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Exploration and Development Activity

Of the total capital invested in exploration and development activities, 12% was spent on new lands, seismic and facilities, while the remaining 88% was spent developing existing reserves and exploring for new reserves. Of the 86 wells drilled, 60 (53 net) were previously identified as undeveloped reserves in last year's reserve report (43 Proved, 17 Probable Additional). The remaining 26 wells were not recognized in last year's report as they were deemed by InSite to be too exploratory in nature. The undeveloped reserves booked to the 60 locations at year end 2011 totaled 180.9 BCFe (3.0 BCFe/well) of Proved Undeveloped plus Probable Additional reserves for a forecast capital investment of $294.9 million ($1.63/Mcfe). In actuality, $277.7 million of capital ($1.42/Mcfe) was spent on these 60 wells during 2012, yielding a Proved Producing plus Probable Additional volume of 196.1 BCFe (3.3 BCFe/well). With less capital yielding even more reserves, the development of these 60 booked locations produced an even better result than was originally projected. This analysis helps to validate the accuracy of the reserve and capital assignments of past undeveloped locations and provides confidence in the quality of the estimates for future undeveloped locations.

Corporate Acquisition Activity

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 lowered the cost of the acquisition at year end to $166.3 million. At December 31, 2012 the acquired assets were producing 4,300 boe/d (net of the disposed volumes) and were assigned Proved Producing reserves of 10.0 mmboes. These reserves reflect both wells that were on production and evaluated by the previous independent engineers on December 31, 2011 as well as the new 2012 drilling conducted by Open Range up to the acquisition date, both adjusted for production to December 31, 2012. The reserve assignments by InSite Petroleum Consultants as of December 31, 2012 were consistent with the assignments given by the previous engineers a year earlier for the same group of wells, further illustrating the predictability of the Deep Basin resource plays.

Value 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. The independent engineers have 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 know the change in debt and the change in shares outstanding to see 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. Although these estimates are believed to be accurate, they remain unaudited at this time and are subject to change.