Peyto Exploration & Development Corp
TSX:PEY
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Peyto Exploration & Development Corp
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Good day, and thank you for standing by. Welcome to the Peyto's Year-end 2021 Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Darren Gee, Chief Executive Officer. You may begin.
Well, thank you very much, Catherine, and good morning, ladies and gentlemen. Thanks, everybody, for tuning in to Peyto's Fourth Quarter and Full Year 2021 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 forward-looking disclaimer and advisory that was set forth in the company's news release issued yesterday.
In the room with me today, we've got the entire Peyto management team, our President and Chief Operating Officer, JP Lachance, is here to answer your questions as is Kathy Turgeon, our Chief Financial Officer. We've got Scott Robinson, our VP Business Development; Dave Thomas, our VP Exploration; Todd Burdick, our VP of Production. So you can ask them all questions about the operations out there going. Lee Curran, our VP of Drilling and Completions is here to answer your questions. Derick Czember, our VP of Land, is here as well, and we've got our newest VP, Riley Frame, who's our VP of Engineering. So they're all here to answer your questions about the quarter and about the year and about Peyto.
Before I get started with my comments about our results today, I do want to recognize the efforts of both our office and field personnel this past quarter and for all of 2021, for that matter.
We had a busy quarter of operations. We drilled some fantastic wells, and we hit all of our year-end targets for production and costs. So kudos to the team for continuing to deliver reliable energy to Albertans. It's Life-saving energy if the truth be told. And considering we had several minus 40 degrees C days in Alberta this past winter. I know for one, I'm very appreciative to be able to come back inside my nice warm house when it's like that outside. And it's something that really none of us should take for granted. And the reason that we have that luxury is in no small part due to the hard-working people here at Peyto. So a great job, everybody.
Okay, on to our fourth quarter results. Operationally, as I mentioned, it was a busy quarter with the strengthening natural gas prices. We shifted more of our drilling to leaner gas formations in the Spirit River, the Notikewin, the Falher, the Wilrich formations, made up close to 70% of the targets that we drilled in the quarter. That, of course, brought on more gas than liquids in the quarter. And then we also had an outage at a frac plant during the quarter. So that forced us to keep some of the liquids in the gas stream.
That species mix of formations has changed once again. The first quarter of 2022 is more focused now on liquid-rich Cardiums. I think we've got about a 50-50 split between Cardium and Spirit River in the first quarter, so that we can take advantage of some of the high oil prices and the flush condensate that comes from the Cardium wells. So we should see our liquids percentage rise again as those wells come online.
The 5 drilling rigs that we have running. They ran well through the fourth quarter, and we exited the year above -- just above our 100,000 boe/d target, which was really just in time for winter gas prices to take off. We were also active buying new land in the fourth quarter. That's something that we hadn't been doing for a while, particularly when land sales were shut down. So we added more drilling inventory to the hopper for the future. Some 75 locations that we internally identified are on those lands. And I think sometimes people forget that's a big part of the Peyto strategy to go out and find our own drilling prospects that we can develop ourselves. But that's the way we've always done it for the last 23 years, and I suspect that's how we'll keep doing it for the next 23.
The other thing we do ourselves is build our own facilities, and we started construction of our 11th gas plant in the quarter, down in a new area, South of Brazeau called Chambers. We prepped the site and pounded piles and got ready to receive all the equipment that we were moving out of inventory. That work has continued into the first quarter. And hopefully, we'll have that new plant in service by the end of the first quarter and have more processing capacity down there.
I think the team did a great job controlling costs in the quarter as well outside of royalty costs, of course, that rose with commodity prices. All our other cash costs were down 10% year-over-year in aggregate. We had much lower interest costs and lower G&A that offsets a little higher transportation costs. Of course, that higher transport got us some higher prices, so it was worth it.
