Peyto Exploration & Development Corp

TSX:PEY

Earnings Call Transcript 2023-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Peyto's Q2 2023 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. [Operator Instructions] Please be advised that today's conference is being recorded.

And I would now like to hand the conference over to your speaker today, Mr. JP Lachance, President and CEO. Sir, please go ahead.

[JP Lachance, President & CEO]

Thanks, Chris. Good morning, folks, and thanks for joining Peyto's second quarter results 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. In the room with me today we have Kathy Turgeon, our Chief Financial Officer; Riley Frame, our VP of Engineering; Tavis Carlson, our VP of Finance; Todd Burdick, our VP of Production; Derick Czember, our VP of Land and Business Development; and Lee Curran, our VP of Drilling and Completions.

Before I recap the quarter, on behalf of the management group here, I'd like to acknowledge and thank the Peyto team as we always do for their efforts over the past quarter, including our people in the field for their commitment to Peyto, for their contribution to the successes that we enjoy.

There's been a lot of talk about the impacts of wildfires in this past quarter and although it did affect Peyto's operations with some curtailed production about 1.5% and some increased trucking costs, I think the team did a great job, a really good job redirecting production to the unaffected plants, warming up our refrigeration units to produce less liquids, remotely operating some of our facilities longer than we normally would and all this while maintaining safe operations I think, this is a really good example of how effective Peyto's strategy is around owning and controlling our infrastructure, our production. This is how we can make these operational adjustments easily and react quickly to these situations. So, kudos to the team.

Incremental gas prices averaged around $2.22 a gigajoule during the quarter, yet we've received an average price of around $2.72 a gigajoule, thanks to our mechanical hedging program, although our diversification program and our extra Empress service didn't really pay off this past quarter, since prices across North America were all quite low. We still have lots of exposure going forward to some of the premium markets such as Malin in California, Ventura and Chicago in the US Midwest, and Dawn in Eastern Canada.

And we're getting closer to the start of our supply agreement to the Cascade power plant. The pipeline is built and we're finishing up the connections at each end right now. And despite the fires and floods, we believe the plant is on schedule and we expect to be selling them some gas sometime at the end of this year, when we will expect to receive some premium pricing relative to vehicle forward curve. Peyto's gas will be base load supply for this highly efficient 900 megawatt power plant, so we will be supplying it constantly while it's up and running.

Despite lower realized prices and the impact of wildfires on production costs, Peyto was able to maintain a strong operating margin during the quarter at 70%, something we've been consistently delivering over the last two years. We're moderating our capital program throughout Q2 and we only spent $82 million, most of that was on wells, I think about 88%, and production is stabilized around 100,000 BOEs a day. The effects of inflation seemed to have steadied and we're now seeing some efficiency gains in our longer laterals. We've been increasing lateral lengths over the last year and a half.

With inflation happening at the same time, it's tough to see the gains on a cost per unit length or a cost per stage basis until now. We're being cautious with our summer drilling program and we're -- but we're ready to ramp up in the fall, assuming prices continue to climb as the forward strip suggest they will. We've seen some positive movement lately or this past week, but we're really looking for a sustained price support as a trigger. In the meantime, we have some solid hedges on for the winter. Over 55% of our forecasted gas volumes are healthy $4.70 -- $4.77 per Mcf, including our diversification costs. Next summer is also well hedged for about 45% of our volumes at $3.16 per Mcf.

All of these are above the current strip and when you couple this with exposure to the other exciting markets I mentioned earlier, it gives Peyto the confidence to maintain the dividend and continue to pay down some debt. And we can and we will react quickly if prices continue to rise as winter approaches. Coming up in this October, we're going to celebrate our 25th birthday or anniversary. I think, we're one of the handful of companies that still standing all this time and we stayed true to our strategy of offering long-term shareholder value, even at times when it wasn't the cool thing to do. And we still believe that gas is the fuel of the future and the build-out of LNG facilities in both US and Canada near term will enable us to be a preferential supplier of this field with our low-cost long-reserve life assets for years to come.

So, I know this is a busy reporting season, so I'll keep this -- I'll keep it short and sweet, like, at that, and maybe we'll open up the phone lines for any questions that shareholders might have. So, Chris, can you turn it over to questions.

[Operator]

Thank you. [Operator Instructions] Our first question will come from Chris Thompson of CIBC. Your line is open.

[Chris Thompson, CIBC World Markets]

Hey. Good morning, everyone. Thanks for taking my question. First on Cascade. JP, you mentioned -- it sounds like projects on schedule on the payroll side, so this Cascade intend to be up and running then by January 2024, or what's the status of that project right now?

[JP Lachance, President & CEO]

Yeah. I mean, this is their project. But our understanding is that they are, and they will be ready to go here either at the end of December or the 1st of January of 2024. So, that's how we're modeling our cash flows here in expectation that they will start up at that time -- at that point in time. We believe they are relatively -- but they are on schedule for that period, for sure.

[Chris Thompson, CIBC World Markets]

Okay. Yeah. And then, second, I just noticed you drilled a couple Dunvegan wells that you mentioned in your press release and there's only a handful of these that you show as being kind of in inventory, should we think about there being potential upside to your Dunvegan opportunities as you continue to explore this play?

[JP Lachance, President & CEO]

Maybe I'll -- it's a good question, maybe I'll ask Riley Frame, our VP of Engineering, to respond to that one, Chris.

