Pipestone Energy Corp

TSX:PIPE

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, and welcome to the Pipestone Energy Quarter Q1 2022 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, Mr. Dan van Kessel, Vice President, Corporate Development. You may begin.

[Dan van Kessel, executive]

Thank you. 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 an overview of Pipestone's updated 2022 guidance and multiyear growth trajectory. Craig will follow with an overview of our Q1 2022 financial results, and Dustin will provide an update on our operations and infrastructure expansion plans. I will provide an update on our risk management activities.

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 Nieboer, executive]

Thanks, Dan. Listeners should be advised that some of our remarks today will contain forward-looking statements within the meaning of applicable security laws. I refer you to our advisories regarding forward-looking statements, non-GAAP financial measures and capital management measures in today's press release and in our Q1 2022 MD&A. 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 an update on Pipestone's strategic progress.

[Paul Wanklyn, executive]

Good morning, everyone. Thank you for joining the call. I'm very pleased to provide you an update on the progress we've made so far this year. The exciting results from our 12-36 pad as well as the enhanced growth plans we expect through 2024. For Q1 2022 production averaged 27,581 BOEs per day, which generated record quarterly revenue of $153.5 million. First quarter production volumes were negatively impacted by 22 days of outages at the third-party Keyera Wapiti Gas Plant. However, with all midstreams running well recently, I'm very pleased to report that based on field estimates, production in April averaged approximately 36,000 BOEs a day, which includes more than 11,000 barrels a day of condensate, a new monthly production record for the company.

To support further production growth and processing flexibility, Pipestone and Keyera have entered into a letter of intent to expand the 8-15 compressor station from its current design capacity of 90 million cubic feet per day to an ultimate capacity of 120 million cubic feet per day. Pipestone will fund this expansion and in exchange earn a working interest in the 8-15 facility. This is expected to be an approximately $8 million capital spend in 2022.

Importantly, to maintain our flexibility on our future relevant pace, Pipestone has not added any incremental take-or-pay obligations with this expanded processing capacity. The expansion is expected to be in service by the end of the year. And when combined with an additional expansion expected another area of midstream facility in late 2023, Pipestone will have sufficient processing capacity to support production in excess of 50,000 BOEs per day.

As a result of both the 8-15 expansion and in recognition of the inflationary pressures we are seeing in our capital program, Pipestone is increasing its 2022 capital guidance range to $225 million to $235 million, up from $210 million to $220 million previously. A revised 2022 price outlook of USD 95 WTI and CAD 5 AECO, Pipestone's forecast to generate between $380 million and $420 million in cash flow, driving free cash flow of $155 million to $185 million.

Exit net debt for this year is expected to be $75 million to $95 million, inclusive of a $50 million to $60 million planned expenditure on share purchases under our existing NCIB. This represents a trailing net debt -- our '22 net debt to cash flow ratio of 0.2x.

The methodical delineation of our assets also continued in the quarter with the completion of our standing 12-36 Montney exploration well. Dustin will provide further specifics on the results later on, but strategically, these results provide increased confidence in the economics and future inventory available within the company's unbooked Eastern acreage. Over the coming years, Pipestone expects to grow its gathering systems stepwise towards the Eastern acreage, facilitating full-scale development of its entire asset base.

Pipestone also has updated its 3-year plan to account for capital cost inflation in '23 and '24 expected to be approximately 15%, largely driven by the rise in commodity prices and increased industry activity. Additionally, our '23 and '24 development program also includes accelerated spending to take advantage of the 8-15 expansion, which results in a forecast '24 exit production rate of approximately 50,000 BOEs per day, up from a previous expectation of approximately 45,000 BOEs per day.

This represents a doubling of our average production rate from 2021. At the same time, we forecast generated a cumulative $670 million in free cash flow from '22 through '24 million at USD 90 and a $4 AECO price in the later 2 years. With that, I'm going to pass it on to Craig to discuss the financial highlights for the quarter.

[Craig Nieboer, executive]

Thanks, Paul. During the first quarter, as Paul previously mentioned, the company generated record revenue of $153.5 million, which more than doubled the revenue from Q1 2021 and represents a 12% increase from Q4 2021 revenue of $137.3 million. Pipestone also achieved record adjusted funds flow from operations of $86.3 million in the quarter, more than tripling its adjusted funds flow from operations of $28.2 million in Q1 2021, while representing a 47% or $27 million increase over Q4 2021 of adjusted funds flow from operations of $58.9 million.

These impressive financial results were driven by the significant WTI and AECO price rally through the quarter, along with previously mentioned average quarterly production of 27,581 BOE a day, which was comprised of 29% oil and condensate, 14% other liquids and 57% natural gas. The company realized continued improvement in operating netback to a corporate record of $37.69 per BOE, inclusive of $4.94 per BOE in the realized hedging losses, which represents an increase of 50% over Q4 2021 and a 115% increase over Q1 2021.

The company commenced its 2022 capital program with 6 Montney wells drilled and rig-released and 9 completed during the first quarter of 2022. Total capital expenditures, including capitalized G&A were $78 million during the 3 months ended March 31. From a returns perspective, Pipestone continued to generate strong returns on invested capital with Q1 2022 annualized ROCE of 35.4% and CROIC of 34.7% as compared to Q1 '21, annualized ROCE and CROIC of 10.9% and 16.5%, respectively.