But all in all, our cash cost before royalties were just $0.79 per Mcfe for OpEx transport, G&A and interest, by far, the lowest in the industry, and we think we can keep those costs before royalties close to that level in 2022. So a fantastic job guys controlling costs. Part of what's helping there, of course, is better utilization of our facilities. We have this incredible infrastructure asset that we get to fill up. We have capacity in it. And so we're filling that up. And of course, as we fill that up, we get much higher utilization and lower per unit costs, and that's just one of the benefits of owning your own processing plants.
On the commodity price side, we didn't realize the full benefit of the price rise over 2021 as much of our production was previously hedged as per our mechanical hedging program, but we will continue to take the future price off the table as we always do, which secures our revenue for planning purposes. And so our realized prices are expected to continue to rise. I suspect we'll probably come under some criticism for our hedging losses right now.
But this program has delivered over the longer term. We've been doing it this way since 2003, and we're in this game for the long run. We truly believe in natural gas is the future. And so we need to be consistent with this program for it to pay off over the long term. We continue to lower our debt with excess cash flow. Long-term debt was down a little over $100 million in 2021. And really that's just a start. We expect to significantly reduce our debt again in 2022. So that by the end of '22, we should have less than 1x debt to EBITDA, which is the strongest balance sheet Peyto will have ever had in its history.
After that, I expect we should be in a position to start raising our dividend again, especially since our earnings which have also grown very significantly over that time. So all in all, a great fourth quarter, very good 2021, particularly considering where we were a year ago. Cash flow is way up, earnings are way up, and our margins are much better. Our capital efficiencies, particularly on the organic side, was the lowest ever at [ 8,000 of ] flowing BOE this past year and our finding costs, PDP FD&A costs were $0.97, which is again the lowest in the last 19 years.
So efficiency-wise, we're doing a fantastic job and we're in, I think, a very strong and advantageous position right now, and that's only going to get better as we go into 2022.
That's probably enough with me ramble on about the quarter. Catherine, why don't we stop there and throw it open to questions from those investors listening in.
[Operator Instructions] We have a question from Nathan Schwartz with -- he's a private investor.
Two questions. In the past, you've written in your monthly report about the potential to term out more of the debt. I wonder if you could give us an update on that, your efforts there? The second question is with the stock where it is, I wonder whether stock buybacks are potentially in the mix.
Thanks, Nathan. Great questions. So first on the term debt. We do have a $415 million of term debt right now, out of our total debt, just a little over $1 billion, so not quite 50%, but a very good portion that's termed out at various renewal dates over the next, I think, about 7 years. On average, I think the interest rate is just around 4% on that. So good coupon rates. And yes, those are with a few large insurance companies. So good counterparties. They have indicated, they are very supportive of Peyto and want to continue the relationship we have with them.
Specifically, we termed out or renewed, I guess, one of the notes -- when was that last -- October for another 7 years. So we have good support from them and they're offering us pretty good terms. We're sort of aggressively paying off our revolving debt right now, and we'll lower that quite significantly in 2022. So we really have to, I think, decide at some point probably towards the end of 2022, just how much debt we want to carry going forward and what that blend of debt will be in terms of whether we want long-term fixed debt or whether we want revolving debt. The easy thing obviously, is just to keep paying off the revolving debt, and then we could retire the term debt as it comes due.
But some of that term debt is quite attractive capital, very low coupon rates. And I think if interest spreads don't blow too badly, and we can continue to access capital at that low cost, then it makes sense to take advantage of that. As I mentioned, our balance sheet is going to be the strongest it's ever been by the end of 2022. And so I don't think we have to pay off more debt necessarily. But we're all aware of the sort of defund oil-and-gas movement that's behind the scenes that's putting pressure on the banks in particular.
And we definitely don't want to get caught up in that. So we want to be sure that we're in a strong position moving forward with respect to our debt. But the other thing is as we're growing, we're probably going to be close to 110,000 BOEs a day by the end of this year, and we're planning a similar capital program at this point, likely for 2023, so that would deliver some more growth. And that would really put us in a position to look at what were -- what sort of debt rating we'd be at. And I do believe that probably sometime in 2023, we'd probably be very close to being BBB- or investment grade, which opens the door even more for very attractive pricing on longer-term debt.
