Peyto Exploration & Development Corp

TSX:PEY

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Peyto's First Quarter 2022 Financial Results Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Darren Gee, Chief Executive Officer. Please go ahead.

[Darren Gee, executive]

All right. Well, good morning, everybody, and thanks for tuning in to Peyto's First Quarter 2022 Results Conference Call. Before we get started today, I would like to remind everybody that all statements made by the company during this call are subject to the same forward-looking disclaimer and advisory set forth in our news release issued yesterday.

We've got a big room full of Peyto management team here to answer your questions today. In the room with me is our President and Chief Operating Officer, JP Lachance; Kathy Turgeon, our Chief Financial Officer; Scott Robinson, our VP of Business Development is here; we've got Dave Thomas, VP Exploration; Todd Burdick, VP Production; Lee Curran, our VP of Drilling and Completions; Derick Czember, our VP of Land, is here too; and our new VP of Engineering, Riley Frame, is here. So we're all here to answer your questions. So feel free to pepper us with questions when we open it up.

Before I guess started just commenting about the quarter though, I do want to recognize both the efforts of our office and our field personnel this past quarter. For those that care to recall, we had a fairly bitter winter in Alberta over the first quarter, with lots of minus 40 out in the Edson area, particularly right after Christmas. And while most of us basked in the warmth of our homes, it was only because of the hardworking people in our industry that kept the gas flowing and the heat in your furnaces.

And that included the hard-working people at Peyto, particularly our field staff that had to brave that weather to keep the gas flowing and plants running. So feel free to send me a note of gratitude and I'll pass it along to them. I for one was very glad to come in from all the cold winter to a nice warm house heated by natural gas. And not only did the Peyto staff keep the gas flowing, but they grew production in the quarter so that we had more to consume. So thank you all for that.

On to the quarter, we had a very busy quarter with drilling completions, pipelining and facility construction all going on throughout the quarter. Of course, the economics of new capital projects were the best we've seen in a very long time, and so we tried to put as much capital to work as we could. All that work resulted in production growing from 97,000 boe/d in the fourth quarter to 101,500 boe/d in the first quarter.

And we really didn't see the full effect of the first quarter activity until mid-April when we brought on the Chambers plant and finished up with all our tie-ins. And then production jumped to 106,000 boe/d, and that's about where it's been since. We expect we can hold at that level until we come out of breakup and start completing and tying in the new wells that we've been drilling through breakup. And so hopefully, production will keep climbing from there.

Of course, all this new production is exposed to spot price, and that is way up. And it also pays the minimum 5% royalties, so it has a big impact on our cash flow going forward. As part of our drilling in Q1, about half the wells were Cardium. And that, of course, was driven by where we had available plant capacity in Wildhay and Brazeau chambers. And it was partly driven by very high oil prices that drove high condensate prices, so we wanted to take advantage of that. As we move through the balance of the year, we'll drill a higher percentage of Spirit River wells that will take advantage of the now higher gas prices, which look to be very strong throughout the summer.

Technically, we only drilled 3 extended reach horizontal wells in the quarter. Just that's the way the lineup came together. But one of them was a record for us, over 6,000 meters in total length, 6 kilometers of drilling and over 3,100 meters of horizontal lateral. So that is an enormous technical feat with the drilling rig, and perhaps Lee can tell us a little more later about the challenge of pushing that rope all the way out to 6,000 meters.

Scott's team was busy in the quarter, taking down another acquisition. This was a corporate acquisition this time. So we accounted for it a little differently. You can ask Kathy how that happens. And this deal had some interesting aspects for Peyto. So it wasn't just the purchase of some producing wells and undeveloped lands like we did last year in Cecilia, which actually turned out to be a great deal for us, by the way. But feel free to ask Scott about this latest one.

What else happened in the quarter? Yes, we did record funds flow at over $200 million. That's a new high for us. The previous record was in Q4 of 2014 when we had, I think it was $179 million in funds from operations. So this $200 million boundary is now broken. And hopefully, we can continue to beat that in subsequent quarters this year and continue to grow our cash flow.

Our mechanical hedging activity meant that we gave up some opportunity this quarter. We had a bit of a hedging loss, of course, but we all have to remember that we do this mechanically every week, every month, every quarter. And we continue to take that future price off the table. And considering that we have close to 9 years of producing reserves, we don't really have a lot of it forward sold. I think it works out to about 13% of our PDP reserves that have a fixed price on it today. So there's still a lot left over that gets the option of higher gas prices into the future.

