Peyto Exploration & Development Corp

TSX:PEY

Earnings Call Transcript 2024-Q1

[Operator]

Good day, everyone, and thank you for standing by. Welcome to Peyto's First Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To participate[Operator's instructions]. Please be advised that today's conference is being recorded. Now I would like to hand the conference over to the President and Chief Executive Officer, JP Lachance. Please proceed.

[Jean-Paul Lachance, executive]

Thanks, Carmen. Good morning, folks, and thanks for joining Peyto's first quarter conference call. I'd 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 the company's news release issued yesterday. Present with me in the room today to answer your questions. We have Riley Frame, our VP of Engineering and Chief Operating Officer; Thomas Carlson, our VP of Finance and CFO; Lee Curran, our VP of Drilling and Completions; Todd Burdick, our VP of Production; and Derick Czember, our VP of Land and Business Development. Firstly, we'd like to thank the Peyto team both in the office and in the field for their contributions to a strong quarter. And Q1 was a good quarter for Peyto despite low gas prices. We generated $205 million of funds from operations and $100 million of earnings, which in part has to do with our industry-leading cash costs, but also thanks to our 90 sorry, a $93 million hedging gain from our systematic hedging program that we put in place over the last 2.5 years. This allowed us to not only fund our capital program of $114 million, but pay our shareholders $64 million in dividends and also left us enough to pay down some debt about $23 million of net debt over the quarter. We continue to be excited by the drilling results in the newly acquired Repsol lands. We had 15 wells on stream to the end of the quarter with enough history that show us a sustained 30% increase of average well productivity as compared to the performance of recent wells, recent years on Peyto's legacy assets. This continues to affirm that the assets we bought last year have the quality we thought they did. We completed some very long lateral wells in the first quarter across all species, longest quarterly program in our history, in fact, at an average length of about 2,200 meters, and we continue to see the benefits of doing this to optimize resource recovery. In Q1, we also drilled two 2400-meter lateral Dunvegan wells that we subsequently brought on in April that demonstrate good deliverability, coupled with higher liquid content in our Spirit River wells about 20 million to 30 barrels per million. It hasn't excited enough to dedicate a rig to the play for the rest of the year. We have over 100 wells booked across our land base, and we expect to drill about 10 to 12 wells total in 2024. You can find a little more information about this plan in the April monthly report and in our corporate presentation slide deck. Peyto's focus on unit operating costs remain a priority so much so that we set a target of at least a 10% reduction from Q1 levels by the end of the year. And we've already begun to make meaningful changes in this regard beyond connecting gathering systems and launched together in the field. The decision to no longer recover ethane via a third-party deep cut plant fits with our own, fits to at with our own and control strategy. Taking someone else to extract low-value ethane from the gas space doesn't make sense, especially when we can redirect a portion of that raw gas stream to our gas plant, which helps dilute its higher fixed costs. We estimate that we will see about $0.02 per Mcfe reduction on overall operating costs going forward without any material loss in revenue. We do use about 2,000 barrels a day of low value production from the base, but in the short term, but we expect to more than make up that loss by the year-end with the quality of the drilling program that we're executing. And this is a good example that we're running a business here to make money, not lower-value BOEs. We're still running 4 rigs right now, but we have them situated on 3-well pads for the most part through breakup to minimize moves, and we'll be prudent on spending capital and bringing on production in the current low price environment. That means we might wait on completions to keep costs down and production adds will be delayed accordingly. We have varying levers we can pull to reduce should low prices prevail past the summer. I know many are wondering about the status of the Cascade power plant and when we're going to start selling gas to them under our contract. As a reminder, that contract is for 60,000 GJs a day or about 52 million cubic feet a day over the next 15 years. It will start once they are fully operational. We have pressured up our pipeline that connects the gas roughly to their plan, and we're ready to go. Based on publicly available data, Wolfclass have been generating some power and are making commissioning progress. So that's a good sign. The latest filing with the Alberta Utilities Commission for start-up is in July of 2024. When we look past summer '24 and into 2025, we're excited about the LNG egress build-out, which is coming over the next few years. By the end of the decade, Canada and the U.S. should be exporting at least another 12 Bcf a day. Besides that, there's significant demand potential that could be born under the evolution of AI with increased power varmint for data centers. We all know that natural gas is safe to cure clean and affordable, but most importantly, it is a reliable supply of energy for the future. In the meantime, while all that comes to fruition, Peyto is well protected with our low-cost structure, our disciplined hedging policy and our quality drilling inventory to thrive in 2024. This gives us confidence to execute a measured capital program, sustained dividend payments to shareholders and still allow us to manage the balance sheet with repayments of debt over the course of the year. Okay. I'll keep this short. But just a reminder, our AGM is next week on Wednesday, May 22, at 3:00 p.m. in the building in our calorie office on the plus 15 level in the conference center. We hope to see there. If you can't make it, we'll be posting a reporting of it on our website afterwards. But please vote your shares. If you could help with that, you can see our press release for instructions. Okay. Again, I'd like to keep this short. So maybe I'll go to the phones Carmen. If there's any questions there. If not, I can go to some questions we have them in overnight.

