International Petroleum Corp

STO:IPCO

Earnings Call Analysis

Firm Exits 2023 in Strong Cash Position

In 2023, the company saw a good performance with EBITDA and operating cash flow exceeding $350 million, although 2022 results were notably higher, highlighting the impact of oil prices on cash flows. Operating costs per barrel of oil equivalent (BOE) were as predicted. A net cash position of $58 million was achieved after covering all expenditures, including the first phase of Blackrod and share buybacks. Share structure improved with a 7% share cancellation. Deposits with banks are yielding 5-6%, which, paired with existing bonds, lead to low net interest expenses. A record investment year culminated in $327 million spent, achieving record production and delivering $353 million in operating cash flow. Finally, the company remains on track to meet its ESG goals, including a net emissions intensity reduction target.

Financial Resilience and Operational Consistency

In the fiscal year 2023, the company saw a stable performance, reaching an operating cash flow in excess of USD 350 million. However, this performance was overshadowed by the exceptional cash flows of 2022, where a higher oil price environment boosted the cash flows nearly to double that of 2023's. The operational cost per barrel of oil equivalent (BOE) aligned with the company's guidance despite a slight uptick in the fourth quarter to USD 18.3. Notably, the company achieved a net cash position of USD 58 million at the end of the year, with access to more than USD 0.5 billion in cash resources to support ongoing and future projects.

Strategic Investments and Shareholder Returns

The company had a record investment year, with USD 327 million directed largely towards growth initiatives in Canada. Furthermore, the company completed a robust share buyback program, canceling 7% of its outstanding shares, signifying a commitment to delivering shareholder value. In addition, the company successfully disposed of the John Lake properties at a substantial premium, injecting more than USD 20 million into its finances.

Robust Hedging and ESG Commitments

The company's hedging strategy paid off significantly in the gas market in 2023, especially in a softer market environment. Looking ahead, the gas hedges have since lapsed, and the company is realizing current market prices. On the ESG front, IPC has shown a strong performance with no material safety incidents and is on track to achieve its net emissions intensity reduction targets, highlighting its commitment to sustainable operations.

Operational Challenges and Market Dynamics

Production faced challenges in Malaysia, as two wells were down throughout Q4 and slightly in Q3, impacting production levels. These wells are now back on stream as of January, contributing positively to production. The minor increase in operational expenses (OpEx) per BOE in the fourth quarter was attributed to the reduced production and is expected to increase slightly in 2024, though no structural changes in operating costs are foreseen. The higher OpEx per BOE in Southern Canada was primarily due to elevated electricity prices. The fluctuations in global oil inventories and the anticipation of supply draws in the first half of 2024, shaped by OPEC's production actions and robust global demand, point toward healthy long-term oil and gas prices.

Earnings Call Transcript 2023-Q4

[William Lundin, executive]