And I think that's something we definitely want to look at. So it's -- that option is for sure on the table. But again, it's all competition for capital or for our cash flow, I should say. I mean do we put the money into the capital program, do we pay down debt with it? Do we pay our dividends with it or to your second question, do we buy back stock? And so share buybacks, we've had an NCIB in the past. We didn't act on it, but we have had that in place in the past. That's one other lever we can pull to return capital to shareholders, debt repayment, dividends and share buybacks. And so it's nice to have all this competition for the capital.
And quite frankly, the capital program and the returns that we're generating on dollars that we're putting to work are fantastic as well. So that's great tension to have on the cash flow. I think we'll get this debt reduced in 2022, and then we'll look at, does it make sense with where the share price is at, to put in an NCIB.
And I'm showing no further questions. I'd like to turn the call back to Darren Gee for any closing remarks.
Okay. We did have a few questions e-mailed in overnight. So I do want to address those. The first one was with respect to our Big Sunny storage reservoir. Was there any update on that? And I think for an answer there, I might just turn that over to Scott Robinson, our VP of Business Development, who's been looking after our Big Sunny play, Scott, can you tell us what your thinking is?
Sure, Darren. Thanks for the question whoever asked it out there. Big Sunny, we acquired that asset a few years ago when the gas market was in turmoil. We still look at it as being a very valuable future component. We've scoped out the cost to convert it to a full storage scheme, but we haven't acted on any of that at this point in time. I think we're just reserving it for that purpose. We've spoken in the past as well about possibly deploying that for space for carbon storage and sequestration. Since that time, we've studied a number of other reservoirs. And I don't think Big Sunny would play into that, although it is situated by one of our gas plants.
So you never know. But I think our preference would be to continue to keep that reservoir on the shelf as a potential future gas marketing diversification asset if we choose to invest in it. So the gas market is very dynamic, it has been over the last few years. I think we'll just watch it for a little bit further here before we make any commitments to a firm direction on that asset.
Okay. Thanks, Scott. Yes, definitely, the basin is growing. So likely over the longer term, we are going to need more storage. So that Big Sunny asset is a nice one to have in our back pocket. Second question that came in was with respect to the Cascade power plant and our ability to potentially supply more than just our contracted volumes there. Todd, do you want to talk a little bit about where we're at with hooking up to Cascade, where they're at, maybe?
Sure. So they -- we get monthly updates and everything appears to be on schedule from there end as far as the information that we get. We've purchased most of the pipe for the pipeline, and we'll start putting that in the ground probably in Q4 of this year. We'll have enough infrastructure to provide more than what we've contracted with Cascade now. So that will allow for some flexibility in the future depending on what things sort of play out going forward. And we did get a connection to them in the summertime. I think we talked about that in our Q3 announcement. So we do have pipe to their site and sort of waiting for them to contact us when they're ready to start flowing some gas, and we'll be there when they're ready.
What's the latest stats we've seen from them since their project, how are they doing?
They've got all their major equipment, was just put in, I think, at the end of December, they've got the turbines in. They were working on their heat recovery steam generator with them. So a lot of the buildings are up, some of the buildings that can't be put on until they get that those big pieces of equipment in but all of the big equipment is in the last update that we've got.
So they're not expecting any major delays or...
Not that..
Quite exciting the stage that they're at right now. The gears -- there's a lot more certainty on that 2023 start-up timing...
I think they mentioned they're at their full peak manpower right now probably until the summertime.
Okay. That's great to know considering how tight manpower is out there that you guys have already got all their people in place. Just as a reminder to those listening in that Cascade project, we're contracted to send them 60,000 gigajoules a day gas purchase agreement we have with them for 15 years. And considering where power pool prices have been over the last year, we would realize some very attractive natural gas price realizations for that gas. So we're quite excited about being able to supply the gas for some very clean, some of the most efficiently produced electricity in Alberta, and we're looking for even more opportunities to do that here at Peyto.
