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

Wed Mar 6, 2013 10:45pm EST

* Reuters is not responsible for the content in this press release.

  CALGARY, ALBERTA, Mar 06 (MARKET WIRE) --
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,
    respectively. 
--  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.                                                               
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                                       3 Months Ended December 31        %  
                                              2012           2011   Change  
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Operations                                                                  
Production                                                                  
 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 31                                                           
Net debt (before future                                                     
 compensation expense and                                                   
 unrealized hedging gains)                                                  
Shareholders' equity                                                        
Total assets                                                                
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                                      12 Months Ended December 31        %  
                                              2012           2011   Change  
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Operations                                                                  
Production                                                                  
 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 31                                                           
Net 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% 
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                                     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     289,995 
Change in non-cash working                                                  
 capital                          4,457     (19,139)     12,920       3,085 
Change 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 
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Funds from operations            90,078      80,410     308,865     314,622 
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Funds from operations per                                                   
 share                             0.62        0.60        2.19        2.36 
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(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   $4.07 
Payout                                $1.36   $2.28   $2.81   $3.47   $3.92 
----------------------------------------------------------------------------

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($/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   $0.94 
Payout                                $4.25   $4.03   $3.37   $1.24   $1.04 
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    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.


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                                 Three Months ended     Twelve Months ended 
                                            Dec. 31                 Dec. 31 
($000)                             2012        2011        2012        2011 
----------------------------------------------------------------------------
Land                              5,206       5,910      10,770      21,002 
Seismic                             612       1,245       1,741       2,859 
Drilling - Exploratory &                                                    
 Development                    123,778      77,570     337,988     279,446 
Production Equipment,                                                       
 Facilities & Pipelines          48,015      10,644      84,482      72,079 
Acquisition of Open Range                                                   
 Energy Corp.                         -           -     187,187           - 
Property Acquisitions                75         527      17,841       5,581 
Dispositions                    (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 
----------------------------------------------------------------------------


    Reserves

    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%
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(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          
      http://www.insitepc.com/. 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 http://www.peyto.com/. 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    $169 
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Proved plus Probable                                                        
 Additional                                                                 
  FD&A ($/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 
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--  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.

    Marketing 

    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                                                                  
 ($/bbl)                  91.22         101.08          94.78          94.47
Propane ($/bbl)           25.58          46.03          24.12          44.00
Butane ($/bbl)            63.38          67.46          64.05          63.41
Pentane ($/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
http://events.digitalmedia.telus.com/peyto/030713/index.php. After this
time the conference call will be archived on the Peyto Exploration &
Development website at www.peyto.com .

    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
http://www.peyto.com/news/Q42012MDandA.pdf and will be filed at SEDAR,
www.sedar.com, 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 www.peyto.com 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
----------------------------------------------------------------------------
Assets                                                                      
Current assets                                                              
Cash                                                        -         57,224
Accounts receivable                                    85,677         53,829
Due from private placement (Note 7)                     3,459          9,740
Derivative financial instruments (Note 13)             10,254         38,530
Prepaid expenses                                        4,150          3,991
----------------------------------------------------------------------------
                                                      103,540        163,314
----------------------------------------------------------------------------
                                                                            
Long-term derivative financial instruments                                  
 (Note 13)                                                  -          6,304
Prepaid capital                                         3,714          1,414
Property, plant and equipment, net (Note 4)         2,096,270      1,629,220
----------------------------------------------------------------------------
                                                    2,099,984      1,636,938
----------------------------------------------------------------------------
                                                                            
----------------------------------------------------------------------------
                                                    2,203,524      1,800,252
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
Liabilities                                                                 
Current liabilities                                                         
Accounts payable and accrued liabilities              164,946        110,483
Current income tax                                      1,890              -
Dividends payable (Note 7)                              8,911          8,278
Provision for future performance based                                      
 compensation (Note 11)                                 2,677          4,321
----------------------------------------------------------------------------
                                                      178,424        123,082
----------------------------------------------------------------------------
                                                                            
Long-term debt (Note 5)                               580,000        470,000
Long-term derivative financial instruments                                  
 (Note 13)                                              2,532              -
Provision for future performance based                                      
 compensation (Note 11)                                    59          1,235
Decommissioning provision (Note 6)                     58,201         38,037
Deferred income taxes (Note 12)                       174,241        152,190
----------------------------------------------------------------------------
                                                      815,033        661,462
----------------------------------------------------------------------------
                                                                            
Shareholders' equity                                                        
Shareholders' capital (Note 7)                      1,124,382        889,115
Shares to be issued (Note 7)                            3,459          9,740
                                                                            
Retained earnings                                      75,247         82,889
Accumulated 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 
----------------------------------------------------------------------------
Revenue                                                                     
Oil and gas sales                                    357,734        387,240 
Realized gain on hedges (Note 13)                     53,667         37,320 
Royalties                                            (30,754)       (41,064)
----------------------------------------------------------------------------
Petroleum and natural gas sales, net                 380,647        383,496 
----------------------------------------------------------------------------
                                                                            
Expenses                                                                    
Operating (Note 8)                                    31,260         27,379 
Transportation                                        11,275          9,754 
General and administrative (Note 9)                    3,846          4,911 
Market and reserves based bonus (Note 11)             12,587         22,696 
Future performance based compensation (Note           (2,819)        (1,154)
 11)                                                                        
Interest (Note 10)                                    25,401         21,881 
Accretion of decommissioning provision (Note           1,044            840 
 10)                                                                        
Depletion and depreciation (Note 4)                  172,338        130,678 
Gain on disposition of assets (Note 4)                (4,378)        (1,634)
----------------------------------------------------------------------------
                                                     250,554        215,351 
----------------------------------------------------------------------------
Earnings before taxes                                130,093        168,145 
----------------------------------------------------------------------------
                                                                            
Income tax                                                                  
Deferred 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        128,183 
Other comprehensive income                                                  
Change in unrealized gain (loss) on cash flow                               
 hedges                                               17,687         54,243 
Deferred 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        115,126 
Common shares issued pursuant to acquisition                                
 of Open Range Energy Corp.                          112,187              - 
Common shares issued by private placement             11,952         17,150 
Common shares issuance costs (net of tax)             (3,896)        (3,854)
Common shares issued pursuant to DRIP                      -          1,973 
Common 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        128,183 
Dividends (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 activities                                                        
Earnings                                              93,951        128,183 
Items 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            840 
Change in non-cash working capital related to                               
 operating activities                                (12,920)        (3,085)
----------------------------------------------------------------------------
                                                     284,309        289,995 
----------------------------------------------------------------------------
Financing activities                                                        
Issuance of common shares                            126,976        132,276 
Issuance costs                                        (5,195)        (5,137)
Dividends                                           (100,960)      (103,615)
Increase (decrease) in bank debt                     (40,000)       115,000 
Repayment of Open Range bank debt                    (72,000)             - 
Issuance of long term notes                          150,000              - 
----------------------------------------------------------------------------
                                                      58,821        138,524 
----------------------------------------------------------------------------
Investing activities                                                        
Additions 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)        49,330 
Cash, 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       19,656
Cash 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
business in bringing each product to its present location and condition. 

