Kiwetinohk Energy Q3 2024 Earnings Call Transcript

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November 7, 2024

There are 8 speakers on the call.

Operator

Good morning. My name is Angeline, and I will be your conference operator today. I would like to welcome everyone to Qvetonaut 20 24 Third Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. Mr. Carlson, you may begin your conference.

Speaker 1

Thank you, Angeline, and good morning, everyone. Welcome to the Kuit No Energy Investor Call for the Q3 of 2024, and thank you for joining us for this update. I am Thad Carlson, Kuit No's CEO. And to start, I will ask Janet Annesley, our Chief Sustainability Officer to do an indigenous land recognition. Please go ahead, Janet.

Speaker 2

Thank you, Pat. Quino's conference call today is coming to you from Calgary, which is located on the traditional territories of the people of Treaty 7, which includes the Blackfoot Confederacy comprised of the Siksika, the Piikani and the Kainai First Nations, the Tsuut'ina First Nation and the Stoney Nakota, including the Chiniki, Bearspaw and Good Stoney First Nations. Calgary is also home to the Otay Pimswack, which is also known as the Metis Nation of Alberta, Districts 56. Cletnow has operations across Alberta, treaties 6, 7 and 8, and we recognize diversity of First Nations and Metis people in all these places that we call home. Back to you, Pat.

Speaker 1

Thank you, Janet. Joining me today in addition to Janet are Jacob Progalski, Chief Financial Officer Mike Backus, Chief Operating Officer, Upstream Fereen Sonderjee, President, Power Division Mike Hench, Senior Vice President, Midstream and Market Development Lisa Wong, Senior Vice President, Business Systems and Kevin Nielsen, VP, Corporate Controller and Investor Relations. We'd like to use the first part of the call to provide you with the summation of our Q3 release from yesterday evening. The telephone line will then be opened up to allow participants to ask questions. Before going through the results, I'll remind everyone that the conference call includes forward looking information and non GAAP financial measures with the associated risks and disclaimers detailed in our news release and management discussion and analysis.

Speaker 1

The news release, financial statements and MD and A and all of the company's official disclosures are all available on our website and SEDAR Plus. I'm extremely pleased with the team's performance in the Q3 of 2024. In our upstream division, we executed on a significant development program, which has provided us with continued confidence in the quality of our assets, including key differentiating factors that we continue to use to our advantage. Among these differentiators are, our Duvernay asset is high pressure, high liquid gas ratio and delivers some of the top performing wells in the Duvernay and Quito has drilling inventory to continue development and grow production into the future. Beyond our Duvernay position, we recently brought on production the 1st Montney well in the Simonette area drilled by Queretino.

Speaker 1

Its results encourage our team to continue to delineate and demonstrate the productivity of an underdeveloped Simonette Montney resource. These results will be elaborated on by Mike Pecas later in the call. Pardon me. We've been able to maintain strong netbacks for two main reasons. First, we own and operate our own facilities within our Simonette asset, which allows us to keep our operating costs low.

Speaker 1

And second, we hold 120,000,000 cubic feet per day of pipeline capacity on the Alliance Pipeline, which recently facilitated the sale of over 90% of our natural gas production in Chicago at a premium to Alberta prices. This Alliance capacity was recently extended by 7 years this continued access until 2,032. In our upstream division, we expanded our 4th quarter plans to include a second drilling rig to accelerate 3 wells previously planned for the second half of twenty twenty five. Incremental capital is expected to result in a higher ratio of net debt to adjusted funds flow from operations in the short term as we exit the year. However, with 9 wells anticipated to come upstream between now and the end of the first quarter of 2025.

Speaker 1

We expect to be in a position to begin delivering free cash flow and begin to repay debt early in 2025. Advancing this investment in wells provides us with flexibility to determine optimal growth levels depending on the commodity price environment. Work on our 2025 budget is well underway and we anticipate releasing guidance in the Q4. In our Power division, we continue to remain cautious and disciplined given the uncertain regulatory environment. We continue to seek sale or financing opportunities for our power portfolio in whole or in part.

Speaker 1

I'm looking forward to providing markets with our 2025 budget later in the year and updating our full year 2024 achievements in the New Year. I'd like to thank our shareholders and Board for their continued support. I want to now ask Jacob Regalski to provide more information from the CFO's perspective. Jacob?

Speaker 3

Thanks, Pat, and good morning, everybody. During the Q3, our focus remained on development of our upstream assets with 98% of our capital investment directed towards our profitable high netback Duvernay and Montney production. The quality of our upstream assets continues to be proven as we develop our extensive inventory, and there are a few key points I wanted to draw your attention to in this quarter. Our liquids rich production, owned infrastructure and U. S.