[Operator]

Thank you. I don't see any questions at this time. But as a reminder, if you do have a question, [Operator's instructions]. I see one question from the phone. How do you want to proceed?

[Jean-Paul Lachance, executive]

Go ahead.

[Operator]

One moment. I will bring it to the stage from Chris Thompson with CIBC.

[Christopher Thompson, analyst]

Hey good morning everyone, thanks for taking my questions this morning. First question for you just on the transportation costs. In your release, you mentioned you've seen an increase in tolls on NGTL and increase in costs related to transportation with your Q1 results. Just wondering how we should think about that trending for the rest of the year?

[Tavis Carlson, executive]

Chris, it's Tavis Carlson here. Yes, we came out at $0.30 per Mcfe in the quarter. And I think you could use that going forward for the rest of the year. I think 2023 were $0.27, so we're up about $0.03 year-over-year here. But $0.30 is a good number to estimate for the rest of the year.

[Christopher Thompson, analyst]

Got it. Okay than you. And then my next question, just in terms of free cash flow for the balance of the year. I'm wondering if you can help us sort of triangulate where you see your free cash flow profile going in the balance of 24.

[Tavis Carlson, executive]

Well, we don't typically guide specifics on that. But generally speaking, we will always prices a little bit lower here in the next 2 quarters. We'll see that come down. Obviously, cash flow will come down in general. And so that might mean we accumulate a small amount of debt over those terms. The Q4, we have stronger prices and, of course, on the strip, but also in our hedge book, which is in the press release, and so we'll see a full paydown of debt over the years. So the free cash flow that we generate, obviously, motors has any free cash flow we have and of course, sustaining the dividend as well throughout that period is a seasonable problem.

[Christopher Thompson, analyst]

Okay thank you. And then on the production profile, just the loss of 2000, I guess that will be 2,000 barrels a day of ethane production from your base. But then you mentioned you're going to make up for it by year-end. So I understand your exit rate is unchanged. But should we think about you know if we are modeling a certain number before this change, would we see our full year average come down 2,000 barrels a day? Or how should we think about really just modeling this out?

[Tavis Carlson, executive]

I'd say in the first like second quarter, third quarter, maybe it continues for that period of time, you'll see a reduction of whatever you have in your model by about 2,000 barrels a day of production, you shouldn't see a change in your revenue. In fact, you should see cash flow go up because we are going to reduce operating costs by, like I said earlier, of $0.02. So you should model something slightly less on the obviously, 2,000 barrels a day less in the short term. But depending on the timing of all the production as we have, which would be Q3, Q4, mainly and corresponding with higher prices, we'll more than make up for that 2,000 barrels a day. So it will be caught up in, say, Q3 and Q4 in that range somewhere near.

[Christopher Thompson, analyst]

Great thanks I'll hand it back.

[Jean-Paul Lachance, executive]

Okay. Thanks for your questions, Chris.

[Operator]

You may continue. I don't see any questions at this time.

