Perpetual Energy : Q3 2021 Interim Report

During the third quarter of 2021, significant progress was made to advance Perpetual's strategic priorities for 2021, particularly through the creation of Rubellite Energy Inc.. Perpetual's top five strategic priorities for 2021 include:

1. Stabilize the balance sheet, improve liquidity and reduce debt;
2. Grow value and impact of Clearwater play;
3. Maximize adjusted funds flow and value of Edson and Mannville;
4. Resolve the Sequoia litigation; and
5. Advance technology-driven diversifying new ventures.

THIRD QUARTER 2021 HIGHLIGHTS

• On July 16, 2021, Perpetual announced the creation of a new wholly owned subsidiary, Rubellite Energy Inc. ("Rubellite") and the sale of all of Perpetual's Clearwater lands, wells, roads and related facilities in northeast Alberta (the "Clearwater Assets") to Rubellite.
• On September 3, 2021, the Plan of Arrangement involving Perpetual, the shareholders of Perpetual, and Rubellite was completed following approval of the plan by the shareholders of Perpetual at its special shareholder meeting held on August 31, 2021 and the receipt of the final order of the Court of Queen's Bench of Alberta approving the Plan of Arrangement. At this time, Rubellite exchanged 1.4 million Rubellite common shares valued at $2.8 million and 16.7 million arrangement warrants with Perpetual shareholders for 8.2 million Perpetual common shares. Perpetual's financial and operating results include the Clearwater Assets up to September 3, 2021, the effective date of the Plan of Arrangement.
• Rubellite acquired the Clearwater Assets from Perpetual for aggregate consideration of $65.5 million. The consideration consisted of promissory notes totaling $59.4 million, which were paid in cash on October 5, 2021 upon closing of Rubellite's private placement and arrangement warrant financings. Additional consideration included the issuance of 680,485 Rubellite common shares valued at $1.4 million, the return of the 8.2 million Perpetual common shares valued at $2.8 million and issuance of warrants to purchase 4.0 million Rubellite common shares at a price of $3.00 per share for a period of five years, valued at $2.0 million.
• Production averaged 4,876 boe/d (74% conventional natural gas), down 4% sequentially from the second quarter of 2021 reflecting the disposition of the Clearwater Assets as of September 3, 2021, the effective date of the Plan of Arrangement.
• At Perpetual's 50% working interest East Edson property, the final well of the 8-well carried interest commitment that formed part of the consideration in the East Edson Transaction in April 2020 was drilled, completed and placed on production in mid-September. Perpetual is participating with its joint venture partner in the ongoing six (3.0 net) well drilling program targeting the Wilrich formation. Two (1.0 net) wells were drilled, completed and placed on production at the end of September and are performing in accordance with Perpetual's type curve. An additional four (2.0 net) well pad has been drilled, completed, frac'd and is commencing flow-back and testing operations, with expectations for production to commence in November to fill the West Wolf gas plant and maximize natural gas and NGL sales through the upcoming winter.
• Adjusted funds flow was $2.2 million ($0.03 per share), flat with the $2.3 million reported in the second quarter of 2021 and a very positive turnaround from the negative $2.1 million adjusted funds flow recorded the same quarter a year prior.
• Net income of $51.1 million ($0.80 per share) was recorded, up from the $7.5 million net loss reported in the third quarter of 2020. The increase was primarily driven by the gain on the disposition of the Clearwater Assets to Rubellite of $47.9 million.
• Total net debt outstanding at September 30, 2021 dropped 49% to $56.4 million, from $110.0 million at the end of the second quarter of 2021.
• On October 5, 2021, $53.6 million in promissory notes owing to Perpetual were repaid in cash by Rubellite. Perpetual paid approximately $38.5 million in cash and delivered 680,485 Rubellite common shares to extinguish all but $2.7 million of its second lien Term Loan and the remainder of the cash proceeds were used to repay the majority of the Company's outstanding bank debt. The borrowing limit on Perpetual's $20 million credit facility was reduced to $17 million, and the maturity was extended to May 31, 2023.

