Peyto Exploration and Development Corp. — Interim / Quarterly Report 2021

Nov 10, 2021

PEYTO

Exploration & Development Corp.

3

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Interim Report for the three and nine months ended September 30, 2021

HIGHLIGHTS

HIGHLIGHTS
	Three Months	Ended Sep 30	%	Nine Months	Ended Sep 30	%
	2021	2020	Change	2021	2020	Change
Operations
Production
Natural gas (mcf/d)	473,008	401,680	18%	462,496	401,692	15%
Oil & NGLs (bbl/d)	11,164	11,263	-1%	11,860	11,325	5%
Thousand cubic feet equivalent (mcfe/d @ 1:6)	539,990	469,259	15%	533,655	469,640	14%
Barrels of oil equivalent (boe/d @ 6:1)	89,998	78,210	15%	88,943	78,273	14%
Production per million common shares (boe/d)*	541	474	14%	537	475	13%
Product prices
Natural gas ($/mcf)	2.48	1.64	51%	2.53	1.57	61%
Oil & NGLs ($/bbl)	55.47	31.08	78%	49.84	29.73	68%
Operating expenses ($/mcfe)	0.35	0.32	9%	0.35	0.36	-3%
Transportation ($/mcfe)	0.23	0.16	44%	0.20	0.17	18%
Field netback ($/mcfe)	2.39	1.53	56%	2.45	1.42	73%
General & administrative expenses ($/mcfe)	0.02	0.04	-50%	0.04	0.04	-
Interest expense ($/mcfe)	0.26	0.35	-26%	0.32	0.32	-
Financial ($000, except per share*)
Revenue and realized hedging gains (losses)1	164,777	92,853	77%	480,561	264,457	82%
Royalties	17,985	5,867	207%	44,786	13,508	232%
Funds from operations	104,608	49,173	113%	303,509	136,697	122%
Funds from operations per share – basic	0.63	0.30	110%	1.83	0.83	120%
Funds from operations per share - diluted	0.62	0.30	110%	1.80	0.83	120%
Total dividends	1,671	1,649	1%	4,979	13,191	-62%
Total dividends per share	0.01	0.01	-	0.03	0.08	-63%
Earnings (loss)	29,271	(11,285)	359%	80,529	(101,506)	179%
Earnings (loss) per share- basic	0.18	(0.07)	359%	0.49	(0.62)	179%
Earnings (loss) per share – diluted	0.17	(0.07)	343%	0.48	(0.62)	177%
Capital expenditures	90,170	61,568	46%	256,107	167,454	53%
Weighted average common shares outstanding	166,440,704	164,892,979	1%	165,622,980	164,880,489	-
As at September 30
Net debt				1,131,600	1,183,754	-4%
Shareholders' equity				1,574,058	1,573,825	-
Total assets				3,735,545	3,515,148	6%
1excludes revenue from sale of third party volumes

1excludes revenue from sale of third party volumes
	Three Months Ended Sep 30		Nine Months Ended Sep 30
($000 except per share)	2021	2020	2021	2020
Cash flows from operating activities	101,982	48,074	307,648	150,169
Changein non-cashworking capital	2,626	1,099	(4,139)	(13,472)
Funds from operations	104,608	49,173	303,509	136,697
Funds from operations per share–basic	0.63	0.30	1.83	0.83
Fundsfromoperations pershare-diluted	0.63	0.30	1.83	0.83

(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.

Report from the president

Peyto Exploration & Development Corp. (“Peyto” or the “Company”) is pleased to present its operating and financial results for the third quarter of the 2021 fiscal year. A 63% Operating Margin[(1)] and a 18% Profit Margin[ (2)] in the quarter delivered an 8% Return on Capital and a 9% Return on Equity, on a trailing twelve-month basis. Highlights for the quarter included:

• Funds from operations per share up 110%. Funds from Operations (“FFO”) were $105 million after hedging losses of $72 million in the quarter. Per share FFO were $0.63, up from $0.30 in Q3 2020. FFO in the quarter exceeded capital expenditures by $14 million. Over the past 12 months Peyto has generated $380 million in FFO, while allocating $324 million to capital expenditures.

• Production per share up 14%. Third quarter 2021 production of 89,998 boe/d, comprised of 473 MMcf/d of natural gas, 6,685 bbl/d of Condensate and Pentanes, and 4,479 bbl/d of Butane and Propane, was up 15% (14% per share) from 78,210 boe/d in Q3 2020. Total liquid yields of 23.6 bbl/MMcf, or 12% of total production, was down from 28.0 bbl/MMcf in Q3 2020 due to an increased focus on leaner Spirit River plays.

• Total cash costs of $1.22/Mcfe (or $0.86/Mcfe ($5.14/boe) excluding royalties). Industry leading low total cash costs included $0.36/Mcfe royalties, $0.35/Mcfe operating costs, $0.23/Mcfe transportation, $0.02/Mcfe G&A and $0.26/Mcfe interest, which combined with a realized price of $3.33/Mcfe to result in a $2.11/Mcfe ($12.68/boe) cash netback, up 86% from $1.14/Mcfe ($6.83/boe) in Q3 2020. Operating costs per unit for Q3 2021 were consistent with Q1 and Q2 2021 despite rising power prices, higher chemical costs and maintenance costs associated with 10 plant turnarounds. Interest charges were down 26% from $0.35/Mcfe in Q3 2020 due to lower interest rates and reduced debt levels.

• Capital investment of $90 million in organic activity . A total of 24 gross wells (93% Working Interest, “WI”) were drilled in the third quarter, 22 gross wells (93% WI) were completed, and 21 gross wells (94% WI) were brought on production. Over the last 12 months new production additions, inclusive of acquisitions, accounted for approximately 40,100 boe/d at the end of the quarter, which, when combined with a trailing twelve-month capital investment of $324 million, equates to a record annualized capital efficiency of $8,100/boe/d.

• Earnings of $0.18/share, Dividends of $0.01/share. Earnings of $29.3 million were generated in the quarter while dividends of $1.7 million were paid to shareholders. The Board of Directors of Peyto is pleased to increase the dividend to $0.05/share on a monthly basis to shareholders of record as of November 30, 2021, paid on December 15, 2021.

Third Quarter 2021 in Review

A steady stream of drilling and completion activity throughout the quarter, utilizing the five drilling rigs active in Peyto’s Deep Basin core areas, resulted in continuous production growth from 86,500 boe/d at the start of July to 94,000 boe/d by the end of September. Superior operational execution, combined with improved well results, delivered record capital efficiency throughout the period. AECO daily natural gas prices, while substantially higher, were extremely volatile with recorded highs of $4.80/GJ and lows of $1.02/GJ. This was the result of insufficient access to EGAT storage reservoirs during periods of NGTL restrictions. Despite the volatility, AECO daily prices averaged $3.41/GJ in Q3 2021, up 161% from $2.12/GJ in Q3 2020. Peyto’s unhedged natural gas price for the quarter was $3.39/GJ, which is evidence of its improving market diversification program. The Company’s methodical hedging program resulted in predictable after-hedge commodity prices that trailed the rapidly rising spot prices. Peyto’s realized revenues were up 77% from Q3 2020, which combined with total cash costs, yielded operating margins of 63%. Lower depletion rates driven by better finding and development costs resulted in improved earnings and a profit margin of 18%. Peyto’s ESG working group was active throughout the quarter advancing several initiatives to improve the Company’s ongoing sustainability and industry leading environmental performance.

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 quarter 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, particularly 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.

Exploration & Development

As a result of significantly higher natural gas prices, third quarter 2021 activity was focused on the leaner, Spirit River formations throughout Peyto’s Deep Basin core areas as shown in the following table:

Zone	Field Sundance Nosehill Wildhay Ansell Cecilia Kisku/ Kakwa	Brazeau	Total Wells Drilled
Belly River Cardium Notikewin Falher Wilrich Bluesky	2 3 1 2 1 1 1 1 1 2 3 2	1 2 1	3 10 3 8
Total	7 5 2 4 2	4	24

Peyto continued to drill longer horizontal laterals in the quarter to access greater reservoir volume and develop more reserves per wellbore, which has the combined benefit of minimizing costs and environmental impact. Drilling cost per meter and completion costs per stage so far in 2021 are consistent with that of 2020. Supply chain issues and labor challenges due to the COVID pandemic have pressured service costs which Peyto has successfully offset with improved well results.

Gross Hz Spuds Measured Depth (m) Drilling ($MM/well) $ per meter Completion ($MM/well) Hz Length (m) $ per Hz Length (m) $ ‘000per Stage	2012 2013 2014 2015 2016 2017 2018 2019 2020	2021 **Q1-Q3 **
	86 99 123 140 126 135 70 61 64 4,017 4,179 4,251 4,309 4,197 4,229 4,020 3,848 4,247 $2.79 $2.72 $2.66 $2.16 $1.82 $1.90 $1.71 $1.62 $1.68 $694 $651 $626 $501 $433 $450 $425 $420 $396 $1.67 $1.63 $1.70 $1.21 $0.86 $1.00 $1.13 $1.01* $0.94 1,358 1,409 1,460 1,531 1,460 1,241 1,348 1,484 1,682 $1,231 $1,153 $1,166 $792 $587 $803 $835 $679 $560 $257 $188 $168 $115 $79 $81 $51 $38 $36	66 4,553 $1.83 $402 $1.00 1,696 $593 $35

*excluding Peyto’s Wildhay Montney well.

Capital Expenditures

During the third quarter of 2021, Peyto invested $43 million on drilling, $26 million on completions, $7 million on wellsite equipment and tie-ins, $12 million on facilities and major pipeline projects, and $2 million acquiring new lands and seismic, for a total organic capital investment of $90 million. Pipeline projects in the Cecilia, Wildhay, Sundance and Brazeau areas accounted for $5 million of the $12 million of major pipeline and facility investments, while new condensate stabilization facilities at Brazeau and compressor equipment upgrades at the various plant turnarounds accounted for $6 million.

Environment, Social, Governance

Peyto’s ESG working group was active in the third quarter, advancing scientific studies across the Company’s business and operations in search of opportunities to enhance Peyto’s environmental performance.

The Company recently completed an inhouse study of the porous saline reservoirs in and around its Greater Sundance Area for potential Carbon Capture and Underground Storage (“CCUS”) of CO2 emissions from Peyto’s operations. Preliminary results from this study concluded that, based on Peyto’s existing and future forecasted emissions, the Company expects to have access to enough storage capacity for all future CO2 disposal requirements. Facility requirements to enable such capture and injection include compressor exhaust gas CO2 extraction, CO2 purification, CO2 compression and pipeline transport, and the drilling and completion of suitable injection wells. While current government policy, taxation levels, carbon credit systems, and facility designs and technologies are rapidly evolving, Peyto envisions a future whereby a large proportion of its CO2 emissions are captured and injected. The Company is actively contributing to and participating in the Government of Alberta’s ongoing input solicitation for ideas and suggestions on policy as well as expressions of interest in instituting specific CCUS schemes.

Peyto’s ESG working group has also been active in the design and testing of an inline pipeline turbine generator to provide emissions-free power at remote Peyto wellsites. The first field trials of this new equipment began in September 2021 and while

no final conclusions have been reached, Peyto is encouraged this type of research and development will lead to further reductions in vented Methane emissions.

As a result of Peyto’s Methane emissions reduction program so far, 2016 total Methane emissions of 378,275 tCO2e/yr will have been reduced by over 50% to approximately 175,000 tCO2e/yr by the end of 2021. The Company has set a further target to reduce the vented and flared methane emissions intensity by 75% from 2016 levels by 2023.

Commodity Prices

Peyto actively marketed all components of its production stream in the quarter including natural gas, condensate, pentane, butane and propane. Natural gas was sold in Q3 2021 at various hubs including Henry Hub (51%), AECO (29%), Malin (8%), Emerson (8%), and Ventura (4%), using both physical fixed price and basis transactions (diversification activities) to access those locations. Natural gas prices were left to float on daily or monthly pricing or locked in using fixed price swaps at those hubs and Peyto’s realized price is benchmarked against those local prices, then adjusted for transportation (either physical or synthetic) to those markets. Going forward, Peyto expects that the cost of market diversification activities will begin to yield superior gas prices to that of a disconnected AECO market.

Peyto employs a methodical commodity risk management program that is designed to smooth out the short-term fluctuations in the price of natural gas and natural gas liquids through future sales. This smoothing gives greater predictability of cashflows for the purposes of capital planning and dividend payments. The future sales are meant to be orderly and consistent to avoid speculation, much like “dollar cost averaging” the future prices. In general, this approach will show hedging losses when short term prices climb and hedging gains when short term prices fall. For Q3 2021, approximately 81% of Peyto’s gas was locked in at a fixed price of $2.04/Mcf. Most of those contracts were established several quarters prior at then market prices that were lower than the eventual spot prices. For Q4 2021, approximately 73% of Peyto’s gas is locked in at a fixed price of $3.16/Mcf, and for Q1 2022, approximately 71% of Peyto’s gas is locked in at a fixed price of $3.71/Mcf. This dramatic rise in fixed prices mirrors that of the spot price rise which occurred earlier.

The Company’s liquids are also actively marketed with condensate being sold on a monthly index differential linked to West Texas Intermediate (“WTI”) oil prices. Peyto’s NGLs (a blend of pentanes plus, butane and propane) are fractionated by a third party in Fort Saskatchewan, Alberta and Peyto markets each product separately. Pentanes Plus are sold on a monthly index differential linked to WTI, with some volumes forward sold on fixed differentials to WTI. Butane is sold as a percent of WTI or a fixed differential to Mount Belvieu, Texas markets. Propane is sold on a fixed differential to Conway, Kansas markets. While some products like Butane and Propane require annual term contracts to ensure delivery paths and markets are certain, others can be sold on the daily spot market.

Condensate and Pentane Plus volumes were sold in Q3 2021 for an unhedged average price of $83.60/bbl, which is almost double the $42.09/bbl in Q3 2020, and as compared to Canadian WTI light oil price that averaged $88.92/bbl. The $5.32/bbl differential from light oil price was similar to the $5.41/bbl in the previous year. Butane and propane volumes were sold in combination at an average price of $37.97/bbl, or 43% of light oil price, up 141% from the $15.76/bbl in Q3 2020, due to postCOVID demand increase. Hedging of Canadian WTI light oil price, as a proxy for Condensate and Pentanes Plus prices, resulted in a loss of $9.82/bbl on a combined volume basis. Peyto’s realized price by product and relative to benchmark prices is shown in the following table.

