PRESIDENT’S
MESSAGE

Throughout 2016, Delphi continued to execute its strategic development plan of our world-class, liquids-rich Montney property (“Bigstone Montney”) located at Bigstone in northwest Alberta, while strengthening the Company’s overall financial position through several strategic initiatives. In 2017, the Company will continue to successfully deliver robust economic returns on our capital projects along with higher cash netbacks, which will continue to exceed our historical proved producing finding and development costs. Innovations applied to the Company’s completion techniques continue to result in significant increases to the field condensate to natural gas ratio, all while cost-saving initiatives continue to be successfully implemented. Field condensate in 2017 is expected to grow by 54 percent to approximately 2,100 to 2,200 barrels per day.

Delphi is positioned to deliver exceptional per share growth metrics in 2017 as a result of continued focus on operational margin growth, profitability and the successful execution of strategic initiatives over the past two years, despite challenging commodity prices. The production rate in the fourth quarter of 2017 is forecast to increase by 61 percent to approximately 11,000 to 11,500 barrels of oil equivalent per day when compared to Delphi’s corporate production from the fourth quarter of 2016. Significant condensate growth coupled with operational margin growth in the fourth quarter of 2017 will have the compounding effect of increasing our annualized funds from operations per share by 143 percent over the comparable quarter in 2016, with cash netbacks on a dollar per barrel equivalent basis increasing in the fourth quarter of 2017(excluding hedges) by 111 percent over the same quarter in 2016. The Company’s continued successful operating margin growth is a result of the high quality Bigstone Montney asset base, majority ownership in strategic infrastructure, firm take away capacity and proven expertise in developing this liquids-rich asset.

Delphi’s commodity price risk management program continues to be an integral part of our financial strategy to protect funds from operations and return on capital employed during periods of price volatility. Despite the prolonged drop in crude oil prices, the Company received $58.61 per barrel (“bbl”) for its condensate production in 2016, including a realized risk management gain of $9.97 per bbl for maturing contracts during the period. Delphi’s realized natural gas price for 2016 was $4.45 per thousand cubic feet, an increase of 11 percent from the comparative period of 2015. The Company’s realized natural gas price was positively influenced by its risk management program and includes a gain of $1.18 per thousand cubic feet for maturing contracts in the period. In 2016, the Company realized $17.6 million in gains from its risk management program. Delphi’s strong hedge position has protected cash flow and economic returns through the entire period of lower commodity prices, creating the flexibility to pursue operational margin growth initiatives. In 2017, the Company has approximately 20 million cubic feet per day or 58 percent of its 2017 forecast natural gas production hedged at an average price of CDN$4.21 per million British thermal units (“mmbtu”) and approximately 1,000 barrels per day (bbls/d) of condensate hedged at an average West Texas Intermediate (“WTI”) price of CDN$66.70 per barrel (“bbl”).

Production volumes in 2016 averaged 7,392 barrels of oil equivalent per day (“boe/d”). A 30-day unscheduled outage at the SemCAMS K3 plant in the second quarter of 2016 reduced annual production volumes by approximately 600 boe/d. When combined with the two major asset dispositions in 2015, which reduced annual production volumes by approximately 1,600 boe/d, this largely accounts for the decrease in 2016 production volumes. Our focus in 2017 aims to accelerate Bigstone Montney drilling by approximately 61 percent to an average fourth quarter 2017 production estimate of 11,500 boe/d. To support production growth, Delphi’s 2017 accelerated development plan contemplates the drilling of 13 gross (8.4 net) Bigstone Montney horizontal wells and the completion, tie-in and well site equipping of 14 gross (9.0 net) wells.

Production volumes in the fourth quarter of 2016 averaged 7,127 boe/d. Weather delays in the third and fourth quarters pushed on-stream dates for two wells of the 2016 program until late December, impacting the fourth quarter production volumes by approximately 600 boe/d. In December 2016, a further reduction of 450 boe/d was incurred as a result of the Partner Transaction. The Company has brought on production seven gross (4.9 net) wells over the past five quarters effectively replacing natural declines over that time period and partially offsetting the Partner Transaction disposition volumes. Delphi’s field operations, well results and current production capability remains on track with our 2017 annual and exit production forecast focusing on accelerated production growth with increased condensate yields.

Delphi’s field condensate weighting as a percentage of 2016 production volumes increased 28 percent from 2015. The Company’s natural gas liquids and field condensate yields increased 26 percent to 92 barrels per million cubic feet (“bbls/mmcf”) in 2016, up from 73 bbls/mmcf in 2015. Field and plant condensate yield averaged 63 bbls/mmcf or 67 percent of the total 92 bbls/mmcf. The Company’s condensate and natural gas liquids weighting is forecast to increase to 40 percent in 2017, from 35 percent in 2016 and 30 percent in 2015.

Funds from operations (“FFO”) in 2016 were $29.9 million or $0.19 per basic and diluted share, compared to $42.9 million or $0.28 per basic and diluted share in 2015. The decrease in FFO in 2016, as compared to 2015, is primarily due to lower production volumes and commodity prices, as well as reduced gains on financial contracts, all partially offset by lower operating costs. For the twelve months ended December 31, 2016 the field operating netback, excluding hedging gains, increased 22 percent compared to the twelve months ended 2015. In 2017, significant condensate growth coupled with operational margin growth in the fourth quarter of 2017 will have the compounding effect of increasing annualized FFO per share by 143 percent over the fourth quarter of 2016.

Delphi’s Alliance Pipeline marketing arrangement, which commenced in December 2015 to ship the Company’s natural gas into the Chicago market, improved the realized sales price Delphi received for its natural gas. Royalties per barrel of oil equivalent (“boe”) increased due to less crown royalty credits, and production volumes encumbered with a gross overriding royalty, as a percentage of total volumes, increased over 2015. Operating expenses per boe in 2016 decreased as a majority of the Company’s production comes from the more efficient Montney play at Bigstone. Transportation expenses have increased as a result of the higher cost of shipping Delphi’s natural gas volumes on the Alliance pipeline system into the Chicago market. Delphi has secured the required firm service transportation for 100 percent of our forecasted 2017 natural gas production growth.

At December 31, 2016, the Company had total net debt of $85.9 million outstanding, a 29 percent decrease from the previous year. The reduction in net debt is a result of the Partner Transaction proceeds of $34.6 million and the total associated $20 million carry capital costs for total proceeds of $54.6 million. At December 31, 2016, Delphi had $53.4 million (net of outstanding letters of credit of $6.6 million) available to be drawn on its senior credit facility. Total net debt has been reduced 51 percent from $173.7 million at December 31, 2014, while the shares outstanding have remained unchanged at 155.6 million. In 2016, the inclusion of Senior Secured Notes into the Company’s capital structure, a new bank syndicate, and the Partner Transaction have all contributed to reduce overall debt by 51 percent over the past two years and allowed for the planned acceleration of our drilling activity in 2017.

Delphi is well now positioned to achieve significant production, cash flow and reserve growth over the near and long term to the benefit of all our stakeholders.

On behalf of the Board of Directors and all the employees of Delphi, we would like to thank our shareholders for their continued support.

David J. Reid President & Chief Executive Officer