Advantage Energy Q3 2024 Earnings Call Transcript

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October 24, 2024

There are 5 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the ADDvantage Energy Limited Q3 2024 Results Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Friday, October 25, 2024. I would now like to turn the conference over to Mr.

Operator

Brian Bagnall, Vice President, Commodities and Capital Markets. Please go ahead.

Speaker 1

Thank you, Cindy, and welcome everybody to Advantage's conference call to discuss our Q3 2024 results. Before we get started, I'd like to refer you to our advisories on forward looking statements contained in the news release as well as advisories contained in ADDvantage's MD and A and annual information form, both of which are available on SEDAR and on our website. I'm here with Mike Pilanky, President and CEO of ADDvantage Craig Blackwood, our CFO as well as other members of our executive team. We'll start by speaking to some of our financial and operational highlights. Once Craig and Mike have finished speaking, we'll pass it back to the operator for questions.

Speaker 1

As usual, we'd ask that if you have any detailed modeling questions that you follow-up with us individually after the call. Mike, please go ahead.

Speaker 2

Thanks, Brian. I'm pleased to report our Q3 results, including record production, strong liquids performance and lower operating costs. I'll start with some highlights. 3rd quarter production averaged 74,400 BOEs per day, an increase of 12% over the prior quarter and 16% over the Q3 of 2023. This was a corporate record despite having curtailed approximately 5,000 BOEs per day of dry gas during the quarter in response to unusually low AECO prices and a significantly reduced drilling program for the year.

Speaker 2

Liquids production achieved a record of 12,800 barrels per day, an increase of 80% over the prior quarter. Liquids represented 71% of our sales revenue, which highlights the diversification benefits of our recent acquisition, while gas prices have been volatile. Thanks to our disciplined capital allocation and continued strong well performance, we were able to reduce our 2024 capital spending guidance to between $245,000,000 $275,000,000 That's a reduction of $35,000,000 compared to our budget at the time of the acquisition only a few months ago. We'll continue to manage our capital program in Q4 with a strict focus on returns and will only bring new wells online when the returns are supported by the forward strip. With lower capital and higher revenues from liquids, our capital spending and adjusted funds low were balanced during the quarter, each at $55,000,000 Net debt remained flat to $222,000,000 Turning now to an update on the performance of the acquired assets.

Speaker 2

We're very pleased to be able to report positive early results on integrating the assets and capitalizing on synergies. Operating costs and G and A are materially lower than budgeted and production declines have been shallower than expected. Cash flows have benefited from added production, including reactivated high H2S wells that were unable to flow without access to our substantial gas processing assets. 3rd quarter operating costs were $5.55 per BOE, which is well below our expectation of $6 per BOE. And there is room for them to fall further.

Speaker 2

This is a great result when considering our production curtailments for the quarter. Our first two Charlie Lake well pad first two excuse me, our first Charlie Lake 2 well pad has been drilled and will be completed in the coming months. We expect it to be on stream in mid December. 7 net wells are planned before the end of 2024 in the Charlie Lake, targeting development locations with strong economics. Construction continues on our 75,000,000 cubic foot per day Progress 4 of 21 gas plant, which we expect to be on stream in the Q2 of 2025.

Speaker 2

This facility will unlock significant synergies from the new assets resulting in lower operating costs and stronger operating netbacks. Combined with surplus capacity that came with the acquisition, Advantage has adequate gas processing capacity now to execute on our growth targets for the next 3 years, while reducing infrastructure spending in 2026 and 2027 by about $100,000,000 Switching now to operational discipline. Glacier is amongst the lowest cost natural gas assets in North America. However, daily gas prices at key regional hubs like AECO and Empress recently fell to as low as $0.05 per GJ at times during September early October. As such, we chose to curtail production by as much as 130,000,000 cubic feet per day on certain days to maximize free cash flow and reduce depletion.

Speaker 2

These curtailments by advantage and a small number of our peers, combined with increasing seasonal demand, have so far supported a sharp recovery in Western Canadian cash prices in the last few weeks, which did allow us to restore production to capacity quickly. We see our ability to quickly turn large volumes of production on and off while pricing is volatile as a competitive advantage. We also recognize though that volatility may continue into the early winter. We expect market conditions for natural gas to improve in 2025 and beyond as a result of growing exports and increasing Western Canadian natural gas demand. Looking forward, Advantage's long term focus is on maximizing the AFF per share growth, while maintaining a strong balance sheet.

Speaker 2

As a result of the acquisition, Advantage now expects to exceed our per share growth targets, So our strategy has temporarily shifted towards maximizing pace of vivibrin with a focus on achieving our net debt target of $450,000,000 As a part of this process, we are evaluating various options to accelerate delevering, including small non core asset sales. We anticipate providing investors with an update early this winter. While Advantage is focused on reaching our net debt target quickly, we may consider opportunistic share buybacks if our share price becomes temporarily disconnected from fundamentals. We plan to host a virtual Investor Day on December 10, 2024 to discuss our 2025 budget and our refreshed 3 year plan. Though the plan is not yet set, it will continue to focus on steady efficient growth, highly efficient capital deployment and a strong predictable focus on total shareholder returns.