Benchmark Commodity Prices at Various Markets

	Three Months ended September 30	Three Months ended September 30
	2021	2020
AECO 7A monthly ($/GJ)	3.36	2.04
AECO 5A daily ($/GJ)	3.41	2.12
NYMEX(US$/MMBTU)	4.28	1.95
Emerson2(US$/MMBTU)	3.71	1.78
Malin NGI(US$/MMbtu)	4.12	1.90
Ventura daily (US$/MMbtu)	4.02	1.80
Canadian WTI($/bbl)	88.92	54.50
ConwayC3(US$/bbl)	49.02	19.54
CND/USD Exchange rate	1.26	1.332

Peyto Realized Natural Gas Price by Market (net of diversification)

	Three Months ended September 30	Three Months ended September 30
	2021	2020
AECO monthly (CND$/GJ)	3.36	2.03
AECO daily (CND$/GJ)	3.28	2.13
NYMEX(US$/MMBTU)	2.87	0.84
Emerson2(US$/MMBTU)	3.18	1.06
Malin(US$/MMBTU)	2.12	N/A
Ventura(US$/MMBTU)	2.89	0.72
Peyto Realized Commodity Prices
Naturalgas(CND$/mcf)	5.20	2.62
Gas marketingdiversification activities(CND$/mcf)	(1.30)	(1.01)
Gas hedging (CND$/mcf)	(1.42)	0.03
Realized naturalgasprice(CND$/mcf)	2.48	1.64
Oil,condensate and C5+(CND$/bbl)	83.60	42.09
Butane andpropane(CND$/bbl)	37.97	15.76
Liquid hedging (CND$/bbl)	(9.82)	(1.78)
Realized Oil & NGLprice(CND$/bbl)	55.47	31.08

Peyto realized natural gas prices are at NIT, prior to fuel. Peyto gas has an average heating value of approx. 1.15GJ/Mcf. Liquids prices are Peyto realized prices in Canadian dollars adjusted for fractionation, transportation, and market differentials Details of Peyto’s ongoing marketing and diversification efforts are available on Peyto’s website at: http://www.peyto.com/Files/Operations/Marketing/hedges.pdf

Financial Results

The Company’s realized price for natural gas in Q3 2021 was $5.20/Mcf, prior to $1.30/Mcf of market diversification activities and a $1.42/Mcf hedging loss, while its realized liquids price was $65.29/bbl, before a $9.82/bbl hedging loss, which yielded a combined revenue stream of $3.33/Mcfe. This net sales price was 55% higher than the $2.15/Mcfe realized in Q3 2020. Cash costs of $1.22/Mcfe were 21% higher than the $1.01/Mcfe in Q3 2020 due to a $0.22/Mcfe increase in royalties. When the total cash costs of $1.22/Mcfe were deducted from realized revenues of $3.33/Mcfe, it resulted in a cash netback of $2.11/Mcfe or a 63% operating margin. Historical cash costs and operating margins are shown in the following table:

	2018	2019	2020		2021
($/Mcfe)	Q1 Q2 Q3 Q4	Q1 Q2 Q3 Q4	Q1 Q2 Q3 Q4	Q1	Q2	Q3
Revenue	3.54 3.20 3.27 3.03	3.20 2.60 2.50 2.76	2.30 1.73 2.15 2.71	3.70	2.92	3.33
Royalties	0.17 0.10 0.14 0.12	0.14 0.01 0.03 0.12	0.12 0.06 0.14 0.18	0.29	0.26	0.36
Op Costs	0.29 0.30 0.31 0.33	0.35 0.34 0.31 0.34	0.39 0.36 0.32 0.31	0.36	0.35	0.35
Transportation	0.13 0.18 0.19 0.19	0.19 0.19 0.19 0.19	0.19 0.17 0.16 0.15	0.17	0.22	0.23
G&A	0.08 0.05 0.03 0.04	0.06 0.05 0.05 0.02	0.04 0.04 0.04 0.04	0.04	0.05	0.02
Interest	0.24 0.26 0.27 0.27	0.28 0.30 0.31 0.31	0.29 0.33 0.35 0.38	0.38	0.33	0.26
Cash Costs	0.91 0.89 0.94 0.95	1.02 0.89 0.89 0.98	1.03 0.96 1.01 1.06	1.24	1.21	1.22
Netback	2.63 2.31 2.33 2.08	2.18 1.71 1.61 1.78	1.27 0.77 1.14 1.65	2.46	1.71	2.11
Operating Margin	74% 72% 71% 69%	68% 66% 64% 65%	55% 45% 53% 61%	67%	59%	63%

Depletion, depreciation, and amortization charges of $1.25/Mcfe, along with a provision for deferred tax and stock-based compensation payments resulted in earnings of $0.60/Mcfe, or a 18% profit margin. Dividends to shareholders totaled $0.03/Mcfe.

Activity Update

Since the end of the quarter, the Company has drilled 9 wells (80% WI), completed 11 wells (95% WI) wells, and brought onstream 11 new wells (95% WI). Eight additional wells (84% WI) are currently drilled and awaiting completion and tie-in. Recent drilling success has yielded higher productivity than expected which is driving Internal Rate of Return (BT IRR)

estimates for this year’s capital program to over 100%. Several of this year’s new wells have already reached payout on their initial capital investment. Peyto expects to bring another 17 wells (91% WI) on production before the end of the year, driving exit production beyond 100,000 boe/d and delivering much needed natural gas supply for this coming winter.

In the Company’s Chambers area in South Brazeau, Peyto has prepared the site for its new 50 MMcf/d gas plant with foundations set and equipment delivery expected to begin by year end. Installation and commissioning of this new facility is expected by the end of Q1 2022. This new plant will be Peyto’s most environmentally efficient plant to date, deploying a new waste heat recovery technology to reduce the need for natural gas fired utility heat along with zero emissions controls and instrumentation systems. Much of the equipment for this new plant will be deployed from existing capital inventory, which successfully avoids supply chain delays, and is already reflected in Peyto’s net debt. A second drilling rig will be transferred into the Chambers area this winter which will develop sufficient production to more than fill the new plant prior to startup. As usual, this plant is designed with modular components for easy expansion and to maximize utilization which is key to minimizing per unit operating costs.

In Peyto’s Cecilia area, recent drilling success has filled all 30 MMcf/d of available compression at the acquired plant. An additional compressor will be added in the fourth quarter to take advantage of optimized capacity in the refrigeration process.

Issuance of Private placement of senior secured Notes

Peyto is pleased to announce that it has priced an issuance of USD$40 million of senior secured notes. The notes will have a coupon rate of 3.98% and mature in October 2028. The notes have been issued by way of a private placement pursuant to a note purchase agreement and rank equally with Peyto's obligations under its bank facility and existing note purchase and private shelf agreement. Interest will be paid semi-annually in arrears. Proceeds from the notes have been used to prepay the CND$50 million, 4.88% notes due September 6, 2022. Closing of the private placement occurred October 29, 2021. The senior notes have not been and will not be registered under the U.S. Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

Amended and Extended Credit Facility

On November 5, 2021, the Company finalized an agreement with its syndicate of lenders and term debt note holders to amend and extend its $950 million senior secured covenant-based credit facility and note purchase agreements. This new facility has a maturity date of October 13, 2023, is made up of a $40 million working capital tranche, a $910 million production line, and is available on a revolving basis. Borrowings under the facility bear interest at Canadian bank prime or US base rate, or, at Peyto’s option, Canadian dollar bankers’ acceptances or US dollar LIBOR loan rates, plus applicable margin and stamping fees. The total stamping fees range between 175 basis points and 365 basis points on Canadian dollar bankers’ acceptance and US dollar LIBOR borrowings. The undrawn portion of the facility is subject to a standby fee in the range of 35 to 73 basis points.

2022 Preliminary Budget

Substantial well performance improvements, combined with superior operational execution over the past twelve months has allowed Peyto to add new production at a record low cost of approximately $8,000/boe/d. When combined with significantly improved commodity prices, this efficiency is delivering record returns on invested capital and justifies a similar capital program for 2022. While specifics of the 2022 budget are still being finalized, a capital program of $350-$400 million is being contemplated, inclusive of a conservative 15% provision for cost inflation, which is estimated to add approximately 37,000 to 42,000 boe/d of new production by the end of the year. This volume addition would be more than sufficient to offset the annual forecast decline of 28% on anticipated 2021 exit production of 100,000 boe/d. Exact 2021 exit production and subsequent base decline will depend on timing of year-end activity.

The proposed 2022 capital program would require all five currently operating drilling rigs to execute continuous operations across Peyto’s deep basin core areas and is projected to be funded from less than half of Peyto’s total cashflow, leaving significant free cashflow available for debt reduction and dividend payments. As always, Peyto will ensure any capital plans will be nimble with the ability to react to changes in commodity prices and the global economic environment, both of which continue to be volatile and uncertain.

Monthly Dividend Reinstated

Over the past 12 months, Peyto has returned to its historic levels of profitability, with cumulative earnings of $147 million on capital expenditures of $324 million or $0.45 of profit per dollar invested. This is similar to Peyto’s entire history of $2.633 billion of cumulative earnings for a total capital investment of $6.657 billion. At current commodity prices, Peyto is forecasting this earnings ratio will grow significantly over the fourth quarter 2021 and throughout 2022. As a result, the Board of Directors of Peyto is please to approve a monthly dividend of $0.05/share starting in November 2021 for shareholders of record as of November 30, 2021 (ex-dividend date November 29, 2021) and paid on December 15, 2021.

Executive Leadership Appointment

The Board of Directors of Peyto is also pleased to announce the appointment of Mr. Jean-Paul Lachance to the position of President, in addition to his current role as the Chief Operating Officer of Peyto. Jean-Paul, “JP”, has been an integral part of Peyto’s leadership team for over 10 years, coordinating the profitable investment of over $4.5 billion of shareholders’ capital all while helping navigate Peyto through the volatile North American natural gas industry. Mr. Lachance, who was appointed Chief Operating Officer in 2018, brings to the role a deep technical understanding of the industry, a good perspective on the risks and pitfalls inherent in the business, and a single-minded focus on profitability. Mr. Lachance will continue to report to Mr. Darren Gee, Chief Executive Officer.

The Peyto senior management team, consisting of the following individuals, will continue to develop strategic direction, provide leadership, and execute on the Corporation's Deep Basin resource developments:

Darren Gee (CEO)

Jean-Paul Lachance (President and COO) Kathy Turgeon (VP of Finance and CFO) Scott Robinson (VP Business Development) Dave Thomas (VP Exploration) Lee Curran (VP Drilling and Completions) Todd Burdick (VP Production) Derick Czember (VP Land)

Outlook

Short term hydrocarbon prices, both globally and domestically, continue to rise as post-pandemic consumption increases against a backdrop of constrained supply caused by a continued lack of investment. As winter approaches, natural gas prices in North America are rising to levels not seen since 2008. These higher prices, combined with Peyto’s growing production, will continue to drive enhanced returns for shareholders.

Peyto expects to crystalize those returns for shareholders, first in the form of material debt reduction and then with dividend payments that will reflect rising earnings. This prediction of increased shareholder returns includes a forecast of future commodity prices that is currently in backwardation. Peyto’s deep inventory of drilling prospects, extensive infrastructure asset with available capacity, track record of superior operational execution, and enhanced environmental performance will ensure continued success for the next chapter in Peyto’s unique story.

(signed) “Darren Gee”

(signed) “Jean-Paul Lachance”

Darren Gee Chief Executive Officer November 9, 2021

Jean-Paul Lachance President and Chief Operating Officer

Management’s discussion and analysis

This Management's Discussion and Analysis (“MD&A”) should be read in conjunction with the audited consolidated financial statements of Peyto Exploration & Development Corp. (“Peyto” or the “Company”) for the year ended December 31, 2020. The financial statements have been prepared in accordance with the International Accounting Standards Board’s (“IASB”) most current International Financial Reporting Standards (“IFRS” or “GAAP”) and International Accounting Standards (“IAS”).

This discussion provides management's analysis of Peyto's historical financial and operating results and provides estimates of Peyto's future financial and operating performance based on information currently available. Actual results will vary from estimates and the variances may be significant. Readers should be aware that historical results are not necessarily indicative of future performance. This MD&A was prepared using information that is current as of November 8, 2021. Additional information about Peyto, including the most recently filed annual information form is available at www.sedar.com and on Peyto’s website at www.peyto.com.

This MD&A contains certain forward-looking statements or information (“forward-looking statements”) as defined by applicable securities laws that involve substantial known and unknown risks and uncertainties, many of which are beyond Peyto's control. These statements relate to future events or the Company's future performance. All statements other than statements of historical fact may be forward-looking statements. The use of any of the words "plan", "expect", "prospective", "project", "intend", "believe", "should", "anticipate", "estimate", or other similar words or statements that certain events "may" or "will" occur are intended to identify forward-looking statements. The projections, estimates and beliefs contained in such forward-looking statements are based on management's estimates, opinions, and assumptions at the time the statements were made, including assumptions relating to: the impact of economic conditions in North America and globally; industry conditions; changes in laws and regulations including, without limitation, the adoption of new environmental laws and regulations and changes in how they are interpreted and enforced; increased competition; the adequacy of the Company's critical accounting estimates; the availability of qualified operating or management personnel; fluctuations in commodity prices, foreign exchange or interest rates; stock market volatility and fluctuations in market valuations of companies with respect to announced transactions and the final valuations thereof; results of exploration and testing activities; and the ability to obtain required approvals and extensions from regulatory authorities. Management of the Company believes the expectations reflected in those forward-looking statements are reasonable, but no assurances 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 that Peyto will derive from them. As such, undue reliance should not be placed on forward-looking statements. Forward-looking statements contained herein include, but are not limited to, statements regarding: expected royalty rate, earnings, cash flow and revenue fluctuations; the Company's expectation that funds generated from operations, together with credit facility borrowings, are sufficient; the expectation that the majority of the Company's capital program will involve drilling, completing and tie-in of lower risk development gas wells; the Company's risk management; and the Company's critical accounting estimates.

The World Health Organization declared novel coronavirus COVID-19 ("COVID-19") a global pandemic in 2020 and at September 30, 2021, Peyto's management has incorporated the current and anticipated impacts of COVID-19 in its preparation of the MD&A.