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2021 OUTLOOK

The Rubellite transactions (the "Rubellite Transactions") provided a "full capital solution" for Perpetual by reducing Perpetual's net debt to $53.6 million at September 30, normalizing the balance sheet leverage ratios and surfacing incremental value from enhanced ability to fund the future development of its assets. The Rubellite Transactions have materially improved Perpetual's liquidity and will enhance Perpetual's ability to capture the inherent value in its asset base by funding investment opportunities to grow and sustain production and adjusted funds flow. Interest cost savings alone will improve Perpetual's adjusted funds flow by approximately $4 million annually. The general and administrative cost recoveries under the management services agreement with Rubellite will further enhance Perpetual's liquidity by approximately $2 to $3 million annually. Additionally, the 4.0 million Rubellite Share Purchase Warrants owned by Perpetual provide an opportunity for Perpetual to participate in value creation from Rubellite's Clearwater Assets over the next five years.

Operationally, at Perpetual's 50% working interest East Edson property, the last of the 8-well carried interest commitment was drilled, completed and tied in during the third quarter and the joint venture partner drilled an additional six (3.0 net) wells targeting the Wilrich formation. Three of these 7 (3.5 net) wells have been completed and are on production while the remaining 4 (2.0 net) wells were completed and frac'd in early November and will be on production in the month of November. Perpetual's fourth quarter 2021 capital spending forecast in West Central Alberta includes funds to participate in the drilling, completion and tie-in of this East Edson program, targeting to fill the West Wolf gas plant to maximize natural gas and NGL sales through next winter.

Activity in Mannville in Eastern Alberta during the fourth quarter of 2021 will continue to be focused on waterflood optimization and battery consolidation projects as well as several shallow gas recompletions. Additionally, the Company has identified a number of horizontal, multilateral drilling opportunities targeting heavy oil at Mannville and modest capital spending is budgeted for preparatory work for first quarter 2022 activities.

Upon commencement of production from the four-well pad at East Edson, Perpetual's production is expected to exceed 6,000 boe/d later in the fourth quarter.

Consistent with guidance provided August 12, 2021, exploration and development capital spending for Perpetual for full year 2021 is expected to be $15 to $18 million, excluding spending recorded in Perpetual's consolidated third quarter financial statements related to Rubellite's Clearwater Assets prior to the effective date of the Plan of Arrangement. Capital spending will be funded using proceeds from the Rubellite Transactions, adjusted funds flow and the Credit Facility. The table below summarizes anticipated capital spending and drilling activities for Perpetual for the fourth quarter of 2021.

	Q4 2021	# of wells
	($ millions)	(gross/net)
West Central(1)	$7 - $9	4/2.0
Eastern Alberta	$0 - $1	-
Total(2)	$7 - $10	4/2.0

1. Capital to drill the four-well pad at East Edson was partially spent in the third quarter.
2. Excludes abandonment and reclamation spending.

Perpetual continues its environmental, social, and corporate governance ("ESG") focus, with total abandonment and reclamation expenditures of up to $2.3 million planned in 2021, with an estimated $1.2 million to be funded through Alberta's Site Rehabilitation Program ("SRP"). The remaining $1.1 million will more than satisfy the Company's annual area-based closure spending requirements of $1.0 million.

Susan Riddell Rose

President and Chief Executive Officer

November 12, 2021

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FINANCIAL AND OPERATING HIGHLIGHTS

