Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to pay those year end 2019 financial results Conference call.
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I'd like to hand, the conference over to your speaking today, Mr. Darrin GE, President and Chief Executive Officer. Thank you. Please go ahead.
Thanks, Jerry and good morning, ladies and gentlemen.
Thanks for tuning into Tito's fourth quarter and year end 2019 results conference call.
Before we get started today I do want to remind everybody that all statements made by the company. During this call are subject to the forward looking disclaimer and the advisory that we had in our company news release issued yesterday.
In the room with me today, we've got the entire Peter management team. We've got Kathy turns on our Chief Financial Officer, G.P., let Charles our VP of engineering and Chief operating Officer.
Dave Thomas our VP exploration is here taught vertically production weaker in deep you're drilling and completions, So Tim Louie RVP Atlanta.
Our newest an older remember the management team Scott Robinson, our VP of business development.
So before I get started with just some general comments today I do want to recognize the efforts of our entire peto team, including all our field personnel.
2019 proved to be another challenging year constantly changing commodity prices and changing whether at operating conditions.
Of course, a very volatile business environment and yet throughout all that our team remained very nimble and ready to react to whatever came our way.
<unk> cold several autobytel during the year I think this year's performance the 20th year.
A solid earnings performance is a testament to our team's ability to handle those challenges.
So on behalf of all Peter shareholders I, just want to say a thank you to the entire peto team for that effort.
So just want to start off sporting with some general comments about the quarter in the year before we open it up questions from most listening in and try to keep this brief since this is a pretty busy reporting weak and I'm sure. There's a lot of calls going on right now.
As I mentioned in the release, a we doubled our piece of investment in the fourth quarter attempting to bring on some new production for the winter heating season on the back so.
Much anticipated reconnected eco gas market.
In addition to our Cardium play that we've been developing all year.
Did some spirit river locations to the quarter.
With the higher gas price they had better economic returns as well.
Some of those spirit River locations were in actually a new flare channel that we found it insulates field in some very prolific wells I think a couple of those even made it into the top wells in the province reports that I saw.
Oh that drilling I agree production from 75000 barrels a day in October to exit the year to peak around 82000 barrels a day.
More importantly, though was the growth in liquids production that we saw since the oil prices were still fairly robust in Q4.
Our liquids production hit a company record actually at 12350 barrels a day average in December.
With two thirds about liquid being called D. N C plus which is of course, the liquid that gets effectively light oil pricing.
So that's over 15% liquids at the end of the year or 30 barrels per million cubic feet on the liquid yield basis.
For the year I think we had averaged around 26, which is pretty close to what we had projected so we definitely hit or.
Target for liquids for the year.
Much of that liquid came from the Cardium, particularly a few of the liquid rich sweet spots that we were targeting a one of those was in west wildly.
Which was why we had to install increased liquid stabilization equipment at the plant there and more liquid storage.
We also had to loop on several pipelines in that area because all the liquid and the gathering system was increasing line pressures and backing out older wells.
That was a problem that we fought so pretty much all year.
And then of course to make things doubly hard for fuel guidance a in wild Hey, a that was also the area, where we drilled computer for smart evolve.
The Montney well completion was similar to what most of the industry is doing.
Involved a lot more frac water than we pumped in the Cardium and so when you're following that back and trying to clean up the Frac you have to handle all this extra water, which at the same time, we were trying to handle all the after condensate from our Cardium wells and things that may things, rather tricky for our guys in west welding.
But needless to say.
The Cardium production, obviously took priority with its condensate over the Montney, well, which was producing back all of this frac water.
Which is why we're actually still solely cleaning up that Martin you well today, you would have cleaned up faster had we had more capacity for it but you wanted to make group Cardium production first.
So I guess, that's one of the challenges if you're trying to do a little exploration write the heart of a bunch of development work.
But on the flip side I guess, we were able to tie that money go right into our gathering system out there and conserve and sell that gas during the entire cleanup pays which was nice.
Anyway that was just some of the fund we were having it was the last year.
What else, we picked up a lot of land last year, we don't advertise it very much but we were very successful adding onto our land base in 2019.
Which added of course to our future drilling inventory.
We did it at some incredibly low land prices I.
I don't think we've ever averaged $37 an acre for a year of crown sales.
And especially with lands like these that have locations on them right next to our infrastructure.
So that really speaks to the level of competition out there right now and and the types of opportunities that are available.
At the end of the fourth quarter I need to January we a shot a big seismic program 98 kilometer Threed seismic program a bunch of those new lines in fact, and that's going to be interpreted in the coming months and should be good for any more cardium in spirit river locations in the future.
The other thing we did at the end of year wasn't all the big pipeline from our Bronto area down to our so proud lance or an area, we're calling chambers.
We already had a couple of wells down they're producing to a third party. So this pipeline enabled us to bring that production up indoor brass plant.
We also have plans in 2020 to do some more drilling down there in chambers. So this pipeline was required obviously to tie in all that activity I think we have a rig running down there right now in fact.
And there are several other operators in that area that we can now offer processing to now that we've got a pipeline that the takes gas from the area up to a processing facility.
