Peyto Exploration & Development Q2 2023 Earnings Call Transcript

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August 10, 2023

There are 6 speakers on the call.

Operator

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 Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, with JP Lachon, President and CEO. Sir, please go ahead.

Speaker 1

Thanks, Chris. Good morning, folks, and thanks for joining Peyto's 2nd quarter results conference call. I'd like to remind everybody that all statements made by the company during this call are 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 Derek Zember, 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've always do for their efforts over the past 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 curtail 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 Uneffected 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.

Speaker 1

I think this is a really good example of how effective Peyto's strategy is around only controlling our infrastructure and our production. This is how we can make these operational adjustments easily and react quickly to these situations. So kudos to the team. April monthly gas prices averaged around $2.22 gigajoule during the quarter, We received an average price of around $2.72 a gigajoule, thanks to our mechanical hedging program. Although our diversification program and our And we're getting closer to the start of our supply agreement to the Cascade Power Plant.

Speaker 1

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 sending them some gas sometime at the end of this year when we'll expect to receive some premium pricing relative to the April forward curve. A reminder, Peyto's gas will be baseable for this highly efficient 900 Megawatt power plant. So we'll 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 2 years.

Speaker 1

We moderated our capital program throughout Q2 and we only spent $82,000,000 most of that was on wells, I think about 88%. And production has stabilized around 100,000 BOEs a day. The effects of inflation seem 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.

Speaker 1

We've been 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 strips 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 $4.77 an Mcf including our diversification costs. Next summer is also well hedged for about 45% of our volumes at $3.16 per Mcf.

Speaker 1

Both of these are above the current strip. And when you couple this with exposure to the other exciting markets I mentioned earlier, it gives Patele the confidence to maintain a 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 a handful of companies that's 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.

Speaker 1

And we still believe the gas is the fuel of the future And the build out of LNG facilities in both U. S. And Canada in the near term will enable us to be a preferential supplier of this field with our low cost So I know this is a busy reporting season, so I'll keep it short and sweet 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. Our first question will come from Chris Thompson of CIBC. Your line is open.

Speaker 2

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

Speaker 1

Yes, 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 January of So that's how we're modeling our cash flows here and expectation that they will start up at that time At that point in time, we believe they're relatively they're on schedule for that period for sure.

Speaker 2

Okay. Yes. And then, second, I just noticed you drilled a couple of Dundegan 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 You're done taking opportunities as you continue to explore this play?

Speaker 1

Maybe I'll It's a good question. Maybe I'll ask Riley Framhear, our VP of Engineering to respond to that one. Chris?

Speaker 3

Yes, Chris, excellent question. Yes. 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

Speaker 1

I think the way to sort

Speaker 3

of think about these locations is that they're very complementary to our current program and And with the above average split within really great economics, it's sort of something that will just continue to feather into our program as we go here.

Speaker 2

Okay. And then just one last question for me. How are you thinking about production Over the second half of twenty twenty three?

Speaker 1

I think, Chris, that we're Be careful here, we're going to want to see, like I said in the opening remarks, prices continue to move to the upside. And if we see that constructiveness And we're seeing a sort of strip as it's played out, we will ramp up here. But if not, then we'll hold things relatively flat. And that means we'll come back to you with Some new advice around where we're going to land as far as production capital goes. Obviously, if we don't ramp up, we're not spending as much capital either.

Speaker 1

So

Speaker 2

Okay, great. Thank you. I'll hand it back.

Speaker 1

Thanks.

Operator

Thank One moment please for our next question. Our next question will come from Henk Van Voegh. Your line is open.

Speaker 4

Hi, good morning folks. I have a question regarding your payout ratio of 98% And in light of that, how safe do you feel your dividends are in the next several quarters? Could you talk to that, please?

Speaker 1

Sure. Thanks, Hank. Good questions. Yes, we're fairly comfortable with our dividend levels because remember, we as I mentioned earlier, we've hedged a lot of our production out there to give us Security around our future revenues. Certainly, that coupled with our low costs Gives us confidence.

Speaker 1

Certainly, prices are in contango. So if that materializes, not only will we be able to maintain the dividend, we'll also pay down some debt. We're watching this carefully. So prices are important and we're

Speaker 4

going to

Speaker 1

look at our capital program and make sure it 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 Very cautious and careful with our payout ratio in that regard.

Speaker 4

So do 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.

Speaker 1

No, we've actually ran that even higher than 100% I don't anticipate us doing that. Maybe in the short term, if we have the timing of capital is such that We spent a little bit extra 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.

Speaker 4

Thank you for your answers.

Speaker 1

Thank you.

Operator

Thank you. 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.

Speaker 1

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

Speaker 5

JP, really two factors impacted our royalties in the 2nd quarter. The first and the biggest reason would have been just the low Alberta reference price. It approximates AECO. So AECO is averaging 222 on the 7a and 232 on 5.8 for the quarter. So I think the reference price that we were modeling was around 2.15, which would have been down from 3.50 in the Q1.

Speaker 5

And then secondly, we did get our annual gas cost allowance adjustment in the quarter. And just based on higher costs over the last 12 months, The Crown compensates us for processing and gathering. So we may get a true up from last year, which lowered our royalty rate in the quarter. So I think going forward, I'd expect our rate to be around 9% to 10% for the rest of the year.

Speaker 1

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

Speaker 1

Okay. Maybe one other question for Riley here. There was a question around the flare channel plays in the release. We talked a bit about that as well as the Dunvegan, which was asked earlier, but what are we doing differently on those from these flare channel plays, provide us some context and what about future Location counts and things like that. Riley, maybe you can answer that question.

Speaker 1

Yes, sure. So as far as what we're doing differently, I wouldn't say it's totally different.

Speaker 3

We're kind of What we've learned in other formations

Speaker 1

to the flare really. So

Speaker 3

some of these tighter flare channels that we haven't necessarily developed in the past, We've really been able to make them work on the 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 have sort of 50 plus locations with some pretty good visibility on them. It's really the kind of play where more we drill, the more we'll be able to develop additional locations.

Speaker 1

This seems like

Speaker 3

there's some pretty good legs on flare for us here.

Speaker 1

Okay, good news. Thank you. That's great. Okay, unless there's any more questions on the phone lines, I know it's been it's Quiet time, summertime. We'll stop there unless there's more questions on the phone.

Speaker 1

I'll turn it back to you, Chris.

Operator

I see no question in the queue. One moment. And no questions have come up in the queue.

Speaker 1

Okay. Well, thanks for tuning in folks and we'll talk again here in November about our Q3 results.

Operator

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

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Peyto Exploration & Development Q2 2023
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