Advantage Energy Q4 2023 Earnings Call Transcript

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Provided by Quartr
March 5, 2024

There are 5 speakers on the call.

Operator

Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the ADDvantage Energy 2023 Year End Results Conference Call. Thank you. Mr.

Operator

Barnel, you may begin your conference.

Speaker 1

Thank you, Julie, and welcome everybody to Advantage's conference call to discuss our 2023 year end results and reserves. My name is Brian Bagnall, and I'm the Director of Commodities and Capital Markets at Advantage. Before we get started here, I refer you to the advisories on forward looking statements contained in the news release as well as the advisories contained in ADDvantage's annual information form and MD and A, which are available on SEDAR and on our website. I also draw your attention to the material factors and assumptions in those advisories. I'm here with Mike Balenke, President and CEO of ADDvantage Craig Blackwood, our Chief Financial Officer as well as the rest of our executive team.

Speaker 1

We'll start by speaking to some of our financial and operational highlights from 2023. Once Mike has finished speaking, we'll pass it back to the operator for questions. And while we're happy to answer your questions, we'd ask that if you have any detailed modeling questions, that you follow-up with us individually after the call.

Speaker 2

Mike, please go ahead. Thank you, Brian, and thanks to everyone for joining us this morning to go over our 2023 year end results. Advantage enjoyed an exceptional year in 2023. Our business is in order. Our balance sheet is strong.

Speaker 2

We have low cost structure and we have decades of top tier inventory and this allows us to maintain a laser like focus on cash flow per share optimization And we do that with disciplined capital allocation with very few distractions. Our results indeed were exceptional in 2023, including record production, record well results and continued significant share buybacks and we ended the year well below our net debt target. And I think everyone will have noticed by now, we've reduced our capital program coming into 2024 by $40,000,000 We're able to do this, thanks to the exceptional well performed and disciplined cost control and capital allocation that the team has been able to achieve through the year and continuing to 2024. As we walk through the financials, I'll refer to advantage numbers only since HP Financials are not particularly relevant as entropy is funded separately by Brookfield and CGF. And HP really being a core, this is controlled by advantage, but not actually relevant to Advantage valuation, currently exception of the common equity ownership.

Speaker 2

As we think about the financials, it was punctuated by our 2nd best AFF per share in the history of the company, dollars 320,000,000 That's the 2nd best both in total AFF and in AFF per share, the best ever having been in 2022, where realized prices were 6.82 per Mcf versus realized pricing this year, this past year of 2.92. So for us to achieve the 2nd best of all time at less than half the pricing realized was an exceptional accomplishment for the team. Free cash flow was $54,000,000 and cash used in investing activities or net capital expenditures is better way to put it, dollars 266,000,000 was right smack in the middle of our guidance, including a $10,000,000 on budget acquisition. So again, to achieve our capital program right in the middle after an incredible amount of inflation, many operational challenges the entire industry experienced and an acquisition, the team is very pleased with that outcome. And while we went through the year, we were able to purchase about 8% of our outstanding shares based on coming into the year numbers, that's 13,100,000 shares repurchased.

Speaker 2

Now we entered the year of 2023 with our debt target well below sorry, with our debt well below our debt target, having basically thrown off too much cash flow to be able to redeploy through the buyback head pace. So what we did through 2023 was we re levered by about $79,000,000 which allowed us to deploy $117,000,000 in the buyback combined with our free cash flow. Since the buyback started less than 2 years ago, we bought back 20% of our stock. Rolling into our operational accomplishments, we achieved record annual production of over 60,000 BOEs per day And our liquids production went with that, an increase of 13% versus 2022. Our liquids continue to be much more valuable than many would understand, representing about 40% of our total revenue.

Speaker 2

This is because our liquids are typically very high value liquids with minimal of the very light low value NGLs. Again, part of the over performance of our capital program and our production is based on our well performance, just simply right down to where the value is generated right at the well. 13 of the top 16 gas producers drilled in the Montney, Alberta were advantages based on IP90 rates. Each of our assets is outperforming, including Glacier, Valhalla, Webley. And on top of that, our emissions continue to fall, reducing exposure to carbon pricing via Entropi's post combustion carbon capture projects.

Speaker 2

Now again, I mentioned Entropies at the start. Entropies is indeed a separate company with separate management team with only a few shared roles. Financials of course are not necessarily relevant. I mean, being a early stage company, but there is embedded value of the Entropy shares and the embedded value is growing. Advantage owns 27,000,000 shares in Entropy and the deal that we announced in December with the Canada Growth Fund would imply a value of $12.75 per share.

Speaker 2

Rolling into reserves highlights, Reserves were again exceptional for Advantage in 2023 with an increase to our PDP reserves of 8%, F and D sitting at $7.67 per BOE, which is as typical amongst the best in our peer group and continuing to grow. 2P reserves increased by 4% with an F and D of $8.17 It's important to note that within our reserves, we include the capital for gas plants and we do not shelter these costs or hide these costs using midstream assumptions. NPV of the TP reserves were $4,200,000,000 or $26 a share. And we were able to replace 151 percent of production based on PDP reserve additions. Also worth noting, our recycle ratios continue to be strong at over 2 times for PDP, 1P and 2P And our ROI for PDP is 6 years and for 2Ps 24 years.

Speaker 2

Important to note again in Canada, there are limits on how many locations can be booked. So we are capped on the number of wells we're able to book. Our inventory is well in excess of the 10 year rule for 2P. We'll talk a little bit about that if you have questions on how we allocate our bookings area by area. So some additional notes on our 2024 capital reductions.