Speaker 3

Egress capacity continue to consistently deliver peer leading operating netbacks with a Q3 netback of $28.98 per BOE. Our hedging activities and strong overall hedge book further added to our netbacks bringing our adjusted operating netback to $30.89 a BOE. We have consistently shown our ability to maintain strong adjusted netbacks over a long period with quarterly netbacks averaging $32.50 per BOE since the start of 2023. As Pat noted, our owned and operated facilities continue to drive low operating costs, achieving $7.19 per BOE in the 3rd quarter, and we remain on track to achieve the low end of our operating cost guidance. Current levels also represent a 22% reduction from the Q3 of last year.

Speaker 3

I also wanted to touch on our recently extended alliance capacity and the value that it has provided us this year. In the Q3, we saw significant downward pricing pressure on the Alberta AECO benchmark gas price. Our Alliance Access has allowed us to realize higher gas pricing based on the Chicago market with benchmark monthly average pricing approximately 200% higher in Chicago when compared to AECO in the Q3. On the capital side of the equation, Quito's assets and our contracting structures provide us the flexibility to respond to a changing pricing environment, and we have the ability to quickly increase or decrease our capital program to maintain a strong balance sheet. This year, we have chosen to reinvest our cash flows into growth with 85% of the approximately CAD237 1,000,000 we have invested in the 1st 9 months of the year covered through our cash flows.

Speaker 3

Our credit facility has supported the remaining capital expenditures. And as of the end of the quarter, we continue to have strong availability with our credit facility of approximately $230,000,000 During the Q3, we announced the further acceleration of our capital program, increasing our capital guidance by $10,000,000 for the year. We expect significant new production coming on stream starting before the end of this year and into the Q1 of 2025, which will allow us to pay down balances on our credit facility. This head start will also provide us with flexibility to respond to the pricing environment in 2025 when determining optimal growth levels. We are planning to announce our budget for 2025 later in the year, as Pat mentioned.

Speaker 3

We also ended the quarter with just under $900,000,000 of tax pools. These valuable offsets to income will help us to defer our tax for the coming years as we continue to profitably grow production. I wanted to conclude by reiterating our excitement over the quality of our asset and underlying value within our shares. We saw multiple acquisition transactions during the Q3, demonstrating value being paid for assets with growth potential and ample inventory, both of which Cuitino possesses. Most recently, at Duvernay, position in the immediate proximity to our asset was part of a US6.5 billion dollars acquisition.

Speaker 3

We are excited by the significantly increasing interest in the Duvernay play and valuation metrics achieved in these market transactions as they continue to demonstrate our significant value potential. Thank you for your time today, and I'll now turn it over to Mike to expand on our upstream results.

Speaker 4

Great. Thanks, Jacob, and good morning, everyone. I'm pleased to provide you with an update on the upstream operations for the Q3. We're safely executing our busiest program to date during the second half of this year. The development program is on track and we're excited to see our production volumes continue to ramp up, particularly in the Q4 and into early next year.

Speaker 4

Our production in Q3 averaged nearly 26,000 BOEs per day, which was consistent with the Q2. This was a very busy quarter with new wells coming on stream later in the quarter as outlined in the press release. It was offset by both some planned and unplanned downtime, which led to production levels that were steady. We remain confident in our annual production guidance, which was increased in the first half of the year from our original budget. I specifically wanted to point out our much anticipated Montney well at the 1 at 27 pad.

Speaker 4

Here we drilled 1 Montney and 1 Duvernay well and this pad came on stream at the end of the quarter. After an initial cleanup period, the Montney well continued to ramp up and is seeing current rates in excess of 7 1,000,000 cubic feet per day of gas and gas liquids, in addition to approximately 400 barrels a day of condensate. This is above our expectations with condensate near the plan, but gas rates well ahead of our expectations. With only about 12% of our Simonette Montney inventory in our current reserve book, we have a lot of value to unlock here. Our operating expenses came in strong again for the quarter and continue to trend to the low end of our guidance range, which is already lowered in Q2.

Speaker 4

This is being driven by our growing production base, high quality owned and operated assets and the team's focused on operational excellence and cost efficiencies. I'm expecting a busy and strong exit to the year. Here's a rundown of our current activity in the Q4 and into early next year. We're currently completing the 2 well Duvernay and 1 Montney well at our 8 to 23 pad that should be on stream later this month. The completion crew is actually moving over to the 9 of 11 pad as we speak, where we currently have 3 Duvernay wells ready to complete with production budgeted early in the New Year.

Speaker 4

We're also currently drilling at 2 Duvernay and another 1 Watt Montney well at our 14 to 29 pad, which will be completed in early 2025. And as Pat mentioned earlier, we and in our press release, we will also commence drilling an additional 3 wells at the 1 at 27 pad in December, which was the capital acceleration decision we mentioned on our Q2 conference call when confirmed in our press release. We are in the process of finalizing our plans for next year, but are expecting to remain active and continue to develop our asset and move us toward our target of 40,000 BOEs per day. Our goal remains to stay safe, delineate and protect our high quality resource, demonstrate the top tier deliverability of our Duvernay, unlock the value potential across our Simonette Montney, fill our owned and operated infrastructure and provide more growth over the next couple of years, which has already more than doubled since we acquired the assets. Thanks for your time today and I hope everyone has a great holiday season coming up.