    n) Provisions

    General

    Provisions are recognized when the Company has a present obligation
(legal or constructive) as a result of a past event, it is probable that
an outflow of resources embodying economic benefits will be required to
settle the obligation and a reliable estimate can be made of the amount
of the obligation. Where the Company expects some or all of a provision
to be reimbursed, the reimbursement is recognized as a separate asset but
only when the reimbursement is virtually certain. The expense relating to
any provision is presented in the income statement net of any
reimbursement. If the effect of the time value of money is material,
provisions are discounted using a current pre-tax rate that reflects,
where appropriate, the risks specific to the liability. Where discounting
is used, the increase in the provision due to the passage of time is
recognized as a finance cost.

    Decommissioning provision

    Decommissioning provision is recognized when the Company has a present
legal or constructive obligation as a result of past events, and it is
probable that an outflow of resources will be required to settle the
obligation, and a reliable estimate of the amount of obligation can be
made. A corresponding amount equivalent to the provision is also
recognized as part of the cost of the related property, plant and
equipment. The amount recognized is the estimated cost of
decommissioning, discounted to its present value using a risk-free rate.
Changes in the estimated timing of decommissioning or decommissioning
cost estimates are dealt with prospectively by recording an adjustment to
the provision, and a corresponding adjustment to property, plant and
equipment. The accretion of the discount on the decommissioning provision
is included as a finance cost.

    o) Taxes

    Current income tax

    Current income tax assets and liabilities for the current and prior
periods are measured at the amount expected to be recovered from or paid
to the taxation authorities. The tax rates and tax laws used to compute
the amount are those that are enacted or substantively enacted, at the
reporting date, in Canada.

    Current income tax relating to items recognized directly in equity is
recognized in equity and not in the income statement. Management
periodically evaluates positions taken in the tax returns with respect to
situations in which applicable tax regulations are subject to
interpretation and establishes provisions where appropriate.

    Deferred income tax 

    The Company follows the liability method of accounting for income taxes.
Under this method, income tax assets and liabilities are recognized for
the estimated tax consequences attributable to differences between the
amounts reported in the financial statements and their respective tax
bases, using enacted or substantively enacted tax rates expected to apply
when the asset is realized or the liability settled. Deferred income tax
assets are only recognized to the extent it is probable that sufficient
future taxable income will be available to allow the deferred income tax
asset to be realized. Accumulated deferred income tax balances are
adjusted to reflect changes in income tax rates that are enacted or
substantively enacted with the adjustment being recognized in earnings in
the period that the change occurs, except for items recognized in
shareholders' equity.

    p) Revenue recognition

    Revenue from the sale of oil, natural gas and natural gas liquids is
recognized when the significant risks and rewards of ownership have been
transferred, which is when title passes to the purchaser. This generally
occurs when product is physically transferred into a pipe or other
delivery system. 

    Gains and losses on disposition

    For all dispositions, either through sale or exchange, gains and losses
are calculated as the difference between the sale or exchange value in
the transaction and the carrying amount of the assets disposed. Gains and
losses on disposition are recognized in earnings in the same period as
the transaction date. 

    q) Borrowing costs

    Borrowing costs directly relating to the acquisition, construction or
production of a qualifying capital project under construction are
capitalized and added to the project cost during construction until such
time the assets are substantially ready for their intended use, which is,
when they are capable of commercial production. Where the funds used to
finance a project form part of general borrowings, the amount capitalized
is calculated using a weighted average of rates applicable to relevant
general borrowings of the Company during the period. All other borrowing
costs are recognized in the income statement in the period in which they
are incurred.

    r) Share-based payments

    Liability-settled share-based payments to employees are measured at the
fair value of the liability award at the grant date. A liability equal to
fair value of the payments is accrued over the vesting period measured at
fair value using the Black-Scholes option pricing model.

    The fair value determined at the grant date of the liability-settled
share-based payments is expensed on a graded basis over the vesting
period, based on the Company's estimate of liability instruments that
will eventually vest. At the end of each reporting period, the Company
revises its estimate of the number of liability instruments expected to
vest. The impact of the revision of the original estimates, if any, is
recognized in the income statement such that the cumulative expense
reflects the revised estimate, with a corresponding adjustment to the
related liability on the balance sheet.

    s) Earnings per share

    Basic and diluted earnings per share is computed by dividing the net
earnings available to common shareholders by the weighted average number
of shares outstanding during the reporting period. The Company has no
dilutive instruments outstanding which would cause a difference between
the basic and diluted earnings per share. 

    t) Shareholders' capital

    Common shares are classified within Shareholders' equity. Incremental
costs directly attributable to the issuance of shares are recognized as a
deduction from Shareholders' capital. 

    u) Standards issued but not yet effective

    Peyto has reviewed new and revised accounting pronouncements that have
been issued but are not yet effective and determined that the following
may have an impact on the Company: 

    In May 2011, the IASB released the following new standards: IFRS 10,
"Consolidated Financial Statements", IFRS 11, "Joint Arrangements", IFRS
12, "Disclosures of Interests in Other Entities" and IFRS 13, "Fair Value
Measurement". Each of these standards is to be adopted for fiscal years
beginning January 1, 2013 with earlier adoption permitted. A brief
description of each new standard follows below: 


--  IFRS 10, "Consolidated Financial Statements" supercedes IAS 27
    "Consolidation and Separate Financial Statements" and SIC-12
    "Consolidation - Special Purpose Entities". This standard provides a
    single model to be applied in control analysis for all investees
    including special purpose entities. The adoption of this standard is not
    expected to have any impact on Peyto's financial statements. 
    
--  IFRS 11, "Joint Arrangements" divides joint arrangements into two types,
    joint operations and joint ventures, each with their own accounting
    model. All joint arrangements are required to be reassessed on
    transition to IFRS 11 to determine their type to apply the appropriate
    accounting. The adoption of this standard is not expected to have any
    impact on Peyto's financial statements. 
    
--  IFRS 12, "Disclosure of Interests in Other Entities" combines in a
    single standard the disclosure requirements for subsidiaries, associates
    and joint arrangements as well as unconsolidated structured entities.
    The adoption of this standard is not expected to have a material impact
    on Peyto's financial statements. 
    
--  IFRS 13, "Fair Value Measurement" defines fair value, establishes a
    framework for measuring fair value and sets out disclosure requirements
    for fair value measurements. This standard defines fair value as the
    price that would be received to sell an asset or paid to transfer a
    liability in an orderly transaction between market participants at the
    measurement date. The adoption of this standard is not expected to have
    a material impact on Peyto's financial statements. 


