Pipestone Energy Corp

TSX:PIPE

Earnings Call Transcript 2020-Q1

[Operator]

Good morning and welcome to the Pipestone Energy Corp. Q1 2020 Financials and Operations Update Conference Call. [Operator Instructions] As a reminder, this call may be recorded.I would now like to introduce your host for today's conference Dan van Kessel, Vice President of Corporate Development. You may begin sir.

[Dan van Kessel, Vice President of Corporate Development]

Thanks. Good morning, everyone, and thank you very much for joining the call. With me I have Paul Wanklyn, President and Chief Executive Officer; Dustin Hoffman, Chief Operating Officer; and Craig Nieboer, Chief Financial Officer. On today's call, Paul will start by providing a summary of operation and a 2020 corporate outlook. Craig will follow with an overview of our financial position and available liquidity. Dustin will provide an overview of our current operations and I'll provide an update on our risk management programs and changes to our processing take-or-pay arrangements.I will now hand the call over to Craig Nieboer, Chief Financial Officer for Pipestone Energy to provide the disclaimer and some comments relating to upcoming financial disclosure.

[Craig Frederick Nieboer, Chief Financial Officer]

Thanks, Dan. Listeners on the call today should be advised that some of our remarks will contain forward-looking statements within the meaning of applicable securities laws. I refer you to our advisories regarding forward-looking statements, non-GAAP financial measures and capital management measures in today's press release. All dollar amounts referenced in our remarks today are in Canadian dollars unless otherwise specified.With that, I would like to pass it over to Paul Wanklyn, President and Chief Executive Officer, who will provide a summary of operations and a corporate outlook for 2020.

[Paul Wanklyn, President, CEO & Director]

Thanks, Craig, and good morning everyone.I'm pleased to provide an update on Pipestone Energy. Our overriding objectives during this period of commodity price uncertainty is to preserve liquidity and to position the company to generate strong returns on capital employed as we emerge from this downturn. As we noted in our March release, Pipestone Energy acted decisively in response to the rapid decline in oil and condensate prices, by cutting our 2020 capital program by 60% from $150 million, originally to $60 million. As of this release, the company has completed more than 95% of its planned development expenditures for this year. We are tracking at or below our budgeted cost, then as a result, we expect to emerge from this downturn with sufficient liquidity to restart the development program we have paused and continue on a high growth strategy focused on generating top decile returns.Lower capital and operating costs are critical to Pipestone Energy's ability to generate corporate level returns. On the recently completed 6 well 6-30 pad, we expect the all in DCE&T costs to be approximately $5.5 million which is 20% lower than our previous type well cost estimate of $7.1 million. Going forward, we are utilizing a $6 million as our DCE&T cost estimate. Coupled with the high productivity of our condensate-rich Montney wells, this CapEx efficiency will dramatically increase the sustainability of our future business plan by lowering the commodity price required to deliver strong returns.Additionally, during 2020, we expect to reduce our gross G&A expenses by approximately 23% from $13 million previously to $10 million. In light of current oil prices, we've elected to shut in our new 6-24 pad until Q3 and defer bringing on the 6-30 pad until Q4. This will preserve much of our flush high condensate volumes as much as we can for improved future pricing. Should commodity prices improve more quickly, we have the infrastructure capacity to quickly respond by turning on those pads. With the 2 pads mentioned behind Pipe and our existing production base averaging more than 15,000 BOEs per day in May, Pipestone has significant corporate productive capacity today.Due to the dynamic management of production in relation to short-term price changes, Pipestone Energy has elected to suspend corporate guidance for 2020. Pipestone Energy is well positioned to emerge from this downturn with the asset quality, financial liquidity and operational talent to thrive.Craig will now give us some highlights on our Q1 2020 financial disclosure.