Speaker 4

I'll turn it back to Pat now.

Speaker 1

Thank you, Mike. This concludes our Q1 conference call. I'll now pass control of the call back to Angeline for any questions. Thank you for joining us for this update. Angeline?

Operator

Thank you. Thank you, Pat. Your first question comes from Amir Aras from ATB Capital Markets. Please go ahead.

Speaker 5

Hi, good morning guys. Just initial question, just on the Montney well. Can you just remind us how that rate compares to your class at Montney? And then I know you completed it in a lower part of the Montney up there or within the bench? And then are the next 2 Montney wells also going to be targeted in that same area?

Speaker 5

Or are you planning on seeing if there's room for 2 wells in the same bench?

Speaker 1

Good morning, Amir and thank you for the question. I'll ask Mike Pekka to answer that for you.

Speaker 4

Sure. Amir, I would say that I think the first part of it was relative to placid, seeing similar kind of results on the condensate side, but probably higher gas rates. I think we probably produce in the 3,000,000 to 4,000,000 a day range across most of our Montney and in Placid and we're seeing obviously rates that are well in excess of that. So pretty encouraged by the gas drive of those wells. And then you talked about the next 2 wells coming up.

Speaker 4

We kind of have 2 main horizons in our Simon at Montney. I won't get into the numbering sequence of them, but we've got some wells in both of those targets. The one we drilled in the lower, the next two wells, one will be an additional lower and then we'll probably drill 1 a little bit in the upper zone as well. So we'll continue to delineate both of those benches across our land base.

Speaker 5

Okay, sounds good. And then just on, I know there wasn't much update on the power segment and there isn't a lot of capital going into that business, but just curious Pat if you could just provide us an update on the status of Homestead, if you can, or just the Power segment in general?

Speaker 1

Sure. Thank you, Amir. I'll ask Karim Senderji to answer that.

Speaker 6

Amir, do you mind repeating your question?

Speaker 5

I was just wondering if

Speaker 4

you are able to provide

Speaker 5

us an update on where Homestead project sits in terms of the status? I know you've been looking at some alternatives. And then just for the power projects in general, just given the minimum capital going in, just curious what the status is in terms of I know some projects are supposed to reach FID by the year end or a couple of things?

Speaker 6

Yes, absolutely, Amir. As you know, the regulatory environment and of the policies still linger, and we're catching up with respect to that. But we are pleased to share that the transmission line for the Homestead project, which was what we've communicated previously as a real regulatory hurdle has advanced significantly, and we're in the final stages of the AUC approval process. So things are progressing on Homestead. But with policy still in questions, particularly the restructuring of the energy only market, capital discipline is what we're applying to the projects right now and moving them cautiously.

Speaker 5

Okay. Appreciate that color. Thanks.

Operator

Thank you. The next question comes from Joseph Schachter from Schachter Energy Research. Please go ahead.

Speaker 7

Good morning, everyone. I've got a bit of a sore throat. So, I hope you can hear me. Just wondering first about the op costs. You've done very, very well with the Simonette 719 BOE down from 917.

Speaker 7

How much more room is there to go as you ramp up production into that facility? How much more space is there? And what could that do to that op cost number?

Speaker 1

Thank you for the question, Joseph, and good morning. I share your throat issue. So sorry about that too. I'll ask Mike Bacchus to answer the question.

Speaker 4

Thanks, Joseph. Our asset is split between Simonette and Placid. Placid carries a higher operating cost, so the $7.19 you're seeing is a blend of that. So the Simonette asset itself is much closer to like a $5 or $6 OpEx environment and that has a little bit of room to decline because we do have spare capacity in our assets. So we would see absolute costs go up there, but on a per BOE basis, I would expect there to be some a little bit more room to lower those to probably bring our average costs down to $7 or potentially even below $7 a BOE.

Speaker 7

Okay, great. Next question is, just from listening in on the calls in the service sector, the drillers seem to have held up pricing, but the frackers were a little weaker. How do you see input costs for drilling and completion? And given we're all hopeful that second half of twenty twenty five when LNG Canada is coming on, would you want to start locking in the crews that you like for both rigs, drilling and fracking in concern that things tighten up once that facility comes on?

Speaker 1

I'll ask Mike to answer that question as well, Joseph.

Speaker 4

Yeah, really good question, Joseph. Yeah, I think our philosophy is very aligned with your question in terms of how we act. We've seen relatively steady drilling and completion rates, I would say, from last year and into this year. You're right, there's been probably a little bit of excess supply on the completion side. So there's maybe a potential for the be a little bit of relief into 'twenty five, but we're not really planning for much of an increase or decrease on the D and C side.

Speaker 4

In terms of locking in providers, we've enjoyed some very long term relationships with both our drilling and completions providers and definitely subscribe to that same philosophy. So I see us continuing to have long relationships and try to have a steady program with both of those providers. So that's our plan.

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