Overall, we're finally back to our historic operating margins of greater than 70% and profit margins of around 35%. That's always been the strength of Peyto, is really high margins. I'm glad to see that we're back at that level. We've managed to get higher commodity prices and hold on to our cost structure so that we're really seeing big margin expansion right now. And I think if we can hold at these levels, that will ultimately drive return on capital employed into the high teens, again, where we've historically been and what we're striving to deliver for shareholders.

I can also say that with where things are going and the commodity price outlook today that we're eager to get to the end of this year, we'll be bringing down our net debt significantly this year. And being at the end of the year in a really strong position to look at boosting our dividends to shareholders and other means of returning capital to shareholders. So it's an exciting year for us. We're off to a great start with this first quarter, and things are looking really good.

So Victor, that's probably enough of me. Why don't we open it to questions from those listening in.

[Operator]

[Operator Instructions] Our first question will come from the line Michael Harvey from RBC Capital Markets.

[Michael Harvey, analyst]

So just a couple of bigger picture questions on capital allocation. So the first one is on cash taxes. Obviously, the byproduct of a profitable business, but you've got to pay some later this year. So does that change any of the drivers of how you're running your business that could mean buying other producers for those NOLs or drilling more to get more deep pools? Or is it just kind of a cost of doing business?

And I guess, the second one, just on the use of cash. Obviously, the market is pretty fixated on dividends and buybacks. But the returns you're getting in your projects could suggest that you're going to get a better improvement to your return on equity just by drilling those up as opposed to dividends. But I would love to hear just how those discussions play out kind of in the boardrooms as it relates to how to allocate that capital.

[Darren Gee, executive]

Yes. Good questions, Mike. The first part, in terms of cash taxes, we do expect that we'll pay a little bit of cash tax probably in 2022. We'll see how the commodity prices play out. But with some of the really high prices that we're experiencing today, and if those carry forward into the rest of the year, even with the good tax pools that we have accumulated over the years with all of our capital investments. And even with the accretion of some pools from this acquisition that we did at the start of the year, we might have a little retax bill at the end of the year.

But that doesn't really influence our investment decisions. I think the rates of return that we're looking to achieve with the capital are both before and after tax. Good rates of return, both before and after tax. So -- and quite frankly, the economics that we're looking at today with the commodity price forecast and where our cost structures are and the type of wells that we're getting, we're just driving some fantastic returns regardless of whether we're paying tax on those or not. So the incentive is definitely there to put as much capital to work in the ground as we can.

And so the second part of your question in terms of capital allocation, we would love to do more. We would love to take more of our cash flow and put it to work for shareholders because that's how we truly create value for them, giving them back the profits that we're earning on previous capital investments, that's great. We've always done that with our dividends matching to our earnings.

But in terms of returning more capital to them, that just means they have to go and find some place to invest it. And the type of returns that we're able to generate by investing it in the ground today are probably better than they can find anywhere else. So we'd love to be able to invest it for them drilling wells.

The challenge, of course, to do that is we're kind of at the limit of the people and the equipment and the amount that we can go and do. We've got the 5 drilling rigs running today. We've been keeping them very busy. I'm glad we picked up that fifth rig mid last year and brought it into the fold. That was a very smart decision, I think, on our part to get that equipment going. We're going to do as much as we possibly can with those 5 rigs this year. I think the decision to drill through breakup is part of that. We'll see if we can get more done. And then if that frees up room to do even more later in the year, then great. Maybe we'll look to expand our capital program in the back half of the year. We have that option to try and do more if the economics are still looking as good as they look today.

The industry, though, is kind of tapped out. The good quality rigs, the good people that can get you the efficiencies that you want to drive these type of economic returns are all working. And until we really build up a lot more capacity in the industry, I don't know that there's a lot more that we can do. There is always the issue of egress too.

And I think gas producers are keenly aware of the fact that last time around, we built out far too much supply in advance of expanding egress that just didn't happen fast enough. And we caught ourselves and the gas price took it on the chin as a result. So we don't want to do that again. We want to make sure that the egress is at least expanding as fast as the basin is growing or maybe even faster. That would be a more comfortable place for a lot of the gas producers. So I think collectively, we still have that fresh in our minds and nobody wants to overbuild until the takeaway is there.

[Operator]

Our next question will come from the line of Travis Wood from National Bank.