So welcome, everyone, to the IPC 2023 Q4 and year-end operations and financial update presentation. My name is William Lundin, I'm the CEO. I'm also joined by Christophe, our CFO, as well as Rebecca, our SVP of IR and Corporate Planning. So I'll begin with the highlights for the full year 2023. This presentation update will be focused on this past year's results and in terms of the detailed forward-looking short- and long-term business plans that will be covered during the CMD presentation later on today.So it was a record investment year of USD 327 million in 2023, about $240 million of that was spent on our Blackrod Phase 1 development. IPC achieved a new all-time high annual production average of 51,100 barrels of oil equivalent per day in 2023. Our operating costs settled at $17.60 per BOE for the full year, representing good cost control and overall financial discipline.We had strong cash flow generation from the business amounting to USD 353 million in operating cash flow and USD 3 million for the full year in free cash flow. Meaning, the record capital investment year was fully funded by the base business free cash flow generation and notwithstanding acquiring Cor4 resources in March of 2023 for USD 60 million. And returning USD 95 million in share buybacks, the company enters 2024 in a net cash position of USD 58 million and a gross cash position of $517 million when including the funds from the bonds that we have in place.We repurchased and canceled 100% of the available 2022-2023 normal course issuer bid program, representing 9.3 million shares. And I'm pleased to share there were no material safety or environmental incidents in 2023. And we're well on track to achieve our 50% net emissions intensity reduction come 2025.The record production year was mainly driven from organic growth investment activities in Canada and France. Our Q4 average daily production was 49,600 barrels of oil equivalent per day. And IPC benefits from a diversified production mix with 33% natural gas. Around 15% of our production mix is Brent-linked. And the remainder of the balance is mainly tied to WCS pricing, so notwithstanding some production downtime in Malaysia for the second half of 2023.Super pleased to share both wells have been successfully brought back online as of now with spot production rates at the Bertam field in excess of 4,000 barrels of oil equivalent per day, which will be touched on by our COO during the CMD presentation. So our operating expenditure per BOE was $17.60, which was well within our guidance of $17.50 to $18 a barrel. Our Q4 operating costs were $18.30. And looking at our full year CapEx program, it was in line with our latest guidance of USD 330 million.Operating cash flow for the company was in line with our Capital Markets Day guidance, settled at USD 353 million, representing strong cash flow from the base business. From a free cash flow perspective, the company was positive in the free cash flow generation through 2023. And excluding the growth investment tied to the Blackrod Phase 1 development, our free cash flow was USD 243 million, representing healthy free cash flow generation from the base business.Our share repurchase program continues to be a staple for the company. Since inception, IPC has purchased nearly 63 million shares at an average price of SEK 65 per share. And that's translated to in excess of USD 275 million in value created relative to where our current share price is sitting.Since 2019, we've repurchased 23% of our shares outstanding and provided our company continues to trade at a material discount relative to its intrinsic 2P value. We're going to keep buying back our cheap stock. With the current NCIB program, we're already well underway with that and purchasing 1.8 million shares, about 20% of the way through that program where we can buy 8.3 million shares. And if we're going to be looking forward, if we fulfill that NCIB program as well as the following year, we'll be back at a share count outstanding in line with when the company was formed back in early 2017.So with only 11% dilution since inception and 5x production increase, 16x increases in our 2P reserves, nearly 20 years added to our reserve life index greater than 1 billion barrels of contingent resources and we've added in excess of $2.5 billion in net asset value. The stakeholders within IPC should be very pleased with the value creation achieved by the company in a relatively short period of time.On the sustainability and ESG front, again, very pleased to share there were no material safety incidents through 2023. We also issued our fourth sustainability report alongside our Q2 results as well as the first standalone TCFD report. So our sustainability and ESG practice and journey continues to progress well alongside our growth ambitions as a company. We're well on track to achieve a 50% net emissions intensity reduction by 2025, using our 2019 as a baseline. And at CMD in 2023, we made a commitment to extend that level to the end of 2027. And coming forward to the CMD later today, we're looking to extend that further as well.Thank you. And now, I'll pass it to Christophe to go through the financials.

[Christophe Nerguararian, executive]

