Advantage Energy Q2 2024 Earnings Call Transcript

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July 25, 2024

There are 4 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the ADDvantage Energy Limited Second Quarter 2024 Results Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Friday, July 26, 2024. I would now like to turn the conference over to Brian Bagnall, Vice President of Commodities and Capital Markets.

Operator

Please go ahead.

Speaker 1

Thank you, Konstantin, and welcome everybody to Advantage's conference call to discuss our Q2 2024 results. Before we get started, I'd like to refer you to the advisories on forward looking statements contained in the news release, as well as the advisories contained in ADDvantage's MD and A and annual information form, which are available on SEDAR and on our website. I'm here with Mike Delankey, President and CEO of ADDvantage Craig Blackwood, our CFO as well as other members of our executive team. We'll start by speaking with some of the financial and operational highlights. Once Mike and Craig have finished speaking, we'll pass it back to the operator for questions.

Speaker 1

And as usual, we'd ask if you have any detailed modeling questions that you follow-up with us individually after the call. Mike, please go ahead. Thanks, Brian, and thanks everyone for joining us for this conference call on our Q2 2024 results. This is the Q1 since our asset acquisition, which we closed on June 24 this year. So this report includes a 7 day stub period from the new assets.

Speaker 1

Let's start with the financial and operating results. Production for the quarter was 66,401 BOEs per day, slightly higher than the Q1 of 2024, but 28% higher than the Q2 of 'twenty three, during which time the Glacier gas plant had a planned turnaround. Production from liquids was 7,141 barrels per day, an 11% increase versus the 1st quarter and a 12% increase versus the Q2 of 2023. Although liquids represent just 11% of our production this quarter, they contributed 53% of our quarterly revenue. As we've seen, gas prices have been quite weak across North America during the quarter, which has impacted our revenue.

Speaker 1

However, this has been significantly offset by higher production and stronger liquids pricing. Adjusted funds flow for ADDvantage not including our entropy subsidiary, but including transaction costs was $44,000,000 or $0.27 per share. Without transaction costs though, adjusted funds flow was 47,200,000 dollars or $0.29 per share. Capital spending for the quarter, excluding the acquisition of Entropet was low for the quarter at just $39,700,000 with 3 wells drilled and completed at Wembley. On the balance sheet, Vantage ended the quarter with net debt of $619,000,000 after funding the acquisition.

Speaker 1

We sit with over $150,000,000 available on our credit facility. Our debt level translates to approximately 1.7 times debt to trailing cash flow when consolidating cash flows from the acquired assets during the last 12 months. With 2024 production expected to average between 7,073,000 BOEs per day and 15% liquids for the remainder of 2024, we are significantly exceeding our annual per share growth targets. Therefore, our strategy has temporarily shifted towards maximizing free cash flow and maximizing the pace of delevering. A few weeks ago we also reduced 2024 capital spending guidance by $20,000,000 to between $260,000,000 $290,000,000 by cutting gas weighted wells from the program that were expected to drive gas production even higher while gas markets remain oversupplied and prices are suppressed.

Speaker 1

As a reminder, our original budget for advantage which we issued in December of 2023 was for the same range $260,000,000 to $290,000,000 Thanks mostly to continued glacier well outperformance. We've been able to deliver roughly the same level of production growth on our base assets, plus we've added 8 net trailing wells on the acquired assets for the same total capital as our original budget. Since the acquisition, we've increased our hedging position to reduce exposure to price volatility. Approximately 28% of our natural gas production is hedged through the end of 'twenty four, as well as 26% for calendar 'twenty five and 10% for calendar 2020 6. Approximately 65% of our oil and condensate production in the second half of twenty twenty four is now hedged, as well as 45% in the first half of 'twenty five and 15% in the second half of 'twenty five.

Speaker 1

I'll talk a little bit about the acquisition. It's only been a month since we closed the Charlotte Lake acquisition. However, we are already encouraged by the results these assets are bringing to the advantaged portfolio. Production from the acquired assets is exceeding expectations with current production of about 15,000 BOEs per day due to some excellent well results including 4 of 18 Valhalla well that delivered over 1100 barrels per day of oil in the 1st 30 days of production. Our team has identified our initial drilling program on the acquired assets with drilling expected to begin in September.