[Travis Wood, analyst]

Yes. I wanted to hear you kind of walk through the inflationary pressures you mentioned, expect the metrics to continue to improve despite some inflationary pressure. Could you unpack, on the capital side, kind of where you're seeing that on the capital spending equation. And then could you help us kind of get a better understanding on where you're seeing that as well on OpEx?

[Darren Gee, executive]

Yes, good question, Travis. So I'm going to turn that over to both JP here, talk a little bit on the capital side, and maybe even Todd can talk a little bit on the production side about the inflation and how we're mitigating that.

[Jean-Paul Lachance, executive]

Yes. So like I think like all companies and businesses, we're feeling the effects of obviously of rising supply costs, everything from steel to frac sand to methanol, at all has a different sort of factor here that's going on. So when you think about that, all that stuff has to get trucked or trained as well. So we're seeing a significant increase, obviously. And they play a role in the transportation cost to get this stuff to us so we can use it, right? All that's playing out. And we're seeing that, of course. We have a steady -- we've had a steady program over the last several years. So the strong relationships we have with our suppliers, we recognize that they have to flow some of that through to us, so we get that.

But overall, I think we've seen about 10% to 15% certainly on the capital side so far in Q1. We expected that. We budgeted for that. So when we look at our program, we -- and our returns, recognize that our future returns and the prices that we put into our models and to our type curves. So we kind of budgeted for that and our capital efficiency. We are expecting that to be a little higher this year for sure. I'm hearing a lot about how companies have mitigated their higher cost with improvements to the cap efficiency to their actual -- the work they're doing out there.

But you got to remember that we're one of the lowest cost producers in the basin -- we're the lowest cost producer in the basin from an operating perspective. And so I think that cap efficiencies are focused for us each and every day. It's not something that's changed over here. So our natural insulation to the sort of rising cost is just the fact that we're starting lower than everybody else. So just the same, we're going to continue to do stuff like drilling extended reach horizontals. We'll draw off as many pads as possible. We'll make use of our tele-double rigs versus more expensive triples. And we're certainly going to help -- that will help mitigate the costs as we go forward. But the prices here still make great returns, and we're seeing some fantastic payout just the same.

So one of the things that we have to remind ourselves and our service providers is that despite the sort of most recent quarter, these are all forward-looking prices, and we haven't realized them yet. So we shouldn't get too far over our skis here with cost creep if we can control it. I guess that's more around the capital side, a little bit of the operating cost discussion. Maybe, Todd, you can add to a little bit on what you're seeing, how we're mitigating.

[Todd Burdick, executive]

Yes, I think you mentioned 10% to 15% on the capital side, and that's pretty much what we're seeing on a lot of the pieces of the operating costs, especially chemicals are probably even higher. We're able to mitigate the cost of methanol. We're probably about 10% lower than market, just given the contracts that we've been putting in place each year in the summertime. So that's helped. But for sure, the market price of methanol and a lot of the corrosion inhibitor chemicals and stuff are derived from oil and natural gas. So we're seeing 20% to 25% market price increases on those, but we're able to mitigate that.

I think given that our assets are very condensed, close together, that helps because you've got to pay truckers. They've got to buy fuel and that sort of stuff, and fuel is up higher. So we've worked some agreements with those guys who have been working with us for a long time. And we recognize that they're feeling it. And so we've allowed them to put some increases in place, but we've worked with them to make sure that they're in line with the -- with what they're feeling. So we'll be able to drop them back, hopefully, when fuel prices come back down. It's about efficiency and just trying to be as efficient as we can to mitigate those costs.

[Darren Gee, executive]

Recall, Trav, that a couple of years ago, a few years back now, that we made an infrastructure investment in a lot of liquids handling pipelines so that we didn't have to truck as much. And that investment is really paying us big time today because when you're looking at diesel charges and trucking charges going way up, we don't have that because we've already put in the pipeline that can take the fluids to those central locations where we need them. So we did that at the time to mitigate the trucking and some of the environmental impact of trucking and the cost of the carbon tax. But it's going to pay us even more return here because the fuel charge, it gets mitigated as well.

[Travis Wood, analyst]

Okay. That's great color. Maybe one more follow-up just on CapEx. The Chambers plant, that seemed like a pretty good cost considering everything that we just talked about. Did that come in under budget or was that on budget?