[Craig Frederick Nieboer, Chief Financial Officer]

Thanks, Paul.Despite unplanned third party processing facility outages that lasted for approximately 22 days during the quarter or 24% of the operating days in the quarter, Pipestone production averaged 14,066 BOE a day, comprised of 28% condensate and 38% total liquids. Albeit in a higher commodity price environment and in combination with positive results from our commodity price hedging program, the company generated positive revenues, positive adjusted funds flow, and positive net income of $32 million, 11.8 and $15.5 million respectively. On the capital spending side Pipestone Energy invested $29.2 million in Q1 to further advance the development of its project by bringing on production from wells at the 6-24 pad-site drilling 6 wells at the 6-30 pad site and the completion of additional in-field infrastructure to support future production.The company's forecasted 2020 spend, as Paul mentioned, is trending to the midpoint of its previously revised capital budget of $55 to $65 million as we continued to realize efficiency gains and cost savings from drilling completions equipment and tie-in operations during the quarter. Also, as Paul mentioned, the company estimates that approximately 95% of its forecasted 2020 capital spending program has already been completed as of April 30, 2020.With the severe downturn in commodity prices, the company is focused on preserving its balance sheet strength and liquidity position. From a liquidity perspective as at March 30, 2020, Pipestone was drawn approximately $163 million on its reserve base loan or RBL which has a current available capacity of $225 million. As of this release, the company has a net draw of approximately $170 million on its RBL. We are currently in the process of our spring redetermination of our RBL with the syndicate of banks and expect a positive result upon the completion of this process, expected to be completed later this month.I'll now hand it over to Dustin to review the quarter's operations.

[Dustin Hoffman, Chief Operating Officer]

Thanks, Craig.Since the beginning of 2020, we've achieved some very meaningful well results and improved capital efficiencies. Pipestone Energy initiated production on 6 new wells from 2 separate Montney benches on its 6-24 pad in early March. The average IP30 for these wells is 845 barrels per day of wellhead condensate and 3.3 million cubic feet per day of natural gas, which results in a condensate gas ratio of 256 barrels per million cubic feet. These initial results are highly encouraging and above our VRGC3 type curve on condensate.During the first quarter, the wells on the 6-30 pad site were drilled with an average -- in an average of 15.1 days for a cost of $2.1 million per well. In April 2020, the company successfully executed completion operations at the 6-30 pad using 2 frac spreads with an average completion cost of approximately $2.9 million per well. The pad is currently being equipped with our latest well site facility design with an expected cost of $500,000 per well, bringing the all-in DCE&T cost for the 6-30 pad to approximately $5.5 million. The successful deployment of dual frac spreads on our last 2 completion operations combined with dual drilling rigs on a pad will allow us to plan future development with the potential to lower cycle times to a target of 100 days for a 6-well pad, thus allowing Pipestone to more quickly resume its development trajectory and response to improving oil prices.Dan will now go through an update on changes to our take-or-pay profile and risk management activities.

[Dan van Kessel, Vice President of Corporate Development]

Thanks, Dustin.Due to the current economic and low commodity price environment, Keyera and Pipestone Energy have agreed to a more gradual escalation in its take-or-pay commitments at the Wapiti Gas Plant. Previously, Pipestone Energy's take-or-pay volumes were to increase to 72 million cubic feet per day on April 1, 2021. As a result of this agreement, Pipestone Energy's commitments will now increase to 60 million cubic feet per day on April 1, 2021 and then to 72 million cubic feet per day on January 1, 2022.This provides Pipestone Energy with more development runway to meet its ultimate commitment volume and decreases the likelihood or magnitude of any volume shortfalls. Pipestone Energy anticipates the near-term cash flow volatility in 2020 to be partially mitigated through its hedging program with an average of 4,800 barrels per day of oil sold forward at a price of CAD59 in Q2 and Q3 and 2,000 barrels a day sold forward at $58.25 in Q4. For 2021, the company has taken advantage of the recent improvements in AECO futures pricing and now has approximately 20 million cubic feet of natural gas production hedged at a weighted average price of approximately [ $2.40 ] an mcf.As of April 30, 2020, the company has recognized realized hedging gains of approximately $12 million, $6.2 million of which was in Q1 and had an additional mark-to-market position on forward hedges of approximately $14 million.I will now pass it over to Paul Wanklyn to provide some closing remarks.

[Paul Wanklyn, President, CEO & Director]

Thanks, Dan.While these are incredibly turbulent times, I believe Pipestone Energy is in an enviable position relative to its peers with a high quality liquids rich asset, top decile capital cost performance and sufficient liquidity to successfully transition back to a returns-focused growth model in the very near future.With that, we will now turn it over to Q&A.

[Dan van Kessel, Vice President of Corporate Development]

[Operator Instructions] Your first question comes from the line of Luke Davis with RBC.