Thank you, Will. Good morning, everyone, pleasure to be reporting for this fourth quarter and to share with you the very good performance of IPC during that fourth quarter and overall for the whole year 2023. And so if we start by looking on Slide 10, you can see as Will mentioned the production in the fourth quarter, just shy of 50,000 BOE and in excess of 51,000 barrels of oil equivalent per day for the whole year. And that was really a strong achievement, especially in the fourth quarter with 2 wells, which still needed to be worked over in Malaysia and which are now back on stream in the -- as of the last few days, so a really strong performance in Q4 and for the whole year.The average dated Brent for the fourth quarter was $84, slightly higher than the average for the whole year. But as is very common in Canada, you have a seasonality effect whereby the WTI/WCS differential widens in the winter months because there is, more volumes to be transported on pipeline. And so that differential tends to widen. So the realized prices in Canada on the WCS fronts were lower. I'll come back to that.And gas prices are relatively weak as we speak as well due to a mild winter. The operating costs continue to be under control, very happy to report that for the full year at USD 17.6 per barrel of oil equivalent for the full year. We've delivered exactly within the very tight range we guided for the whole year between $17.5 and $18 per barrel, strong operating cash flow of close to USD 75 million for the quarter and more than USD 350 million for the full year.And as Will mentioned, that's a very, very significant point because effectively despite the fact that we were -- we spent as much as we've ever spent in the life of IPC with a very strong and solid base business performance, a very strong production. It allowed us to fully fund our base business CapEx but as well the totality of our Blackrod investment.So the CapEx was significant particularly in the fourth quarter. And that was always the case that the CapEx was going to ramp up from the date we sanctioned the Blackrod project in February last year. So Q4 was no exception and was much higher than the 2 previous quarters. The free cash flow was negative in the fourth quarter but positive for the full year, as just mentioned, resulting in a net profit of USD 173 million for the full year.Looking at the realized prices, as I just mentioned, WTI/WCS was a bit wider in the fourth quarter at $22 per barrel, in line actually with the fourth quarter in 2022, actually in 2022 was even a bit wider. So that seasonality shouldn't be a surprise. It's a common theme and feature of the Canadian business.Now looking at the Malaysian crude. If you look at the full year, very happy to report that we continue to sell our barrels in Malaysia at a significant premium, $7 to $8 above dated Brent. It's a high-quality crude in high demand for Southeast Asian refineries. In France, as usual, we tend to sell at parity with Brent. Sometimes there's a small difference mainly driven by when we offtake our annual cargo in Aquitaine, but generally exactly in line with Brent.And for the Suffield area in the Onion Lake, because we're selling on the WCS basis despite some very minor adjustment, you can see that throughout the year, we tend to sell at WCS at a small, very small discount to the WCS. We were hedged for a portion of the transportation in between Hardisty and the Gulf Coast in the U.S. during the year. And so that hedge proved to be positive and insulated a part of the widening gap in the differential in Q4. I'll come back to the hedging gains.On the realized gas prices, the market is flushed with gas in North America. And the winter was reasonably mild with the exception of a couple of days in January when actually Will and I were in Calgary, it was minus 40 degrees. Gas prices jumped for the weekend to CAD 35 per Mcf, but otherwise, reasonably low at around CAD 2.5 per Mcf. But very happy to report that for the full year, realized prices were CAD 2.73 per Mcf. And we had a very successful hedging program in 2023, which was covering the first 3 quarters up to and including October.Looking at the financial results, I think it's an interesting cycle despite the very good performance in 2023 with EBITDA and operating cash flow in excess of USD 350 million. You can see that 2022 really dwarf the performance of 2023. And I think it's a good opportunity to remind ourselves that in a higher oil price environment, the IPC base business can really generate fantastic cash flow. So it was really good in 2023. But with $20 higher oil prices in 2022, the cash flows can almost double. So that's a very significant performance. And so we should all be reminded that in a higher oil price environment, the cash flows can be significantly higher as well.In terms of operating cost per BOE, as mentioned, we delivered right in line with our guidance. You can see that oil, with oil production slightly lower in Q3 and Q4 with operating costs essentially fixed. They have been creeping up slightly by a few cents per BOE at USD 18.3 in the fourth quarter.Looking at the netback, it's always an interesting slide and to consider that the revenues less production costs for the full year were around $20 per BOE. So that includes all of our oil and gas production.And operating cash flow and EBITDA roughly stood at $19 per BOE for the full year. They're a bit lower as indicated in the fourth quarter based on lower oil and gas realized prices, but a very good performance overall for the year.Looking at the net cash evolution of 2023, I think it's very important, again, to state how consistent and robust has been the performance of our base business. And so if you look at our operating cash flow in excess of USD 350 million, it covered all of our development costs, including the $240 million spent on Blackrod Phase I, all of our abandonment costs, all of our cash G&A, all of our cash financial items. And so, that resulted into a positive free cash flow for the year, after I'd say all the operational expenses being OpEx or CapEx.Then, we had some M&A activity with the acquisition of Cor4, which we are extremely pleased with. We've drilled a few very promising wells there. And we're continuing to drill as we speak. We've disposed at a material premium to our carrying book value. We've disposed of the John Lake properties for more than USD 20 million.As, Will mentioned, we had a very effective share buyback program, which we completed last year and spent $95 million on share buyback. And we're continuing to actively buyback our shares. So that resulted into together with the proceeds from a bond tap issue in September of USD 150 million. It resulted into a net cash position at year-end of $58 million and a gross cash position of USD 517 million. So I'll come back to that. But it's very important to understand that IPC is in an extremely strong and robust position to face all of the CapEx of Blackrod Phase 1 going forward. And we're in a very comfortable position to continue to deliver. I'll come back to that on our 3 strategic pillars.Looking at G&A and financial items, because of this gross cash position we've deposited all of or more than USD 500 million with essentially North American Canadian banks. And the deposit yields are between 5% and 6%.So despite the USD 450 million of bonds at 7.25% coupon, you can see that our net interest expenses are reasonably low for the full year at less than USD 4 million. So the cost of carry is fairly limited.On the G&A, so the G&A per BOE remains below $1, which is good and consistent with the prior quarter. This quarter, at USD 6 million is a bit higher than usual. Usually, it's USD 4 million to USD 4.5 million per quarter. This is the result of an accounting treatment, our prior CEO, Mike, not being an employee anymore. We have to account for some of his long-term incentive program, which drives this accounting increase in G&A for the fourth quarter, but the following quarter should move back to between USD 4 million and USD 4.5 million.Looking at the financial results, so a very strong performance overall with gross profit for the year of USD 250 million and net result of USD 173 million. On the balance sheet, you can see that a significant expansion of our balance sheet, which really is the result of a significant investment program in 2023.You can see that our oil and gas properties increased on the asset side of the balance sheet from less than USD 1 billion to almost USD 1.3 billion. And that was really funded, if you look on the liability side of the balance sheet by an increase in the bonds.Just a small comment here, you can see that the bonds are reported to be USD 435 million at year-end. This is due to the fact that the tap issue was done at a discount to the par. So that's going to be unwound over the next 4 years until maturity. So that USD 435 million is going to increase and will be reported as $450 million by the maturity date of the bonds, which is February 2027.You can note a current liability increase, which is really driven by all the activity in Canada and also the equity which is increased as a result of incorporating some very strong retained earnings for the full year.The capital structure, nothing is really changed here with the exception in September, which we already reported, obviously, of the bond tap for another $150 million. So we now have a total of USD 450 million of bonds maturing in February 2027.We have a minor unsecured French loan, which continues to repay at less than EUR 1 million per quarter. And we have the luxury of having a fully committed and almost fully undrawn Canadian revolver credit facility of CAD 180 million. And I'm saying almost undrawn because we've used as part of our normal operating procedures we've issued CAD 5 million of letters of credit to support our activity.But I think having the luxury of having this very strong, robust balance sheet is critical at this juncture in IPC's life, because it supports our 3 strategic pillars, which is to deliver Blackrod to continue buying back shares under the NCIB and to remain opportunistic on the M&A market. We're not expecting anything significant. But typically, another Cor4 would be very welcome with the success we have on drilling wells on Cor4 right now.In terms of hedging, just a reminder that we had, as I said, transportation costs to the WCS-ARV, so 12,000 barrels a day of transportation costs from Hardisty, Alberta to the Gulf Coast in the U.S. was covered and yielded very positive gains in the fourth quarter, almost $6 million and $3 million for the full year.The gas hedges were really the most successful part of our hedging strategy in 2023, given the softness of the gas market. Unfortunately, the gas hedges have lapsed now. And we're just realizing the current market prices. Our condensate hedging was neutral. It didn't really influence the results.And so on this, I will let, Will finish the comment for this fourth quarter. Thank you very much.