    As of January 1, 2015, Peyto will be required to adopt IFRS 9 "Financial
Instruments", which is the result of the first phase of the International
Accounting Standards Board ("IASB") project to replace IAS 39 "Financial
Instruments: Recognition and Measurement". The new standard replaces the
current multiple classification and measurement models for financial
assets and liabilities with a single model that has only two
classification categories: amortized cost and fair value. Portions of the
standard remain in development and the full impact of the standard on
Peyto's Consolidated Financial Statements will not be known until the
project is complete. 

    3. Corporate Acquisition

    On August 14, 2012, Peyto completed the acquisition, by plan of
arrangement, of all issued and outstanding common shares of Open Range.
The total consideration of approximately $187.2 million was paid for by
the issuance of 5.4 million common shares of Peyto and the assumption of
Open Range's long-term debt and working capital deficiency ($190.4
million was allocated to Property, plant & equipment). Transaction costs
of approximately $0.7 million are included in general and administrative
expenses in the Consolidated Income Statement.


Fair value of net assets acquired                                           
----------------------------------------------------------------------------
Working capital                                                      (1,868)
Property, plant and equipment                                       190,385 
Financial derivative instruments                                     (1,132)
Bank debt                                                           (72,000)
Decommissioning provision                                            (5,127)
Deferred income taxes                                                 1,929 
----------------------------------------------------------------------------
Total net assets acquired                                           112,187 
----------------------------------------------------------------------------
Consideration                                                               
Shares issued (5,404,007 shares)                                    112,187 
----------------------------------------------------------------------------
Total purchase price                                                112,187 
----------------------------------------------------------------------------


    The above amounts are estimates, which were made by management at the
time of the preparation of these consolidated financial statements based
on information then available. Amendments may be made as amounts subject
to estimates are finalized.

    If Peyto had acquired Open Range on January 1, 2012, the pro-forma
results of the oil and gas sales, net income and comprehensive income for
the period ended December 31, 2012 would have been as follows;


                                        Open Range January                  
                     As Stated December  1, 2012 to August         Pro Forma
                               31, 2012           14, 2012 December 31, 2012
----------------------------------------------------------------------------
Oil and gas sales               380,647             27,756           408,403
Net income                       93,951              1,134            95,085
Comprehensive income             66,966              1,134            68,100
----------------------------------------------------------------------------


    4. Property, plant and equipment, net


                                                                            
                                                                            
Cost                                                                        
----------------------------------------------------------------------------
At December 31, 2010                                              1,452,242 
----------------------------------------------------------------------------
  Additions                                                         392,309 
  Dispositions                                                         (785)
----------------------------------------------------------------------------
At December 31, 2011                                              1,843,766 
----------------------------------------------------------------------------
  Acquisitions through business combinations                        190,385 
  Additions                                                         466,506 
  Dispositions                                                      (17,649)
----------------------------------------------------------------------------
At December 31, 2012                                              2,483,008 
----------------------------------------------------------------------------
                                                                            
Accumulated depletion and depreciation                                      
----------------------------------------------------------------------------
At December 31, 2010                                                (84,373)
----------------------------------------------------------------------------
  Depletion and depreciation                                       (130,678)
  Dispositions                                                          505 
----------------------------------------------------------------------------
At December 31, 2011                                               (214,546)
----------------------------------------------------------------------------
  Depletion and depreciation                                       (172,338)
  Dispositions                                                          146 
----------------------------------------------------------------------------
At December 31, 2012                                               (386,738)
----------------------------------------------------------------------------
                                                                            
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Carrying amount at December 31, 2012                              2,096,270 
----------------------------------------------------------------------------
----------------------------------------------------------------------------


    Proceeds received for assets disposed of during 2012 were $21.9 million
(2011 - $3.0 million). 

    In September 2012, Peyto acquired producing properties for net proceeds
of $16.7 million, which were allocated to property, plant and equipment
of $17.4 million and decommissioning liabilities of $0.7 million. The
properties are in Peyto's core area of production. The impact on revenue
and net income is not significant.

    During 2012 Peyto capitalized $7.8 million (2011 - $5.5 million) of
general and administrative expense directly attributable to exploration
and development activities. 

    The Company did not have any indicators of impairment in the current or
prior years. 

    5. Long-term debt


----------------------------------------------------------------------------
                                       December 31, 2012   December 31, 2011
----------------------------------------------------------------------------
Bank credit facility                             430,000             470,000
Senior secured notes                             150,000                   -
----------------------------------------------------------------------------
Balance, end of the year                         580,000             470,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------


    The Company has a syndicated $730 million extendible revolving credit
facility with a stated term date of April 28, 2013. The bank facility is
made up of a $30 million working capital sub-tranche and a $700 million
production line. The facilities are available on a revolving basis for a
period of at least 364 days and upon the term out date may be extended
for a further 364 day period at the request of the Company, subject to
approval by the lenders. In the event that the revolving period is not
extended, the facility is available on a non-revolving basis for a
further one year term, at the end of which time the facility would be due
and payable. Outstanding amounts on this facility will bear interest at
rates ranging from prime plus 1.0% to prime plus 2.5% determined by the
Company's debt to earnings before interest, taxes, depreciation,
depletion and amortization (EBITDA) ratios ranging from less than 1:1 to
greater than 2.5:1. A General Security Agreement with a floating charge
on land registered in Alberta is held as collateral by the bank.

    On January 3, 2012, Peyto issued CDN $100 million of senior secured notes
pursuant to a note purchase and private shelf agreement. The notes were
issued by way of private placement and rank equally with Peyto's
obligations under its bank facility. The notes are secured under the
General Security Agreement with a floating charge on land registered in
Alberta is held as collateral. The notes have a coupon rate of 4.39% and
mature on January 3, 2019. Interest will be paid semi-annually in
arrears. 

    On September 6, 2012, Peyto issued CDN $50 million of senior secured
notes pursuant to a note purchase and private shelf agreement. The notes
were issued by way of private placement and rank equally with Peyto's
obligations under its bank facility. The notes are secured under the
General Security Agreement with a floating charge on land registered in
Alberta is held as collateral. The notes have a coupon rate of 4.88% and
mature on September 6, 2022. Interest will be paid semi-annually in
arrears. 

    Upon the issuance of the senior secured notes January 3, 2012, Peyto
became subject to the following financial covenants as defined in the
credit facility and note purchase and private shelf agreements:


--  Senior Debt to EBITDA Ratio will not exceed 3.0 to 1.0 
--  Total Debt to EBITDA Ratio will not exceed 4.0 to 1.0 
--  Interest Coverage Ratio will not be less than 3.0 to 1.0 
--  Total Debt to Capitalization Ratio will not exceed 0.55:1.0 


    Peyto is in compliance with all financial covenants at December 31, 2012.