The forward-looking statements contained herein are subject to numerous known and unknown risks and uncertainties that may cause Peyto's actual financial results, performance or achievement in future periods to differ materially from those expressed in, or implied by, these forward-looking statements, including but not limited to, risks associated with: imprecision of reserves estimates; competition from other industry participants; failure to secure required equipment; changes in general global economic conditions including, without limitations, the economic conditions in North America; increased competition; the lack of availability of qualified operating or management personnel; fluctuations in commodity prices, foreign exchange or interest rates; environmental risks; changes in laws and regulations including, without limitation, the adoption of new environmental and tax laws and regulations and changes in how they are interpreted and enforced; the results of exploration and development drilling and related activities; the ability to access sufficient capital from internal and external sources; and stock market volatility. Readers are encouraged to review the material risks discussed in Peyto's annual information form for the year ended December 31, 2020 under the heading "Risk Factors" and herein under the heading "Risk Management".

The Company cautions that the foregoing list of assumptions, risks and uncertainties is not exhaustive. 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 there from. The forward-looking statements

contained in this MD&A speak only as of the date hereof and Peyto does not assume any obligation to publicly update or revise them to reflect new information, future events or circumstances or otherwise, except as may be required pursuant to applicable securities laws.

All references are to Canadian dollars unless otherwise indicated. Natural gas liquids volumes are recorded in barrels of oil (bbl) and are converted to a thousand cubic feet equivalent (mcfe) using a ratio of six (6) thousand cubic feet to one (1) barrel of oil (bbl). 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). Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based in an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. In addition, given that the value ratio based on the current price of oil as compared with natural gas is significantly different from the energy equivalent of six to one, utilizing a boe conversion ratio of 6 mcf:1 bbl may be misleading as an indication of value.

OVERVIEW

Peyto is a Canadian energy company involved in the development and production of natural gas and oil & natural gas liquids in Alberta’s deep basin. At December 31, 2020, the Company’s total Proved plus Probable reserves were 5.0 trillion cubic feet equivalent (834 million barrels of oil equivalent) as evaluated by its independent petroleum engineers. Production is weighted approximately 88 per cent to natural gas and 12 per cent to oil & natural gas liquids.

The Peyto model is designed to deliver a superior total return with growth in value, assets, production and income, all on a debt adjusted per share basis. The model is built around three key strategies:

• Use technical expertise to achieve the best return on capital employed through the development of internally generated drilling projects.

• Build an asset base which is made up of high-quality natural gas reserves.

• Over time, balance dividends paid to shareholders with earnings and cash flow, and balance funding for the capital program with cash flow, equity and available credit lines.

Operating results over the last twenty-three years indicate that these strategies have been successfully implemented. This business model makes Peyto a truly unique energy company.

QUARTERLY FINANCIAL INFORMATION

		2021			2020	2020		2019
($000 exceptper share amounts)	Q3	Q2	Q1	Q4	Q3	Q2	Q1	Q4
Revenue and realized hedging
gains (losses) (net of royalties)1	146,792	127,727	161,258	116,018	86,986	71,178	92,787	111,389
Funds from operations	104,608	82,191	116,709	76,013	49,173	33,012	54,513	75,974
Per share – basic	0.63	0.50	0.71	0.46	0.30	0.20	0.33	0.46
Per share – diluted	0.62	0.50	0.71	0.46	0.30	0.20	0.33	0.46
Earnings (loss)	29,271	12,760	38,500	65,951	(11,285)	(22,538)	(67,684)	3,492
Per share – basic	0.18	0.08	0.23	0.40	(0.07)	(0.14)	(0.41)	0.02
Per share – diluted	0.17	0.08	0.23	0.40	(0.07)	(0.14)	(0.41)	0.02
Dividends	1,671	1,658	1,651	1,649	1,649	1,649	9,892	9,892
Per share	0.01	0.01	0.01	0.01	0.01	0.01	0.06	0.06
Payout ratio (%)	2	2	1	2	3	5	18	13
Capital expenditures	90,170	57,086	108,851	68,250	61,568	37,299	68,587	73,351
Totalpayout ratio(%)	88	71	95	92	129	118	144	110

1 excludes revenue from sale of natural gas volumes from third-parties

Funds from Operations

“Funds from operations” is a non-GAAP measure which represents cash flows from operating activities before changes in non-cash operating working capital and provision for future performance-based compensation. Management considers funds from operations and per share calculations of funds from operations to be key measures as they demonstrate the Company’s ability to generate the cash necessary to pay dividends, repay debt and make capital investments. Management believes that by excluding the temporary impact of changes in non-cash operating working capital, funds from operations provides a useful

measure of Peyto’s ability to generate cash that is not subject to short-term movements in operating working capital. The most directly comparable GAAP measure is cash flows from operating activities.

Total Payout Ratio

“Total payout ratio” is a non-GAAP measure which is calculated as the sum of dividends declared plus capital expenditures, divided by funds from operations. This ratio represents the percentage of the capital expenditures and dividends that is funded by cashflow. Management uses this measure, among others, to assess the sustainability of Peyto’s dividend and capital program.

RESULTS OF OPERATIONS

Production

Production
Three Months ended September 30 2021 2020	Nine Months ended September 30 2021 2020
Natural gas (mmcf/d) 473.0 401.7 Oil & natural gas liquids (bbl/d) 11,164 11,263 Barrels of oil equivalent (boe/d) 89,998 78,210 Thousand cubic feet equivalent (mmcfe/d) 540 469.3	462.5 401.7 11,860 11,325 88,943 78,273 533.7 469.6

Condensate and NGL production decreased 1 per cent from 11,263 bbl/d in the third quarter of 2020 to 11,164 in the third quarter of 2021. Natural gas production increased 18 per cent from 401.7 mmcf/d in the third quarter of 2020 to 473.0 mmcf/d in the third quarter of 2021. Total third quarter production increased 15 per cent from 469.3 mmcfe/d to 540.0 mmcfe/d. Production increases are attributable to Peyto’s capital program.

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Average Daily Production
14,000 600
12,000 500
10,000
400
8,000
300
6,000
200
4,000
100
2,000
0 0
Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021
Oil & natural gas liquids (bbl/d) Natural gas (mmcf/d) Production per million shares (boe/d)
bbl/d
mmcf/d
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Oil & Natural Gas Liquids Production by Component

	Three Months ended September 30	Three Months ended September 30	Nine Months ended September 30	Nine Months ended September 30
	2021	2020	2021	2020
Oil, Condensate and Pentanes Plus (bbl/d)	6,685	6,493	6,984	6,564
Other Natural gas liquids(bbl/d)	4,479	4,770	4,876	4,761
Oil & Natural gas liquids (bbl/d)	11,164	11,263	11,860	11,325
Barrels per million cubic feet	23.6	28.0	25.6	28.2

The liquid production to sales gas ratio decreased 16 per cent from 28.0 bbl/mmcf in the third quarter of 2020 to 23.6 bbl/mmcf in the third quarter of 2021. As natural gas prices improve, Peyto is including more dry gas wells into the drilling program.

Benchmark Commodity Prices

Benchmark Commodity Prices
	Three Months ended September 30		Nine Months ended September 30
	2021	2020	2021	2020
AECO 7A monthly ($/GJ)	3.36	2.04	2.94	1.96
AECO 5A daily ($/GJ)	3.41	2.12	3.11	1.98
NYMEX (US$/MMbtu)	4.28	1.95	3.53	1.79
Emerson2 (US$/MMbtu)	3.71	1.78	3.12	1.71
Malin NGI (US$/MMbtu)	4.12	1.90	3.30	1.90
Ventura daily (US$/MMbtu)	4.02	1.80	6.43	1.70
Canadian WTI ($/bbl)	88.92	54.50	81.08	51.52
Conway C3 (US$/bbl)	49.02	19.54	40.81	17.04

Q3 2021 average CND/USD exchange rate of 1.26

Commodity Prices

Commodity Prices
	Three Months ended September 30		Nine Months ended September 30
($CAD)	2021	2020	2021	2020
Oil, Condensate, Pentanes Plus ($/bbl)	83.60	42.09	76.40	43.43
Other Natural gas liquids ($/bbl)	37.97	15.76	31.32	10.78
Realized Oil and NGL price– before
hedging ($/bbl)	65.29	32.86	57.87	28.82
Hedging ($/bbl)	(9.82)	(1.78)	(8.03)	0.91
Realized Oil and NGL price– after
hedging price ($/bbl)	55.47	31.08	49.84	29.73
Natural gas ($/mcf)	5.20	2.62	4.49	2.47
Diversification activities ($/mcf)	(1.30)	(1.01)	(1.22)	(0.89)
Hedging ($/mcf)	(1.42)	0.03	(0.74)	(0.01)
Realized price ($/mcf)	2.48	1.64	2.53	1.57
Total Hedging ($/mcfe)	(1.45)	(0.02)	(0.82)	0.02
Total Hedging ($/boe)	(8.70)	(0.13)	(4.90)	0.09

liquids prices are Peyto realized prices in Canadian dollars adjusted for fractionation and transportation.

Peyto’s natural gas price, before hedging and diversification activities, averaged $5.20/mcf during the third quarter of 2021 an increase of 98 per cent from $2.62/mcf for the equivalent period in 2020. Oil & natural gas liquids prices, before hedging, averaged $65.29/bbl, an increase of 99 per cent from $32.86/bbl a year earlier.

Peyto actively marketed all components of its production stream in the third quarter including natural gas, condensate, pentane, butane and propane. Peyto’s market diversification activity resulted in natural gas being sold at various hubs including AECO, Ventura, Emerson 2, Malin and Henry Hub using both physical fixed price and temporary basis transactions to access those locations. Natural gas prices were left to float on daily pricing or locked in using fixed price swaps at those hubs and Peyto’s realized price was benchmarked against those local prices, then adjusted for marketing arrangements (either physical or short-term synthetic) to those markets. This gas market diversification cost represents the total marketing and synthetic transportation cost, not just the difference between those markets and an AECO equivalent price.

The Company’s liquids were also actively marketed with condensate being sold on a monthly index differential linked to West Texas Intermediate (“WTI”) oil prices. Peyto’s NGLs (a blend of pentanes plus, butane and propane) are fractionated by a third party in Fort Saskatchewan, Alberta however Peyto markets each product separately. Pentanes Plus were sold on a monthly index differential linked to WTI, with some volumes forward sold on fixed differentials to WTI. Butane was sold as a percent of WTI or a fixed differential to the Mount Belvieu, Texas market. Propane was sold on a fixed differential to the Conway, Kansas market. While some products were sold pursuant to annual term contracts to ensure delivery paths remain open, others were marketed on the daily spot market.

Natural Gas Price

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$4.00
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021
Peyto's Realized Natural Gas Price ($/GJ) AECO monthly ($/GJ)
Oil & NGL Prices
$100
$80
$60
$40
$20
$0
Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021
Peyto's Realized Oil & NGL Prices ($/bbl) WTI (C$/bbl)
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Revenue from Produced Volumes and Realized Hedging Gains (Losses)

Revenue from Produced Volumes	and Realized Hedging Gains (Losses)	and Realized Hedging Gains (Losses)
	Three Months ended September 30		Nine Months ended September 30
($000)	2021	2020	2021	2020
Natural gas1	169,789	59,719	412,245	173,021
Oil & natural gas liquids	67,063	34,052	187,355	89,431
Hedging – gas	(61,987)	930	(93,046)	(819)
Hedging–oil and NGL	(10,088)	(1,848)	(25,993)	2,824
	164,777	92,853	480,561	264,457

1 excludes revenue from sale of natural gas volumes from third-parties

Revenue and Realized Hedging Gains (Losses)

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$200,000
$150,000
$100,000
$50,000
$0
Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021
-$50,000
-$100,000
Natural gas (produced) Oil and natural gas liquids Hedging gain (loss)
($000)
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For the three months ended September 30, 2021, revenue from the sale of produced volumes and realized hedging losses increased 77 per cent to $164.8 million from $92.9 million for the same period in 2020. The increase in revenue from the sale of produced volumes and realized hedging losses for the quarter was a result of increased production volumes and commodity prices, as detailed in the following table:

	Three Months	ended September 30	ended September 30	Nine Months	ended September 30	ended September 30
	2021	2020	$million	2021	2020	$million
September 30, 2020			93			265
change due to:
Natural gas
Volume (mmcf)	43,517	36,955	11	126,261	110,064	26
Price ($/mcf)	$2.48	$1.64	36	$2.53	$1.57	121
Oil & NGL
Volume (mbbl)	1,027	1,036	-	3,238	3,103	4
Price ($/bbl)	$55.47	$31.08	25	$49.84	$29.73	65
September 30, 2021			165			481

Change in Revenue and Realized Hedging Losses

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$180 $165
$160
$140
$120
$93
$100
$80
$60
$37
$40 $25
$20 $11
$0
$0
-$20
Q3 2020 revenue Gas Volume Gas Price Oil & NGL Oil & NGL Price Q3 2021 revenue
and realized Volume and realized
hedging losses hedging losses
($million)
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Royalties

Royalties are paid to the owners of the mineral rights with whom leases are held, including the provincial government of Alberta. Alberta Natural Gas Crown royalties are invoiced on the Crown's share of production based on a monthly established Alberta Reference Price. The Alberta Reference Price is a monthly weighted average price of gas consumed in Alberta and gas exported from Alberta reduced for transportation and marketing allowances. All Peyto’s new natural gas wells qualify for the Crown incentive programs which have a 5 per cent initial royalty rate.

	Three Months ended September 30	Three Months ended September 30	Nine Months ended September 30	Nine Months ended September 30
	2021	2020	2021	2020
Royalties ($000)	17,985	5,867	44,786	13,508
per cent of sales excluding hedging	7.6	6.3	7.5	5.1
$/mcfe	0.36	0.14	0.31	0.11
$/boe	2.17	0.82	1.84	0.63

For the third quarter of 2021, royalties averaged $0.36/mcfe or approximately 8 per cent of Peyto's total petroleum and natural gas sales excluding hedging losses. The increase was due to higher AECO and WTI prices. The royalty rate expressed as a percentage of natural gas and natural gas liquid sales will fluctuate from period to period as the Alberta Reference Price can differ significantly from the commodity prices realized by Peyto. Royalties include the impact of gas cost allowance (“GCA”) which is a reduction of royalties payable to the Alberta Provincial Government (the “Crown”) to recognize capital and operating expenditures incurred in the gathering and processing of the Crown’s share of natural gas production. In its 23year history, Peyto has invested over $6.6 billion in capital projects, found and developed 4.0 TCFe of natural gas reserves and paid over $1.0 billion in royalties.