Speaker 1

Finally drill 8 net Charlie Lake development wells this year selected based on MAX internal rate of return. We're executing on synergies to reduce costs and improve efficiencies on the assets. The largest synergy relates to deferral of the second phase of the Progress Gas Plant, which was originally planned to begin construction in 2026. However, thanks to the acquisition, that expansion has been deferred definitely, which frees up approximately $100,000,000 for the 2026 and 2027 programs. That expansion no longer required thanks to the new processing capacity that we acquired through the transaction.

Speaker 1

On the other end of the synergy spectrum, we're also already seeing operating costs on the assets trending lower by more than $1 per BOE versus our forecast already, with further reductions expected by the Q2 of 2025 once Phase 1 of the Progress Gas Plant is online. For more information on the synergies, we have lots of details in our investor slide deck, feel free to refer to that. As some of you have likely noticed from our latest investor presentation, we are evaluating various options for accelerating towards our net debt target and that includes consideration of non core non producing asset dispositions. We are in the very early stages of this process and we'll provide more information later this year. On Entropi, during the quarter we were pleased to see the Canadian CCS investment tax credits finally received Royal Assent after about 3 years, which is great news for us as we are eligible to be 1 of the first recipients.

Speaker 1

We're currently preparing applications for our operating carbon capture projects at Glacier to realize the ITC for expenses we incurred on CCS back to January 1, 2022. Any ITCs we receive will lower our net capital for advantage at least in this round of ITCs hopefully prior to the end of the year. At Glacier Phase 2, at the beginning of the quarter, we are pleased to announce FID for Glacier Phase 2, our 2nd and largest post combustion CCS project to date, with an on stream date expected in the Q2 of 2026. Total CO2 capture capacity will be approximately 160,000 tonnes per annum from 9 gas fired engines plus 1 gas fired power generation turbine. This is in addition to the existing Phase 1 capacity of 32,000 tons per annum.

Speaker 1

Total cost of Glacier Phase 2 CCS including capture equipment, compression, transportation and storage at surge wells is $127,000,000 resulting in a capital efficiency of $800 per tonne per annum or $600 per tonne per annum for capture only excluding compression transportation and storage. All capital costs are incurred and financed directly by Entropi at no cost to Advantage. All capital expenditures are also expected to be eligible for the federal investment tax credits of up to 50%, plus the Alberta Carbon Capture and Sensor Program of 12%. Revenue from the project is contractually underpinned 75% by a 15 year carbon credit offtake agreement with the Canada Growth Fund and 25% by a 15 year power purchase agreement with Advantage. In conjunction with the Glacier Phase 2 CCS project, Entropi will repower Advantage Glacier gas plant by installing a 15 megawatt gas fired turbine and selling power to Advantage via competitive price power purchase agreement, PPA, while also capturing approximately 90% of the CO2 emissions from the turbine.

Speaker 1

This modular power plant is estimated to cost $47,000,000 providing power and heat for the plant and for Entropy CCS equipment. With the more efficient turbine power source, ADDvantage's existing power generators will be shut in eliminating prior CO2 emissions and methane emissions. This project is expected to be the world's 1st CCS project on gas fired base low power. We expect this to be an important aspect of Entropy's business in the future. A few weeks ago we also announced a partnership with Methanex, where Entropy entered into an agreement to invest in a pre FEED study for C6 deployment and Methanex's Medicine Hat Alberta facility.

Speaker 1

We're tremendously excited about this collaboration that will leverage Entropet's proprietary modular post combustion CCS technology and Methanex's manufacturing expertise to utilize portion of the captured CO2 to produce additional methanol. Hence we plan to construct and own the capture equipment adjacent to Methanex's facility and Methanex will supply the utilities, build the tie ins to its facility and operate the capture equipment once commissioned. Total emissions captured targets approximately 400 tonnes of CO2 per day and involves an investment of approximately $100,000,000 the largest portion of which will come from entropy. Methanex plans to use the captured CO2 as feedstock to produce approximately 50,000 tonnes per annum of additional methanol with the remaining CO2 primarily sequestered safely underground possibly by entropy. The MethaX partnership highlights for us the versatility of our CCS technology and the strong growing market for CCS and Alberta.

Speaker 1

More to come on Entropi. So the outlook for Advantage. Advantage's long term focus on cash flow per share growth remains unchanged. Our short term focus on delivering will be executed with conviction, the disciplined capital allocation and potential asset sales. Most importantly, we're very pleased to have been able to acquire high quality asset base with deep strategic synergies resulting in cash flow per share growth that is above and beyond what we could possibly deliver within our organic development framework and we're able to do this all at an accretive price.

