------------------------------- 

Peyto Exploration & Development Corp.

Notes to Consolidated Financial Statements

As at December 31, 2012 and 2011

(Amount in $ thousands, except as otherwise noted)

1.Nature of operations

Peyto Exploration & Development Corp. and its wholly owned subsidiary Open Range Energy Corp. ("Open Range"), (collectively "Peyto" or the "Company") are Calgary based oil and natural gas companies. Peyto and Open Range amalgamated on January 1, 2013. 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.

These financial statements were approved and authorized for issuance by the Board of Directors of Peyto on March 5, 2013.

2.Basis of presentation

These consolidated financial statements ("financial statements") for the years ended December 31, 2012 and December 31, 2011 represent the Company's results and financial position in accordance with International Financial Reporting Standards ("IFRS"). The consolidated financial statements include the accounts of Peyto Exploration & Development Corp. and its subsidiary. Subsidiaries are defined as any entities, including unincorporated entities such as partnerships, for which the Company has the power to govern their financial and operating policies to obtain benefits from their activities. Intercompany balances, net earnings and unrealized gains and losses arising from intercompany transactions are eliminated in preparing the consolidated financial statements.

a)Summary of significant accounting policies

The precise determination of many assets and liabilities is dependent upon future events and the preparation of periodic financial statements necessarily involves the use of estimates and approximations. Accordingly, actual results could differ from those estimates. The financial statements have, in management's opinion, been properly prepared within reasonable limits of materiality and within the framework of the Company's basis of presentation as disclosed.

b) Significant accounting estimates and judgements

The timely preparation of the financial statements in conformity with IFRS requires that management make estimates and assumptions and use judgment regarding the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, actual results may differ from estimated amounts as future confirming events occur.

Amounts recorded for depreciation, depletion and amortization, decommissioning costs and obligations and amounts used for impairment calculations are based on estimates of gross proved plus probable reserves and future costs required to develop those reserves. By their nature, these estimates of reserves, including the estimates of future prices and costs, and the related future cash flows are subject to measurement uncertainty, and the impact in the financial statements of future periods could be material.

The amount of compensation expense accrued for future performance based compensation arrangements are subject to management's best estimate of whether or not the performance criteria will be met and what the ultimate payout will be.

Tax interpretations, regulations and legislation in the various jurisdictions in which the Company operates are subject to change. As such, income taxes are subject to measurement uncertainty.

c) Presentation currency

All amounts in these financial statements are expressed in Canadian dollars, as this is the functional and presentation currency of the Company.

d) Cash Equivalents

Cash equivalents include term deposits or a similar type of instrument, with a maturity of three months or less when purchased.

e) Jointly controlled assets

A jointly controlled asset involves joint control and offers joint ownership by the Company and other partners of assets contributed to or acquired for the purpose of the jointly controlled assets, without the formation of a corporation, partnership or other entity.

The Company accounts for its share of the jointly controlled assets, any liabilities it has incurred, its share of any liabilities jointly incurred with its partners, income from the sale or use of its share of the joint asset's output, together with its share of the expenses incurred by the jointly controlled asset and any expenses it incurs in relation to its interest in the jointly controlled asset.

f) Exploration and evaluation assets

Pre-license costs

Costs incurred prior to obtaining the legal right to explore for hydrocarbon resources are expensed in the period in which they are incurred. The Company has no pre-license costs.

Exploration and evaluation costs

Once the legal right to explore has been acquired, costs directly associated with an exploration well are capitalized as exploration and evaluation intangible assets until the drilling of the well is complete and the results have been evaluated. All such costs are subject to technical feasibility, commercial viability and management review as well as review for impairment at least once a year to confirm the continued intent to develop or otherwise extract value from the discovery. The Company has no exploration or evaluation assets.

g) Property, plant and equipment

Oil and gas properties and other property, plant and equipment are stated at cost, less accumulated depreciation and accumulated impairment losses.

The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation, the initial estimate of the decommissioning provision and borrowing costs for qualifying assets. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. Costs include expenditures on the construction, installation or completion of infrastructure such as well sites, pipelines and facilities including activities such as drilling, completion and tie-in costs, equipment and installation costs, associated geological and human resource costs, including unsuccessful development or delineation wells.

Oil and natural gas asset swaps

For exchanges or parts of exchanges that involve assets, the exchange is accounted for at fair value. Assets are then de-recognized at their current carrying amount.

Depletion and depreciation

Oil and natural gas properties are depleted on a unit-of-production basis over the proved plus probable reserves. All costs related to oil and natural gas properties (net of salvage value) and estimated costs of future development of proved plus probable undeveloped reserves are depleted and depreciated using the unit-of-production method based on estimated gross proved plus probable reserves as determined by independent reservoir engineers. For purposes of the depletion and depreciation calculation, relative volumes of petroleum and natural gas production and reserves are converted at the energy equivalent conversion rate of six thousand cubic feet of natural gas to one barrel of crude oil.