    Peyto's total borrowing capacity is $880 million and Peyto's net credit
facility is $730 million. 

    The fair value of all senior notes as at December 31, 2012, is $149.9
million compared to a carrying value of $150.0 million. 

    Total interest expense for 2012 was $25.4 million (2011 - $21.9 million)
and the average borrowing rate for 2012 was 4.7% (2011 - 4.8%). 

    6. Decommissioning provision

    The Company makes provision for the future cost of decommissioning wells,
pipelines and facilities on a discounted basis based on the commissioning
of these assets.

    The decommissioning provision represents the present value of the
decommissioning costs related to the above infrastructure, which are
expected to be incurred over the economic life of the assets. The
provisions have been based on the Company's internal estimates on the
cost of decommissioning, the discount rate, the inflation rate and the
economic life of the infrastructure. Assumptions, based on the current
economic environment, have been made which management believes are a
reasonable basis upon which to estimate the future liability. These
estimates are reviewed regularly to take into account any material
changes to the assumptions. However, actual decommissioning costs will
ultimately depend upon the future market prices for the necessary
decommissioning work required which will reflect market conditions at the
relevant time. Furthermore, the timing of the decommissioning is likely
to depend on when production activities ceases to be economically viable.
This in turn will depend and be directly related to the current and
future commodity prices, which are inherently uncertain.

    The following table reconciles the change in decommissioning provision:


----------------------------------------------------------------------------
Balance, December 31, 2010                                            24,734
----------------------------------------------------------------------------
New or increased provisions                                            4,764
Accretion of discount                                                    840
Change in discount rate and estimates                                  7,699
----------------------------------------------------------------------------
Balance, December 31, 2011                                            38,037
----------------------------------------------------------------------------
New or increased provisions                                           13,908
Accretion of discount                                                  1,044
Change in discount rate and estimates                                  5,212
----------------------------------------------------------------------------
Balance, December 31, 2012                                            58,201
----------------------------------------------------------------------------
----------------------------------------------------------------------------
  Current                                                                  -
  Non-current                                                         58,201
----------------------------------------------------------------------------
----------------------------------------------------------------------------


    The Company has estimated the net present value of its total
decommissioning provision to be $58.2 million as at December 31, 2012
($38.0 million at December 31, 2011) based on a total future undiscounted
liability of $127.9 million ($101.2 million at December 31, 2011). At
December 31, 2012 management estimates that these payments are expected
to be made over the next 50 years with the majority of payments being
made in years 2041 to 2062. The Bank of Canada's long term bond rate of
2.36 per cent (2.49 per cent at December 31, 2011) and an inflation rate
of 2.0 per cent (2.0 per cent at December 31, 2011) were used to
calculate the present value of the decommissioning provision.

    7. Shareholders' capital 

    Authorized: Unlimited number of voting common shares

    Issued and Outstanding


                                                       Number of     Amount 
Common Shares (no par value)                       Common Shares          $ 
----------------------------------------------------------------------------
Balance, December 31, 2010                           131,875,382    755,831 
----------------------------------------------------------------------------
Common shares issued                                   4,899,000    115,126 
Common share issuance costs (net of tax)                       -     (3,854)
Common shares issued by private placement                906,196     17,150 
Common shares issued pursuant to DRIP                    113,527      1,973 
Common shares issued pursuant to OTUPP                   166,196      2,889 
----------------------------------------------------------------------------
Balance, December 31, 2011                           137,960,301    889,115 
----------------------------------------------------------------------------
Common shares issued                                   4,628,750    115,024 
Common shares issued for acquisition                   5,404,007    112,187 
Common share issuance costs (net of tax)                       -     (3,896)
Common shares issued by private placement                525,655     11,952 
----------------------------------------------------------------------------
Balance, December 31, 2012                           148,518,713  1,124,382 
----------------------------------------------------------------------------
----------------------------------------------------------------------------


    Peyto reinstated its amended distribution reinvestment and optional trust
unit purchase plan (the "Amended DRIP Plan") effective with the January
2010 distribution whereby eligible unitholders could elect to reinvest
their monthly cash distributions in additional trust units at a 5 percent
discount to market price. The DRIP plan incorporated an Optional Trust
Unit Purchase Plan ("OTUPP") which provided unitholders enrolled in the
DRIP with the opportunity to purchase additional trust units from
treasury using the same pricing as the DRIP. The DRIP and the OTUPP plans
were cancelled December 31, 2010 with the final shares issued under the
plan January 14, 2011.

    On December 31, 2010, Peyto completed a private placement of 655,581
common shares to employees and consultants for net proceeds of $12.4
million ($18.95 per share). These common shares were issued on January 6,
2011. 

    On January 14, 2011, 279,723 common shares (113,527 pursuant to the DRIP
and 166,196 pursuant to the OTUPP) were issued for net proceeds of $4.9
million. 

    On March 25, 2011, Peyto completed a private placement of 250,615 common
shares to employees and consultants for net proceeds of $4.7 million
($18.86 per share). 

    On December 16, 2011, Peyto closed an offering of 4,899,000 common shares
at a price of $23.50 per common share, receiving proceeds of $110.1
million (net of issuance costs).

    On December 31, 2011 Peyto completed a private placement of 397,235
common shares to employees and consultants for net proceeds of $9.7
million ($24.52 per share). These common shares were issued on January
13, 2012.

    On March 23, 2012 Peyto completed a private placement of 128,420 common
shares to employees and consultants for net proceeds of $2.2 million
($17.22 per share).

    On August 14, 2012 Peyto issued 5,404,007 common shares which were valued
at $112.2 million (net of issuance costs) ($20.76 per share) in relation
to the closing of a corporate acquisition (Note 3).

    On December 11, 2012, Peyto closed an offering of 4,628,750 common shares
at a price of $24.85 per common share, receiving proceeds of $110.0
million (net of issuance costs).

    Shares to be issued

    On December 31, 2012 the Company completed a private placement of 154,550
common shares to employees and consultants for net proceeds of $3.5
million ($22.38 per share). These common shares were issued on January 7,
2013.

    Per share amounts 

    Earnings per share or unit have been calculated based upon the weighted
average number of common shares outstanding for the year ended December
31, 2012 of 141,093,829 (2011 - 133,196,103). There are no dilutive
instruments outstanding.

    Dividends 

    During the year ended December 31, 2012, Peyto declared and paid
dividends of $0.72 per common share or $0.06 per common share per month,
totaling $101.6 million (2011 - $0.72 or $0.06 per share per month, $96.1
million). 

    On January 15, 2013 Peyto declared dividends of $.06 per common share
paid on February 15, 2013. On February 15, 2013, Peyto declared dividends
of $0.06 per common share to be paid to shareholders of records February
28, 2013. These dividends will be paid March 15, 2013. 

