Kiwetinohk Energy Corp

TSX:KEC

Earnings Call Analysis

Kiwetinohk Announces Strong Production and Strategic Growth Plans for 2024

In the third quarter of 2024, Kiwetinohk saw stable production at approximately 26,000 BOEs per day and reported impressive netbacks, averaging $30.89 per BOE. The company anticipates ramping up production as they implement an accelerated drilling program, bringing nine wells online by early 2025. Operating costs were reduced to $7.19 per BOE, down 22% year-over-year, with further decreases possible. Looking ahead to 2025, Kiwetinohk is positioned for growth, now guiding for new production that will enable free cash flow generation and debt repayment. Additionally, the company revealed plans for a $10 million capital program increase, reinforcing their commitment to asset development.

Strong Performance Amid Robust Development

In the third quarter of 2024, Kiwetinohk Energy reported solid operational advancements, emphasizing the strength of its Upstream assets. They directed 98% of their capital investments towards high-netback Duvernay and Montney production. This substantial focus highlights their strategy of leveraging profitable assets. Particularly noteworthy is the successful launch of production from their first Montney well in the Simonette area, which bodes well for future productivity.

Impressive Financial Metrics

Kiwetinohk achieved a third-quarter adjusted operating netback of $30.89 per BOE, bolstered by strong results from its hedging activities and operations. This figure remains substantially above their historical averages, reflecting their efficiency and market positioning. For context, the company's average netbacks since the beginning of 2023 have been around $32.50 per BOE, reaffirming their consistent performance.

Declining Operating Costs and Future Projections

The company successfully reduced its operating costs to $7.19 per BOE, a significant 22% decrease from Q3 of the previous year. They are on course to reach lower operating cost targets, which may fall below $7 due to spare capacity in their Simonette asset. This positions Kiwetinohk favorably ahead of 2025 as production ramps up.

Market Positioning and Strategic Advantages

Kiwetinohk's strategic access via the Alliance Pipeline has proven advantageous, allowing them to sell over 90% of their natural gas production at premium prices in Chicago—approximately 200% higher than Alberta auction prices. This extended access until 2032 further solidifies their competitive edge in the market and enhances revenue potential.

Enhanced Capital Program and Future Growth

In response to favorable market conditions, Kiwetinohk announced a $10 million increase in its capital guidance for the year, totaling $237 million. This expansion reflects their confidence in upcoming production from new wells slated to come online before year-end and into 2025. Notably, they anticipate streaming nine new wells which is expected to generate positive cash flow and facilitate a reduction in their credit facility balances.

Valuable Tax Pools and Long-term Financial Health

By the end of the quarter, Kiwetinohk reported nearly $900 million in tax pools, which will serve as vital offsets against income in the coming years. This aspect of their financial strategy not only extends their operational versatility but provides a buffer for sustainable growth as they profitably scale production.

Commitment to Operational Excellence

Executives underscored a commitment to operational excellence, which has already led to significant efficiencies in production. The new wells are producing higher-than-expected rates, particularly from the Montney well at the 1-27 pad, which has exceeded initial projections significantly. This proactive approach is characteristic of Kiwetinohk’s goal to demonstrate the top-tier deliverability of their assets while unlocking latent value in their Simonette Montney holdings.

Cautious Outlook for Power Division

Kiwetinohk's Power Division remains disciplined amidst regulatory uncertainties. Their portfolio is moving cautiously in light of evolving government policies, with the Homestead project progressing through final stages of approval. While capital allocation remains minimal in this segment, this strategic restraint ensures focus on core upstream operations.

Conclusion: A Company on the Rise

Overall, Kiwetinohk Energy's third quarter signals strong momentum, supported by cost efficiencies, strategic market positioning, and promising production outlooks. Their ability to adapt and thrive amid changing market dynamics positions them as a compelling investment opportunity in the energy sector going into 2025.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning. My name is Angeline, and I will be your conference operator today. I would like to welcome everyone to Kiwetinohk 2024 Third Quarter Results Conference Call. [Operator Instructions] Mr. Carlson, you may begin your conference.

[Patrick Carlson, executive]

Thank you, Angeline, and good morning, everyone. Welcome to the Kiwetinohk Energy Investor Call for the third quarter of 2024, and thank you for joining us for this update. I am Pat Carlson, Kiwetinohk's CEO. And to start, I will ask Janet Annesley, our Chief Sustainability Officer, to do an indigenous land recognition. Please go ahead, Janet.