[William Lundin, executive]

Thanks, Christophe. A strong set of financial numbers, thanks to the excellent work done by the IPC teams across all regions. And to close out and remind everyone of the highlights for 2023 that IPC achieved was a record investment year of $327 million spent targeting growth largely in Canada, record production achieved of 51,100 barrels of oil equivalent per day. Our OpEx per BOE settled at $17.60 and a combination of record production and healthy commodity prices delivered $353 million in operating cash flow as well as a positive free cash flow amount of $3 million. So, strong financial performance translates into us exiting the year in a net cash position of USD 58 million.And with the financial arrangements in place, we have greater than $0.5 billion of cash resources available to continue funding growth in our business and create significant value for all stakeholders.We canceled 7% of our shares outstanding in 2023 and strong performance on the ESG front with no material safety incidents. And we're on track to deliver our net emissions intensity reduction target.So that concludes the highlights of an impressive year for IPC. And we'll be expanding that on our 2024 and long-term business plans at our CMD presentation later today. So we're happy to take any questions pertaining to our 2023 delivery.

[Rebecca Gordon, executive]

Yes. Thanks, Will. We've just got a couple of questions from the Internet. There is one which is could you elaborate slightly on the vision of the company post Blackrod, but I do think that we'll keep that for this afternoon. I'll keep it in the back of my mind and I will ask you this afternoon that one. But perhaps we can start with a question from Teodor, Christophe. Could you go through the Q4 working capital movements and what was behind that? And then, could you also explain whether that's going to continue going on through 2024?

[Christophe Nerguararian, executive]

Well, as you know, the change in working cap is driven by the realized prices, the outstanding invoices, both for the sale of our oil and gas volumes as well as all the invoices for the ongoing work. And so really, the theme at the end of 2023 was the increased activity in Malaysia with the finalization of the 2 workovers and the high activity in Canada. So all of this resulted in the change in working cap, which you can see on the graph.