    Comprehensive income 

    Comprehensive income consists of earnings and other comprehensive income
("OCI"). OCI comprises the change in the fair value of the effective
portion of the derivatives used as hedging items in a cash flow hedge.
"Accumulated other comprehensive income" is an equity category comprised
of the cumulative amounts of OCI.

    Accumulated hedging gains 

    Gains and losses from cash flow hedges are accumulated until settled.
These outstanding hedging contracts are recognized in earnings on
settlement with gains and losses being recognized as a component of net
revenue. Further information on these contracts is set out in Note 13. 

    8. Operating expenses

    The Company's operating expenses include all costs with respect to
day-to-day well and facility operations. Processing and gathering
recoveries related to jointly controlled assets and third party natural
gas reduce operating expenses.


                                                    Years ended December 31 
                                                        2012           2011 
----------------------------------------------------------------------------
Field expenses                                        46,591         38,240 
Processing and gathering recoveries                  (15,331)       (10,861)
----------------------------------------------------------------------------
Total operating expenses                              31,260         27,379 
----------------------------------------------------------------------------
----------------------------------------------------------------------------


    9. General and administrative expenses

    General and administrative expenses are reduced by operating and capital
overhead recoveries from operated properties.


                                                    Years ended December 31 
                                                        2012           2011 
----------------------------------------------------------------------------
General and administrative expenses                   12,822         11,402 
Overhead recoveries                                   (8,976)        (6,491)
----------------------------------------------------------------------------
Net general and administrative expenses                3,846          4,911 
----------------------------------------------------------------------------
----------------------------------------------------------------------------


    10. Finance costs


                                                     Years ended December 31
                                                         2012           2011
----------------------------------------------------------------------------
Interest expense                                       25,401         21,881
Accretion of discount on provisions                     1,044            840
----------------------------------------------------------------------------
                                                       26,445         22,721
----------------------------------------------------------------------------
----------------------------------------------------------------------------


    11. Future performance based compensation

    The Company awards performance based compensation to employees annually.
The performance based compensation is comprised of reserve and market
value based components.

    Reserve based component

    The reserves value based component is 4% of the incremental increase in
value, if any, as adjusted to reflect changes in debt, equity, dividends,
general and administrative costs and interest, of proved producing
reserves calculated using a constant price at December 31 of the current
year and a discount rate of 8%. 

    Market based component 

    Under the market based component, rights with a three year vesting period
are allocated to employees and key consultants. The number of rights
outstanding at any time is not to exceed 6% of the total number of common
shares outstanding. At December 31 of each year, all vested rights are
automatically cancelled and, if applicable, paid out in cash.
Compensation is calculated as the number of vested rights multiplied by
the total of the market appreciation (over the price at the date of
grant) and associated dividends of a common share for that period. The
2012 market based component was based on i) 0.5 million vested rights at
an average grant price of $13.50, average cumulative distributions of
$1.44 and a ten day weighted average closing price of $18.83, ii) 0.6
million vested rights at an average grant price of $19.13, average
cumulative distributions of $0.72 and a ten day weighted average price of
$24.75 and iii) 0.07 million vested rights at an average grant price of
$20.63, average cumulative dividends of $0.48 and a ten day weighted
average price of $22.58. 

    The total amount expensed under these plans was as follows:


($000)                                                        2012      2011
----------------------------------------------------------------------------
Market based compensation                                    7,762    17,486
Reserve based compensation                                   4,825     5,210
----------------------------------------------------------------------------
Total market and reserves based compensation                12,587    22,696
----------------------------------------------------------------------------
----------------------------------------------------------------------------


    For the future market based component, compensation costs as at December
31, 2012 were a recovery of $2.8 million related to 0.6 million
non-vested rights with an average grant price of $19.13, average
cumulative dividends of $0.72 and 0.1 million non-vested rights with an
average grant price of $20.63 and average cumulative dividends of $0.48.
(2011 - 0.6 million non-vested rights with an average grant price of
$13.50 and 1.3 million non-vested rights with an average grant price of
$19.13 were $1.2 million). The cumulative provision for future
performance based compensation as at December 31, 2012 was $2.7 million
(2011 - $5.6 million). 

    The fair values were calculated using a Black-Scholes valuation model.
The principal inputs to the option valuation model were: 


                                             December 31         December 31
                                                    2012                2011
----------------------------------------------------------------------------
Share price                                       $22.58              $24.75
Exercise price                           $18.41 - $19.91     $12.06 - $18.41
Expected volatility                                   0%                  0%
Option life                                  1 - 2 years         1 - 2 years
Dividend yield                                        0%                  0%
Risk-free interest rate                            1.08%               0.97%
----------------------------------------------------------------------------


    Subsequent to December 31, 2012, 3.0 million rights were granted at a
price of $22.58 to be valued at the ten day weighted average market price
at December 31, 2013 and vesting one third on each of December 31, 2013,
December 31, 2014 and December 31, 2015.

    12. Income taxes


($000)                                                       2012      2011 
----------------------------------------------------------------------------
Earnings before income taxes                              130,093   168,145 
Statutory income tax rate                                   25.00%    26.50%
----------------------------------------------------------------------------
Expected income taxes                                      32,523    44,558 
Increase (decrease) in income taxes from:                                   
  Corporate income tax rate change                              -    (2,429)
  True-up tax pools                                         1,634    (7,706)
  Resolution of reassessment and other                      1,985     5,539 
----------------------------------------------------------------------------
Total income tax expense (recovery)                        36,142    39,962 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Deferred income tax expense (recovery)                     34,274    35,013 
Current tax expense                                         1,868     4,949 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total income tax expense (recovery)                        36,142    39,962 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Differences between tax base and reported amounts for                       
 depreciable assets                                       207,805   167,282 
Derivative financial instruments                            1,930    11,208 
Share issuance costs                                       (3,095)   (3,083)
Future performance based bonuses                             (684)   (1,389)
Provision for decommission provision                      (14,550)   (9,509)
Cumulative eligible capital                                (6,599)   (7,096)
Attributable crown royalty income carryforward                  -    (4,964)
Tax loss carry-forwards recognized                        (10,566)     (259)
----------------------------------------------------------------------------
Deferred income taxes                                     174,241   152,190 
----------------------------------------------------------------------------
----------------------------------------------------------------------------


    At December 31, 2012 the Company has tax pools of approximately $1,288.0
million (2011 - $998.1 million) available for deduction against future
income. The Company has approximately $42.1 million in loss
carry-forwards (2011 - $0.4 million) available to reduce future taxable
income.