Other property, plant and equipment are depreciated using a declining balance method over useful life of 20 years.

h) Corporate assets

Corporate assets not related to oil and natural gas exploration and development activities are recorded at historical costs and depreciated over their useful life. These assets are not significant or material in nature.

i) Impairment of non-financial assets

The Company assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset's recoverable amount. An asset's recoverable amount is the higher of fair value less costs to sell or value-in-use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is assessed as part of a cash generating unit ("CGU"). If the carrying amount of an asset or CGU exceeds its recoverable amount, the asset or CGU is considered impaired and is written down to its recoverable amount. In assessing value-in-use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded securities or other available fair value indicators.

Impairment losses of continuing operations are recognized in the income statement.

An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the Company estimates the asset's or cash-generating unit's recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset's recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years.

j) Leases

Leases or other arrangements entered into for the use of an asset are classified as either finance or operating leases. Finance leases transfer to the Company substantially all of the risks and benefits incidental to ownership of the leased asset. Assets under finance lease are amortized over the shorter of the estimated useful life of the assets and the lease term. All other leases are classified as operating leases and the payments are amortized on a straight-line basis over the lease term.

k) Financial instruments

Financial instruments within the scope of IAS 39 Financial Instruments: Recognition and Measurement ("IAS 39") are initially recognized at fair value on the balance sheet. The Company has classified each financial instrument into the following categories: "fair value through profit or loss"; "loans & receivables"; and "other liabilities". Subsequent measurement of the financial instruments is based on their classification. Unrealized gains and losses on fair value through profit or loss financial instruments are recognized in earnings. The other categories of financial instruments are recognized at amortized cost using the effective interest rate method. The Company has made the following classifications:

 ----------------------------------------------------------------------------Financial Assets & Liabilities Category----------------------------------------------------------------------------Cash Fair value through profit or loss----------------------------------------------------------------------------Accounts Receivable Loans & receivables----------------------------------------------------------------------------Due from Private Placement Loans & receivables----------------------------------------------------------------------------Accounts Payable and Accrued Liabilities Other liabilities----------------------------------------------------------------------------Provision for Future Performance Based Other liabilities Compensation----------------------------------------------------------------------------Dividends Payable Other liabilities----------------------------------------------------------------------------Long Term Debt Other liabilities----------------------------------------------------------------------------Derivative Financial Instruments Fair value through profit or loss---------------------------------------------------------------------------- 

Derivative instruments and risk management

Derivative instruments are utilized by the Company to manage market risk against volatility in commodity prices. The Company's policy is not to utilize derivative instruments for speculative purposes. The Company has chosen to designate its existing derivative instruments as cash flow hedges. The Company assesses, on an ongoing basis, whether the derivatives that are used as cash flow hedges are highly effective in offsetting changes in cash flows of hedged items. All derivative instruments are recorded on the balance sheet at their fair value. The effective portion of the gains and losses is recorded in other comprehensive income until the hedged transaction is recognized in earnings. When the earnings impact of the underlying hedged transaction is recognized in the income statement, the fair value of the associated cash flow hedge is reclassified from other comprehensive income into earnings. Any hedge ineffectiveness is immediately recognized in earnings. The fair values of forward contracts are based on forward market prices.

Embedded derivatives

An embedded derivative is a component of a contract that causes some of the cash flows of the combined instrument to vary in a way similar to a stand-alone derivative. This causes some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified variable, such as interest rate, financial instrument price, commodity price, foreign exchange rate, a credit rating or credit index, or other variables to be treated as a financial derivative. The Company has no contracts containing embedded derivatives.

Normal purchase or sale exemption

Contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the Company's expected purchase, sale or usage requirements fall within the exemption from IAS 32 Financial Instruments: Presentation ("IAS 32") and IAS 39, which is known as the 'normal purchase or sale exemption'. The Company recognizes such contracts in its balance sheet only when one of the parties meets its obligation under the contract to deliver either cash or a non-financial asset.

l) Hedging

The Company uses derivative financial instruments from time to time to hedge its exposure to commodity price fluctuations. All derivative financial instruments are initiated within the guidelines of the Company's risk management policy. This includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company enters into hedges of its exposure to petroleum and natural gas commodity prices by entering into natural gas fixed price contracts, when it is deemed appropriate. These derivative contracts, accounted for as hedges, are recognized on the balance sheet. Realized gains and losses on these contracts are recognized in revenue and cash flows in the same period in which the revenues associated with the hedged transaction are recognized. For financial derivative contracts settling in future periods, a financial asset or liability is recognized in the balance sheet and measured at fair value, with changes in fair value recognized in other comprehensive income.

m) Inventories

Inventories are stated at the lower of cost and net realizable value. Cost of producing oil and natural gas is accounted on a weighted average basis. This cost includes all costs incurred in the normal course of bus


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