In Q1, Pipestone generated $8.4 million of free cash flow after deducting capital expenditures in the quarter. The company anticipates that it will continue to produce material free cash flow throughout the remainder of '22, which will direct to deleveraging -- significantly deleveraging its balance sheet and buying back common shares. At USD 95 WTI and $5 AECO, the company forecast free cash flow to be between $155 million and $185 million, which would result in a year-end net debt balance of between $15 million and $45 million after incorporating NCIB and purchases of $50 million to $60 million for the year.

As a testament to our commitment to provide shareholder returns while growing production and continue to deleverage, Pipestone commenced an NCIB in November 21 to repurchase up to 5% of its basic shares or approximately 10 million shares over a 12-month period. Pipestone has been actively executing on this program since its implementation as we believe our share price does not represent the intrinsic value of the business.

In Q1, we purchased 1,484,000 common shares for cancellation at a weighted average price of $4.82 per share for total consideration of $7.2 million. Subsequent to the quarter, we have purchased an additional 1.3 million shares for cancellation at a weighted average price of $5.48 per share. In aggregate, since the commencement of the program, the company has repurchased 3.7 million common shares or approximately 2% of our outstanding common shares at a weighted average price of $4.60 per share.

Going forward, as previously announced, Pipestone's first priority for its free cash flow in '22 is to substantially deleverage the business with a corporate target of less than $100 million, which would equate to less than 1x debt to cash flow at a $45 WTI or $2 AECO price. Also a $100 million debt balance equates to a run rate '22 debt to cash flow of about 0.25x at USD 95 WTI and 5 AECO. Pipestone expects to achieve this target during the second half of the year.

In 2022, after deleveraging and executing on its NCIB, Pipestone expects to generate additional free cash flow that will be available for a combination of additional debt repayment and/or other forms of shareholder returns or additional capital to expand the business. I'll now hand it over to Dustin to provide an update on our field operations and recent well results.

[Dustin Hoffman, executive]

Thanks, Craig. Pipestone field operations at each quarter. We rig-released 4 wells on the 2-25 pad and 2 wells on the 9-14 pad in Q1 with 19.5 net wells drilled for the rest of 2022. In April, a second rig was added to our schedule and both rigs are currently located at the 2-32 pad where 6 wells are planned. Completions activity in Q1 saw Pipestone complete 6 wells on the 2-31 pad, 3 wells on the second phase of the 6-30 pad and frac operations start on 4 wells at the 2-25 pads. In total, 29.5 net completions are planned for 2022, including the 2 delineation wells drilled Southeast off the 9-14 pad and the standing exploration well at the 12-36 pad.

During the quarter, Pipestone brought a Lower Montney delineation well on production at the 6-30 pad site adjacent to the original 6 wells on that pad. The IP60 results of 361 barrels per day of wellhead condensate and 2 million cubic feet per day of raw gas are very encouraging and support further development of the Lower Montney bench on our asset base. As Paul mentioned earlier, subsequent to the quarter, the company completed its standing 12-36 Montney exploration well. Given that the well is approximately 13 kilometers east of Pipestone's nearest producing wells, this was a very important test for demonstrating the resource extent of the asset.

We completed the well using a plug-and-perf completion design with proppant loading of 2.5 tonnes per meter on a short 1,900-meter lateral and began flowing the well in late April. The average rate over the past 8 days was 330 barrels per day of light oil and 1.4 million cubic feet of raw gas. These early test results are highly encouraging with the expectation well productivity will indeed scale linearly to increase lateral lengths. I'll now hand it over to Dan to provide an update on our risk management activities.

[Dan van Kessel, executive]

Thanks, Dustin. Since our Q1 release in early March, WTI oil prices have remained largely range bound between USD 100 and USD 110 per barrel. Pipestone has added an incremental 500 barrels per day of Canadian dollar WTI swaps for Q3 2022 at an average price of approximately $132 per barrel. The company will continue to opportunistically add incremental crude oil hedges for the second half of '22 and into 2023 to protect its production growth and shareholder return objectives. With respect to natural gas, if the -- Futures prices have risen significantly over the past month, providing an opportunity for Pipestone to swap incremental volumes from winter 2022, 2023 at the highest prices seen in over a decade. Since the beginning of April, Pipestone has added 20,000 gigajoules per day of AECO swaps from November 2022 to March 2023 at an advert price of $7.22 per gigajoule. With that, I will hand it back over to Paul to conclude the call.

[Paul Wanklyn, executive]

Thanks, Dan. Pipestone has the offset and the prudent execution ability to deliver peer-leading growth in production combined with significant free cash flow generation while simultaneously deleveraging and providing returns to its share buyback program. Our delineation activities over the last 18 months gives us confidence in the economic potential of both the central and eastern portions of Pipestone acreage supporting growth to a risk long-term production plateau of 55,000 BOEs per day, which can be maintained for another decade. With that, I'll turn it over to the operator for Q&A.

[Operator]

[Operator Instructions] I am showing no questions in the queue. I would now like to turn the call back over to Paul for closing remarks.

[Paul Wanklyn, executive]

Thank you all for participating this morning, and look forward to giving you a further update in the next quarter. Thanks all. Thanks, everyone.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference call. This concludes today's program. You may all disconnect. Everyone, have a great day.