    Canada Revenue Agency ("CRA") conducted an audit of restructuring costs
incurred in the 2003 trust conversion. On September 25, 2008, the CRA
reassessed on the basis that $41 million of these costs were not
deductible and treated them as an eligible capital amount. The Company
filed a notice of objection and the CRA confirmed the reassessment.
Examinations for discovery have been completed. The Tax Court of Canada
had agreed to both parties' request to hold the Company's appeal in
abeyance pending a decision of the Supreme Court of Canada to hear
another taxpayer's appeal. The other appeal raised issues that are
similar in principle to those raised in the Company's appeal. As the
other taxpayer's appeal was unsuccessful with the Federal Court of
Appeal, in 2011, the Company expensed the income tax of $4.9 million and
interest charges of $2.2 million assessed and paid in 2008. Subsequently,
the Alberta Government reassessed the same time period resulting in
income taxes payable of $1.8 million and interest charges of $1.4 million
paid in 2013.

    13. Financial instruments

    Financial instrument classification and measurement

    Financial instruments of the Company carried on the consolidated balance
sheet are carried at amortized cost with the exception of cash and
financial derivative instruments, specifically fixed price contracts,
which are carried at fair value. There are no significant differences
between the carrying amount of financial instruments and their estimated
fair values as at December 31, 2012.

    The fair value of the Company's cash and financial derivative instruments
are quoted in active markets. The Company classifies the fair value of
these transactions according to the following hierarchy.


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


    The Company's cash and financial derivative instruments have been
assessed on the fair value hierarchy described above and classified as
Level 1. 

    Fair values of financial assets and liabilities

    The Company's financial instruments include cash, accounts receivable,
financial derivative instruments, due from private placement, current
liabilities, provision for future performance based compensation and long
term debt. At December 31, 2012 and 2011, cash and financial derivative
instruments are carried at fair value. Accounts receivable, due from
private placement, current liabilities and provision for future
performance based compensation approximate their fair value due to their
short term nature. The carrying value of the long term debt approximates
its fair value due to the floating rate of interest charged under the
credit facility.

    Market risk 

    Market risk is the risk that changes in market prices will affect the
Company's earnings or the value of its financial instruments. Market risk
is comprised of commodity price risk and interest rate risk. The
objective of market risk management is to manage and control exposures
within acceptable limits, while maximizing returns. The Company's
objectives, processes and policies for managing market risks have not
changed from the previous year. 

    Commodity price risk management 

    The Company is a party to certain derivative financial instruments,
including fixed price contracts. The Company enters into these contracts
with well established counterparties for the purpose of protecting a
portion of its future earnings and cash flows from operations from the
volatility of petroleum and natural gas prices. The Company believes the
derivative financial instruments are effective as hedges, both at
inception and over the term of the instrument, as the term and notional
amount do not exceed the Company's firm commitment or forecasted
transactions and the underlying basis of the instruments correlate highly
with the Company's exposure. 

    Following is a summary of all risk management contracts in place as at
December 31, 2012:


----------------------------------------------------------------------------
Propane                                            Monthly       Price      
Period Hedged                         Type         Volume        (USD)      
----------------------------------------------------------------------------
September 1, 2012 to March 31, 2013   Fixed Price  2,000 bbl     $49.56/bbl 
September 1, 2012 to March 31, 2013   Fixed Price  2,000 bbl     $44.10/ bbl
September 1, 2012 to March 31, 2013   Fixed Price  2,000 bbl     $32.34/ bbl
September 1, 2012 to March 31, 2013   Fixed Price  2,000 bbl     $33.60/ bbl
September 1, 2012 to March 31, 2013   Fixed Price  2,000 bbl     $32.97/ bbl
October 1, 2012 to March 31, 2013     Fixed Price  2,000 bbl     $34.01/ bbl
October 1, 2012 to March 31, 2013     Fixed Price  2,000 bbl     $34.65/ bbl
October 1, 2012 to March 31, 2013     Fixed Price  2,000 bbl     $36.96/ bbl
January 1, 2013 to March 31, 2013     Fixed Price  4,000 bbl     $36.12/bbl 
April 1, 2013 to June 30, 2013        Fixed Price  4,000 bbl     $34.86/bbl 
April 1, 2013 to December 31, 2013    Fixed Price  4,000 bbl     $30.66/bbl 
April 1, 2013 to December 31, 2013    Fixed Price  4,000 bbl     $32.34/bbl 
April 1, 2013 to December 31, 2013    Fixed Price  4,000 bbl     $34.86/bbl 
April 1, 2013 to December 31, 2013    Fixed Price  4,000 bbl     $35.39/bbl 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Butane                                             Monthly       Price      
Period Hedged                         Type         Volume        (USD)      
----------------------------------------------------------------------------
September 1, 2012 to March 31, 2013   Fixed Price  2,000 bbl     $80.64/bbl 
September 1, 2012 to March 31, 2013   Fixed Price  2,000 bbl     $58.38/bbl 
September 1, 2012 to March 31, 2013   Fixed Price  2,000 bbl     $60.06/bbl 
September 1, 2012 to March 31, 2013   Fixed Price  2,000 bbl     $60.06/bbl 
October 1, 2012 to March 31, 2013     Fixed Price  2,000 bbl     $66.36/bbl 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Iso-Butane                                         Monthly       Price      
Period Hedged                         Type         Volume        (USD)      
----------------------------------------------------------------------------
September 1, 2012 to March 31, 2013   Fixed Price  1,000 bbl     $82.32/bbl 
September 1, 2012 to March 31, 2013   Fixed Price  1,000 bbl     $60.48/bbl 
September 1, 2012 to March 31, 2013   Fixed Price  1,000 bbl     $62.58/bbl 
September 1, 2012 to March 31, 2013   Fixed Price  1,000 bbl     $62.58/bbl 
October 1, 2012 to March 31, 2013     Fixed Price  1,000 bbl     $69.30/bbl 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Natural Gas                                                      Price      
Period Hedged                         Type         Daily Volume  (CAD)      
----------------------------------------------------------------------------
April 1, 2011 to March 31, 2013       Fixed Price  5,000 GJ      $4.055/GJ  
April 1, 2011 to March 31, 2013       Fixed Price  5,000 GJ      $3.80/GJ   
June 1, 2011 to March 31, 2013        Fixed Price  5,000 GJ      $4.17/GJ   
June 1, 2011 to March 31, 2013        Fixed Price  5,000 GJ      $4.10/GJ   
June 1, 2011 to March 31, 2013        Fixed Price  5,000 GJ      $4.10/GJ   
November 1, 2011 to March 31, 2013    Fixed Price  5,000 GJ      $4.00/GJ   
April 1, 2012 to October 31, 2013     Fixed Price  5,000 GJ      $4.00/GJ   
April 1, 2012 to October 31, 2013     Fixed Price  5,000 GJ      $4.00/GJ   
April 1, 2012 to October 31, 2013     Fixed Price  5,000 GJ      $4.00/GJ   
April 1, 2012 to October 31, 2013     Fixed Price  5,000 GJ      $4.00/GJ   
April 1, 2012 to March 31, 2013       Fixed Price  5,000 GJ      $2.20/GJ   
April 1, 2012 to March 31, 2013       Fixed Price  5,000 GJ      $2.31/GJ   
April 1, 2012 to October 31, 2013     Fixed Price  5,000 GJ      $2.52/GJ   
April 1, 2012 to March 31, 2014       Fixed Price  5,000 GJ      $3.00/GJ   
May 1, 2012 to October 31, 2013       Fixed Price  5,000 GJ      $2.30/GJ   
August 1, 2012 to March 31, 2014      Fixed Price  5,000 GJ      $3.00/GJ   
August 1, 2012 to October 31, 2014    Fixed Price  5,000 GJ      $3.10/GJ   
November 1, 2012 to October 31, 2013  Fixed Price  5,000 GJ      $2.60/GJ   
November 1, 2012 to October 31, 2013  Fixed Price  5,000 GJ      $3.005/GJ  
November 1, 2012 to October 31, 2013  Fixed Price  5,000 GJ      $3.00/GJ   
November 1, 2012 to March 31, 2014    Fixed Price  5,000 GJ      $2.81/GJ   
November 1, 2012 to March 31, 2014    Fixed Price  5,000 GJ      $3.00/GJ   
November 1, 2012 to March 31, 2014    Fixed Price  5,000 GJ      $3.05/GJ   
November 1, 2012 to March 31, 2014    Fixed Price  5,000 GJ      $3.02/GJ   
November 1, 2012 to October 31, 2014  Fixed Price  5,000 GJ      $3.0575/GJ 
January 1, 2013 to October 31, 2013   Fixed Price  5,000 GJ      $3.42/GJ   
January 1, 2013 to December 31, 2013  Fixed Price  5,000 GJ      $3.105/GJ  
January 1, 2013 to March 31, 2013     Fixed Price  5,000 GJ      $3.32/GJ   
January 1, 2013 to March 31, 2014     Fixed Price  5,000 GJ      $3.00/GJ   
January 1, 2013 to March 31, 2014     Fixed Price  5,000 GJ      $3.02/GJ   
April 1, 2013 to October 31, 2013     Fixed Price  5,000 GJ      $3.205/GJ  
April 1, 2013 to March 31, 2014       Fixed Price  5,000 GJ      $3.105/GJ  
April 1, 2013 to March 31, 2014       Fixed Price  5,000 GJ      $3.53/GJ   
April 1, 2013 to March 31, 2014       Fixed Price  5,000 GJ      $3.45/GJ   
April 1, 2013 to March 31, 2014       Fixed Price  5,000 GJ      $3.50/GJ   
April 1, 2013 to March 31, 2014       Fixed Price  5,000 GJ      $3.08/GJ   
April 1, 2013 to March 31, 2014       Fixed Price  5,000 GJ      $3.17GJ    
November 1, 2013 to October 31, 2014  Fixed Price  5,000 GJ      $3.50/GJ   
----------------------------------------------------------------------------