One other question that was brought up, and maybe I'll ask this of Derick, our VP of Land. We talked a lot about our Cecilia acquisition over this last year. How successful we've been with that. We just obviously closed another acquisition here, a small one tuck-in that gives us opportunities. We bought a bunch of land in the year, 44 transactions we noted, but we do other deals, Derick behind the scenes that we probably don't talk much about. Can you elaborate on any of those?
Yes, for sure, Darren. In addition to the 54 growth sections we acquired in Cecilia, and the 44 sections acquired at Crown sales, we were also able -- we were also active on the smaller tuck-in deal front. In total, we added an additional 24 sections through farm-ins, swaps, poolings and on these lands, Peyto has currently identified 38 new drilling locations, in which we were already able to drill a total of 14 wells throughout a year. While the business development team continues to pursue larger asset deals like Cecilia and Brazeau, the various teams continue to complement those efforts in 2022. And with ready to drill inventory through farm-ins, pooling, swaps, landfills and other tuck-in type acquisitions.
That's awesome. Okay. I guess the only other question I had actually came from an analyst last night. They were asking about these current commodity prices that we have, and obviously, they are changing quite dramatically week by week here as geopolitical events unfold around the world. But the question was, payout times have shortened even more for a lot of the oil guys and how our economics in terms of our future payouts and rate of returns looking. And so maybe I'll ask our newest Vice President, Riley, if he could provide a little color on just what are the sort of most recent economics that we're running based on the strip that we see today and what kind of results are those showing us for [indiscernible], rather?
Yes. So we're seeing some really good rates of return across almost all the species, both the liquid-rich and the gas-rich stuff. Almost everything that we're doing is over 100% rate of return with payouts under a year here. Our program for the 2022 year here is going to look a lot like last year as far as what we're going to drill. And despite the new plant capital that we have in the program as well as some inflationary pressure, we expect to see some great returns. So the team is looking forward to another strong year here in 2022.
That was awesome. All right. Well, if there's no more questions, Catherine, I want to thank all the listeners for listening in to our conference call this morning. And...
We do have one question from Michael Beall with Davenport.
Sorry for the late entry. If you could just remind us, I'm sure it's in your somewhere roughly what percentage of our 2022 output is currently hedged. And then if you could just talk a minute about the longer-term opportunities for gas from airfields finding their way into the export markets. Just kind of remind us what's going on in that world and maybe the timetable. Sorry for waiting till the last minute.
No problem, Mike. Good questions. So yes, we've got about 68% of our gas hedged for this winter. Those were hedges that we started putting in place a year ago, and we slowly layered in overtime to protect this winter. And obviously, the price rose a lot as we went through last summer and into the fall. But we've got a pretty nice attractive price for that. The remainder that's floating, about 1/3 of our gas that's floating through this winter has basically diversification to 3 other markets.
We've got a little bit exposed to the AECO spot market. And we always need to have just a bit exposed even though it's covered through some Empress service at the border in case AECO disconnects, we do need to have a little bit of operational flexibility. So we don't want to physically commit some of that volume just in case we have a plant go down or something on any given day. But we do have more than enough service at the border to make sure that we don't get caught with any AECO price disconnections. About half of that unhedged volume this winter is headed down the main line halfway to Emerson, and then we compare that with other synthetic when we choose to get it to Dawn or Great Lakes or wherever we'd like to send it.
And then about 12%, 15% of that volume that unhedged volume heads off to the Ventura market. So that's just outside of Chicago. This coming summer, we've got a little over 75% of our gas already hedged fixed prices on that. I think the average price there is just a little close to $3. So it's less than the strip, but still a very attractive price for our economics and relative to what we've seen in the past to -- and we'll see what happens with this summer, despite the fact that the strip today might show something better than that. You just don't know until you get through the summer what the prices will actually end up being.