Speaker 2

With that, I'd like to thank our long term investors and Board of Directors for their continued support, and I'll hand it back to the operator to open the lines for questions.

Speaker 1

Cindy, we'll pass it to you to address any Q and A. Thank you.

Operator

Thank You have one question on the queue from Amir Elif from ATB Capital. You may now ask your question.

Speaker 3

Thanks. Mike, a couple of quick questions for you. First, just in terms of the breakeven prices to think about for gas, can you give us a sense of what gas price you do think about shutting in volumes? And then also what gas price you do think about either completing DUCs or willing to go ahead and do put new capital into quite your wealth?

Speaker 2

Yes, thanks for the question. Yes, I appreciate that. Our Senior VP, who's in charge of all things operational, has a list with his team of the individual operating costs, this is variable operating costs at each one of our wells. And based on the price of the day, we go down the list and that is essentially a higher cost molecule than the price of that day. And so on any given day, the prices may raise, increase the amount that's shut in or decrease it.

Speaker 2

So there's no single number. But I think that the way to think about it should be, we do tend to reduce we see reductions start to grow and we fall below $0.80 and at $0.50 becomes quite material. Certainly at $0.05 or $0.20 we're going to be pinned at the top end of that range where anything that's exposed to AECO or Empress pricing will be shut in that low price.

Speaker 3

Makes sense. And then in terms of completing DUCs, like bringing some of the capital back in, is there certain gas price you're looking for on that side?

Speaker 2

Yes. Thank you. So that second part, in terms of that, that's each well is looked at with a cumulative free cash flow metric. As we think about when to bring the wells on, what we're driving towards is maximum pace of delivering using free cash flow. So on a regular basis, we'll recalibrate well economics to establish the optimal time to turn a well on that might be shut in or has been completed but not yet tied in.

Speaker 2

So really it's about calculating simply for highest cumulative free cash flow. And that can vary quite a bit, Amari.

Speaker 3

Okay. Fair enough. And then just a second question on the comment of willingness to buy back from the stock opportunistically if the stock price is dissipated from fundamentals. Can you give us a sense of would that come from cash flow or would that only come if you have some non core asset sales? And just some more color around that comment relative to the 4 $50,000,000 longer term net debt target?

Speaker 2

Yes. Again, this is it's important to note that we mentioned this to just be very clear that our primary goal now that we've exceeded our growth targets, our primary goal is to delever. But that's not to say that it's the best use of capital all times. There may be times if our share price is volatile where a better use of capital is to pick up some shares opportunistically. So again, it's not necessary you asked if it's coming from cash flow or from sales.

Speaker 2

It all goes on the same pool. It all comes really in the end. It goes through our balance sheet. And so positive news on pricing, positive news on asset sales or simply low price will all influence our willingness to go and pick up some more shares along the way. But really, primary focus is just an opportunity for us to fine tune.

Speaker 3

Okay. Got it. Appreciate the color. Thanks.

Speaker 2

Okay. Thank you.

Operator

Next question is from Jamie Kirby from CIBC. Please ask your question.

Speaker 4

Yes. Thanks for taking my question. I'm just curious on the non core asset sales that you highlighted in your press release. Can you talk a little bit more about what you consider to be non core in your portfolio and if you have any targeted total disposition values in mind or things to that effect? Thanks.

Speaker 2

Sure. Thanks, Jamie. Yes, so what we consider to be non core are things that are not on main Alberta map sheet. So that includes both the block at Hitachi, which is 37 secondtions of high quality Monterey Heights, 53 secondtions at Conroy, high quality Monterey Heights, which are non producing. So there's no cash flow from those.

Speaker 2

So we consider those both non core in terms of geographically and then non producing, so it doesn't impact our cash flow. Within the Alberta assets, there are still some non core items in there, things that we don't expect to drill in the near future, things that are not cash flowing or things that are worth more in the hands of our partners. In some cases, these are low working interest lands that would be better owned by partners. Qualifying the target value of this sort of multifaceted sales process that we would look at, It's very difficult, very wide range, so probably not worth being too crystal clear on. But we don't expect this to be picking up.

Speaker 2

If our debt target is, call it, dollars 150,000,000 lower than we currently are at, We think this would take a partial bite of that, but not likely to be complete. Okay. Hopefully that answers that quickly for you, Jamie. Yes. That's perfect color.

Speaker 2

Thank you. That's all for me.

Speaker 4

Okay.

Operator

Okay. There are no further questions at this time. I would like to turn the call back over to Mr. Bagnell. Please continue.

Speaker 1

Thank you very much everybody for joining and happy to catch up with you individually later. That will end the call today. Thank you. Thanks everybody.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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