[Todd Burdick, executive]

It was on budget. We did have a lot of equipment that we had planned for another plant. And so we have held on to that equipment. So we got a great sale, if you want to look at it that way, on that equipment. We had preserved that equipment. And so we were able to do a little bit of work to it, but the preservation keep things in pretty good conditions. So yes, so we came on budget. Some of the labor costs, we even saw a cost increase come from the vendor during the construction, which we've never seen but they were losing guys. So we needed them to keep people so we could get the plant done. So yes, a great project all in all.

[Darren Gee, executive]

Well and recall, Travis, I wrote up in my project this past month about the Chambers plant startup, and it was one of the fastest plants we've ever built in terms of time line. So a testament to the guys to have it all pre planned out and executed on time, on budget and even faster than we've ever built a plant before. I had to laugh because I got an e-mail from an investor who lives in Australia, and he was just blown away that we had basically put a plant down and got it up and running in a little over 100 days. He told me that it took him over 2 years to equip a well and tie it in down in Australia.

So the speed at which we can move here is important because it translates into more time producing the cash back to pay for the investment in the first place and shortens our payout time and obviously improves our rate of return. So being able to move fast is an important feature. And I think Peyto is one of the leaders in terms of how quickly we can get stuff done.

[Operator]

Next question comes from the line of Aaron Bilkoski from TD Securities.

[Aaron Bilkoski, analyst]

I have a couple of LNG-related questions for you. The first is, we've seen a couple of the Canadian producers sign JKM-based contracts with Cheniere. I guess I'm looking to understand whether or not Peyto would meet the requirement to be a counterparty for these type of agreements, and I'm thinking from a size, a resource and a credit perspective? And if the answer to that is yes, is this something that you would look to pursue?

[Darren Gee, executive]

I think the answer is yes. We're not as big as Tourmaline and ARC, the guys that have signed up some of those deals. I don't know if the counterparties are looking necessarily for BBB credits with their counterparties or they're looking for guys that have big resource behind them. I mean if it's the latter, then definitely we should be a consideration. We have a little over 0.5 Bcf a day of production. We do have a very long reserve life, so we can look at long-term contracts, 15-year type dedications. We did that with our Cascade power contract. Obviously, we've got a 15-year contract dedicating gas to that power plant. So I wouldn't think that a long-term contract to an LNG offtake in that order is out of the realm of consideration for us.

That's why we're part of the Rockies LNG group, is to look at those kind of things. I think we still have optionality in terms of which direction we might look for LNG export. The West Coast of BC, I don't think is a given necessarily because we've just seen that Western Canadian producers can also get the transport through the pipe down into the Gulf and look at that as an option for LNG export. Obviously, that's moving a lot faster than the Western Coast of British Columbia. It doesn't seem like we're seeing the same kind of cost overruns in the Gulf of Mexico in terms of those LNG facilities and the pipe to get to them that we're seeing to go to BC, unfortunately.

But I was just in an LNG conference on Tuesday in Vancouver. And there is a lot of enthusiasm still for BC LNG exports. There's a lot more, I would say, pull these days from the Asian markets that would take most of that BC LNG. It's $30 LNG prices around the world as opposed to $15 last time we were at these kind of conferences talking about new BC LNG projects. So I think there's a lot more interest in Canada. And there is still, like I say, a lot more pull from the buyer today to hopefully get these projects across the line, get things up and running.

This decade is going to be a real interesting one because I think once the first project comes on, we're going to get a chance to see how quickly as an industry we can move to accelerate and advance that. The U.S. was only exporting 3 Bs a day in 2019. And here, we are looking at 2022 and they're up to 12 going to 16 Bcf a day in the near horizon. So they have ramped up really fast. And I hope that Canada can do the same once we get going. And from Peyto's perspective, we've got long reserve life and we'd love to be aligned with some of that export for sure.

[Operator]

Our next question will come from Chris Thompson from CIBC.

[Christopher Thompson, analyst]

In terms of accelerating the capital spending, how much of your original guidance would you then plan to be through by the end of Q2? And then the second part of the question is how are those working rigs contracted in terms of keeping them working in the latter half of the year? I mean, it would seem that capital increase, therefore, seems likely unless you're going to give up those rigs.

[Darren Gee, executive]

Yes. So good question. Riley, why don't I turn it to you, ask you about the allocation of capital and how that budget looks playing out right now. If we don't exceed our capital guidance, what would the next couple of quarters look like? And I guess, what would they look like -- obviously, we would have to exceed our capital guidance if we keep them running. And then maybe we can ask Lee here about the contract.