				Three months ended		Nine months ended
				September 30		September 30
(Cdn$ thousands, except volume and per share amounts)	2021	2020	Change	2021	2020	Change
Financial
Oil and natural gas revenue	14,603	7,089	106%	39,366	21,308	85%
Net income (loss)			51,141	(7,491)	-	75,452	(76,040)	-
Per share - basic	(2)	0.80	(0.12)	-	1.20	(1.25)	-
Per share - diluted	(2)	0.72	(0.12)	-	1.08	(1.25)	-
Cash flow from (used in) operating activities	6,655	(2,538)	-	11,192	(8,429)	-
-	-
Adjusted funds flow(1)	2,174	(2,098)	7,020	(9,027)
Per share - basic(2)	0.03	(0.03)	-	0.11	(0.15)	-
Per share - diluted(2)	0.03	(0.03)	-	0.11	(0.15)	-
Total assets			217,665	129,959	68%	217,665	129,959	68%
Revolving bank debt		13,183	15,089	(13)%	13,183	15,089	(13)%
Term loan, principal amount	42,329	45,000	(6)%	42,329	45,000	(6)%
Senior notes, principal amount	34,065	33,580	1%	34,065	33,580	1%
Net working capital deficiency(1)	(35,933)	8,383	-	(35,933)	8,383	-
Net debt(1)			56,351	102,052	(45)%	56,351	102,052	(45)%
Capital expenditures	9,947	251	3,863%	11,504	5,473	110%
Net proceeds on acquisitions and dispositions	-	133	-	423	(34,528)	-
Net capital expenditures	9,947	384	2,490%	11,927	(29,055)	-
Common shares outstanding (thousands)(3)
End of period			63,892	61,253	4%	63,892	61,253	4%
Weighted average - basic	63,801	61,200	4%	62,668	60,896	3%
Weighted average - diluted	71,227	61,200	16%	69,955	60,896	15%
Operating
Daily average production
Conventional natural gas (MMcf/d)	21.6	16.3	32%	22.2	22.2	0%
Heavy crude oil (bbl/d)	972	1,193	(19)%	1,047	1,029	2%
NGL (bbl/d)			300	273	10%	309	382	(19)%
Total (boe/d)(5)			4,876	4,188	16%	5,061	5,106	(1)%
Average prices
Realized natural gas price ($/Mcf)(4)(5)	2.59	0.06	4,222%	2.36	0.67	252%
Realized oil price ($/bbl)(4)	65.19	55.71	17%	53.56	48.06	11%
Realized NGL price ($/bbl)(4)	65.37	28.09	132%	58.84	30.01	96%
Wells drilled - gross (net)
Conventional natural gas	3 (1.5)	2 (1.0)		5 (2.5)	2 (1.0)
Heavy crude oil			5 (4.5)	- (-)		6 (5.0)	4 (4.0)
Total			8 (6.0)	2 (1.0)		11 (7.5)	6 (5.0)

1. These are non-GAAP measures. Please refer to "Non-GAAP Measures" below.
2. Based on weighted average basic and diluted common shares outstanding for the period.
3. All common shares are net of shares held in trust (September 30, 2021 - 0.2 million; September 30, 2020 - 0.6 million). See "Note 14 to the condensed interim consolidated financial statements".
4. Realized natural gas, oil, and NGL prices included physical forward sales contracts for which delivery was made during the reporting period, along with realized gains and losses on financial derivatives and foreign exchange contracts.
5. Please refer to "Boe volume conversions" below.

ADVISORIES

The letter to shareholders and third quarter 2021 interim report refer to certain non-GAAP measures and metrics commonly used in the oil and natural gas industry and provides forward-looking information and statements. Further detailed information regarding these measures is provided in "Management's Discussion and Analysis - Advisories" on pages 4 and 5 and "Management's Discussion and Analysis - Forward- Looking Information and Statements" on pages 19 and 20 of this third quarter 2021 interim report.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

The following is management's discussion and analysis ("MD&A") of Perpetual Energy Inc.'s ("Perpetual", the "Company" or the "Corporation") operating and financial results for the three and nine months ended September 30, 2021 as well as information and estimates concerning the Corporation's future outlook based on currently available information. This discussion should be read in conjunction with the Corporation's unaudited condensed interim consolidated financial statements and accompanying notes for the three and nine months ended September 30, 2021 as well as the audited consolidated financial statements and accompanying notes for the years ended December 31, 2020 and 2019. The MD&A should be read in conjunction with the Corporation's MD&A for the year ended December 31, 2020, as disclosure which is unchanged from the December 31, 2020 MD&A has not been duplicated herein. The Corporation's consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles ("GAAP") which require publicly accountable enterprises to prepare their financial statements using International Financial Reporting Standards ("IFRS"). Readers are referred to the advisories for additional information regarding forecasts, assumptions and other forward-looking information contained in the "Forward Looking Information and Statements" section of this MD&A. The date of this MD&A is November 11, 2021.

NATURE OF BUSINESS: Perpetual is an oil and natural gas exploration, production and marketing company headquartered in Calgary, Alberta. Perpetual owns a diversified asset portfolio, including liquids-rich conventional natural gas assets in the deep basin of West Central Alberta, heavy crude oil and shallow conventional natural gas in Eastern Alberta, and undeveloped bitumen leases in Northern Alberta. Additional information on Perpetual, including the most recently filed Annual Information Form, can be accessed at www.sedar.comor from the Corporation's website at www.perpetualenergyinc.com.