Speaker 1

So with that, I'd like to thank our Board of Directors and our long term shareholders for the continued support. And Brian, I'll throw it back to you. Constantin, we'll take any questions if there are any. Thank you.

Operator

Your first question comes from the line of AmirAli from ATB Capital. Your line is now open.

Speaker 2

Hey, thanks. Good morning, guys. I appreciate the color on the acquired assets in terms of operating costs already down $1 BOE. Could you possibly just lay out qualitatively at least in terms of activities you're doing to help further reduce the operating costs or at least even on capital efficiency side in terms of what you're doing differently than the previous operator to help bring those down further?

Speaker 1

Yes. I'll take this question myself. It's Mike here. First, the first thing that we're able to do is capitalize on manpower synergies which is essentially we have a great presence for highly skilled operators in the area. We brought on all the people that we believe we needed to continue to operate the assets, but in aggregate less people required to operate because this is all one footprint, so less hours in trucks, less driving time and so on.

Speaker 1

That cuts out a significant aspect of the operator hours, which is a significant cost in these operations. The first step, the first and most immediate thing that happens, there's a lot of other stuff that's also quick to happen coming down pipe. We don't have to wait until the Progress Gas Plant comes on before we see all of our synergies, but that's the biggest thing of all, which comes in the Q2 of 'twenty five, where we can take natural gas that's currently being processed in 3rd party facilities for as much as, in some cases, close to $2 per Mcf and turn that into owned operated very low variable operating cost plants that we own. So that will be the single biggest step in the East one in the coming, I guess, 12 months. And in the interim, there's a lot of processes and procedures that have been used as including safety, including efficient operations, chemical issues, power management that through the in the area where we apply and just simply improve day to day.

Speaker 1

Prior company, of course, was a growth resource development and exploration company. We're an operating cash flow generation company. So those processes flow through quite quickly. Okay.

Speaker 2

I appreciate that. And then just in terms of well capital efficiency, any differences on that front?

Speaker 1

Yes. I'll throw it to Jack. Hi, Dale.

Speaker 3

We've been actively operating in this area. We expect having looked at the design that these guys have used historically, we've identified a number of kind of inconsistencies through the drilling program that we will rationalize going forward. This is a new program for us though. So our expectation is we will proceed the measured pace on these locations, focusing on execution 1st and foremost on the highest quality locations. And we would anticipate our drilling costs would come in line with the industry standard in the area quickly.

Speaker 2

Okay. Could you quantify that in terms of average well cost, what it is and where you think you can get it? Because I believe you're also going to be drilling more pad wells versus the way the previous operator was more delineating the acreage.

Speaker 3

We're definitely going to be targeting minimum of 2 well pads. It won't be any single wells. So we'll reduce that kind of inefficiency throughout our operations. We will be targeting a DCET in the order of about $6,000,000 on each of these, which is also in line with the industry standard in the area. Expect to see that come down in future years with more activity.

Speaker 2

And what would that number have been with the prior operators, that TCET number?

Speaker 1

We see the numbers being about $500,000 cheaper right now, but until we've actually drilled some and achieved these numbers, we don't want to be too attached yet. Got it.

Speaker 2

No, it makes sense, Mike. And then just second question in terms of your net debt target number there, Mike. I mean commodities have been volatile, you've hedged more, so that gets you there. But just curious, does that net debt target change as the commodity outlook changes from the current position? Or is that more of a hard fixed number of $450,000,000

Speaker 1

Yes, the $450,000,000 is probably an interim net debt target. Historically, we've chosen our net debt targets based on long term steady operations where we knew we could fully fund, we'd be less I guess better way to put it is we'd be less than one time debt to cash flow at the bottom of the price cycle. Now $450,000,000 as a debt target is higher than that traditional index for us. So when we hit 450, the bigger question is what the allocation of our free cash flow back to our share buyback program, which as everyone knows has been an important part of our strategy in the past. So we do intend to shift into a share buyback program at that point at some level.

Speaker 1

The only question is what percent of total free cash flow that would be. But if you've been part of our story for long you'll know that we tend to be very convicted behind share buybacks.

Speaker 2

Okay, appreciate the color. Thank you.

Operator

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.

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Advantage Energy Q2 2024
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