[Riley Frame, executive]

Yeah. So as Darren mentioned here, we are going to stay more active through Q2, which is going to pull some of that capital forward. Obviously, the reason for us doing that is pretty obvious with the prices being where they are right now. So we will expect to spend a little bit more capital in the next quarter and the next 2 quarters than we would have initially. As we roll out a breakup here, I think we'll be ramping back up to 5 rigs.

And I think -- the activity will be obviously 2 rigs in Brazeau, with a steady diet of trying to fill up our Chambers facility and Brazeau facility. Three rigs in the Greater Sundance area. And with that activity levels, we'll be pushing, I think, towards the higher end of our guidance here, that $400 million as we come towards the end of the year.

[Darren Gee, executive]

I think we had scheduled, Chris, that Q4 capital now is lower than what we had originally envisioned, which would be, I guess, a bit of a slowdown. Now typically, we go into the end of the year and there's a bit of a Christmas break. And sometimes we do shut rigs down for that Christmas break in mid-December. That slows things down a little bit. But the rig companies are going to work pretty hard all year long for us. Is that going to be a big issue for them if we have a little bit of a slowdown in the fourth quarter? Or conversely, are they ready to just tear it right through next winter full on, no break?

[Lee Curran, executive]

Yes, I think the appetite is going to be strong to keep operating. So we'll have to monitor that. You got to remember, these rigs have been stable, some of them were better than a decade. So the relationships are pretty strong. The individuals at the field level on a deemed data was their home. So there is an element of loyalty.

Now we're very respectful of that relationship and the revenues that these contractors are expecting. So I think it's going to be tough to play out until we get closer to that point in time when we have discussions about whether that capital program is going to be expended. By all means, the opportunity to window those rigs out to another operator will certainly be there based on activity levels. I don't think we have a hard time asking peer operators to help us keep our rigs busy and then get them back in Q1, if that's what it comes to. But we've got to kind of wait and see how that shapes up.

Our contracts are written. We're in kind of a spring cycle. So we're pretty fixed on what those look like for the year. I think you asked about some increase to rates. So we've just signed those. It doesn't make us immune from any flow-through increases. We have a labor increase, another labor increase. That will be the third one to crew wages in the last 12 months. So we've got a labor increase coming on June 1.

And we understand that -- we've got to work with those pressures. We're in a tough game where we're having trouble attracting new people to an industry when we're only running a couple of hundred rigs, if you remember back to 2006 when we were on 800 rigs in this basin, kind of scratch our head where our people went.

But -- so we have a little bit of insulation. We're not completely insulated from that cost creep. We have to continue to attract and retain people. So those things are going to flow through. But as far as increasing margins with our rigs, we're insulated on that front.

So like all things, it's a risk, but our relationships with these contractors are strong, showing our loyalty over the last 4 to 6 years of downturn, I think it puts us in a different category as many of our peers that are having to throw out top dollar to just get anybody to show up and work.

[Darren Gee, executive]

Well, I'd add, Chris, that we have to be sensitive to the labor issue right now. As Lee points out, a lot of the people that are working on these rigs that have worked for us for many years are the same people. And you can't work people to the bone either. We have to make sure that we're giving people enough down days, that we're not exposing ourselves to safety issues or exposing them to any risk. Guys have to have a break every once in a while.

And I know that even though they maybe haven't worked enough during in COVID and they're trying to make up for some lost time, we still have to be safe out there. We still have to have the good people working for us, and we have to respect their needs as well. So a lot of the reason that we shut down at Christmas is to give guys a bit of a break and make sure that we're not pushing people too hard through the winter program. So we may still have a little bit of down days, which would make our fourth quarter a little bit less capital than if we were to plow right through. But we have to remain nimble and sensitive to that as well.

[Jean-Paul Lachance, executive]

Darren, if I could add to that. There's one more point here we could add to that, and that's regarding the fact that we would have budgeted for 2 rigs run through breakup anyway. So really this is an acceleration of 2 rigs worth of work through the breakup period. So that's maybe 8 wells or something like that extra beyond what we plan to spend. So it isn't -- it doesn't mean we have to slow down in the back half of the year. But certainly, as we indicated that we have that ability if we needed to, if we had to, right?

[Darren Gee, executive]

Yes. We're talking about $25 million-ish type in terms of capital.