ADVISORIES

NON-GAAPMEASURES: The terms "adjusted funds flow", "adjusted funds flow per share", "adjusted funds flow per boe", "available liquidity", "cash costs", "net working capital deficiency", "net debt", "net bank debt", "net debt to adjusted funds flow ratio", "operating netback", "realized revenue", and "enterprise value" used in this MD&A are not recognized under GAAP. Management believes that in addition to net income (loss) and net cash flows from (used in) operating activities as defined by GAAP, these terms are useful supplemental measures to evaluate performance. Users are cautioned however that these measures should not be construed as an alternative to net income (loss) or net cash flows from (used in) operating activities determined in accordance with GAAP as an indication of Perpetual's performance and may not be comparable with the calculation of similar measurements by other entities.

Adjusted funds flow: Adjusted funds flow is calculated based on cash flows from (used in) operating activities, excluding changes in non- cash working capital and expenditures on decommissioning obligations since Perpetual believes the timing of collection, payment or incurrence of these items is variable. Expenditures on decommissioning obligations may vary from period to period depending on capital programs and the maturity of the Company's operating areas. Expenditures on decommissioning obligations are managed through the capital budgeting process which considers available adjusted funds flow. The Company has added back non-cash oil and natural gas revenue in-kind, equal to retained East Edson royalty obligation payments taken in-kind, to present the equivalent amount of cash revenue generated. The Company has also deducted payments of the gas over bitumen royalty financing from adjusted funds flow to present these payments net of gas over bitumen royalty credits received. These payments are indexed to gas over bitumen royalty credits and are recorded as a reduction to the Corporation's gas over bitumen royalty financing obligation in accordance with IFRS. Additionally, the Company has excluded payments of restructuring costs associated with employee downsizing costs, which management considers to not be related to cash flow from (used in) operating activities. Management uses adjusted funds flow and adjusted funds flow per boe as key measures to assess the ability of the Company to generate the funds necessary to finance capital expenditures, expenditures on decommissioning obligations, and meet its financial obligations.

Adjusted funds flow per share is calculated using the weighted average number of shares outstanding used in calculating net income (loss) per share. Adjusted funds flow is not intended to represent net cash flows from (used in) operating activities calculated in accordance with IFRS.

Adjusted funds flow per boe is calculated as adjusted funds flow divided by total production sold in the period.

The following table reconciles net cash flows from (used in) operating activities as reported in the Company's condensed interim consolidated statements of cash flows, to adjusted funds flow:

	Three months ended September 30,	Nine months ended September 30,
($ thousands, except per share and per boe amounts)	2021	2020	2021	2020
Net cash flows from (used in) operating activities	6,655	(2,538)	11,192	(8,429)
Change in non-cash working capital	(5,621)	(176)	(7,604)	(2,494)
Decommissioning obligations settled (cash)	(54)	(62)	377	115
Oil and natural gas revenue in-kind	1,282	752	3,613	1,402
Payments of gas over bitumen royalty financing	(88)	(151)	(558)	(507)
Payments of restructuring costs	-	77	-	886
Adjusted funds flow	2,174	(2,098)	7,020	(9,027)
Adjusted funds flow per share	0.03	(0.03)	0.11	(0.15)
Adjusted funds flow per boe	4.85	(5.45)	5.08	(6.45)

Available Liquidity: Available Liquidity is defined as Perpetual's reserve-based first lien credit facility (the "Credit Facility") borrowing limit (the "Borrowing Limit"), less borrowings and letters of credit issued under the Credit Facility. Management uses available liquidity to assess the ability of the Company to finance capital expenditures and expenditures on decommissioning obligations, and to meet its financial obligations.

Cash costs: Cash costs are comprised of royalties, production and operating, transportation, general and administrative, and cash finance expense as detailed below. Cash costs per boe is calculated by dividing cash costs by total production sold in the period. Management believes that cash costs assist management and investors in assessing Perpetual's efficiency and overall cost structure.

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	Three months ended September 30,	Nine months ended September 30,
($ thousands, except per boe amounts)	2021	2020	2021	2020
Royalties	1,620	1,563	6,134	4,740
Production and operating	3,159	2,618	9,997	8,620
Transportation	678	761	2,122	2,813
General and administrative	3,051	1,656	7,100	5,876
Cash finance expense	916	1,960	270	6,432
Cash costs	9,424	8,558	25,623	28,481
Cash costs per boe	21.01	22.21	18.55	20.36

Realized revenue: Realized revenue is the sum of realized natural gas revenue, realized oil revenue, and realized natural gas liquids ("NGL") revenue which includes realized gains (losses) on financial natural gas, crude oil, NGL, and foreign exchange contracts. Realized revenue is used by management to calculate the Corporation's net realized commodity prices, taking into account the monthly settlements of financial crude oil and natural gas forward sales, collars, basis differentials, and forward foreign exchange sales. These contracts are put in place to protect Perpetual's adjusted funds flow from potential volatility in commodity prices and foreign exchange rates. Any related realized gains or losses are considered part of the Corporation's realized price.