The 25% that isn't hedged over the summer, again, a lot of that heads down the mainline to Emerson to Ventura and then we've got the rest exposed there at Empress. And then next winter, we're starting to lay in hedges for that period too. That price has come up, and we've been taking advantage of sort of the forward curve flattening out a little bit and rising. So we've got about 60% of next winter locked away. I think the price there is 3.45, 3.40, something like that. So pretty good price for winter and we'll continue to layer on, on top of that so that by the time we do get to next winter, we want to probably have about 75% locked up and then again, the unhedged portion is dedicated down the pipe to NYMEX or Ventura or Dawn market. So we're not exposed to really any AECO disconnects on any of that volume.
And then beyond that, it falls off. Summer '23, we are starting to lay some hedges in. Again, the curve is in pretty steep backwardation. So we're slow in sort of picking up some of those future prices. But we do want to sort of layer that those in overtime as we always have. And as that forward curve flattens out a little bit, it starts to rise on just overall North American demand and supply, we'll continue to head stop period out as well. But we have very good diversification in until really we get out into 2024. We do want to lay some more probably basis deals in to NYMEX and Chicago markets to protect against any dislocations in the AECO market.
And then really beyond 24, we've got the LNG Canada project kicking in sometime in '25, probably late '25 and that is going to be quite a dramatic change to the AECO market to have significant volumes heading the opposite direction. The majority of the exports coming out of the Western Canadian Basin go either east or south. And so for us to have a completely new direction for exports going West, I think, is going to put some interesting tension on that AECO market.
And so we may well want to have a lot more volume right back here at home, selling into the local market when that tension rise. We do have a little bit of oil hedged as well, Mike. We've got some WTI that we've been laying in as well. It's a good -- it's not a perfect hedge for our products. Condensate trades as a bit of an offset to oil, but you can't hedge the condensate directly. So the WTI is a slightly dirty hedge but we do lock our butane in as a direct offset to WTI. So when we lock the WTI, then we get a direct butane price. So we are starting to lay some hedges in on oil as well. Obviously, these are some fantastic prices for oil and the backwardation in that curve is slowly flattening out as well. So it looks pretty attractive. You can get 90 some dollar oil right out for 4 or 5 years now. So that's where we stand on the hedges. Sorry, you had a second question.
No, second question dealt with the 2025-time horizon you were talking about where you could head a different direction and ultimately, I guess, an export market, I presume.
Yes. And it's one of the reasons in our diversification that we've used a lot of synthetic transport because of those are short-term financial ways to access other markets. We like the basis deals. They're just a fixed cost to get to a market and then you can hedge out that market or you can float at that market. But it's short term. And that's the great part about it. If you were to do physical pipe deals, typically, the contracts are for much longer term, 10 years or more. And we need to be nimble. We need to potentially be able to redirect the gas in the opposite way, depending on how the market evolves here in Western Canada.
Last question while I've got you. Based on where we sit today, would we expect to repay something on the order of, what, $150 million, $200 million in debt?
I think we have higher targets than that in mind by quite a bit, maybe double or more than double that. So yes, we've got -- I think with the free cash flow that we look like we're going to generate in '22.
Obviously, that's based on the forecasts with the strip pricing today and prices change. But yes, we're looking for a very material debt repayment in 2022. Like I said, it would take us down under 1x debt to EBITDA by the end of the year.
Just wanted to hear you say it.
Yes. No, it's looking really good. It's definitely one of the goals for '22.
Thank you. And there are no other questions in the queue.
Great. Well, thanks, everybody, for listening in. '22 is going to be an exciting year. So check back in on the quarters when we have our calls, and we should have lots to talk about -- it's steady as she goes at Peyto. We've managed to survive some of the nasty gas prices over the last few years, and it's time to really take advantage now because -- we've got huge margins that we can keep our costs down and enjoy all of this price rally. They're going to deliver some fantastic results for shareholders too. So thanks again, and we'll be back to you here in a couple of months.
This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.