					Royalties
$25,000											10%
$22,500											9%
$20,000											8%
$17,500											7%
$10,000 $12,500 $15,000 ($000)											4% 5% 6%
$7,500											3%
$5,000											2%
$2,500											1%
$0											0%
Q4 2019	Q1 2020	Q2	2020	Q3 2020		Q4 2020		Q1 2021		Q2 2021	Q3 2021
	Royalties				Royalties as a % of sales before hedging
Operating Costs & Transportation
Peyto’s operating expenses	include all	costs with respect to day-to-day well and facility operations.
			Three Months ended			September		30	Nine Months		ended September 30
				2021			2020			2021	2020
Payments to Government				6,226			4,007			16,161	12,831
Other expenses			11,056				10,184			34,831	33,493
Operating costs ($000)			17,282				14,191			50,992	46,324
$/mcfe				0.35			0.32			0.35	0.36
$/boe				2.09			1.97			2.10	2.16
Transportation ($000)			11,323				6,840			30,086	22,285
$/mcfe				0.23			0.16			0.20	0.17
$/boe				1.37			0.95			1.24	1.04

For the third quarter, operating expenses were $17.3 million compared to $14.2 million for the same quarter in 2020 due to increased power, chemical and lubricant costs along with an opportunity to advance some service and maintenance work during plant turnarounds that occurred through the summer. On a unit-of-production basis, operating costs increased 9 per cent from $0.32/mcfe to $0.35/mcfe. Approximately 30 per cent of operating expenses are related to government fees, taxes and levies. Peyto focuses on being the industry leader in operating costs and strives to achieve incremental cost reductions on a continuous basis.

Transportation expenses increased 44 per cent on a unit-of production basis from $0.16/mcfe in the third quarter 2020 to $0.23/mcfe in the third quarter 2021 due to the addition of Empress service.

Operating Expenses

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$24,000
$1.60
$21,000
$1.40
$18,000
$1.20
$15,000 $1.00
$12,000 $0.80
$9,000 $0.60
$6,000 $0.40
$3,000 $0.20
$0 $-
Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021
Operating expenses Operating expenses per mcfe
($000)
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Transportation

$0 $3,000 $6,000 $9,000 $12,000 $15,000 ($000)	$0 $3,000 $6,000 $9,000 $12,000 $15,000 ($000)
General and Administrative Expenses
Three Months ended September 30 2021 2020	Nine Months ended September 30 2021 2020
G&A expenses ($000) 3,964 3,615 Overhead recoveries ($000) (3,003) (1,823)	12,265 10,854 (7,049) (5,726)
Net G&A expenses ($000) 961 1,792	5,216 5,128
$/mcfe 0.02 0.04	0.04 0.04
$/boe 0.12 0.25	0.22 0.23

For the third quarter, general and administrative expenses before overhead recoveries was $4.0 million compared to $3.6 million for the same quarter of 2020. This increase was due primarily to increased employment and insurance costs. General and administrative expenses averaged $0.08/mcfe before overhead recoveries of $0.06/mcfe for net general and administrative expenses of $0.02/mcfe in the third quarter of 2021 ($0.08/mcfe before overhead recoveries of $0.04/mcfe for net general and administrative expenses of $0.04/mcfe in the third quarter of 2020).

Net G&A Expense

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$8,000 $0.50
$0.40
$6,000
$0.30
$4,000
$0.20
$2,000
$0.10
$0 $-
Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021
Net G&A G&A per mcfe
($000)
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Performance and Stock Based Compensation

The Company awards performance-based compensation to employees, key consultants and directors. Performance and stock based compensation is comprised of stock options, deferred share units, and reserve value-based components.

The reserve value-based component is 4 per cent of the incremental increase in value, if any, as adjusted to reflect changes in debt, dividends, general and administrative expenses and interest expense, of proved producing reserves calculated using realized prices at December 31 of the current year and a discount rate of 8 per cent. Compensation expense of $Nil was recorded for the third quarter of 2021.

Under the market-based component, rights with a three-year vesting period were allocated to employees and key consultants. On December 31 of each year, all vested rights are automatically cancelled and, if applicable, paid out by the issuance of equity. This compensation component was replaced by the adopted stock option plan in 2019. All outstanding rights will vest on December 31, 2021.

In 2019, the Company adopted a stock option plan allowing for the granting of stock options to officers, employees and consultants of the Company. Stock options are to be granted periodically with a three-year vesting period. At the vesting, recipients have thirty days to exercise options after which any unexercised options are cancelled.

In 2020, the Company adopted a deferred share unit plan, whereby DSUs may be issued to members of the Board of Directors. Each DSU is a notional unit equal in value to one Common Share, which entitles the holder to receive a common share upon redemption. DSUs vest immediately but can only be converted to a share upon the holder ceasing to be a Director of the Company. The expense associated with the DSU plan is determined based on the 5-day VWAP of Common Shares at the grant date. The expense is recognized in the statement of operations in the quarter in which the units are granted, with a corresponding charge to contributed surplus in the statement of financial position.

Based on the weighted average trading price of the common shares for the period ended September 30, 2021, compensation costs related to 0.7 million non-vested rights (1 per cent of the total number of common shares outstanding), with an average grant price of $7.23 are $0.1 million for the third quarter of 2021, 9.1 million non-vested stock options (6 per cent of the total number of common shares outstanding), with an average grant price of $4.03 are $1.3 million for the third quarter of 2021 and $0.2 million vested DSU’s (0.09 per cent of the total number of common shares outstanding), with an average grant price of $3.20 are $0.1 million for the third quarter of 2021. Peyto records a non-cash provision for compensation expense over the life of the rights calculated using a Black-Scholes valuation model (refer to Note 9 of the consolidated financial statements for more details). These plans limit the number of common shares that may be granted to 10 per cent of the outstanding common shares at the date of the Board's adoption of these plans, being 16,487,418 common shares.

Outstanding Under Market Based Bonus Plan

				Rights	Average Grant
Valuation	and Vesting Date	Rights Granted	Rights Forfeited	Outstanding	Price
December	31, 2021	825,000	119,033	705,967	$7.23

Stock Options Plan

Stock Options Plan
Valuation and Vesting Date Stock Options Granted Stock Options Forfeited	Options Outstanding Average Grant Price
May 15, 2022 825,000 112,233 August 15, 2022 864,167 91,266 November 15, 2021 889,633 77,932 November 15, 2022 889,633 77,933 January 1, 2022 275,000 24,970 January 1, 2023 275,000 24,970 July 8, 2022 275,000 22,399 July 8, 2023 275,000 22,408 August 20, 2022 275,000 18,999 August 20, 2023 275,000 19,008 November 19, 2021 292,000 7,103 November 19, 2022 292,000 7,094 November 19, 2023 292,000 7,103 January 1, 2022 432,850 10,000 January 1, 2023 432,850 10,000 January 1, 2024 432,850 10,000 May 20, 2022 425,416 - May 20 2023 425,417 - May 20, 2024 425,417 - August 20, 2022 366,670 - August 20, 2023 366,670 - August 20, 2024 366,670 -	712,767 $5.72 772,901 $3.18 811,701 $3.07 811,700 $3.07 250,030 $3.75 250,030 $3.75 252,601 $1.91 252,592 $1.91 256,001 $3.03 255,992 $3.03 284,897 $2.79 284,906 $2.79 284,897 $2.79 422,850 $2.92 422,850 $2.92 422,850 $2.92 425,416 $5.92 425,417 $5.92 425,417 $5.92 366,670 $6.53 366,670 $6.53 366,670 $6.53

Deferred Share Units

Deferred Share Units
Valuation and Vesting Date Units Granted Units Forfeited	Units Outstanding Average Grant Price
July 8, 2020 46,466 - August 20, 2020 29,290 - November 19, 2020 31,810 - November 19, 2020 31,133 - May 20, 2021 15,248 - August 20, 2021 13,780 -	46,466 $1.91 29,290 $3.03 31,810 $2.79 31,133 $2.92 15,248 $5.91 13,780 $6.53

Interest Expense

Interest Expense
	Three Months ended September 30		Nine Months ended September 30
	2021	2020	2021	2020
Interest expense ($000)	13,009	14,990	47,134	41,237
$/mcfe	0.26	0.35	0.32	0.32
$/boe	1.57	2.08	1.94	1.92
Average interest rate	4.6%	5.1%	5.4%	4.8%

Third quarter 2021 average interest rate was 4.6% compared to 5.1% for the third quarter 2020 due to a decrease in leverage resulting in lower stamping fees and interest costs.

Interest

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$20,000 10.0%
8.0%
$15,000
6.0%
$10,000
4.0%
$5,000
2.0%
$0 0.0%
Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021
Interest Average interest rate
($000)
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Netbacks

Netbacks
	Three Months ended September 30		Nine Months ended September 30
($/mcfe)	2021	2020	2021	2020
Gross Sale Price	4.78	2.17	4.13	2.04
Realized hedging gain (loss)	(1.45)	(0.02)	(0.82)	0.02
Net Sale Price	3.33	2.15	3.31	2.06
Less: Royalties	0.36	0.14	0.31	0.11
Operating costs	0.35	0.32	0.35	0.36
Transportation	0.23	0.16	0.20	0.17
Field netback	2.39	1.53	2.45	1.42
General and administrative	0.02	0.04	0.04	0.04
Interest on long-term debt	0.26	0.35	0.32	0.32
Cash netback ($/mcfe)	2.11	1.14	2.09	1.06
Cash netback ($/boe)	12.68	6.83	12.55	6.37

Netbacks are a non-GAAP measure that represent the profit margin associated with the production and sale of petroleum and natural gas. Netbacks are per unit of production measures used to assess Peyto’s performance and efficiency. The primary factors that produce Peyto’s strong netbacks and high margins are a low-cost structure and the high heat content of its natural gas that results in higher commodity prices.

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Cash Costs
$4.00
$3.50
$3.00
$2.50
$2.00
$1.50
$1.24 $1.21 $1.22
$1.00 $0.98 $1.03 $0.96 $1.01 $1.06
$0.50
$-
Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021
Royalties Operating costs Transportation
General and administrative Interest on long-term debt Net Sale Price
($/mcfe)
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Depletion, Depreciation and Impairment

Under IFRS, Peyto uses proved plus probable reserves as its depletion base to calculate depletion expense. The 2021 third quarter provision for depletion, depreciation and amortization totaled $62.2 million ($1.25/mcfe) compared to $57.8 million ($1.34/mcfe) in the third quarter 2020.

Income Taxes

The current provision for deferred income tax expense is $9.2 million compared to a recovery of $3.4 million in the third quarter of 2020. Resource pools are generated from the capital program, which are available to offset current and deferred income tax liabilities.

	September 30,	December 31,
Income Tax Pool type ($ millions)	2021	2020	Annual deductibility
Canadian Oil and Gas Property Expense	170.9	160.3	10% declining balance
Canadian Development Expense	581.5	489.4	30% declining balance
Canadian Exploration Expense	105.2	102.5	100%
Undepreciated Capital Cost	290.1	250.2	Primarily 25% declining balance
Tax Losses Carried Forward	71.3	234.1	100%
Other	-	0.2	20% declining balance
Total Federal Tax Pools	1,219.0	1,236.7
Additional Alberta Tax Pools	45.0	45.0	Primarily 100%

MARKETING

Commodity Price Risk Management

Financial Derivative Instruments

The Company is a party to certain derivative financial instruments, including fixed price contracts. The Company enters into these forward contracts with well-established counterparties for the purpose of protecting a portion of its future revenues from the volatility of oil and natural gas prices. To minimize counterparty risk, these marketing contracts are executed with financial institutions which are members of Peyto’s banking syndicate. During the third quarter of 2021, a realized hedging loss of $72.1 million was recorded as compared to a $1.0 million loss for the equivalent period in 2020. A summary of contracts outstanding in respect of the hedging activities are as follows:

Natural Gas			Average Price
Period Hedged- Monthly Index	Type	Daily Volume	(AECO CAD/GJ)
April 1, 2021 to October 31, 2021	Fixed Price	75,000 GJ	$2.00
November 1, 2021 to March 31, 2022	Fixed Price	125,000 GJ	$2.94
April 1, 2022 to October 31, 2022	Fixed Price	115,000 GJ	$2.18
November 1, 2022 to March 31, 2023	Fixed Price	160,000 GJ	$2.98
April 1, 2023 to October 31, 2023	Fixed Price	140,000 GJ	$2.43
Natural Gas			Average Price
Period Hedged– Daily Index	Type	Daily Volume	(AECO CAD/GJ)
April 1, 2021 to October 31, 2021	Fixed Price	50,000 GJ	$2.22
Natural Gas			Average Price
Period Hedged- NYMEX	Type	Daily Volume	(Nymex USD/mmbtu)
April 1, 2020 to March 31, 2022	Fixed Price	20,000 mmbtu	$2.28
April 1, 2021 to October 31, 2021	Fixed Price	187,500 mmbtu	$2.69
November 1, 2021 to March 31, 2022	Fixed Price	77,500 mmbtu	$3.04
April 1, 2022 to October 31, 2022	Fixed Price	10,000 mmbtu	$2.56
Natural Gas			Average Price
Period Hedged- Malin	Type	Daily Volume	(Nymex USD/mmbtu)
November 1, 2021 to March 31, 2022	Fixed Price	15,000 mmbtu	$3.26
April 1, 2022 to October 31, 2022	Fixed Price	40,000 mmbtu	$2.38
November 1, 2022 to March 31, 2023	Fixed Price	40,000 mmbtu	$2.98

Crude Oil Period Hedged- WTI Type		Daily Volume Average Price (WTI USD/bbl) 1,000 bbl $58.45 900 bbl $58.26 1,100 bbl $58.38 300 bbl $62.98 800 bbl $61.89 300 bbl $64.05 Daily Volume Price (WTI CAD/bbl) 900 bbl $81.96 500 bbl $88.93 300 bbl $84.43 2,000 bbl $86.93 Daily Volume Average Price (USD/bbl) 250 bbl $26.36 250 bbl $25.41
April 1, 2021 to December 31, 2021 Fixed Price July 1, 2021 to December 31, 2021 Fixed Price October 1, 2021 to December 31, 2021 Fixed Price April 1, 2022 to June 30, 2022 Fixed Price January 1, 2022 to March 31, 2022 Fixed Price January 1, 2022 to December 31, 2022 Fixed Price
Crude Oil Period Hedged- WTI Type
January 1, 2022 to December 31, 2022 Fixed Price January 1, 2022 to March 31, 2022 Fixed Price January 1, 2022 to June 30, 2022 Fixed Price October 1, 2021 to December 31, 2021 Fixed Price
Propane Period Hedged Type
April 1, 2021 to March 31, 2022 Fixed Price October 1, 2021 to March 31, 2022 Fixed Price
Natural Gas Period– NYMEX Covered Call Options Type		Daily Volume Strike Price Nymex USD/mmbtu
April 1, 2021 to October 31, 2021 Call		50,000 mmbtu $2.88

As at September 30, 2021, Peyto had committed to the future sale of 101,480,000 gigajoules (GJ) of natural gas at an average price of $2.59 per GJ or $2.98 per mcf, 24,365,000 mmbtu of natural gas at an average price of $2.82 USD per mmbtu, 484,800 barrels of crude at an average price of $60.03 USD per bbl, 611,800 barrels of crude at an average price of $84.27 CAD per bbl and 91,000 barrels of propane at an average price of $25.88 USD per bbl. Had these contracts closed on September 30, 2021, Peyto would have realized a hedging loss in the amount of $250.5 million. Total hedged volumes represent approximately 6 per cent of Peyto’s developed 2020 year end reserves.