[Rebecca Gordon, executive]

Thanks, Christophe. Well, could you potentially – I've got a question here from David. For how long was production down in Malaysia from the 2 wells in Q4?

[William Lundin, executive]

Yes. So it was for the entirety of Q4 and actually a little bit at the end of Q3 as well there, those 2 wells that were down in Malaysia. So we just restored production in January here for both those wells. And now, they're back on stream and the asset is benefiting from the production delivery from those 2 wells, which is in line with their production levels prior to going down.

[Rebecca Gordon, executive]

And potentially a related question here. What should we read for the minor OpEx per BOE increase Q4 versus Q3?

[William Lundin, executive]

It's generally operating costs are largely in line as our production reduces a little bit. That is the main driver to some of our OpEx increases. And seeing that forward, looking ahead to 2024 as we take a prudent approach to managing our business and reducing our base business investment, there's a natural impact to that with respect to our OpEx per BOE, slightly going up, but there's no structural changes overall in terms of our operating costs.

[Rebecca Gordon, executive]

Yes. And then, we do have a couple of questions on operating costs and CapEx by asset, which I think we'll leave for this afternoon. And then, also some long-term business plan questions, which also I think we'll leave for Capital Markets Day, but I won't forget to ask those. So well, just one last question, which I think is a good one. The crude oil inventories versus the 5-year, average storage is projected to go down significantly under the first half of 2024. What do you think about this imbalance that's ahead?

[William Lundin, executive]

Yes. I think it's an interesting situation and the time where typically you see storage builds. And now we're expecting that there's going to be storage draws. And I think that's largely as a result of OPEC curtailing some of their production or holding their production back. So it's an interesting time in the market overall at this juncture. There has been supply growth larger than consensus, mainly driven from U.S. as well as some other countries in the world. But at the end of the day, demand is very robust at around 102 million barrels per day on average in 2023 and the consensus is that it's expected to grow.So when you add those elements together with significant geopolitical tension taking place around the globe, I think it sets it up for a long-term outlook of healthy oil and gas prices in general.

[Rebecca Gordon, executive]

Yes. I have to agree on that one. We actually do just have one more question on the economics of the gas market in Canada. Is there a supply response at these gas prices from their Canadian players? Well, Christophe.

[William Lundin, executive]

Yes. No, it's a good question. The gas market in Canada is quite oversaturated at this point in time with 5-year storage levels above average. I think there's a big expectation here with the LNG Canada project set to come on stream later in 2025 that the prices should increase. And that's what you're seeing in the forward markets a little bit. So I believe in the short term, there may be a little bit of a supply disruption potentially if you're not making any money at these levels. But we're fortunate, at least within the IPC portfolio that our operating cost, their Suffield gas asset is very low. So even at current levels, we're cash flow positive.

[Rebecca Gordon, executive]

Okay. Just one more question again, sorry, they're coming in thick and fast. Could you comment a bit on the slightly higher OpEx per BOE in South Canada in financial year '23 versus '22? Is that a rise in underlying costs or is it to do with the mix of products that we have in that area?

[Christophe Nerguararian, executive]

I think what we saw through 2023 was really high electricity prices, specifically. And our southern assets do consume a decent amount of electricity to the tune of around 30 megawatts. So that was mainly the change and a slight increase in overall operating costs. But again, nothing structurally changed in terms of operating expenditure, more commodity-related consumption costs.

[Rebecca Gordon, executive]

Okay. Thank you very much. As I mentioned, here we go. Actually, it is a good question and we should answer this one, sorry. Do you have any insight into when the TransMountain pipeline will become available? Well, we'll ask this afternoon as well, but it's quite important.

[William Lundin, executive]

Yes. It's a great question. That project is 98% to 99% complete. It was, of course, supposed to be online actually at the end of last year. So there have been some delays and some hiccups along the way there. It is expected to be on stream by the first half of 2024. Experiencing some of these pipeline delays in our past, IPC took the decision to hedge our differential at the level of about $15 a barrel through the course of 2024, just in case further delays are observed. But I'm quite confident that that line should be on stream by the end of the first half of the year.

[Rebecca Gordon, executive]

Thank you very much, Will. Just a reminder for everyone, we'll be doing our Capital Markets Day presentation, which is available on our website. That will be at 2 p.m. GMT, so 3 p.m. CET today. And you can listen to IPC management comment on our future.

[William Lundin, executive]

Yes. Thanks very much, Rebecca. And I hope everyone enjoyed this presentation and look forward to everyone tuning in for the CMD around the corner. Thank you.