[Riley Frame, VP, Engineering]

Hey, Chris. Thanks for the question. Yeah. At the time, we only have a handful of locations booked out here, so we'll continue to delineate this play as we go. Overall, I don't -- we don't have a massive inventory, but I think the way to sort of think about these locations is that they are very complementary to our current drilling program and infrastructure. And with the above average liquids and the really great economics, it's -- so it is something that we will just continue to feather into our program as we go here. So…

[Chris Thompson, CIBC World Markets]

Okay. And then just one last question for me. How are you thinking about production over the next -- over the second half of 2023?

[JP Lachance, President & CEO]

I think, Chris, we're going to be careful here and we're going to want to see it like I said in the opening remarks. Prices continue to move to the upside and if we see that constructive and we're seeing it -- the sort of strip as it's played out, we will wrap up here, but if not then we will hold things relatively flat and that means we will come back to you with some new advice around where we're going to land as far as production capital, because obviously if we don't ramp up, we're not spending as much capital either. So…

[Chris Thompson, CIBC World Markets]

Okay. Great. Thank you. I'll hand it back.

[JP Lachance, President & CEO]

Thanks.

[Operator]

Thank you. [Operator Instructions] Our next question will come from Hank VanVook (ph), and your line is open.

[Unidentified Participant]

Hi. Good morning, folks. Another question regarding your payout ratio of 98%. In light of that, how safe do you feel your dividends are in the next several quarters, if you can talk to that, please?

[JP Lachance, President & CEO]

Sure. Thanks, Hank. Good questions. Yeah. We're fairly comfortable with our dividend levels, because remember, we -- as I mentioned earlier, we have hedged a lot of our production out there to give us security around our future revenues. Certainly, that coupled with the -- with our low-cost gives us confidence, certainly prices are in contango. So, if that materializes, not only will we be able to maintain the dividend, but will also pay down some debt. But we're watching this carefully. So, prices are important and we're going to look at our capital program to make sure it still makes sense under these prices. I don't think anybody is getting us to drill wells and bring on a bunch of production at low prices, if that makes any sense. We'll just be very cautious and careful with our payout ratio in that regard.

[Unidentified Participant]

So, would you see yourself or you see the company attempting to reduce that ratio, it's -- from an investor point of view, it's getting a little high?

[JP Lachance, President & CEO]

Yeah. We've actually ran at even higher than 100% in the past. I don't anticipate us doing that, maybe in the short term if we have. The kind of timing of capital is such that we spent a little bit extra and you don't want to realize future volumes or future value and future revenues later. So, I could see that maybe only on a short-term basis, but not over the long-term.

[Unidentified Participant]

Thanks. Thank you for your answers.

[JP Lachance, President & CEO]

Thank you.

[Operator]

Thank you. [Operator Instructions] I am not seeing any more questions in the queue. I would now like to turn the conference back to JP Lachance for closing remarks.

[JP Lachance, President & CEO]

Okay. Thanks. I have some other questions that have come in overnight through email or through the website, so maybe I'll ask those. One of the question was just around our royalty rates. They were down a little bit here this past quarter. We had a true up I think of -- a royalty rate -- of royalties with the government there. And maybe, Tavis, you can run us through that, what we might expect going forward to the rest of the year on the current strip? Is that a royalty rate we should expect to see or are we're going to go back to something more in line with the past?

[Tavis Carlson, VP, Finance]

Thank you, JP. Really two factors impacted our royalties in the second quarter. The first and the biggest region would have been just the low Alberta reference price. It approximates AECO, so AECO was averaging $2.22 on the 7A and $2.32 on the 5A for the quarter. So, I think, the reference rates that we were modeling was around $2.15, which would have been down from $3.50 in the first quarter. And then, secondly, we did get our annual gas cost allowance adjustments in the quarter. And just based on higher costs over the last 12 months, the Crown compensates us for processing and gathering. So, we could get a true up from last year, which lowered our royalty rate in the quarter. So, I think, going forward, I would expect our rate to be around 9% to 10% for the rest of the year.

[JP Lachance, President & CEO]

Okay. Thanks. And, I guess, that's an important point to make with our hedging and those values being higher than AECO's prices we kind of gain on both sides of that equation don't lead with respect to the fact that we paid less royalties on the actual realized price that we're getting.

[Tavis Carlson, VP, Finance]

Yeah. Exactly.

[JP Lachance, President & CEO]

Yeah. Okay. Maybe one other question for Riley here. It was a question around the flare channel plays in the release, we talked a bit about that as well as Dunvegan, which was asked earlier. But what are we doing differently on these flare channel plays to provide us some context? What about future location counts and things like that? Riley, maybe you can answer that question.

[Riley Frame, VP, Engineering]

Yeah. Sure. So as far as what we're doing differently, I wouldn't say it's totally different. We're kind of applying what we've learned in other formations to the flare really. So, some of these types of flare channels that we haven't necessarily developed in the past and we've really been able to make them more horizontals, so we'll continue to test out different areas of this and continue to develop the inventory. So, from the inventory perspective, I think, right now, we are sort of 50 plus locations, there's a pretty good visibility on them. It's really the kind of play where more we drill, the more we will be able to develop additional locations. So, it seems like there is some pretty good legs on that flare for us here or so.

[JP Lachance, President & CEO]

Okay. Good news. Thank you.

[Riley Frame, VP, Engineering]

That's great.

[JP Lachance, President & CEO]

Okay. Unless there's any more questions on the phone lines, I know it's been quiet time, summertime, we'll stop there unless there's more questions on the phone. I'll turn it back to you, Chris.

[Operator]

I see no questions in the queue. [Operator Instructions] And no questions have come up in the queue.

[JP Lachance, President & CEO]

Okay. Well, thanks. Thanks for tuning in folks, and we'll talk again here in November about our third quarter results.

[Operator]

This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a pleasant day.