Subsequent to September 30, 2021, Peyto entered into the following contracts:

Natural Gas Period Hedged- Monthly Index Type	Daily Volume Price (AECO CAD/GJ)
November 1, 2022 to March 31, 2023 Fixed Price April 1, 2023 to October 31, 2023 Fixed Price	30,000 GJ $3.93 40,000 GJ $2.95
Natural Gas Period Hedged- NYMEX Type	Daily Volume Average Price (Nymex USD/mmbtu)
November 1, 2021 to March 31, 2022 Fixed Price April 1, 2022 to October 31, 2022 Fixed Price November 1, 2022 to March 31, 2023 Fixed Price	10,000 mmbtu $5.97 30,000 mmbtu $3.98 30,000 mmbtu $4.17
Crude Oil Period Hedged- WTI Type	Daily Volume Price (WTI CAD/bbl)
January 1, 2022 to March 31, 2022 Fixed Price April 1, 2022 to June 30, 2022 Fixed Price July 1, 2022 to December 31, 2022 Fixed Price	600 bbl $97.10 100 bbl $94.10 100 bbl $91.30

Commodity Price Sensitivity

Peyto’s earnings are largely determined by commodity prices for crude oil and natural gas including the US/Canadian dollar exchange rate. Volatility in these oil and gas prices can cause fluctuations in Peyto’s earnings and cash flow. Low operating costs and a long reserve life reduce Peyto’s sensitivity to changes in commodity prices.

Currency Risk Management

The Company is exposed to fluctuations in the Canadian/US dollar exchange ratio since commodities are effectively priced in US dollars and converted to Canadian dollars. This risk is mitigated indirectly as the Canadian dollar tends to rise as commodity prices rise. Currently, Peyto has not entered into any agreements to further manage its currency risks.

Interest Rate Risk Management

The Company is exposed to interest rate risk in relation to interest expense on its revolving credit facility. Currently there are no agreements to manage the risk on the credit facility. At September 30, 2021, the increase or decrease in earnings for each 100 bps (1 per cent) change in weighted average borrowing rate paid on the outstanding revolving demand loan amounts to approximately $1.8 million per quarter. Average debt outstanding for the quarter was $1.13 billion (including $415 million fixed rate debt).

LIQUIDITY AND CAPITAL RESOURCES

Funds from operations is reconciled to cash flows from operating activities below:	Funds from operations is reconciled to cash flows from operating activities below:	Funds from operations is reconciled to cash flows from operating activities below:
	Three Months ended September 30		Nine Months ended September 30
($000)	2021	2020	2021	2020
Cash flows from operating activities	101,982	48,074	307,648	150,169
Changein non-cashworking capital	2,626	1,099	(4,139)	(13,472)
Fundsfromoperations	104,608	49,173	303,509	136,697
Fundsfromoperations perbasic share	0.63	0.30	1.83	0.83
Fundsfromoperations perdilutive share	0.62	0.30	1.80	0.83

For the third quarter ended September 30, 2021, funds from operations totaled $104.6 million or $0.63 per share, compared to 49.2 million or $0.30 per share during the same quarter in 2020. The increase in funds from operation was due to an increase in commodity prices and production volumes.

Peyto’s policy is to balance dividends to shareholders with earnings and cash flow, and to balance funding for the capital program with cash flow, equity and available credit lines. Earnings and cash flow are sensitive to changes in commodity prices, exchange rates and other factors that are beyond Peyto’s control. Current volatility in commodity prices creates uncertainty as to the funds from operations and capital expenditure budget. Accordingly, results are assessed throughout the year and operational plans revised as necessary to reflect the most current information.

Revenues will be impacted by drilling success and production volumes as well as external factors such as the market prices for commodities and the exchange rate of the Canadian dollar relative to the US dollar.

Change in Funds from Operations

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$200
$143
$150
$105
$100
$49
$50
$1 $2
$0
-$12 -$3 -$4
-$50
-$100 -$71
($millions)
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Current and Long-Term Debt

Current and Long-Term Debt
($000)	September 30, 2021 December 31, 2020
Long-term senior secured notes Current senior secured notes Bank credit facility	365,000 415,000 50,000 - 700,000 755,000
Balance, end of theperiod	1,115,000 1,170,000

On June 29, 2020, the Company finalized an agreement with its syndicate of lenders and term debt note holders to revise its credit and note purchase agreements to reflect a reduction in the size of its credit facility and provide financial covenant relief until March 2022. The credit facility and long-term notes are now secured by a floating debenture on Peyto’s assets.

The Company has a syndicated $950 million extendible secured revolving credit facility with a stated term date of October 13, 2022. The bank facility is made up of a $40 million working capital sub-tranche and a $910 million production line. The facilities are available on a revolving basis. Borrowings under the facility bear interest at Canadian bank prime or US base rate, or, at Peyto’s option, Canadian dollar bankers’ acceptances or US dollar LIBOR loan rates, plus applicable margin and stamping fees. The total stamping fees range between 200 basis points and 600 basis points on Canadian dollar bankers’ acceptance and US dollar LIBOR borrowings. The undrawn portion of the facility is subject to a standby fee in the range of 50 to 150 basis points.

The Company received relief from its previous financial covenants with respect to senior and total debt to EBITDA and interest coverage until March 2022. Peyto is subject to the following financial covenants as in the June 29, 2020 amended credit facility and note purchase agreements:

Total Debt to EBITDA

Total Debt to EBITDA to be less than 4.75 for the Fiscal Quarter ending September 30, 2021.

Senior Debt to EBITDA

Senior Debt to EBITDA to be less than 4.25 for the Fiscal Quarter ending September 30, 2021.

Interest Coverage Ratio

EBITDA to be greater than 2.50:1:00 up to and including the Fiscal Quarter ending September 30, 2021

Total Debt to Capitalization Ratio

Total Debt not to exceed 55% of shareholders’ equity and total debt.

Peyto’s financial covenants include financial measures defined within our revolving credit facility agreement that are not defined under IFRS. These financial measures are defined by our amended credit facility agreement as follows:

• Total Debt: includes long-term debt and subordinated debt plus bank overdraft and letters of credit.

• Senior Debt: includes long-term debt plus bank overdraft and letters of credit.

• EBITDA: trailing twelve-month net income before non-cash items, interest, and income taxes.

Financial covenant	Limit	September 30, 2021	December 31, 2020
Total Debt to EBITDA	Less than 4.75	2.48	4.35
Senior Debt to EBITDA	Less than 4.25	2.48	4.35
Interest coverage	Greater than 2.5	6.97	4.60
Total Debt to (Total Debt+Equity)	Less than 0.55	0.41	0.41

Peyto is in compliance with all financial covenants as at September 30, 2021.

Outstanding secured senior notes are as follows:

Senior Secured Notes	Date Issued	Rate*	Maturity Date
$50 million	September 6, 2012	4.88%	September 6, 2022
$100 million	October 24, 2016	3.70%	October 24, 2023
$65 million	May 1, 2015	4.26%	May 1, 2025
$100 million	January 3, 2012	4.39%	January 3, 2026
$100 million	January 2, 2018	3.95%	January 2, 2028

• In any fiscal quarter where senior debt to EBITDA exceeds 3.0x, the interest rate on the notes will increase by a range between 85 and 285 basis points.

The total amount of capital invested in 2021 will be driven by the number and quality of projects generated. Capital will only be invested if it meets the long-term return objectives of the Company. The majority of the capital program will involve drilling, completion and tie-in of lower risk development gas wells. Peyto’s rapidly scalable business model has the flexibility to match planned capital expenditures to actual cash flow.

On October 29, 2021, the Company closed an issuance of USD $40 million of senior secured notes. The notes have been issued by way of a private placement, pursuant to a note purchase agreement and rank equally with Peyto's obligations under its bank facility and existing note purchase agreements. The notes have a coupon rate of 3.98% and mature on October 29, 2028. Interest will be paid semi-annually in arrears. Proceeds from the notes have been used to repay the senior notes which mature on September 6, 2022.

On November 5, 2021, the Company finalized an agreement with its syndicate of lenders and term debt note holders to amend and extend its $950 million senior secured covenant-based credit facility and note purchase agreements. This new facility has a maturity date of October 13, 2023, is made up of a $40 million working capital tranche, a $910 million production line, and is available on a revolving basis. Borrowings under the facility bear interest at Canadian bank prime or US base rate, or, at Peyto’s option, Canadian dollar bankers’ acceptances or US dollar LIBOR loan rates, plus applicable margin and stamping fees. The total stamping fees range between 175 basis points and 365 basis points on Canadian dollar bankers’ acceptance and US dollar LIBOR borrowings. The undrawn portion of the facility is subject to a standby fee in the range of 35 to 73 basis points

As of November 5, 2021, Peyto is subject to the following financial covenants as defined in the credit facility and note purchase agreements:

Financial covenant	Limit
Total Debt to EBITDA	Less than 4.00
Senior Debt to EBITDA	Less than 3.50
Interest coverage	Greater than 3.0

Net Debt

“Net debt” is a non-GAAP measure that is the sum of long-term debt and working capital excluding the current financial derivative instruments and current provision for future performance-based compensation. It is used by management to analyze the financial position and leverage of the Company. Net debt is reconciled below to long-term debt which is the most directly comparable GAAP measure:

	As at	As at	As at
($000)	September 30, 2021	December 31,2020	September 30,2020
Bank credit facility - drawn	700,000	755,000	755,000
Senior unsecured notes	365,000	415,000	415,000
Current assets	(133,427)	(82,651)	(83,119)
Current liabilities	401,936	95,060	139,511
Financial derivative instruments	(200,716)	(4,962)	(41,541)
Currentportion of lease obligation	(1,193)	(1,107)	(1,097)
Net debt	1,131,600	1,176,340	1,183,754

Capital

Authorized : Unlimited number of voting common shares

Issued and Outstanding

Issued and Outstanding
	Number of	Amount
Common Shares (no par value)	Common Shares	($000)
Balance, December 31, 2020	164,940,975	1,649,635
Common shares issued under stock option plan	2,115,146	10,749
Balance,September 30,2021	167,056,121	1,660,384

Capital Expenditures

Net capital expenditures for the third quarter of 2021 totaled $90.2 million. Exploration and development related activity represented $69.5 million (77 per cent), while expenditures on facilities, gathering systems and equipment totaled $18.7 million (21 per cent) and land, acquisitions and seismic totaled $2.0 million (2 per cent). The following table summarizes capital expenditures for the period:

Three Months ended September 30 ($000) 2021 2020	Nine Months ended September 30 2021 2020
Land 548 - Seismic 1,391 1,007 Drilling 43,288 27,974 Completions 26,229 20,121 Equipping & Tie-ins 6,902 6,019 Facilities & Pipelines 11,778 4,947 Acquisitions/Dispositions 34 1,500	1,127 100 3,229 6,203 104,700 76,061 59,622 48,440 15,791 15,841 35,786 19,009 35,852 1,800
Total Capital Expenditures 90,170 61,568	256,107 167,454
Dividends
Three Months ended September 30 2021 2020	Nine Months ended September 30 2021 2020
Funds from operations ($000) 104,608 49,173 Total dividends ($000) 1,671 1,649	303,509 136,697 4,979 13,191
Total dividends per common share ($) 0.01 0.01 Payout ratio (%) 2 3	0.03 0.08 2 10

Peyto’s policy is to balance dividends to shareholders with earnings and cash flow; and funding for the capital program with cash flow, equity and available credit lines. The Board of Directors is prepared to adjust the payout ratio levels (dividends declared divided by funds from operations) to achieve the desired dividends while maintaining an appropriate capital structure.

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Dividend Payout Ratio
$1.00 100%
$0.80 80%
$0.60 60%
$0.40 40%
$0.20 20%
$- 0%
Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021
Dividends per share Funds from operations per share Payout Ratio
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Contractual Obligations

In addition to those recorded on the Company’s balance sheet, the following is a summary of Peyto’s contractual obligations and commitments at September 30, 2021:

($000)	2021	2022	2023	2024	2025	Thereafter
Interest payments(1)	3,235	17,249	14,809	11,109	9,725	12,070
Transportation commitments	17,756	85,391	55,377	35,475	35,017	371,808
Operating leases	531	2,200	2,200	2,200	2,200	2,200
Methanol	-	5,767	-	-	-	-
Total	21,522	110,607	72,386	48,784	46,942	386,078

(1) Fixed interest payments on senior secured notes

RELATED PARTY TRANSACTIONS

Certain directors of Peyto are considered to have significant influence over other reporting entities that Peyto engages in transactions with. Such services are provided in the normal course of business and at market rates. These directors are not involved in the day to day operational decision making of the Company. The dollar value of the transactions between Peyto and the related reporting entities is summarized below:

($000)	Expense			Accounts Payable
Three Months ended September 30		Nine Months ended September 30		As at September 30
2021	2020	2021	2020	2021 2020
181.1	6.0	361.0	100.9	207 -

RISK MANAGEMENT

Investors who purchase common shares are participating in the total returns from a portfolio of western Canadian natural gas producing properties. As such, the total returns earned by investors and the value of the shares are subject to numerous risks inherent in the oil and natural gas industry.

Expected returns depend largely on the volume of petroleum and natural gas production and the price received for such production, along with the associated costs. The price received for oil depends on a number of factors, including West Texas Intermediate oil prices, Canadian/US currency exchange rates, quality differentials and Edmonton par oil prices. The price received for natural gas production is dependent on current Alberta, Henry Hub, Ventura, and Emerson market prices and Canadian/US currency exchange rates. Peyto’s marketing strategy is designed to smooth out short term fluctuations in the price of natural gas through future sales. It is meant to be methodical and consistent and to avoid speculation.