Operating netback: Operating netback is calculated by deducting royalties, production and operating expenses, and transportation costs from realized revenue. Operating netback is also calculated on a per boe basis using total production sold in the period. Operating netback on a per boe basis can vary significantly for each of the Company's operating areas. Perpetual considers operating netback to be an important performance measure as it demonstrates its profitability relative to current commodity prices.

Net working capital deficiency: Net working capital deficiency includes total current assets and current liabilities excluding short-term derivative assets and liabilities related to the Corporation's risk management activities, revolving bank debt, second lien term loan (the "Term Loan"), current portion of royalty obligations, current portion of lease liabilities, and current portion of decommissioning obligations.

Net bank debt, net debt, and net debt to adjusted funds flow ratio: Net bank debt is measured as current and long-termrevolving bank debt, including the net working capital deficiency. Net debt includes the carrying value of net bank debt, the principal amount of the Term Loan, and the principal amount of senior notes. Net debt, net bank debt, and net debt to adjusted funds flow ratios are used by management to assess the Corporation's overall debt position and borrowing capacity. Net debt to adjusted funds flow ratios are calculated on a trailing twelvemonth basis.

Enterprise value: Enterprise value is equal to net debt plus the market value of issued equity, and is used by management to analyze leverage.

VOLUME CONVERSIONS: Barrel of oil equivalent ("boe") may be misleading, particularly if used in isolation. In accordance with National Instrument 51-101, a conversion ratio for conventional natural gas of 6 Mcf:1 bbl has been used, which is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. In addition, utilizing a conversion on a 6 Mcf:1 bbl basis may be misleading as an indicator of value as the value ratio between conventional natural gas and heavy crude oil, based on the current prices of natural gas and crude oil, differ significantly from the energy equivalency of 6 Mcf:1 bbl. A conversion ratio of 1 bbl of heavy crude oil to 1 bbl of NGL has also been used throughout this MD&A. Refer to the "Production" section of this MD&A for details of constituent product components that comprise Perpetual's boe production.

MATERIAL TRANSACIONS

On July 16, 2021, Perpetual announced the creation of a new wholly owned subsidiary, Rubellite Energy Inc. ("Rubellite" or "RBY") and the sale of all of Perpetual's Clearwater lands, wells, roads and related facilities in northeast Alberta (the "Clearwater Assets") to Rubellite. On September 3, 2021, the Plan of Arrangement involving Perpetual, the shareholders of Perpetual, and Rubellite was completed following approval of the plan by the shareholders of Perpetual at its special shareholder meeting held on August 31, 2021 and the receipt of the final order of the Court of Queen's Bench of Alberta approving the Plan of Arrangement. At this time, Rubellite exchanged 1.4 million Rubellite common shares valued at $2.8 million and 16.7 million arrangement warrants with Perpetual shareholders for 8.2 million Perpetual common shares valued at $2.8 million. This MD&A reflects operating results for Rubellite's Clearwater Assets up to the effective date of the Plan of Arrangement of September 3, 2021.

Rubellite acquired the Clearwater Assets from Perpetual for aggregate consideration of $65.5 million. The consideration consists of promissory notes totaling $59.4 million, which were paid in cash on October 5, 2021, the issuance of 680,485 Rubellite common shares valued at $1.4 million, the return of the 8.2 million Perpetual common shares valued at $2.8 million and issuance of warrants to purchase 4.0 million Rubellite common shares at a price of $3.00 per share for a period of five years, valued at $2.0 million.

The Rubellite Financings were completed on October 5, 2021 at $2.00 per Rubellite common share equivalent and included:

1. a backstopped Arrangement Warrant financing, which closed on October 5, 2021 and resulted in the issuance of 16.7 million Rubellite common shares for total proceeds of $33.5 million;
2. a non-brokered $20 million private placement financing (10 million Rubellite common shares) that closed on October 5, 2021; and
3. a brokered $30.0 million subscription receipt financing (15 million subscription receipts) that closed on July 13, 2021 with cash held in escrow by a third-party trustee that was released on October 5, 2021. On October 5, 2021, each subscription receipt issued was exchanged on a one-to-one basis for 15 million common shares of Rubellite.

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