Peyto Exploration & Development Q1 2024 Earnings Call Transcript

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May 15, 2024

There are 6 speakers on the call.

Operator

Good day, everyone, and thank you for standing by. Welcome to Peyto's First Quarter 20 24 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 session. Please be advised that today's conference is being recorded.

Operator

Now I would like to hand the conference over to the President and Chief Executive Officer, JP Lachance. Please proceed.

Speaker 1

Thanks, Carmen. Good morning, folks, and thanks for joining Peyto's Q1 conference call. I'd like to remind everybody that all statements made by the company during this call are subject to the same forward looking disclaimer and advisory set forth in the company's news release issued yesterday. Present with me in the room today to answer your questions, we have Riley Frame, our VP of Engineering and Chief Operating Officer Tavis Carlson, our VP of Finance and CFO Lee Kern, our VP of Drilling and Completions Todd Burdick, our VP of Production and Derek Sember, our VP of Land and Business Development. Firstly, we'd like to thank the Peyto team both in the office and in the field for their contributions to a strong quarter.

Speaker 1

And Q1 was a good quarter for Peyto despite low gas prices. We generated $205,000,000 of funds from operations and $100,000,000 of earnings, which in part has to do with our industry leading cash costs, but also thanks to our $900 sorry, a $93,000,000 hedging gain for our from our systematic hedging program that we put in place over the last 2.5 years. This allowed us to not only fund our capital program of $114,000,000 but pay our shareholders $64,000,000 in dividends and also left us enough to pay down some debt about $23,000,000 of net debt over the quarter. We continue to be excited by the drilling results on the newly acquired Repsol lands. We had 15 wells on stream to the end of the quarter with enough history that show us a sustained 30% increase of average well productivity as compared to the performance of recent wells recent years on Peyto's legacy assets.

Speaker 1

This continues to affirm that the assets we bought last year have the quality we thought they did. We completed some very long lateral wells in the first quarter across all species, longest quarterly program in our history in fact at an average length of about 2,200 meters. And we continue to see the benefits of doing this to optimize resource recovery. In Q1, we also drilled 2 2,400 meter lateral Dunvegan wells that we subsequently brought on in April that demonstrate good deliverability coupled with higher liquid content in our Spirit River wells, about 20,000,000,000 to 30,000,000,000 barrels per million. It has us excited enough to dedicate a rig to the play for the rest of the year.

Speaker 1

We have over 100 wells booked across our land base and we expect to drill about 10 wells to 12 wells total in 2024. You can find a little more information about this play in our in the April monthly report and in our corporate presentation slide deck. Peyto's focus on unit operating costs remain a priority, so much so that we set a target of at least a 10% reduction from Q1 levels by the end of the year. And we've already begun to make meaningful changes in this regard beyond connecting gathering systems and plants together in the field. The decision to no longer recover ethane via a 3rd party deep cut plant fits with our own fits to a tee with our own and control strategy.

Speaker 1

Paying someone else to extract low value ethane from the gas space doesn't make sense, especially when we can redirect a portion of that raw gas stream to our It's in gas plant, which helps dilute its higher fixed costs. We estimate that we will see about a $0.02 per Mcfe reduction on overall operating costs going forward without any material loss in revenue. We do lose about 2,000 barrels a day of low value production from the base, but in the short term, but we expect more to make that up make up that loss by the year end with the quality of the drilling program that we're executing. And this is a good example that we're running a business here to make money, not lower value BOEs. We're still running 4 rigs right now, but we have them situated on 3 well pads for the most part through a breakup to minimize moves and will be prudent on spending capital and bringing on production in the current low price environment.

Speaker 1

That means we might wait on completions to keep costs down and production adds will be delayed accordingly. We have varying levers we can pull to reduce capital should low prices prevail past the summer. I know many are wondering about the status of the Cascade power plant and when we're going to start selling gas to them under our contract. As a reminder, that contract is for 60,000 GJ's a day or about 52,000,000 cubic feet a day over the next 15 years and it will start once they are fully operational. We have pressured up our pipeline that connects the gas roughly to their plan and we're ready to go.

Speaker 1

Based on publicly available data, both plants have been generating some power and are making commissioning progress. So that's a good sign. The latest filing with the Alberta Utilities Commission for start up is in July of 2024. When we look past summer 2024 and into 2025, we're excited about the LNG egress build out, which is coming over the next few years. By the end of the decade, Canada and U.