[Janet Annesley, executive]

Thank you, Pat. Kiwetinohk conference call today is coming to you from Calgary, which is located on the traditional territories of the people of Treaty 7, which includes the Blackfoot Confederacy comprised of the Siksika, the Piikani and the Kainai First Nations, the Tsuut’ina First Nation and the Stoney-Nakoda, including the Chiniki, Bearspaw and Goodstoney First Nations. Calgary is also home to the Otipemisiwak, which is also known as the Métis Nation of Alberta, Districts 5 and 6.

Kiwetinohk has operations across Alberta, Treaty 6, 7 and 8, and we recognize the diversity of First Nations and Métis people in all these places that we call home. Back to you, Pat.

[Patrick Carlson, executive]

Thank you, Janet. Joining me today in addition to Janet are Jakub Brogowski, Chief Financial Officer; Mike Backus, Chief Operating Officer, Upstream; Fareen Sunderji, President, Power Division; Mike Hantzsch, Senior Vice President, Midstream and Market Development; Lisa Wong, Senior Vice President, Business Systems; and Kevin Nielsen, VP, Corporate Controller and Investor Relations.

We'd like to use the first part of the call to provide you with the summation of our third quarter release from yesterday evening. The telephone line will then be opened up to allow participants to ask questions. Before going through the results, I'll remind everyone that the conference call includes forward-looking information and non-GAAP financial measures with the associated risks and disclaimers detailed in our news release and management discussion and analysis.

The news release, financial statements and MD&A and all of the company's official disclosures are all available on our website and SEDAR+. I'm extremely pleased with the team's performance in the third quarter of 2024. In our Upstream division, we executed on a significant development program, which has provided us with continued confidence in the quality of our assets, including key differentiating factors that we continue to use to our advantage. Among these differentiators are: our Duvernay asset has high-pressure, high-liquid gas ratio and delivers some of the top-performing wells in the Duvernay and Kiwetinohk has drilling inventory to continue development and grow production into the future.

Beyond our Duvernay position, we recently brought on production the first Montney well in the Simonette area drilled by Kiwetinohk. Its results encourage our team to continue to delineate and demonstrate the productivity of an underdeveloped Simonette Montney resource. These results will be elaborated on by Mike Backus later in the call.

We've been able to maintain strong netbacks for 2 main reasons. First, we own and operate our own facilities within our Simonette asset, which allows us to keep our operating costs low. And second, we hold 120 million cubic feet per day of pipeline capacity on the Alliance Pipeline, which recently facilitated the sale of over 90% of our natural gas production in Chicago at a premium to Alberta prices. This Alliance capacity was recently extended by 7 years, allowing us continued access until 2032.

In our Upstream division, we expanded our fourth quarter plans to include a second drilling rig to accelerate 3 wells previously planned for the second half of 2025. Incremental capital is expected to result in a higher ratio of net debt to adjusted funds flow from operations in the short term as we exit the year. However, with 9 wells anticipated to come Upstream between now and the end of the first quarter of 2025, we expect to be in a position to begin delivering free cash flow and begin to repay debt early in 2025.

Advancing this investment in wells provides us with flexibility to determine optimal growth levels depending on the commodity price environment. Work on our 2025 budget is well underway, and we anticipate releasing guidance in the fourth quarter.

In our Power division, we continue to remain cautious and disciplined given the uncertain regulatory environment. We continue to seek sale or financing opportunities for our power portfolio in whole or in part. I'm looking forward to providing markets with our 2025 budget later in the year and updating our full year 2024 achievements in the new year. I would like to thank our shareholders and Board for their continued support.

I will now ask Jakub Brogowski to provide more information from the CFO's perspective. Jakub?

[Jakub Brogowski, executive]

Thanks, Pat, and good morning, everybody. During the third quarter, our focus remained on development of our Upstream assets with 98% of our capital investment directed towards our profitable, high netback Duvernay and Montney production. The quality of our Upstream assets continues to be proven as we develop our extensive inventory, and there are a few key points I wanted to draw your attention to in this quarter.

Our liquids-rich production, owned infrastructure and U.S. egress capacity continue to consistently deliver peer-leading operating netbacks with a Q3 netback of $28.98 per BOE. Our hedging activities and strong overall hedge book further added to our netbacks, bringing our adjusted operating netback to $30.89 a BOE. We have consistently shown our ability to maintain strong adjusted netbacks over a long period with quarterly netbacks averaging $32.50 per BOE since the start of 2023.

As Pat noted, our owned and operated facilities continue to drive low operating costs, achieving $7.19 per BOE in the third quarter, and we remain on track to achieve the low end of our operating cost guidance. Current levels also represent a 22% reduction from the third quarter of last year. I also wanted to touch on our recently extended Alliance capacity and the value that it has provided us this year.