Although Peyto’s focus is on internally generated drilling programs, any acquisition of oil and natural gas assets depends on an assessment of value at the time of acquisition. Incorrect assessments of value can adversely affect dividends to shareholders and the value of the shares. Peyto employs experienced staff and performs appropriate levels of due diligence on the analysis of acquisition targets, including a detailed examination of reserve reports; if appropriate, re-engineering of reserves for a large portion of the properties to ensure the results are consistent; site examinations of facilities for environmental liabilities; detailed examination of balance sheet accounts; review of contracts; review of prior year tax returns and modeling of the acquisition to attempt to ensure accretive results to the shareholders.

Inherent in development of the existing oil and gas reserves are the risks, among others, of drilling dry holes, encountering production or drilling difficulties or experiencing high decline rates in producing wells. To minimize these risks, Peyto employs experienced staff to evaluate and operate wells and utilize appropriate technology in operations. In addition, prudent work practices and procedures, safety programs and risk management principles, including insurance coverage protect Peyto against certain potential losses.

Peyto routinely monitors its financial forecasts, capital spending, balance sheet and dividend policy and has the ability to make operational and financial changes to help ensure Peyto remains compliant with all financial covenants. If necessary, Peyto can request temporary relief from financial covenants from lenders. In the event Peyto does not comply with it's financial covenants and lenders do not grant covenant relief, Peyto’s access to capital could be restricted or repayment required.

The value of Peyto’s common shares is based on, among other things, the underlying value of the oil and natural gas reserves. Geological and operational risks can affect the quantity and quality of reserves and the cost of ultimately recovering those reserves. Lower oil and gas prices increase the risk of write-downs on oil and gas property investments. In order to mitigate this risk, proven and probable oil and gas reserves are evaluated each year by a firm of independent reservoir engineers. The reserves committee of the Board of Directors reviews and approves the reserve report.

Access to markets may be restricted at times by pipeline or processing capacity. These risks are minimized by controlling as much of the processing and transportation activities as possible and ensuring transportation and processing contracts are in place with reliable cost-efficient counterparties.

The petroleum and natural gas industry is subject to extensive controls, regulatory policies and income and resource taxes imposed by various levels of government. These regulations, controls and taxation policies are amended from time to time. Peyto has no control over the level of government intervention or taxation in the petroleum and natural gas industry. Peyto operates in such a manner to ensure, to the best of its knowledge that it is in compliance with all applicable regulations and are able to respond to changes as they occur.

The petroleum and natural gas industry is subject to both environmental regulations and an increased environmental awareness. Peyto has reviewed its environmental risks and is, to the best of its knowledge, in compliance with the appropriate environmental legislation and have determined that there is no current material impact on operations. Peyto employs environmentally responsible business operations and looks to both Alberta provincial authorities and Canada’s federal authorities for direction and regulation regarding environmental and climate change legislation.

Changes to the demand for oil and natural gas products and the rise of petroleum alternatives may negatively affect Peyto's financial condition, results of operations and cash flows. Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas and technological advances in fuel economy and renewable energy generation systems could reduce the demand for oil, natural gas and liquid hydrocarbons. Recently, certain jurisdictions have implemented policies or incentives to decrease the use of hydrocarbons and encourage the use of renewable fuel alternatives, which may lessen the demand for petroleum products and put downward pressure on commodity prices. Advancements in energy efficient products have a similar effect on the demand for oil and natural gas products. Peyto cannot predict the impact of changing demand for oil and natural gas products, and any major changes may have a material adverse effect on Peyto's business, financial condition, results of operations and cash flow by decreasing Peyto's profitability, increasing its costs, limiting its access to capital and decreasing the value of its assets.

A number of factors, including the effects of the use of hydrocarbons on climate change, the impact of crude oil and natural gas operations on the environment, environmental damage relating to spills of crude oil products during production and transportation, and Indigenous rights, have affected certain investors' sentiments towards investing in the crude oil and natural gas industry. As a result of these concerns, some institutional, retail and governmental investors have announced that they are no longer funding or investing in crude oil and natural gas assets or companies, or are reducing the amount thereof over time. In addition, certain institutional investors are requesting that issuers develop and implement more robust ESG policies and practices. Developing and implementing such policies and practices can involve significant costs and require a significant time commitment from the Board, Management and employees of Peyto. Failing to implement the policies and practices, as requested by institutional investors, may result in such investors reducing their investment in Peyto, or not investing in Peyto at all. Any reduction in the investor base interested or willing to invest in the crude oil and natural gas industry and more specifically, Peyto, may result in limiting Peyto's access to capital, increasing the cost of capital, and decreasing the price and liquidity of Peyto's securities even if Peyto's operating results, underlying asset values, or cash flows have not changed.

Peyto is subject to financial market risk. In order to maintain substantial rates of growth, Peyto must continue reinvesting in, drilling for or acquiring petroleum and natural gas. The capital expenditure program is funded primarily through funds from operations, debt and, if appropriate, equity.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company's Chief Executive Officer and Chief Financial Officer have designed, or caused to be designed under their supervision, disclosure controls and procedures to provide reasonable assurance that: (i) material information relating to the Company is made known to the Company's Chief Executive Officer and Chief Financial Officer by others, particularly during the period in which the annual and interim filings are being prepared; and (ii) information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time period specified in securities legislation. Such officers have evaluated, or caused to be evaluated under their supervision, the effectiveness of the Company's disclosure controls and procedures at

the year end of the Company and have concluded that the Company's disclosure controls and procedures are effective at the financial period end of the Company for the foregoing purposes.

Internal Control over Financial Reporting

The Company's Chief Executive Officer and Chief Financial Officer have designed, or caused to be designed under their supervision, internal control over financial reporting to provide reasonable assurance regarding the reliability of the Company's financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Such officers have evaluated, or caused to be evaluated under their supervision, the effectiveness of the Company's internal control over financial reporting at the financial period end of the Company and concluded that the Company's internal control over financial reporting is effective, at the financial period end of the Company, for the foregoing purpose.

Peyto is required to disclose herein any change in Peyto's internal control over financial reporting that occurred during the period ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, Peyto's internal control over financial reporting. No material changes in Peyto's internal control over financial reporting were identified during such period that has materially affected, or are reasonably likely to materially affect, Peyto's internal control over financial reporting.

It should be noted that a control system, including the Company's disclosure and internal controls and procedures, no matter how well conceived, can provide only reasonable, but not absolute, assurance that the objectives of the control system will be met and it should not be expected that the disclosure and internal controls and procedures will prevent all errors or fraud.

CRITICAL ACCOUNTING ESTIMATES

Reserve Estimates

Estimates of oil and natural gas reserves, by necessity, are projections based on geologic and engineering data, and there are uncertainties inherent to the interpretation of such data as well as the projection of future rates of production and the timing of development expenditures. Reserve engineering is an analytical process of estimating underground accumulations of oil and natural gas that can be difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation and judgment. Estimates of economically recoverable oil and natural gas reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effects of regulations by governmental agencies and assumptions governing future oil and natural gas prices, future royalties and operating costs, development costs and workover and remedial costs, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, classifications of such reserves based on risk recovery, and estimates of the future net cash flows expected there from may vary substantially. Any significant variance in the assumptions could materially affect the estimated quantity and value of the reserves, which could affect the carrying value of Peyto's oil and natural gas properties and the rate of depletion of the oil and natural gas properties as well as the calculation of the reserve value based compensation. Actual production, revenues and expenditures with respect to Peyto's reserves will likely vary from estimates, and such variances may be material.

Peyto's estimated quantities of proved and probable reserves at December 31, 2020 were evaluated by independent petroleum engineers InSite Petroleum Consultants Ltd. InSite has been evaluating reserves in this area and for Peyto since inception.

Depletion and Depreciation Estimate

All costs of exploring for and developing petroleum and natural gas reserves, together with the costs of production equipment, are capitalized and then depleted and depreciated on the unit-of-production method based on proved plus probable reserves. Petroleum and natural gas reserves and production are converted into equivalent units based upon estimated relative energy content (6 mcf to 1 barrel of oil). Costs for gas plants and other facilities are capitalized and depreciated on a declining balance basis.

Impairment of Long-Lived Assets

Impairment is indicated if the carrying value of the long-lived asset or oil and gas cash generating unit exceeds its recoverable amount under IFRS. If impairment is indicated, the amount by which the carrying value exceeds the estimated fair value of the long-lived asset is charged to earnings. The determination of the recoverable amount for impairment purposes under IFRS involves the use of numerous assumptions and judgments including future net cash flows from oil and gas reserves, future third-party pricing, inflation factors, discount rates and other uncertainties. Future revisions to these assumptions impact the recoverable amount.

Decommissioning Provision

The decommissioning provision is estimated based on existing laws, contracts or other policies. The fair value of the obligation is based on estimated future costs for abandonment and reclamation discounted at a credit adjusted risk free rate. The liability is adjusted each reporting period to reflect the passage of time and for revisions to the estimated future cash flows, with the accretion charged to earnings. By their nature, these estimates are subject to measurement uncertainty and the impact on the financial statements could be material.

Reserve Value Performance Based Compensation

The reserve value-based compensation is calculated using the year end independent reserves evaluation which was completed in February 2021. A quarterly provision for the reserve value-based compensation is calculated using estimated proved producing reserve additions adjusted for changes in debt, equity and dividends. Actual proved producing reserves additions and forecasted commodity prices could vary significantly from those estimated and may have a material effect on the calculation.

Income Taxes

The determination of the Company’s income and other tax liabilities requires interpretation of complex laws and regulations often involving multiple jurisdictions. All tax filings are subject to audit and potential reassessment after the lapse of considerable time. Accordingly, the actual income tax liability may differ significantly from that estimated and recorded.

Accounting Changes

Voluntary changes in accounting policy are made only if they result in financial statements which provide more reliable and relevant information. Accounting policy changes are applied retrospectively unless it is impractical to determine the period or cumulative impact of the change. Corrections of prior period errors are applied retrospectively and changes in accounting estimates are applied prospectively by including these changes in earnings. When the Company has not applied a new primary source of GAAP that has been issued, but is not effective, the Company will disclose the fact along with information relevant to assessing the possible impact that application of the new primary source of GAAP will have on the financial statements in the period of initial application.

ADDITIONAL INFORMATION

Additional information relating to Peyto Exploration & Development Corp. can be found on SEDAR at www.sedar.com and www.peyto.com.

Quarterly information

		2021		2020
	Q3	Q2	Q1	Q4	Q3
Operations
Production
Natural gas (mcf/d)	473,008	458,696	455,593	433,226	401,680
Oil & NGLs (bbl/d)	11,164	12,289	12,138	11,256	11,263
Barrels of oil equivalent (boe/d @ 6:1)	89,998	88,738	88,070	83,461	78,210
Thousand cubic feet equivalent (mcfe/d @ 6:1)	539,990	532,430	528,419	500,764	469,259
Liquid to gas ratio (bbl per mmcf)	23.6	26.8	26.6	26.0	28.0
Average product prices
Natural gas ($/mcf)	2.48	2.06	3.06	2.19	1.64
Oil & natural gas liquids ($/bbl)	55.47	48.77	45.63	35.82	31.08
$/mcfe
Average sale price ($/mcfe)	3.33	2.92	3.70	2.71	2.15
Average royalties paid ($/mcfe)	0.36	0.26	0.29	0.18	0.14
Average operating expenses ($/mcfe)	0.35	0.35	0.36	0.31	0.32
Average transportation costs ($/mcfe)	0.23	0.22	0.17	0.15	0.16
Field netback ($/mcfe)	2.39	2.09	2.88	2.07	1.53
General & administrative expense ($/mcfe)	0.02	0.05	0.04	0.04	0.04
Interest expense ($/mcfe)	0.26	0.33	0.38	0.38	0.35
Cash netback ($/mcfe)	2.11	1.71	2.46	1.65	1.14
Financial ($000 except per share)
Revenue and realized hedging gains (losses)1	164,777	140,457	175,327	124,524	92,853
Royalties	17,985	12,370	14,069	8,506	5,867
Funds from operations	104,608	82,191	116,709	76,013	49,173
Funds from operations per share	0.63	0.50	0.71	0.46	0.30
Funds from operations per diluted share	0.62	0.50	0.71	0.46	0.30
Total dividends	1,671	1,658	1,651	1,649	1,649
Total dividends per share	0.01	0.01	0.01	0.01	0.01
Payout ratio	2%	2%	1%	2%	3%
Earnings (loss)	29,271	12,760	38,500	65,951	(11,285)
Earnings (loss) per share	0.18	0.08	0.23	0.40	(0.07)
Earnings (loss) per diluted share	0.17	0.08	0.23	0.40	(0.07)
Capital expenditures	90,170	57,086	108,851	68,250	61,568
Total payout ratio (%)	88%	71%	95%	92%	129%
Weighted average shares outstanding	166,440,704	165,343,937	165,069,227	164,937,898	164,892,979

1 excludes revenue from sale of third-party volumes

Peyto Exploration & Development Corp. Condensed Consolidated Balance Sheet (unaudited)

(Amount in $ thousands)

	September 30	December 31
	2021	2020
Assets
Current assets
Cash	13,038	9,310
Accounts receivable (Note 10)	104,798	56,445
Prepaid expenses	15,591	16,896
	133,427	82,651
Long-term derivative financial instruments_(Note 11)_	-	6,475
Property, plant and equipment,net_(Note 3)_	3,602,118	3,511,931
	3,602,118	3,518,406
	3,735,545	3,601,057
Liabilities
Current liabilities
Accounts payable and accrued liabilities	148,356	87,342
Dividends payable_(Note 7)_	1,671	1,649
Current portion of lease obligation_(Note 6)_	1,193	1,107
Derivative financial instruments_(Note 11)_	200,716	4,962
Currentportion of senior secured notes_(Note 4)_	50,000	-
	401,936	95,060
Long-term debt_(Note 4)_	1,065,000	1,170,000
Long-term derivative financial instruments_(Note 11)_	49,736	-
Decommissioning provision (Note 5)	201,529	182,456
Lease obligation_(Note 6)_	5,649	6,563
Deferred income taxes	437,637	469,505
	1,759,551	1,828,524
Equity
Share capital_(Note 7)_	1,660,384	1,649,635
Contributed surplus	12,113	10,487
Retained earnings (deficit)	88,277	12,727
Accumulated other comprehensive loss(Note 7)	(186,716)	4,624
	1,574,058	1,677,473
	3,735,545	3,601,057

See accompanying notes to the consolidated financial statements.