Speaker 1

S. Should be exporting at least another 12 Bcf a day. Besides that, there's significant demand potential that could be borne out of the evolution of AI with increased power requirements for data centers. We all know that natural gas is safe, secure, clean and affordable, but most importantly, it is a reliable supply of energy for the future. In the meantime, we all while all that comes to fruition, Peyto is well protected with our low cost structure, our disciplined hedging policy and our quality drilling inventory to thrive in 2024.

Speaker 1

This gives us confidence to execute a measured capital program, sustained dividend payments to shareholders and still allow us to manage the balance sheet with repayments of debt over the course of the year. Okay. I'll keep this short, but just a reminder, our AGM is next week on Wednesday, May 22 at 3 pm in our the building in our Calgary office on the plus 15 level in the conference center. We hope to see you there. If you can't make it, we'll be posting a reporting of it on our website afterwards.

Speaker 1

But please vote your shares. If you need help with that, you can see our press release for instructions.

Speaker 2

Okay. Again, I'd like to keep

Speaker 1

this short. So maybe I'll go to the phones, Carmen, if there's any questions there. If not, I can go to some questions we have that came in overnight.

Operator

Thank you. I don't see any questions at this time. I see one question from the phone. How do you want to proceed?

Speaker 1

Go ahead and we'll

Operator

All right. Thank you. One moment while I bring it to the stage. From Chris Thompson with CIBC. Please proceed.

Speaker 2

Hey, good morning, everyone. Thanks for taking my question this morning. First question for you just on the transportation costs. In your release, you mentioned you've

Speaker 3

seen an

Speaker 2

increase in tolls on NGTL and increase in costs related to transportation with your Q1 results. Just wondering how we should think about that trending for the rest of the year?

Speaker 4

Hey, Chris, it's Tavis Carlson here. Yes, we came out at $0.30 per Mcfe in the quarter. And I think you could use that going forward for the rest of the year. I think 2023, we're at $0.27 so we're up about $0.03 year over year here. But $0.30 is a good number to estimate for the rest of the year.

Speaker 2

Got it. Okay. Thank you. And then my next question just in terms of free cash flow for the balance of the year, I'm wondering if you can help us sort of triangulate where you see your free cash flow profile going in the balance of 24?

Speaker 1

Well, we don't typically guide specifics on that. But generally speaking, we will with prices a little bit lower here in the next two quarters, we'll see that come down. Obviously, cash flow will come down in general. And so that might mean we accumulate a small amount of debt over those terms. But Q4, we have stronger prices and of course, on strip, but also in our hedge book, which is in the press release.

Speaker 1

And so we'll see a meaningful pay down of debt over the years. So free cash flow that we generate, obviously, any free cash flow we have and of course, sustaining the dividend as well throughout that period is no problem.

Speaker 2

Okay. Thank you. And then on the production profile, just the loss of 2,000 I guess that would be 2,000 barrels a day of ethane production from your base. But then you mentioned you're going to make up for it by year end. So I understand your exit rate is unchanged.

Speaker 2

But should we think about if we are modeling a certain number before this change, would we see our full year average come down 2,000 barrels a day? Or how should we think about really just modeling this out?

Speaker 1

I'd say in the first like Q2, Q3, maybe it continues for that period of time, you'll see a reduction of whatever you had in your model by about 2,000 barrels a day of production, you shouldn't see a change in your revenue. In fact, you should see cash flow go up because we are going to reduce operating costs by, like I said earlier, dollars 0.02 So you should model something slightly less on the obviously 2,000 barrels a day less on the short term. But spending on the timing of all the production as we have, which would be Q3 and Q4 mainly and corresponding with higher prices, will more than make up for that 2,000 barrels a day. So it will be caught up in say Q3, Q4 in that range somewhere in there.

Speaker 2

Great. Thanks. I'll hand it back.

Speaker 1

Okay. Thanks for your questions, Chris.

Operator

Thank you. You may continue. I don't see any questions at this time.

Speaker 1

Okay. Thanks. I'm going to take a couple of questions that came in over the wire there last night. Maybe this one's probably for Riley about we talked about the 30% improvement on our well results. We're very happy with what we expected or maybe it's even a little better than we expected.

Speaker 1

Can you maybe elaborate some more around maybe what are the costs associated with these wells and how are we predicting where F and D and sort of things are, a little more color maybe around that program? Yes. Thanks, JB.