In the third quarter, we saw significant downward pricing pressure on the Alberta AECO benchmark gas price. Our Alliance access has allowed us to realize higher gas pricing based on the Chicago market with benchmark monthly average pricing approximately 200% higher in Chicago when compared to AECO in the third quarter.

On the capital side of the equation, Kiwetinohk's assets and our contracting structures provide us the flexibility to respond to a changing pricing environment, and we have the ability to quickly increase or decrease our capital program to maintain a strong balance sheet. This year, we have chosen to reinvest our cash flows into growth with 85% of the approximately $237 million we have invested in the first 9 months of the year covered through our cash flows.

Our credit facility has supported the remaining capital expenditures. And as of the end of the quarter, we continue to have strong availability with our credit facility of approximately $230 million. During the third quarter, we announced a further acceleration of our capital program, increasing our capital guidance by $10 million for the year. We expect significant new production coming on stream starting before the end of this year and into the first quarter of 2025, which will allow us to pay down balances on our credit facility.

This head start will also provide us with flexibility to respond to the pricing environment in 2025 when determining optimal growth levels. We are planning to announce our budget for 2025 later in the year, as Pat mentioned. We also ended the quarter with just under $900 million of tax pools. These valuable offsets to income will help us to defer our tax for the coming years as we continue to profitably grow production.

I wanted to conclude by reiterating our excitement over the quality of our asset and underlying value within our shares. We saw multiple acquisition transactions during the third quarter, demonstrating value being paid for assets with growth potential and ample inventory, both of which Kiwetinohk possesses.

Most recently, Duvernay position in the immediate proximity to our asset was part of a USD 6.5 billion acquisition. We are excited by the significantly increasing interest in the Duvernay play and valuation metrics achieved in these market transactions as they continue to demonstrate our significant value potential. Thank you for your time today, and I'll now turn it over to Mike to expand on our upstream results.

[J. Backus, executive]

Great. Thanks, Jakub, and good morning, everyone. I'm pleased to provide you with an update on the upstream operations for the third quarter. We're safely executing our busiest program to date during the second half of this year. The development program is on track, and we're excited to see our production volumes continue to ramp up, particularly in the fourth quarter and into early next year.

Our production in Q3 averaged near 26,000 BOEs per day, which was consistent with the second quarter. This was a very busy quarter with new wells coming on stream later in the quarter, as outlined in the press release. It was offset by both some planned and unplanned downtime, which led to production levels that were steady.

We remain confident in our annual production guidance, which was increased in the first half of the year from our original budget. I specifically wanted to point out our much anticipated Montney well at the 1-27 pad. Here, we drilled one Montney and one Duvernay well, and this pad came on stream at the end of the quarter. After an initial cleanup period, the Montney well continued to ramp up and is seeing current rates in excess of 7 million cubic feet per day of gas and gas liquids in addition to approximately 400 barrels a day of condensate.

This is above our expectations with condensate near the plan, but gas rates well ahead of our expectations. With only about 12% of our Simonette Montney inventory in our current reserve book, we have a lot of value to unlock here. Our operating expenses came in strong again for the quarter and continue to trend to the low end of our guidance range, which is already lowered in Q2. This is being driven by our growing production base, high-quality owned and operated assets and the team's focused on operational excellence and cost efficiencies.

I'm expecting a busy and strong exit to the year. Here's a rundown of our current activity in the fourth quarter and into early next year. We're currently completing the 2-well Duvernay and one Montney well at our 8-23 pad that should be on stream later this month. The completion crew is actually moving over to the 9-11 pad as we speak, where we currently have 3 Duvernay wells ready to complete with production budgeted early in the new year.

We're also currently drilling a 2 Duvernay and another 1 Montney well at our 14-29 pad, which will be completed in early 2025. And as Pat mentioned earlier and in our press release, we will also commence drilling an additional 3 wells at the 1-27 pad in December, which was the capital acceleration decision we mentioned on our second quarter conference call and confirmed in our press release.

We are in the process of finalizing our plans for next year, but are expecting to remain active and continue to develop our asset and move us toward our target of 40,000 BOEs per day. Now our goal remains to stay safe, delineate and protect our high-quality resource, demonstrate the top-tier deliverability of our Duvernay, unlock the value potential across our Simonette Montney, fill our owned and operated infrastructure and provide more growth over the next couple of years, which has already more than doubled since we acquired the assets.

Thanks for your time today, and I hope everyone has a great holiday season coming up. I'll turn it back to Pat now.

[Patrick Carlson, executive]

Thank you, Mike. This concludes our third quarter conference call. I will now pass control of the call back to Angeline for any questions. Thank you for joining us for this update. Angeline?

[Operator]

[Operator Instructions]

Your first question comes from Amir Arif from ATB Capital Markets.