Speaker 2

We've been able to cut $40,000,000 out of our capital program via 3 bins or buckets of spending. We started with 2 fewer wells, at least 2 fewer wells, that number may actually increase. We may be able to drop additional wells pending continued high performance of our program. We're also deferring a debottlenecking project that was approximately $10,000,000 perhaps a little over $10,000,000 worth of spending. That was not necessarily a production adder, but a reliability improver for the company.

Speaker 2

So it reduces the risk of constrictions or outages. So that's not reducing production, but it certainly narrows our landing strip in certain circumstances. And previously, on budgeted capital recovery, which relates to the federal government's investment tax credit for carbon capture, which is spending that we did during 2022 prior to entropy being spun. There remains significant discretionary capital in the budget for the second half of twenty twenty four. Each individual well that we drill is evaluated on a regular basis at strip pricing and in the event that North American supply growth continues to overwhelm demand and if strip were to be suppressed further, in particular, forward strip were to be suppressed additionally, we have the constant process of reviewing each investment and an ability to cut those individual investments at the appropriate time.

Speaker 2

So the capital revision that we've announced yesterday is not necessarily the lowest number that we'd get to if futures pricing were to be reduced further. And it's important to note that on a 2 year average, our spending will be 75% of forecasted AFF. So we are remaining at a fairly low level in spite of the fact that we are a growth company, I. E, cash flow per share growth. So this is a nice balance where we're essentially sticking to our 3 year plan of about 10% growth while throwing off free cash flow per share buybacks.

Speaker 2

That focus is of course cash flow per share driven as always. Looking forward, we will remain focused on cash flow per share growth. We do believe that our value is driven by that primary metric. Our debt target is unlikely to change $200,000,000 to $250,000,000 We remain within that range or we're going to be back in that range for this year and stay within that range. All excess cash will be returned to shareholders via the share buybacks.

Speaker 2

And every on a regular basis, as the world changes, we will change with it quickly and make sure that that is optimized on a simple cash per share basis, not on some dogmatic approach to achieving the 10% number or on the flip side of cashing up with some other reason to be too conservative. We're looking for that balance and that balance will be optimized on a regular basis. With that, that concludes my prepared remarks. I'll throw it back to Brian, and we'll be happy to answer questions. Thank you, Mike.

Speaker 2

Julie, we'll take some Q and A from the lines. Thank you.

Operator

Thank you. The first question comes from Jamie Kubik from CIBC. Please go ahead.

Speaker 3

Yes. Good morning, guys. Thanks for taking my question. Mike, you alluded to this in your remarks and your press release indicates that significant discretionary capital remains in the budget for the second half of twenty twenty four, including the Progress gas plant project. If gas pricing remains weak for the balance of 2024, I guess, how much discretionary capital could be reduced?

Speaker 3

And when would you have to make that decision for the second half? Thanks.

Speaker 2

Thanks, Jamie. Yes, we do have a huge amount of discretionary capital in the second half. The ability to cut wealth is constant for us. We obviously don't want to do that in a way that reduces our 2025 cash flow per share targets. So we think about optimizing either well count or about sliding in the Progress gas plant backwards and there's about $50,000,000 of spending in the Progress gas plant in the second half.

Speaker 2

Now the nuance here with capital spending in 2024 is that, yes, gas prices are very low today and they're low for a very good reason because of North American oversupply. But there's also a pretty good reason why Fort Strip is in contango, which is obvious structural demand growth. So there's an analogy here that we use frequently, which is we don't want to close the barn door just before the horse goes back into the barn. And you can see that obviously prices are low today. We expect price to be less low in the future.

Speaker 2

I wouldn't say that we're unbridled bulls about how high prices will go next year. That is not the case. But we do know that the economics of our investments that we're making today, are investment, but these are actually significantly these are basically very economic at strip pricing, which of course is driven heavily by some recovery into 2025. Best example is that we were slide our Progress gas pump by 1 quarter, 3 months, we would reduce capital by $25,000,000 this year, but we would also reduce cash flow next year by about $58,000,000 on strip pricing. So we're balancing that carefully.

Speaker 2

We're not at a spot now where we think there's any reason to cut our program further. If 25 pricing were to be suppressed and these investments no longer resulted in the higher cash flow per share next year, we will make those adjustments at that time. Okay, got it. Okay. Got it.

Speaker 3

Yes. Just to be clear, so I mean depending on 2024 pricing for the back half of this year, but also how 2025 is shaping up.

Speaker 2

Yes. The best way to think of it is investments being made in the second half, deliver cash flow in 2025. So we're making those investments forward looking rather than sort of being mired in what's happening today.

Speaker 3

Okay, thanks. And maybe one more question from me here is just on the drought conditions in Western Canada. I've heard from a number of different operators, some of the water management techniques and recycling initiatives underway to try and combat potential restrictions from forthcoming drought. Can you just talk about how Advantage is set up to be defensible in that scenario? Thanks.

Speaker 4

Hi, Jamie. It's Neil Bokenfort here. We've been thinking about drought conditions and water supply for a long time. So we have some water recycling initiatives going on and we've also I feel like we're in a position that we have enough water supply to get us through at least 3 quarters of 2024. And then the expectation is that Q4 would be a little bit better in the province for water supply.

Speaker 4

So we're comfortable with our position right now for 2024.

Speaker 3

Okay. That's all for me. Thanks.

Operator

And there are no further questions over the phone at this time. I will turn the call back over to Brian. Thank you. Okay.

Speaker 1

Thank you, Julie, and thank you everybody for joining our call. Just a reminder, if you have any follow-up questions, we're available should you need us. Thank you very much.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and you may now disconnect your lines. Thank you.

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Earnings Conference Call
Advantage Energy Q4 2023
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