Speaker 5

Yes, so obviously the performance of the wells on the Repsol lands have been excellent, as you mentioned, 30% over last year's program on average, which is great. From a cost perspective, everything is coming in line with what we would expect. Average cost for

Speaker 3

the quarter about 4.8 D

Speaker 5

and C. The Repsol costs were actually just a little bit below that at 4.7 $1,000,000 per well, even though we're actually drilling those wells slightly longer, roughly 15%. So based on the data we have right now to forecast these wells, we're predicting an F and D around $0.95 which is really good. And actually is right in line with what we're seeing from our Marfork from our reserve process this year.

Speaker 1

So yes, that's all really positive. And I

Speaker 5

would actually expect that F and D number here will drop even a little bit further throughout the course of the year as we feather in more punching out of Q1 locations. As we move through the second half, we've been able to digest a bunch of the seismic that we picked up late last year and there's a suite of really high quality on a few locations that will be drilling in the second half. So expect that those numbers to improve

Speaker 3

to the second half of the

Speaker 1

year as well. That's encouraging. Todd, I also have some questions around our preparedness for wildfire season. We saw some smoke rolling over the weekend in Calgary. As a reminder, it is that time we've heard we're hearing about evacuations already in some areas.

Speaker 1

Maybe you could elaborate on what we learned last year and maybe and then what we've done or what we how we will mitigate any impacts from that. It's one of the common questions I'm getting these days.

Speaker 3

Yes, sure. So as far as key learnings last year, we did learn that our gas plants, we can operate them remotely for short periods of time. We can't obviously do that with the Edison gas plant. It's a fairly large facility and a little more complex to operate, but we can run them for a short period of time. Cutoff of access is pretty key issue where obviously if we can't get into a certain area due to an evacuation or something like that, And you've got water tanks that are filling on leases, that sort of thing.

Speaker 3

So again, you can run for a short period of time, but we can remotely shut wells in, which helps. So we try and keep things going as long as we can, and we did that in certain situations last year. Liquid trucking egress is a main concern that affects many of our plants. Right now, about 68% of our liquids move on pipes to sales. As long as those facilities that are on the other end of those keep moving, then we can move a large volume of fluid, but a lot is moved out on trucks.

Speaker 3

So that's some a little bit of risk that we see. As far as mitigation, obviously, we talk about it quite a bit. We've got a lot of plants linked together, especially in the Sundance area and as well down in Greater Brazil. And as we've been talking about since the acquisition, we've worked to connect the Repsol plants in the Greater Sundance area as well. So that gives flexibility to move production around if needed, if a fire should approach a particular part of that Greater Sundance or Greater Brazzow area.

Speaker 3

We've cleared areas around plants where maybe trees were a little bit closer than what we felt comfortable with. We looked at all of the rep salts former rep salt plants, and there was no issues there. Obviously, I mentioned the liquids pipelines. When fires start to get near the area that we start looking at things like pulling tank levels down at plants and LPD levels and that sort of stuff just to be able to run a little bit longer. And then obviously, we installed cameras last year.

Speaker 3

So we've got cameras at all of the plants so that we've got 360 degree views just to see and make sure that fires aren't getting too close so we can get people out if need be quickly. And then we can even our propane refrigeration plants, we can always warm up, make less liquid, put it in the gas space so that we can stretch out that time while tanks are filling. So I guess the final thing would be, we learned last year that good communication with fire liaisons is really important. At times, we were talking to them a couple of times a day. They were really good at sending information to us.

Speaker 3

That allowed us to feel confident that we are protecting our people and we're not going to get anybody caught where they shouldn't be. So obviously that will be something buyers come close, we'd be reaching out to those people right away, both fire liaisons with industry and with the Alberta government. So we feel pretty good that should something come our way, we learned a lot last year and made a few changes of what we've done. And I think hopefully, we don't have to go there. But if we do, we're ready as we can.

Speaker 1

Be. Thank you for that. I think it's important for folks to understand that we do have owning and controlling our facilities is a real advantage for us to be able to take it to be able to do these kinds of things, right, to be able to make the changes we need to, to make situations like this. Okay. I don't have any more questions.

Speaker 1

If there are no questions on the call, is there any more questions on the call?

Operator

All right. I don't see any further questions. I'll turn it back to JP Lachance for final comments.

Speaker 1

Okay. Well, thanks for tuning in folks. I hope to see you at the AGM next week. But if not, we'll talk again in the next quarter. Thanks for tuning in.

Operator

Thank you, everyone. You may now disconnect.

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Earnings Conference Call
Peyto Exploration & Development Q1 2024
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