[Laique Ahmad Amir Arif, analyst]

Just an initial question just on the Montney well. Can you just remind us how that rate compares to your Placid Montney? And then I know you completed it in a lower part of the Montney up there or within the bench? And then are the next 2 Montney wells also going to be targeting that same area? Or are you planning on seeing if there's room for 2 wells in the same bench?

[Patrick Carlson, executive]

Thank you for the question. I'll ask Mike Backus to answer that for you.

[J. Backus, executive]

Sure. Amir, I would say that -- I think the first part of it was relative to Placid, seeing similar kind of results on the condensate side, but probably higher gas rates. I think we probably produce in the 3 million to 4 million a day range across most of our Montney and in Placid, and we're seeing obviously rates that are well in excess of that. So pretty encouraged by the gas drive of those wells.

And then you talked about the next 2 wells coming up. We kind of have 2 main horizons in our Simonette Montney. I won't get into the numbering sequence of them, but we've got some wells in both of those targets. The one we drilled in the lower -- the next 2 wells, one will be an additional lower, and then we'll probably drill one a little bit in the upper zone as well. So we'll continue to delineate both of those benches across our land base.

[Laique Ahmad Amir Arif, analyst]

Okay. Sounds good. And then just -- I know there wasn't much update on the Power segment, and there isn't a lot of capital going into the business. But just curious, Pat, if you could just provide us an update on the status of Homestead, if you can, or just the Power segment in general?

[Patrick Carlson, executive]

Sure. Thank you, Amir. I'll ask Fareen Sunderji to answer that.

[Fareen Sunderji, executive]

Amir, do you mind repeating your question?

[Laique Ahmad Amir Arif, analyst]

I was just wondering if you are able to provide us an update on where Homestead project sits in terms of the status. I know you've been looking at some alternatives. And then just for the power projects in general, just given the minimum capital going in. Just curious what the status is in terms of -- I know some projects are supposed to reach FID by the year-end or a couple of them?

[Fareen Sunderji, executive]

Yes, absolutely, Amir. As you know, the regulatory environment and some of the policies still linger, and we are catching up with respect to that. But we are pleased to share that the transmission line for the Homestead project, which was what we've communicated previously as a real regulatory hurdle has advanced significantly, and we're in the final stages of the AUC approval process.

So things are progressing on Homestead. But with the policy still in questions, particularly the restructuring of the energy-only market, capital discipline is what we're applying to the projects right now and moving them cautiously.

[Operator]

The next question comes from Josef Schachter from Schachter Energy Research.

[Josef Schachter, analyst]

I've got a bit of a sore throat. So I hope you can hear me. Just wondering first about the op costs. You've done very, very well with the Simonette $7.19 a BOE, down from $9.17 a BOE. How much more room is there to go as you ramp up production into that facility? How much more space is there? And what could that do to that op cost number?

[Patrick Carlson, executive]

Thank you for the question, Josef. I share your throat issue. So sorry about that, too. I'll ask Mike Backus to answer the question.

[J. Backus, executive]

Yes. Thanks, Josef. Yes, we're -- our asset is split between Simonette and Placid. Placid carries a higher operating cost. So the $7.19 you're seeing is a blend of that. So the Simonette asset itself is much closer to like a $5 or $6 OpEx environment.

And that has a little bit of room to decline because we do have spare capacity in our asset. So we would see absolute costs go up there. But on a per BOE basis, I would expect there to be some -- a little bit more room to lower those to probably bring our average cost down to $7 or potentially even below $7 a BOE.

[Josef Schachter, analyst]

Okay. Great. Next question is just from listening in on the calls in the service sector, the drillers seem to have held up pricing, but the frackers were a little weaker. How do you see input costs for drilling and completion? And given we're all hopeful that second half of 2025 when LNG Canada is coming on, would you want to start locking in the crews that you like for both rigs, drillings and fracking in concern that things tighten up once that facility comes on?

[Patrick Carlson, executive]

I'll ask Mike to answer that question as well, Josef.

[J. Backus, executive]

Yes. Really good question, Josef. Yes, I think our philosophy is very aligned with your question in terms of how we act. We've seen relatively steady drilling and completion rates, I would say, from last year and into this year.

You're right, there's been probably a little bit of excess supply on the completion side. So there's maybe a potential for being a little bit of relief into '25, but we're not really planning for much of an increase or decrease on the D&C side.

In terms of locking in providers, we've enjoyed some very long-term relationships with both our drilling and completions providers and definitely subscribe to that same philosophy. So I see us continuing to have long relationships and try to have a steady program with both of those providers. So that's our plan.

[Operator]

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

[Patrick Carlson, executive]

Thank you, everyone.