[Jean-Paul Lachance, executive]

Yeah.

[Christopher Thompson, analyst]

Okay. And then just on a similar thread there. As you do look at increasing your capital spending, potentially that comes with additional production. Is additional production going to have to come with additional infrastructure spending? Or should we just think about it as purely half cycle economics at this point?

[Darren Gee, executive]

For this year, definitely, it's the half cycle economics, I think, right?

[Jean-Paul Lachance, executive]

We built out the infrastructure in the first quarter here.

[Darren Gee, executive]

That said, we are drilling in some areas that obviously have some long-term plans in them. And we're hoping that those are going to lead to new plants and new infrastructure, new facility constructions. Whitehorse jumps to mind. We've got some wells already there, and we're testing out that play area, and we're going to drill some more. And hopefully, we can get to a critical math there where we've got a new station going in. And we already have the Meter station arguably, a new gas plant going in.

Gear might be a little tough in terms of time line. So we have to plan in advance. And maybe we can shuttle -- shuffle around some of the existing equipment that we have. We've got a Galloway plant that's just sitting there. We've got probably some spare equipment in this Aurora plant that we purchased with the corporate acquisition. So we can potentially take advantage of that too. But we don't envision any more big facility projects this year, just like you say, half cycle economics.

[Todd Burdick, executive]

We've got some running room in Greater Sundance and down in Brazeau Chambers area with the Aurora plant and we've got room in Brazeau. So we'll be able to get through the year without any issue.

[Darren Gee, executive]

So we're up. That's the plan.

[Operator]

We have a follow-up from the line of Michael Harvey from RBC Capital Markets.

[Michael Harvey, analyst]

Yes, sure. Just a follow-up here on , I think, Travis' question. So you mentioned that 10% to 15% inflation, which would be pretty much close to best-in-class. I'm just trying to line that up with the cost table you put in your release, which would seem to suggest drilling is up 17%, fracs up almost 30%. So I know there's some differences in timing well type, length, all this kind of stuff, but maybe you could just sort of square the circle for folks who might be doing the same simple math we are.

[Darren Gee, executive]

Yes, you bet, Mike. And that's why we made the comment that, that was really driven more by species than it was by service cost. Cardium wells typically have shorter laterals. We're trying to get as much frac intensity on them as we can. But the extended reach horizontals obviously dragged down that cost per meter in a big way, both on a per-stage basis and on a per-meter drilling basis. And we didn't have much of that in the first quarter. We plan to have a bunch more Spirit River extended reach horizontals in the balance of the year. And so that should help stretch some of those costs out. You guys want to add to that?

[Jean-Paul Lachance, executive]

Yes. I think if you look at that table, that includes all of our -- all of the wells that we participated in. So there's a couple of -- if you're not operating well there that we participated and the costs were significantly higher. So from our -- what we control and going forward, we're going to see costs going forward much better than that, I think. Lee, do you want to add to that?

[Lee Curran, executive]

Yes, sure. That's a good point. There's a clear representation in the data that we have that shows our relative advantage on cost structure relative to our peers. We had the opportunity to participate in some non-op work, and that clearly illustrated the advantages of our cost structure relative to some of our peers up there in the Greater Brazeau area. The biggest elements of cost creep that is a little concerning, and I wish I had a crystal ball on it, is steel, is OCTG. We have watched steel alone almost double -- basically double from its lows about 1.5 years ago.

Since that point in time, the mill capacities have been a little restrictive. They've scaled back to obviously, the kind of global economic concerns. Got us to a point where there was really no excess inventory on the ground. So we didn't even have a position if we chose to do so. It's a really load up on low dollar pipe, you would have had to be pretty predictive of how the future was going to unfold. So now it's just-in-time delivery. And with that comes some significant cost increases.

We're getting to a point -- I hope that, that stabilized and we start to see some retraction in that pricing. Capacities are expanding. So I don't think we'll see it until the last half of the year, but we're optimistic about that. But our cost is very sensitive to that on the capital front. We run a lot of type of these wells. And with that, we're going to continue to evaluate designs and maybe scale back on, on some of our designs and see if we can minimize the amount of pipe we are installing. But that's a big factor, and that's a big hunk of our overall inflationary pressures just as one single line item.