    As at December 31, 2012, Peyto had committed to the future sale of
261,000 barrels of natural gas liquids at an average price of $39.86 USD
per barrel and 59,810,000 gigajoules (GJ) of natural gas at an average
price of $3.19 per GJ or $3.74 per mcf. Had these contracts been closed
on December 31, 2012, Peyto would have realized a gain in the amount of
$7.7 million. If the AECO gas price on December 31, 2012 were to increase
by $1/GJ, the unrealized gain would decrease by approximately $59.8
million. An opposite change in commodity prices rates would result in an
opposite impact on other comprehensive income. 

    Subsequent to December 31, 2012 Peyto entered into the following
contracts:


----------------------------------------------------------------------------
Propane                                            Monthly       Price      
Period Hedged                         Type         Volume        (USD)      
----------------------------------------------------------------------------
April 1, 2013 to December 31, 2013    Fixed Price  4,000 bbl     $34.44/bbl 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Natural Gas                                                      Price      
Period Hedged                         Type         Daily Volume  (CAD)      
----------------------------------------------------------------------------
April 1, 2013 to March 31, 2014       Fixed Price  5,000 GJ      $3.10/GJ   
April 1, 2013 to October 31, 2014     Fixed Price  5,000 GJ      $3.25/GJ   
April 1, 2013 to October 31, 2014     Fixed Price  5,000 GJ      $3.30/GJ   
April 1, 2013 to October 31, 2014     Fixed Price  5,000 GJ      $3.33/GJ   
April 1, 2013 to October 31, 2014     Fixed Price  7,500 GJ      $3.20/GJ   
April 1, 2013 to October 31, 2014     Fixed Price  5,000 GJ      $3.22/GJ   
April 1, 2013 to October 31, 2014     Fixed Price  5,000 GJ      $3.20/GJ   
April 1, 2013 to October 31, 2014     Fixed Price  5,000 GJ      $3.1925/GJ 
April 1, 2013 to October 31, 2014     Fixed Price  5,000 GJ      $3.25/GJ   
April 1, 2013 to October 31, 2014     Fixed Price  5,000 GJ      $3.30/GJ   
November 1, 2013 to March 31, 2015    Fixed Price  5,000 GJ      $3.6025/GJ 
----------------------------------------------------------------------------


    Interest rate risk

    The Company is exposed to interest rate risk in relation to interest
expense on its revolving credit facility. Currently, the Company has not
entered into any agreements to manage this risk. If interest rates
applicable to floating rate debt were to have increased by 100 bps (1%)
it is estimated that the Company's earnings before income tax for the
year ended December 31, 2012 would decrease by $4.2 million. An opposite
change in interest rates will result in an opposite impact on earnings
before income tax. 

    Credit risk 

    A substantial portion of the Company's accounts receivable is with
petroleum and natural gas marketing entities. Industry standard dictates
that commodity sales are settled on the 25th day of the month following
the month of production. The Company generally extends unsecured credit
to purchasers, and therefore, the collection of accounts receivable may
be affected by changes in economic or other conditions and may
accordingly impact the Company's overall credit risk. Management believes
the risk is mitigated by the size, reputation and diversified nature of
the companies to which they extend credit. The Company has not previously
experienced any material credit losses on the collection of accounts
receivable. Of the Company's revenue for the year ended December 31,
2012, approximately 13% was received from one company (December 31, 2011
- 54%, four companies (18%, 13%, 12% and 11%)). Of the Company's accounts
receivable at December 31, 2012, approximately 14% was receivable from a
single company (December 31, 2011 - 15%, one company). The maximum
exposure to credit risk is represented by the carrying amount on the
balance sheet. There are no material financial assets that the Company
considers past due and no accounts have been written off.

    The Company may be exposed to certain losses in the event of
non-performance by counterparties to commodity price contracts. The
Company mitigates this risk by entering into transactions with
counterparties that have investment grade credit ratings.