[Luke Davis, Analyst]

Just wondering if you can speak to the take-or-pay commitments through 2021. Dan, you mentioned they're being reduced gradually. So, what's the total commitment through the year? Between Keyera and Tidewater.

[Dan van Kessel, Vice President of Corporate Development]

Yes. So, as I mentioned previously, we were escalating to 72 million a day at Keyera on April 1, 2021. That's now 60 million a day, moving up to 72 on Jan. 1, 2022. At the beginning of the year when it -- in 2021 when it's 60 million a day with Keyera it's 25 million at that point with Tidewater. So, we've got a total of 85 million a day of commitments at that time. By the end of the year, Tidewater's commitment is 30 million a day plus the 72 million out of Keyera. So in total, we get to a 102 million a day by the beginning of 2022.

[Luke Davis, Analyst]

Okay. That's helpful, thanks. And then Craig, you mentioned a positive result expected on the RBL. Can you frame out what you would consider a success there, like, are you expecting a minor reduction flat. How are you thinking about that?

[Craig Frederick Nieboer, Chief Financial Officer]

Yes, Luke, I think we're hopeful that we could be flat, pretty early in the process and a lot of moving parts right now. We're still trying to figure out collectively with [indiscernible] will fit into that process has been announced. So, I think north of $200 million is our expectation, hopefully to be full at $225 million. We're also looking at an additional facility with EDC to move our letters of credit out of our RBL for about $15 million. So, it feels like net-net we should end up with the same amount of capacity or more.

[Luke Davis, Analyst]

Got it, thanks. And then, just the final one from me on that 9-14 pad, the CGR well below what you've seen on the western portion of your land block. Do you think that's representative of the area out east or anything else there that you guys would point to?

[Dustin Hoffman, Chief Operating Officer]

Yes. Hey, Luke. The CGR average is right around 105 barrels a million on that pad. I think that was pretty much in line with how we had it mapped. I mean, obviously, the CGR profiles that we've seen to date have kind of varied from bench to bench, as well as geographically. So for an average for the 9-14 pad, I think that 105 barrels a million is pretty representative. I think as we step to the north where we'd expect it to be higher than that.

[Operator]

Your next question comes from the line of Tyler Maguire with Peters & Company.

[Tyler James Maguire, Principal and Oil & Gas Analyst]

Just trying to think about, I guess, the priority sequence and how you'd approach production additions over the course of the year and then into 2021. I guess you outlined cash flow maximization take-or-pay commitments and then holding off on flush production until higher prices. So, if you can maybe just outline how you're thinking about each of those in the context of strip over the next few months and then what you'd need to see in terms of prices to bring on each pad sooner?

[Dan van Kessel, Vice President of Corporate Development]

Well, as you can imagine, it's tough to have a completely dogmatic, absolute price approach to this, but in general, we're currently meeting all of our take-or-pay commitments without the 6-24 or the 6-30 pad producing. So -- and we expect to be able to do that for a number -- a couple of months here. At that point, at which, if we aren't meeting or have the potential to not achieve gas volumes to meet those take-or-pay commitments, I think we can gradually bring the 6-24 pad on. Based on where the contango in the current strip is and with condensate differentials moving in substantially over the past couple of weeks to -- we've seen physical at minus $2 minus $1 for June and July here. That would be pricing at which we feel comfortable to execute on the plan we've outlined and begin bringing on those 6-24 volumes at which point we'd be comfortably meeting all our take-or-pay obligations, substantially increase the condensate component of the production mix and can bake a decision as we get through the summer and into Q4 on when to bring on the 6-30 of volumes. If condensate prices were to go north of CAD40, CAD45 for Q3, then I would suggest we may be able to bring on those 6-30 volumes more quickly, but we're going to be dynamically making those decisions.

[Dustin Hoffman, Chief Operating Officer]

Yes, maybe, I'll just add to that. One of the things that we do on a well-by-well basis is kind of manage our production. So, we've got the tools in place where we will turn on and off wells to maximize our kind of total net back and as the pricing plays out over the summer, we will likely manage in that fashion for the next number of months. So as Dan said 6-24 may come on, maybe some gas wells come off or vice versa pending price, but we have that granularity in our business to manage it appropriately.