[Darren Gee, executive]

So Mike, when you think about this decision to accelerate into the quarter, it's kind of an easy one. If you say, well, let's take $20 million or $25 million of capital that we were going to spend in Q4 that has the real risk of inflation on it, and let's just pull it right into Q2 where we know where the costs are. And we don't have to then risk it that it's going to cost a lot more. And then when we get to Q4, if it turns out that the inflation isn't as bad as we feared then we can add some more capital to the program. If it's worse than we fear here, then aren't we glad that we did things a lot earlier in the year when they cost cheaper.

[Lee Curran, executive]

The part about it, especially with the steel element is we have to remember we have mill allocations, and there are a lot of peers or competitors out there that simply can't get it. So we have our allocations. We have trusted business relationships. And so despite the price, I mean, the price is one element. But the ability to actually obtain the goods is pretty critical right now, too.

[Darren Gee, executive]

Which becomes a natural governor on the industry activity. You just -- I mean you can't drill a well if you can't get the casing and the tubing.

[Michael Harvey, analyst]

Right. So is it fair to say that the frac cost is considered -- the increases in frac costs are considerably more than those of the drilling cost, even including the effect of casing prices. Is that fair? Or maybe I'm just pulling too much and this is not applicable?

[Darren Gee, executive]

No, we're just reading into the math for the quarter there, just the stage count numbers and just the individual wells that we drilled. Some of them might have been a little shorter in lateral length. And so then you don't get as many stages off as you want to in those wells. And so just the average math is skewing the numbers a little bit. I think let's not read too deeply into that ratio just for this quarter. Let us get the rest of the quarters for the year done, and I think we'll see that the per metric costs actually come in line with and along the same lines as the type of inflation that we're expecting.

[Operator]

[Operator Instructions] Our next question comes from the line of Nathan Schwartz as a private investor.

[Unknown Attendee]

A quick question about share count. Can you provide some detail on the dramatic increase in basic and fully diluted shares outstanding. And should we expect going forward for the dilution, that significant dilution to be an annual event?

[Darren Gee, executive]

That's a good question, Nathan. And we have seen our share count creeping up here over the last few quarters directly resulting from our compensation program, our stock option program. So employees who have received stock options over the last couple of years at a much lower share price are now starting to see their options in the money. And so they're taking advantage of those. I'm glad to see it. It also means our share price is going up. So shareholders are enjoying that rise in share price.

Typically, our option program out in front of us, our expectation is we're going to have no more than about 5% dilution on the whole thing. But stock options are performance-based compensation practice that is used throughout our industry. We tend to have them here at Peyto, not only to incent everybody to do their best to deliver the results that should make our share price go up. But also, it's hard to hire people away from other companies that have stock options if you don't offer the same. So in terms of the compensation package, we have to somewhat be aligned with the rest of the industry to be competitive for new employees.

But that dilution that you're seeing, when we calculate a fully diluted metric, we're assuming that all of the outstanding options are exercised if they're in the money, which at the current time, they all are that new options that are awarded today, of course, our share price has to go up for them to be in the money. And we fully hope and expect that if we continue to execute as well as we have been that our share price should reflect that success.

[Operator]

[Operator Instructions] Looks like we have no further questions in the queue. I'll turn the call over to Darren for any closing remarks.

[Darren Gee, executive]

Okay. Well, that was a good call. Lots of good questions on the quarter. It's a busy quarter of releases and today, I think, is a busy day in terms of conference calls and whatnot. So I think we'll probably just wrap it up there. I think we covered most of the pertinent issues of the quarter. We had a very good quarter by all measures, and we're pretty excited about the balance of the year, as you can hear in the voices here.

We don't need these fantastic gas prices to carry forward even $4 on the far end of the futures curve, is a fantastic price in terms of our economics, but we're sure going to love it when we can get $7 or $8, too. This is a bit of a whole new world for us and it happened quite dramatically. We only made $212 million of cash flow in 2020, and we just posted $203 million this quarter. So that's an enormous gain in the last couple of years, and we really didn't even get the full of full bang for our buck yet, which we'll get here in subsequent quarters.

So it's an exciting time to be a gas producer, and we're going to keep doing our part to try and have a lot here in Western Canada that we can hopefully share with the rest of the world, this clean responsibly developed natural gas energy that Peyto is known for. So thanks for tuning in, and we'll be back to you in August with the second quarter results after breakup with some of our drilling results and how we're doing. And of course, watch our website for my monthly report. You can follow on how it's going. But thanks for tuning in, and we'll talk to you next quarter.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.