    Counterparties to financial instruments expose the Company to credit
losses in the event of non-performance. Counterparties for derivative
instrument transactions are limited to high credit-quality financial
institutions, which are all members of our syndicated credit facility.

    The Company assesses quarterly if there should be any impairment of
financial assets. At December 31, 2012, there was no impairment of any of
the financial assets of the Company.

    Liquidity risk

    Liquidity risk includes the risk that, as a result of operational
liquidity requirements:


--  The Company will not have sufficient funds to settle a transaction on
    the due date; 
--  The Company will be forced to sell financial assets at a value which is
   less than what they are worth; or 
--  The Company may be unable to settle or recover a financial asset at all.


    The Company's operating cash requirements, including amounts projected to
complete our existing capital expenditure program, are continuously
monitored and adjusted as input variables change. These variables
include, but are not limited to, available bank lines, oil and natural
gas production from existing wells, results from new wells drilled,
commodity prices, cost overruns on capital projects and changes to
government regulations relating to prices, taxes, royalties, land tenure,
allowable production and availability of markets. As these variables
change, liquidity risks may necessitate the need for the Company to
conduct equity issues or obtain debt financing. The Company also
mitigates liquidity risk by maintaining an insurance program to minimize
exposure to certain losses.

    The following are the contractual maturities of financial liabilities as
at December 31, 2012:


                          less than 1                                     
                               Year       1-2 Years   2-5 Years  Thereafter 
----------------------------------------------------------------------------
Accounts payable and                                                        
 accrued liabilities         164,946                                        
Dividends payable             8,911                                         
Provision for future                                                        
 market and reserves                                                        
 based bonus                  2,677          59                             
Current taxes payable         1,890                                         
Long-term debt(1)                          430,000                          
Senior secured notes                                               150,000  
----------------------------------------------------------------------------
(1) Revolving credit facility renewed annually (see Note 5)                 


    14. Capital disclosures

    The Company's objectives when managing capital are: (i) to maintain a
flexible capital structure, which optimizes the cost of capital at
acceptable risk; and (ii) to maintain investor, creditor and market
confidence to sustain the future development of the business.

    The Company manages its capital structure and makes adjustments to it in
light of changes in economic conditions and the risk characteristics of
its underlying assets. The Company considers its capital structure to
include Shareholders' equity, debt and working capital. To maintain or
adjust the capital structure, the Company may from time to time, issue
common shares, raise debt, adjust its capital spending or change
dividends paid to manage its current and projected debt levels. The
Company monitors capital based on the following measures: current and
projected debt to earnings before interest, taxes, depreciation,
depletion and amortization ("EBITDA") ratios, payout ratios and net debt
levels. To facilitate the management of these ratios, the Company
prepares annual budgets, which are updated depending on varying factors
such as general market conditions and successful capital deployment.
Currently, all ratios are within acceptable parameters. The annual budget
is approved by the Board of Directors. 

    There were no changes in the Company's approach to capital management
from the previous year.


                                                  December 31    December 31
                                                         2012           2011
----------------------------------------------------------------------------
Shareholders' equity                                1,210,067      1,015,708
Long-term debt                                        580,000        470,000
Working capital (surplus) deficit                      74,884       (40,232)
----------------------------------------------------------------------------
                                                    1,864,951      1,445,476
----------------------------------------------------------------------------
----------------------------------------------------------------------------


    15. Related party transactions

    An officer and director of the Company is a partner of a law firm that
provides legal services to the Company. For the year ended December 31,
2012, legal fees totaled $1.2 million (2011 - $0.8 million). As at
December 31, 2012, an amount due to this firm of $1.2 million was
included in accounts payable (2011 - $0.7 million).

    The Company has determined that the key management personnel consists of
it key employees, officers and directors. In addition to the salaries and
directors fees paid to these individuals, the Company also provides
compensation in the form of market and reserve based bonus to some of
these individuals. Compensation expense of $1.3 million is included in
general and administrative expenses and $5.0 million in market and
reserves based bonus relating to key management personnel for the year
2012 (2011 - $1.7 million in general and administrative and $10.1 million
in market and reserves based bonus).

    16. Commitments 

     Peyto has contractual obligations and commitments as follows:


                            2013    2014    2015    2016    2017  Thereafter
----------------------------------------------------------------------------
Note repayment(1)              -       -       -       -       -     150,000
Interest payments(2)       4,635   6,830   6,830   6,830   6,830      18,785
Transportation                                                              
 commitments              14,033  13,077   9,749   4,575   1,221         924
Operating leases           1,678   1,694     522       -       -           -
----------------------------------------------------------------------------
Total                     20,346  21,601  17,101  11,405   8,051     169,709
----------------------------------------------------------------------------
(1) Long-term debt repayment on senior secured notes                        
(2) Fixed interest payments on senior secured notes                         
                                                                            
Officers                                                                    
                                                                            
  Darren Gee                                    Tim Louie                   
  President and Chief Executive Officer         Vice President, Land        
                                                                            
  Scott Robinson                                David Thomas Vice           
  Executive Vice President and Chief Operating  President, Exploration      
  Officer                                                                   
                                                                            
  Kathy Turgeon                                 Jean-Paul Lachance          
  Vice President, Finance and Chief Financial   Vice President, Exploitation
  Officer                                                                   
                                                                            
  Stephen Chetner                                                           
  Corporate Secretary                                                       
                                                                            
Directors                                                                   
  Don Gray, Chairman                                                        
  Rick Braund                                                               
  Stephen Chetner                                                           
  Brian Davis                                                               
  Michael MacBean, Lead Independent Director                                
  Darren Gee                                                                
  Gregory Fletcher                                                          
  Scott Robinson                                                            
                                                                            
Auditors                                                                    
  Deloitte LLP                                                              
                                                                            
Solicitors                                                                  
  Burnet, Duckworth & Palmer LLP                                            
                                                                            
Bankers                                                                     
  Bank of Montreal                                                          
  Union Bank, Canada Branch                                                 
  Royal Bank of Canada                                                      
  Canadian Imperial Bank of Commerce                                        
  HSBC Bank Canada                                                          
  The Toronto-Dominion Bank                                                 
  Alberta Treasury Branches                                                 
  Canadian Western Bank                                                     
                                                                            
Transfer Agent                                                              
  Valiant Trust Company                                                     
                                                                            
Head Office                                                                 
  1500, 250 - 2nd Street SW                                                 
  Calgary, AB                                                               
  T2P 0C1                                                                   
  Phone: 403.261.6081                                                       
  Fax: 403.451.4100                                                         
  Web: http://www.peyto.com/                                                
  Stock Listing Symbol: PEY.TO                                              
                                                Toronto Stock Exchange      


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

Copyright 2013, Market Wire, All rights reserved.

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