[Jean-Paul Lachance, executive]

Okay thanks. I'm going to take a couple of questions that came in over the wire there last night. Maybe this one's probably for Riley we talked about the 30% improvement on our well results. We're very happy with and what we expected or maybe even a little better than we expected. Can you maybe elaborate some more around maybe what are the costs associated with these wells and how are we predicting our F&D and the sort of things are a little more color maybe around that program

[Riley Frame, executive]

Yes. Thanks, JP. Yes. So obviously, the performance of the wells on the Repsol lens have been excellent, as you mentioned, 30% over last year's program on average, which is great. From a cost perspective, everything is coming in, in line with what we would expect. Average cost for the quarter or about 4.8% and C, the Repsol costs were actually just a little bit below that at $4.7 million per well, even though we're actually drilling those wells slightly longer roughly 15%. So based on the data we have right now to forecast these wells, we're predicting an F&D of around $0.95, which is really good. And actually is right in line with what we're seeing from our from our reserve process this year. So yes, that's all really positive. And I would actually expect that, that F&D number here will drop a little bit further throughout the course of the year as we feather in more hunting out acumen locations. As we move through the second half here, we've been able to digest a bunch of the seismic that we picked up late last year, and there's a suite of really high-quality ones that we'll be drilling in the second half. So we expect to have those numbers to improve half of the year as well.

[Jean-Paul Lachance, executive]

That's encouraging. Thanks for that color. Todd also have some questions around our preparedness for wildfire season, we saw some smoke rolling over the weekend in Calgary. As a reminder, it is that time. We're hearing about evacuations or running some areas. Maybe you could elaborate on what we learned last year and maybe what we've done or what we, how we will mitigate any impacts from that. It's one of the common questions I'm getting these days.

[Todd Burdick, executive]

Yes, sure. So as far as key learnings last year, we did learn that our gas plants, we can operate them remotely for short periods of time. We can't obviously do that with the Edson gas plant. It's a fairly large facility and a little more complex to operate, but we can run them for a short period of time. Cutoff of access is pretty key issue where, obviously, if we can't get into a certain area due to an evacuation or something like that, then you've got water tanks that are filling on sort of things. So again, you can run for a short period of time, but we can remotely shut wells in, which helps. So we kind of try and keep things going as long as we can, and we did that in certain situations last year. Liquid trucking egress is a main concern that affects many of our plants right now, about 68% of our liquids move on pipes to sales. As long as those facilities that are on the other end of those keep moving, then we can move a large volume of fluid, but a lot is moved out on trucks. So that's some a little bit of risk that we see. As far as mitigation, obviously, we talk about it quite a bit. We've got a lot of plants linked together, especially in the Sundance area and as well down in greater Brazeau. And as we've been talking about since the acquisition, we've worked to connect the Repsol plants in the Greater Sundance area as well. So that gives flexibility to move production around, if needed, have a fire should approach a particular part of that greater Sundance or greater Brazeau area. We cleared areas around plants where maybe trees were a little bit close closer than what we felt comfortable with. We looked at all of the Repsol, former Repsol plants, and there was no issues there. Obviously, I mentioned the liquids pipelines when fire start to get near the area that we start looking at things like pulling tank lemme down to plants and LPD levels and that sort of stuff just to be able to run a little bit longer. And then obviously, we installed cameras last year. So we've got cameras at all of the plants, so that we've got 360-degree views just to see and make sure that fires aren't getting too close, so we can get people out if need be quickly. And then given our propane refrigeration plants, we can always warm up, make less liquid, put it in the gas phase so that we can stretch out that time while tanks are filling. So I guess the final thing would be we learned last year that good communication with fire liaisons is really important. At times, we were talking to them a couple of times a day. They were really good at sending information to us. That allowed us to feel confident that we are protecting our people, and we're not to get anybody caught where they shouldn't be. So obviously, that will be something buyers come close, we'd be reaching out to those people right away, both fire liaisons with the industry and with the Alberta government. So we feel pretty good that should something come our way. We learned a lot last year and made a few changes of what we've done. And I think, hopefully, we don't have to go there. But if we do, we're ready.

[Jean-Paul Lachance, executive]

Thank for that. I think it's important for folks to understand that we do have owning and controlling our facilities is a real advantage for us to be able to do these kinds of things, right, to be to make the changes we need to on situations like this. Okay. I don't have any more questions. If there are no questions on the call. Are there any more questions?

[Operator]

All right. So our tele audience. As a reminder,[Operator's instructions] I don't see any further questions. I'll turn it back to JP. Leshan for final comments.

[Jean-Paul Lachance, executive]

Okay. Well, thanks for turning in folks. I hope to see you at the AGM next week. But if not, we'll talk again in the next quarter. Thanks for joining in.

[Operator]

Thank you, everyone. You may now disconnect.