Approved by the Board of Directors

(signed) “Michael MacBean” Director

(signed) “Darren Gee” Director

Peyto Exploration & Development Corp. Condensed Consolidated Income (Loss) Statement (unaudited)

(Amount in $ thousands except earnings per share amount)

	Three months ended	Three months ended	Nine	months ended
	September 30			September 30
	2021	2020	2021	2020
Revenue
Natural gas and natural gas liquid sales (Note 10)	236,852	93,771	599,600	262,452
Royalties	(17,985)	(5,867)	(44,786)	(13,508)
Sales of naturalgas from thirdparties	-	-	-	11,060
Naturalgas and naturalgas liquid sales,net of royalties	218,867	87,904	554,814	260,004
Realized gain (loss) on risk management contracts_(Note 11)_	(72,075)	(918)	(119,039)	2,005
Unrealized loss on risk management contracts_(Note 11)_	(1,400)	(3,546)	(3,471)	(3,546)
Other Income	391	-	1,162	-
	145,783	83,440	433,466	258,463
Expenses
Natural gas purchased from third parties	-	-	-	10,338
Operating	17,282	14,191	50,992	46,324
Transportation	11,323	6,840	30,086	22,285
General and administrative	961	1,792	5,216	5,128
Stock based compensation_(Note 9)_	1,570	1,608	4,123	4,822
Gain on disposition of capital assets	-	-	(2,582)	-
Interest	13,009	14,990	47,134	41,237
Accretion of decommissioning provision (Note 5)	996	842	2,925	2,509
Depletion,depreciation,and impairment(Note 3)	62,159	57,833	189,756	257,647
	107,300	98,096	327,650	390,290
Earnings (loss) before taxes	38,483	(14,656)	105,816	(131,827)
Income tax
Deferred income tax expense(recovery)	9,212	(3,371)	25,287	(30,321)
Earnings (loss) for theperiod	29,271	(11,285)	80,529	(101,506)
Earnings (loss) per share(Note 7)
Basic	$0.18	$(0.07)	$0.49	$(0.62)
Diluted	$0.17	-	$0.48	-
See accompanying notes to the consolidated financial
statements.

Peyto Exploration & Development Corp.

Condensed Consolidated Statement of Comprehensive (Loss) Income (unaudited)

(Amount in $ thousands)

	Three months ended September 30 Nine months ended September 30 2021 2020 2021 2020
Earnings (loss) for the period Other comprehensive loss Change in unrealized gain (loss) on cash flow hedges Deferred income tax recovery Realized loss on cash flow hedges	29,271 (11,285) 80,529 (101,506) (184,877) (44,334) (358,748) (40,292) 27,810 9,338 57,154 9,081 63,963 3,734 110,254 811
Comprehensive loss	(63,833) (42,547) (110,811) (131,906)

See accompanying notes to the consolidated financial statements.

Peyto Exploration & Development Corp. Condensed Consolidated Statement of Changes in Equity (unaudited)

(Amount in $ thousands)

	Nine months ended September 30 2021 2020
Share capital, beginning of period Common shares issued	1,649,635 1,649,369 10,749 233
Share capital, end ofperiod	1,660,384 1,649,602
Contributed surplus, beginning of period Stock based compensation expense Recognized under share-based compensationplans	10,487 4,462 4,123 4,822 (2,497) (50)
Contributed surplus, end ofperiod	12,113 9,234
Retained earnings (deficit), beginning ofperiod	12,727 63,122
Earnings (deficit) for the period Dividends_(Note 7)_	80,529 (101,506) (4,979) (13,191)
Retained earnings (deficit), end ofperiod	88,277 (51,575)
Accumulated other comprehensive income(loss), beginning ofperiod	4,624 (3,036)
Other comprehensive loss	(191,340) (30,400)
Accumulated other comprehensive(loss) income, end ofperiod	(186,716) (33,436)
Total equity	1,574,058 1,573,825
See accompanying notes to the consolidated financial statements.

Peyto Exploration & Development Corp.

Condensed Consolidated Statement of Cash Flows (unaudited)

(Amount in $ thousands)

	Three	months ended	Nine	months ended
		September 30		September 30
	2021	2020	2021	2020
Cash provided by (used in)
Earnings (loss)	29,271	(11,285)	80,529	(101,506)
Items not requiring cash:
Deferred income tax (recovery)	9,212	(3,371)	25,287	(30,321)
Depletion, depreciation, and impairment	62,159	57,833	189,756	257,647
Gain on disposition of capital assets	-		(2,582)
Accretion of decommissioning provision	996	842	2,925	2,509
Stock based compensation	1,570	1,608	4,123	4,822
Unrealized loss on risk management contracts	1,400	3,546	3,471	3,546
Change in non-cash working capital related to
operatingactivities	(2,626)	(1,099)	4,139	13,472
	101,982	48,074	307,648	150,169
Financing activities
Bank overdraft	-	(83)	-	-
Stock options exercised	3,694	183	8,252	183
Cash dividends paid	(1,658)	(1,649)	(4,958)	(14,838)
Lease interest_(Note 6)_	61	71	188	217
Principal repayment of lease_(Note 6)_	(338)	(338)	(1,016)	(1,015)
Increase(decrease)in bank debt	(25,000)	15,000	(55,000)	50,000
	(23,241)	13,184	(52,534)	34,547
Investing activities
Additions to property, plant and equipment	(90,170)	(61,568)	(256,107)	(167,454)
Change in prepaid capital	(221)	2,965	(4,687)	8,904
Change in non-cash working capital relating to
investing activities	21,155	19,305	9,408	(10,391)
	(69,236)	(39,298)	(251,386)	(168,941)
Net increase (decrease) in cash	9,505	21,960	3,728	15,775
Cash, beginning ofperiod	3,533	-	9,310	6,185
Cash, end ofperiod	13,038	21,960	13,038	21,960
The following amounts are included in cash flows
from operatingactivities:
Cash interest paid	14,654	14,674	45,275	40,966
Cash taxespaid	-	-	-	-

See accompanying notes to the consolidated financial statements

Peyto Exploration & Development Corp. Notes to Condensed Consolidated Financial Statements (unaudited) As at September 30, 2021 and 2020 (Amount in $ thousands, except as otherwise noted)

1. Nature of operations

Peyto Exploration & Development Corp and its subsidiary (together “Peyto” or the “Company”) is a Calgary based oil and natural gas company. 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 300, 600 – 3[rd ] Avenue SW, Calgary, Alberta, Canada, T2P 0G5.

These condensed consolidated financial statements were approved and authorized for issuance by the Audit Committee of Peyto on November 8, 2021.

2. Basis of presentation

The condensed consolidated financial statements have been prepared by management and reported in Canadian dollars in accordance with International Accounting Standard (“IAS”) 34, “Interim Financial Reporting”. These condensed consolidated financial statements do not include all of the information required for full annual consolidated financial statements and should be read in conjunction with the Company’s consolidated financial statements as at and for the year ended December 31, 2020.

Significant Accounting Policies

(a) Significant Accounting Judgments, Estimates and Assumptions

The timely preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies, if any, as at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the period. By their nature, estimates are subject to measurement uncertainty and changes in such estimates in future years could require a material change in the condensed consolidated financial statements.

All accounting policies and methods of computation followed in the preparation of these consolidated financial statements are the same as those disclosed in Note 2 of Peyto’s consolidated financial statements as at and for the year ended December 31, 2020.

3. Property, plant and equipment, net

Cost
At December 31, 2020	6,148,012
Additions	259,107
Decommissioning provision additions	16,148
Prepaid capital	4,687
At September 30, 2021	6,427,954
Accumulated depletion and depreciation
At December 31, 2020	(2,636,081)
Depletion and depreciation	(189,755)
AAt September 30, 2021	(2,825,836)

Carryingamount at December 31,2020	3,511,931
Carrying amount at September 30, 2021	3,602,118

During the three- and nine-month periods ended September 30, 2021, Peyto capitalized $2.7 million and $6.2 million (2020 - $0.8 million and $2.7 million) of general and administrative expense directly attributable to exploration and development activities.

During the period ended March 31, 2020, Peyto recorded an impairment of $79.7 million ($61.4 million net of deferred tax expense). At December 31, 2020 due to the increase in the outlook of future oil and natural gas prices as well as an increase in the market capitalization since March 31, 2020 indicators of impairment reversal were identified. A recovery of $76.1 million net of depletion was recognized as depletion, depreciation, and impairment. The estimated recoverable amounts were based on fair value less costs of disposal calculations using after-tax discount rates that are based on an estimated industry weighted average cost of capital of 10 per cent after tax.

For the period ended September 30, 2021, the Company identified no indicators of impairment and therefore a test was not performed.

On February 1, 2021, the Company acquired assets in the Deep Basin for cash consideration of $35.0 million. The acquisition resulted in an increase in PP&E of approximately $48.0 million including $13 million in decommissioning liabilities. The assets acquired include a working interest in production, reserves and a gas processing facility The Company applied the optional IFRS 3 concentration test to this acquisition which resulted in the acquired assets being accounted for as an asset acquisition. On March 5, 2021, the Company acquired assets in the Deep Basin for cash consideration of $0.75 million. The acquisition resulted in an increase in PP&E of approximately $1.5 million including $0.75 million in decommissioning liabilities. The assets acquired include a working interest in production and reserves. The Company applied the optional IFRS 3 concentration test to this acquisition which resulted in the acquired assets being accounted for as an asset acquisition.

4. Debt

	September 30, 2021	December 31,2020
Bank credit facility	700,000	755,000
Current senior secured notes	50,000	-
Long-term senior secured notes	365,000	415,000
Balance, end of theperiod	1,115,000	1,170,000

The Company has a syndicated $950 million extendible secured revolving credit facility with a stated term date of October 13, 2022. The bank facility is made up of a $40 million working capital sub-tranche and a $910 million production line. The facilities are available on a revolving basis. Borrowings under the facility bear interest at Canadian bank prime or US base rate, or, at Peyto’s option, Canadian dollar bankers’ acceptances or US dollar LIBOR loan rates, plus applicable margin and stamping fees. The total stamping fees range between 200 basis points and 600 basis points on Canadian dollar bankers’ acceptance and US dollar LIBOR borrowings. The undrawn portion of the facility is subject to a standby fee in the range of 50 to 150 basis points.

The Company has received relief from its previous financial covenants with respect to senior and total debt to EBITDA and interest coverage until March 2022. Peyto is subject to the following financial covenants as set forth in the June 29, 2020, amended credit facility and note purchase agreements.

Total Debt to EBITDA

Total Debt to EBITDA to be less than 4.75 for the Fiscal Quarter ending September 30, 2021.

Senior Debt to EBITDA

Senior Debt to EBITDA to be less than 4.25 for the Fiscal Quarter ending September 30, 2021.

Interest Coverage Ratio

EBITDA to be greater than 2.50:1:00 up to and including the Fiscal Quarter ending September 30, 2021

Total Debt to Capitalization Ratio

Total Debt not to exceed 55% of shareholders’ equity and total debt.

Peyto’s financial covenants include financial measures defined within our revolving credit facility agreement that are not defined under IFRS. These financial measures are defined by our revolving credit facility agreement as follows:

• Total Debt: includes long-term debt and subordinated debt plus bank overdraft and letters of credit.

• Senior Debt: includes long-term debt plus bank overdraft and letters of credit.

• EBITDA: trailing twelve-month net income before non-cash items, interest, and income taxes.

Outstanding senior notes are as follows:

Senior Secured Notes	Date Issued	Rate*	Maturity Date
$50 million	September 6, 2012	4.88%	September 6, 2022
$100 million	October 24, 2016	3.70%	October 24, 2023
$65 million	May 1, 2015	4.26%	May 1, 2025
$100 million	January 3, 2012	4.39%	January 3, 2026
$100 million	January 2, 2018	3.95%	January 2, 2028

• In any fiscal quarter where senior debt to EBITDA exceeds 3.0x, the interest rate on the notes will increase by a range of 85 basis points to 285 basis points.

Peyto is in compliance with all financial covenants at September 30, 2021.

Total interest expense for the three- and nine-month periods ended September 30, 2021, was $13.0 million and $47.1 million (2020 - $15.0 million and $41.2 million) and the average borrowing rate for the periods was 4.6% and 5.4% (2020– 5.1% and 4.8%).

On October 29, 2021, the Company closed an issuance of USD $40 million of senior secured notes. The notes have been issued by way of a private placement, pursuant to a note purchase agreement and rank equally with Peyto's obligations under its bank facility and existing note purchase agreements. The notes have a coupon rate of 3.98% and mature on October 29, 2028. Interest will be paid semi-annually in arrears. Proceeds from the notes have been used to repay the senior notes which mature on September 6, 2022.

On November 5, 2021, the Company finalized an agreement with its syndicate of lenders and term debt note holders to amend and extend its $950 million senior secured covenant-based credit facility and note purchase agreements. This new facility has a maturity date of October 13, 2023, is made up of a $40 million working capital tranche, a $910 million production line, and is available on a revolving basis. Borrowings under the facility bear interest at Canadian bank prime or US base rate, or, at Peyto’s option, Canadian dollar bankers’ acceptances or US dollar LIBOR loan rates, plus applicable margin and stamping fees. The total stamping fees range between 175 basis points and 365 basis points on Canadian dollar bankers’ acceptance and US dollar LIBOR borrowings. The undrawn portion of the facility is subject to a standby fee in the range of 35 to 73 basis points.

As of November 5, 2021, Peyto is subject to the following financial covenants as defined in the credit facility and note purchase agreements:

Financial covenant	Limit
Total Debt to EBITDA	Less than 4.00
Senior Debt to EBITDA	Less than 3.50
Interest coverage	Greater than 3.0

5. Decommissioning provision

The following table reconciles the change in decommissioning provision:

Balance, December 31, 2020	182,456
New provisions	4,731
New provisions relating to property acquisitions	13,951
Accretion of decommissioning provision	2,925
Change in discount rate and estimates	(2,534)
Balance, September 30, 2021	201,529
Current	-
Non-current	201,529

The Company has estimated the net present value of its total decommissioning provision to be $201.5 million as at September 30, 2021 (2020 – $182.5 million) based on a total escalated future undiscounted liability of $362.9 million (2020 – $337.3 million). At September 30, 2021 management estimates that these payments are expected to be made over the next 50 years (2020 – 50 years) with the majority of payments being made in years 2024 to 2070. The Bank of Canada’s long-term bond rate of 2.00 per cent (2020 – 2.00 per cent) and an inflation rate of 2.0 per cent (2020 – 2.0 per cent) were used to calculate the present value of the decommissioning provision.