[Tyler James Maguire, Principal and Oil & Gas Analyst]

Okay, great. And then, just trying to think about how the well cost savings, I guess, if you could maybe outline just on the permanent well cost savings versus what you might be thinking as, I guess, reflection of the environment we're in today. Obviously, the $5.5 million is great and we've only gone down to $6 million, but if we see much higher prices here do you see that going up by 10% or do you think that you might be able to hold $6 million pretty flat?

[Dustin Hoffman, Chief Operating Officer]

I'll take that one, Tyler. It's Dustin here. When we look at how we've executed some of these capital cost reductions, a lot of it has been through efficiencies and, not necessarily price. If I look at our well site facility design, 15-14 original pad was close to $1.5 million per well. We've driven our costs down to [ about ] $500,000 now on 6-30. That was really just through optimizing the facilities and those gains are real and I don't see those going away. On the drilling side of things, we've made some step changes in our well bore construction and our kind of drilling hydraulics and programs. That's all real wins that are going to stay. So, feeling pretty good about our drilling costs continuing to get better. I'll just remind you our pacesetter on that 6-30 pad was actually $1.7 million and that was our kind of new wellbore design. So, that, in my mind, is our target going into the restart of our activity.On the completion side of things for sure, we saw some wins on some of the ancillary services where you would expect that some of that margin may need to come back, but again a lot of the wins we made was really going to that manufacturing style and doing all that pre-planning with the 2 frac spreads, and a lot of that's not going away.

[Paul Wanklyn, President, CEO & Director]

And Tyler maybe -- it's Paul here. I'll add a couple of other comments. We do enjoy a real structural advantage in terms of our location right outside Grande Prairie and all the service centers and the service support that we have. For example, [ sand deposer ] 2 miles from our most recent frac location. So, that's a permanent advantage we're going to enjoy. And then, the second is, there is some conservatism built into this plan and that we are using a $6 million versus a $5.5 million cost. So, I think we're trying to advertise that there is significant conservatism built into our future plan.

[Operator]

Your next question comes from the line of Amir Arif with Cormark.

[Amir Arif, Analyst of Institutional Equity Research]

Just a quick question on the Keyera plant take-or-pay extensions or the slower ramp there. Is there any offset there for Keyera in terms of the rate you're paying for the volumes that are going through or anything -- or is it a pure net benefit in terms of a slow gradual ramp up?

[Dan van Kessel, Vice President of Corporate Development]

Yes. There is no changes to the fees as a result of that change in the take or pay profile. For 2020, we have increased our take-or-pay from -- it was originally $24 million a day. We moved that up to $48 million to match what our current production profile is. As is common in these contracts, you pay a lower fee on your take-or-pay volumes than you do on your non-take-or-pay volumes. So for us, moving up to $48 million a day of take-or-pay for 2020 is the net financial benefit where we expect to save $1.5 million to $2 million on our operating costs versus the original case. So overall, it really is the net benefit and kudos to Keyera for working with us on -- and being flexible, given the current environment.

[Operator]

[Operator Instructions] Your next question comes from the line of Josef Schachter with Schachter Energy Research.

[Josef I. Schachter, Author & President]

Two things for me. You had the downtime facility with the plant, how is everything running there? And are you having both of Keyera and Tidewater or things running very smoothly and if you had any glitches that could potentially impact you on production going into year end.

[Dustin Hoffman, Chief Operating Officer]

Thanks. Dustin here. I'll take that one. Outside of the 2 major events that we talked about earlier in the call, both those facilities have been running very, very well. We've seen run times in excess of 95%. So, we are very happy with what we're seeing out of both Keyera and Tidewater. Both parties have done a really fantastic job of shoring up their processes and for the last number of weeks here, we've seen strong run times from both parties.

[Josef I. Schachter, Author & President]

Okay. And my second question is where is current production right now?

[Craig Frederick Nieboer, Chief Financial Officer]

They are about 15,000 BOEs a day, Josef, average so far for May.

[Dustin Hoffman, Chief Operating Officer]

And then just as a reminder, that's with the 3-1 pad and the 15-14 pad producing and excludes any volumes from the 6-24 pad or the 6-30 pad.

[Operator]

At this time there are no further questions in queue. Are there any closing remarks from the company?

[Dan van Kessel, Vice President of Corporate Development]

No. Thank you all for dialing in this morning and following along with our story.

[Operator]

Thank you for participating. This concludes today's conference call. You may now disconnect.