6. Leases

The ROU asset and lease obligation relates to the Company's head office lease in Calgary.

Right of use Asset

Balance as at December 31, 2020	6,052
Depreciation	(588)
Balance at September 30, 2021	5,464

The ROU asset is included in Property plant & equipment, refer to Note 3.

Lease Obligation

Lease obligation at December 31, 2020	7,670
Lease interest expense	188
Principal repayment of lease	(1,016)
Lease obligation at September 30, 2021	6,842
Currentportion of lease obligation at September 30,2021	1,193
Non-currentportion of lease obligation at September 30,2021	5,649

The variable lease payments not included in the measurement of the office lease obligation is $0.2 million and $0.6 million for the three and nine months ended September 30, 2021 (2020-$0.2 million and $0.6 million). The variable lease payments are recognized through general and administration expense.

During the period ended September 30, 2021, $10.6 million was capitalized in relation to short-term leases.

The following sets forth future commitments associated with its lease obligation:

	As at
	September
	30, 2021
Less than 1 year	338
1-3 years	4,285
4-5 years	2,857
Total lease payment	7,480
Amount representing interest	(638)
Present value of lease payments	6,842
Currentportion of lease obligation	1,193
Non-currentportion of lease obligation	5,649

7. Share capital

Authorized : Unlimited number of voting common shares

Issued and Outstanding

	Number of
	Common	Amount
Common Shares (no par value)	Shares	$
Balance, December 31, 2020	164,940,975	1,649,635
Common shares issued	2,115,146	10,749
Balance, September 30, 2021	167,056,121	1,660,384

Earnings per common share has been determined based on the following:

	Three Months ended	Nine Months ended
	September 30	September 30
	2021 2020	2021 2020
Weighted average common shares basic	166,440,704 164,892,979	165,622,980 164,880,489
Weighted average common shares diluted	169,512,566 164,910,727	169,112,156 164,881,267

Dividends

During the three- and nine-month periods ended September 30, 2021, Peyto declared and paid dividends of $0.01 and $0.03 per common share, totaling $1.7 million and $10.0 million respectively (2020 - $0.01 and $0.08, totaling $1.6 million and $13.2 million respectively).

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 and losses

Gains and losses from cash flow hedges are accumulated until settled. These outstanding hedging contracts are recognized in earnings on settlement. Further information on these contracts is set out in Note 11.

8. Performance-based compensation

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 realized price at December 31 of the current year and a discount rate of 8%. For three and nine months ended September 30, 2021 $nil, (2020 - $nil) was expensed.

9. Stock based compensation

In 2019, the Company adopted a stock option plan allowing for the granting of stock options to officers, employees and consultants of the Company. In addition, the shareholders of the Company approved the issuance of commons shares to fulfill the Company’s obligation under previously granted rights pursuant to its market-based bonus plan, as a transition between the market-based bonus and the newly adopted stock option plan. The stock option plan will replace the marketbased bonus plan on a go forward basis. These plans limit the number of options and DSU’s that may be granted to 10% of the outstanding common shares at the date of the Board's adoption of these plans, being 16,487,418 common shares.

The following tables summarize the rights outstanding under the market-based bonus plan at September 30, 2021:

		Weighted average
		exercise price
		$
Balance, December 31, 2020	726,200	7.23
Rights under market-based bonus plan granted	-	7.23
Forfeited	(20,233)	(7.23)
Balance, September 30, 2021	705,967	7.23

The Company estimates the fair value of rights under the market-based bonus plan using the Black-Scholes pricing model. During the three months ended September 30, 2021 the fair value per right was $2.55. The following tables summarizes the assumptions used in the Black-Scholes model:

	September 30, 2021
Share price	$7.23
Exercise price (net of dividends)	$7.17
Expected volatility	39.60%
Average life	2 year
Risk-free interest rate	1.85%
Forfeiture rate	0.17%

The rights granted under the 2019 market-based bonus plan vest one-third on each of December 31, 2019, 2020 and 2021.

The following tables summarize the stock options outstanding at September 30, 2021:

		Weighted average
		exercise price
		$
Balance, December 31, 2020	7,934,202	3.50
Stock options granted	3,674,810	5.04
Exercised	(2,115,146)	3.90
Forfeited	(368,041)	3.55
Balance, September 30, 2021	9,125,825	4.03

The Company estimates the fair value of stock options using the Black-Scholes pricing model. During the nine months ended September 30, 2021, the weighted-average fair value per option was $1.29. The following tables summarize the assumptions used in the Black-Scholes model:

	September 30, 2021
Share price	$4.04
Exercise price	$4.04
Expected volatility	60.42%
Average option life	2 year
Risk-free interest rate	0.33%
Forfeiture rate	3.38%

Options are granted throughout the year and vest 1/3 on each of the first, second and third anniversaries from the date of grant .

The following tables summarizes the Company’s equity compensation arrangements:

			Weighted Average
		Weighted	Remaining
		Average	Contractual life-
		Exercise price	Years
		$
Rights under market-based bonus plan	705,967	7.23	0.75
Stock options	9,125,825	4.03	1.29
DSU	167,727	3.20	3.21

At September 30, 2021, no stock options were exercisable

10. Revenue and receivables

	Three Months ended	Three Months ended	Nine Months	ended
	September 30		September	30
	2021	2020	2021	2020
Natural Gas Sales	169,789	59,719	412,245	173,021
Natural Gas Sales from third parties	-	-	-	11,060
Natural Gas Liquid sales	67,063	34,052	187,355	89,431
Naturalgas and naturalgas liquid sales	236,852	93,771	599,600	273,512

	September 30,	December 31,
	2021	2020
Accounts receivable from customers	100,734	52,519
Accounts receivable from realized risk management contracts	-	766
Accounts receivable from joint venture partners and other	4,064	3,160
	104,798	56,445

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.

11. Financial instruments

Financial instrument classification and measurement

Financial instruments of the Company carried on the condensed consolidated balance sheet are carried at amortized cost with the exception of cash and derivative financial instruments. There are no significant differences between the carrying amount of financial instruments and their estimated fair values as at September 31, 2021 except for derivative financial instruments.

The Company’s areas of financial risk management and risks related to financial instruments remained unchanged from December 31, 2020.

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, accounts payable and accrued liabilities, dividend payable, long term debt and derivative financial instruments. At September 30, 2021 and 2020, cash and derivative financial instruments, are carried at fair value through profit or loss (“FVTPL”). Accounts receivable and current liabilities 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.

Commodity price risk management

Peyto uses derivative instruments to reduce its exposure to fluctuations in commodity prices. Peyto considers all these transactions to be effective economic hedges for accounting purposes.

Following is a summary of all risk management contracts in place as at September 30, 2021:

Natural Gas			Price
Period Hedged- Monthly Index	Type	Daily Volume	(AECO CAD/GJ)
April 1, 2021 to October 31, 2021	Fixed Price	75,000 GJ	$1.48 to $2.63
November 1, 2021 to March 31, 2022	Fixed Price	125,000 GJ	$2.55 to $4.26
April 1, 2022 to October 31, 2022	Fixed Price	115,000 GJ	$2.07 to $2.26
November 1, 2022 to March 31, 2023	Fixed Price	160,000 GJ	$2.30 to $3.68
April 1, 2023 to October 31, 2023	Fixed Price	140,000 GJ	$2.05 to $2.80

Natural Gas Period Hedged– Daily Index Type	Daily Volume Price (AECO CAD/GJ) 50,000 GJ $1.64 to $2.55
April 1, 2021 to October 31, 2021 Fixed Price
Natural Gas Period Hedged- NYMEX Type	Daily Volume Price (Nymex USD/mmbtu)
April 1, 2020 to March 31, 2022 Fixed Price April 1, 2021 to October 31, 2021 Fixed Price November 1, 2021 to March 31, 2022 Fixed Price April 1, 2022 to October 31, 2022 Fixed Price	20,000 mmbtu $2.28 187,500 mmbtu $2.47 to $2.99 77,500 mmbtu $2.86 to $3.20 10,000 mmbtu $2.56 to $2.57
Natural Gas Period Hedged- Malin Type	Daily Volume Price (Nymex USD/mmbtu)
November 1, 2021 to March 31, 2022 Fixed Price April 1, 2022 to October 31, 2022 Fixed Price November 1, 2022, to March 31, 2023 Fixed Price	15,000 mmbtu $3.21 to $3.30 40,000 mmbtu $2.35 to $2.40 40,000 mmbtu $2.90 to $3.10
Crude Oil Period Hedged- WTI Type	Daily Volume Price (WTI USD/bbl)
April 1, 2021 to December 31, 2021 Fixed Price July 1, 2021 to December 31, 2021 Fixed Price October 1, 2021 to December 31, 2021 Fixed Price April 1, 2022 to June 30, 2022 Fixed Price January 1, 2022 to March 31, 2022 Fixed Price January 1, 2022 to December 31, 2022 Fixed Price	1,000 bbl $57.50 to $59.00 900 bbl $52.25 to $61.10 1,100 bbl $50.60 to $65.75 300 bbl $62.10 to $64.00 800 bbl $58.65 to $65.25 300 bbl $63.75 to $64.65
	Daily Volume Price (WTI CDN/bbl) 900 bbl $79.75 to $85.50 500 bbl $85.65 to $92.40 300 bbl $83.45 to $85.25 2,000 bbl $81.85 to $92.15
Crude Oil Period Hedged- WTI Type
January 1, 2022 to December 31, 2022 Fixed Price January 1, 2022 to March 31, 2022 Fixed Price January 1, 2022 to June 30, 2022 Fixed Price October 1, 2021 to December 31, 2021 Fixed Price
Propane Period Hedged Type	Daily Volume Price (USD/bbl)
April 1, 2021, to March 31, 2022 Fixed Price October 1, 2021 to March 31, 2022 Fixed Price	250 bbl $26.36 250 bbl $25.41
Natural Gas Period– Covered Call Options Type	Daily Volume Strike Price Nymex USD/mmbtu
April 1, 2021, to October 31, 2021 Call	50,000 mmbtu $2.75 to $3.15

As at September 30, 2021, Peyto had committed to the future sale of 101,480,000 gigajoules (GJ) of natural gas at an average price of $2.59 per GJ or $2.98 per mcf, 24,365,000 mmbtu at an average price of $2.82 US per mmbtu, 484,800 barrels of crude at an average price of $60.03 USD per bbl, 611,800 barrels of crude at an average price of $84.27 CAD per bbl and 91,000 barrels of propane at an average price of $25.88 USD per bbl. Had these contracts closed on September 30, 2021, Peyto would have realized a loss in the amount of $250.5 million. If the gas price on September 30, 2021, were to increase by $0.10/GJ, the unrealized loss would increase by approximately $23.2 million. An opposite change in commodity prices would result in an opposite impact on other comprehensive income.

Subsequent to September 30, 2021 Peyto entered into the following contracts:

Natural Gas Period Hedged– Monthly Index Type	Daily Volume Price (AECO CAD/GJ) 30,000 GJ $3.85 to $4.03 40,000 GJ $2.90 to $3.01
November 1, 2022 to March 31, 2023 Fixed Price April 1, 2023 to October 31, 2023 Fixed Price
Natural Gas Period Hedged- NYMEX Type	Daily Volume (Nymex USD/mmbtu)
November 1, 2021 to March 31, 2022 Fixed Price April 1, 2022 to October 31, 2022 Fixed Price November 1, 2022 to March 31, 2023 Fixed Price	10,000 mmbtu $5.96 to $5.98 30,000 mmbtu $3.89 to $4.03 30,000 mmbtu $4.10 to $4.31
	Daily Volume Price (WTI CAD/bbl) 600 bbl $96.15 to $98.00 100 bbl $94.10 100 bbl $91.30
Crude Oil Period Hedged- WTI Type
January 1, 2022 to March 31, 2022 Fixed Price April 1, 2022 to June 30, 2022 Fixed Price July 1, 2022 to December 31, 2022 Fixed Price

12. Related party transactions

Certain directors of Peyto are considered to have significant influence over other reporting entities that Peyto engages in transactions with. Such services are provided in the normal course of business and at market rates. These directors are not involved in the day to day operational decision making of the Company. The dollar value of the transactions between Peyto and the related reporting entities is summarized below:

	Expense			Accounts Payable/
Three Months ended September 30		Nine Months ended September 30		As at September 30
2021	2020	2021	2020	2021 2020
181.1	6.0	361.0	100.9	207 -

13. Commitments

In addition to those recorded on the Company’s balance sheet, the following is a summary of Peyto’s contractual obligations and commitments as at September 30, 2021:

	2021	2022	2023	2024	2025	Thereafter
Interest payments(1)	3,235	17,249	14,809	11,109	9,725	12,070
Transportation commitments	17,756	85,391	55,377	35,475	35,017	371,808
Operating leases	531	2,200	2,200	2,200	2,200	2,200
Methanol	-	5,767	-	-	-	-
Total	21,522	110,607	72,386	48,784	46,942	386,078

(1) Fixed interest payments on senior secured notes

Officers

Darren Gee Chief Executive Officer

Jean-Paul Lachance President and COO

Kathy Turgeon Vice President, Finance and CFO Scott Robinson Vice President, Business Development David Thomas Vice President, Exploration

Lee Curran Vice President, Drilling and Completions

Todd Burdick Vice President, Production

Derick Czember Vice President, Land

Stephen Chetner Corporate Secretary

Directors

Don Gray, Chairman Brian Davis Michael MacBean, Lead Independent Director Darren Gee Gregory Fletcher Kathy Turgeon John Rossall Auditors Deloitte LLP

Solicitors Burnet, Duckworth & Palmer LLP

Bankers

Bank of Montreal Canadian Imperial Bank of Commerce ATB Financial National Bank of Canada Royal Bank of Canada The Bank of Nova Scotia The Toronto-Dominion Bank Wells Fargo Bank, N.A., Canadian Branch Canadian Western Bank Bank of China (Canada) Business Development Bank of Canada

Transfer Agent Computershare

Head Office

300, 600 – 3 Avenue SW Calgary, AB T2P 0G5 Phone: 403.261.6081 Fax: 403.451.4100 Web: www.peyto.com Stock Listing Symbol: PEY.TO