Overall, I think 20 I team was a successful year from a financial in reserves perspective, we generated 170 million in free cash flow.
Hey, down another 78 million in debt.
The only reinvested 64% of our funds from operations, but that was enough to replace almost all our production promote PDP reserves perspective.
In fact, we replaced it with a more liquids rich barrels so it had more value.
Proven reserve life PDP ROI grew again from 8.7 years in 2018 to 9.4 years in 2019 and the projected based equine continues to fall. So that means we have a more stable producing base.
That requires less capital going forward to replace the decline.
We added to our inventory of undeveloped locations as I mentioned, we bought new lands and a identified even more locations booked some of those so growing the undeveloped locations in the reserve books from the about 1200 locations to 1200 80 locations at year end.
And considering we're only drilling around 90 locations here.
That piece, we've got more than 14 years of booked inventory so.
They were going to be here while.
And lastly, we strengthened our you'll see standing this past year, a with a focus a again on on reducing our emissions intensity, which we continue to do.
We had good improvement in our safety record this last year, and we tightened up our corporate governance.
Even further with respect to a board mandates and corporate policies and.
Whatnot.
So you know very busy year.
But I suppose you can read most of that in the press release, we sent out yesterday.
So Jimmy why don't we take this opportunity and I will throw the call open to questions from those listening in.
Thank you as a reminder, if you'd like to ask a question you May have star then one to join the queue to withdraw your question press the pound key.
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And again that is star then one if you'd like to ask a question.
The other question from Germany, Mcrae with Raymond James Your line is now open.
Hi, guys I'm, just trying to get a better sense just split the volatility in commodity prices I know you guys delayed some of your Capex from Q1.
Two later this year, but how.
How.
Willing and kind of drastic do you guys wanted maybe potentially make your capex cuts this year potentially just and what are you what are the signs that you guys are looking for here.
You know Jeremy I think.
We've already demonstrated we can be extremely nimble with capital program.
And we have the luxury of being able to operate.
Actively year round I mean, we get real bands for maybe six weeks in the spring breakup hits, but.
We don't have to do our drilling in Q1 or a during the wintertime. We can do it in the summer in fact, there's probably some cost savings and talk to do it in summer you get more daylight hours and you're not heating rigs in water and all the rest of it so.
That said the last year for instance, we had a pretty rainy summer. So sometimes the rain does impact our ability to move around as effectively in the summertime too but.
So that you know the nimbleness of our capital program and I think our ability to speed up and slow down has been demonstrated over the last few years and so what we're watching obviously is this corona virus and its effect on the commodity prices were watching oil price pretty pretty closely as everybody is.
We're watching the Nymex gas price.
Got it really weak and it looks like there's going to be a supply response already you know rig count you asked so on gas has been tumbling pretty steadily.
So.
I think we're anticipating as a lot of the market is that there will be a commodity price recovery that there has to be a commodity price recovery.
And so we'd like to time allotted this capital if we could into that recovery.
And you're bringing on flush production unhedged production into a into better pricing.
So.
We operate all their own facilities and and we've got capacity in those facilities. It's not like there's a big time lag really between when we kick on drilling activity there will be a little bit of time delay, but not very much at all and.
What do we averaging 45 days spud to Onstream date, which is still some of the fastest on production time.
The industry. So you know we can we can rapidly gear up capital and we can rapidly increased production into that commodity price trigger.
And so I think like lot of companies, we're waiting to see that commodity price triggered before we really want to ramp up hard.
Okay.
And the kind of the second question here, just with your new ventures team.
This handle going back to the open range deal like you guys kind of mentioned you guys would never really look at corporate acquisitions again, but.
Would you consider that now given where some of the valuations have fallen for other entities or are you guys more or less looking for green pastures, maybe pick up Atlanta Crown landfills like whats Directionally you guys leaning toward.
You know I don't know that we set at the time that Weve never do another acquisition other than we didn't enjoy being sued.
We bought the open range piece by a bunch of Poseidon shareholders, but right.
You know that ultimately resolved.
Obviously stack, but.
I think we've done well at those assets they were easily integrated into our.
Infrastructure, you know they were right underneath our feet in Sundance and so we've built upon them.
The Swanson finds a good example, what was at 20 million anyone we bought it and it's a 135 or 140 million today and going through time, yeah. So you know its way larger we we did really well by that.
Which is not to say that the only thing we're looking at his stuff that's.
Proximal to our infrastructure are.
Perfectly complementary to our asset base I don't know Scott you want to comment on all the things that you've been looking at.
We ended the Openreach acquisition appropriately it was a very good fit for us and I agree that wasn't we didnt look at that negatively and should we come across any other opportunities that.
Sit in from that perspective that a aligned with our you know the strategies that weve stuck to very just there just a matter and strategies our assets that can deliver low capital and little operating costs.
Performance to us ended our core.
She geographically focused those are things that we're looking at considering what we step out into greener pastures. They would have to have those same attributes. So we are looking at a number of those opportunities.
Just price.
Entity price downturn, it affords us that opportunity to go shopping perhaps makes a lot of sense in these times to consider buying a barrel instead of developing a new barrel at this point in time.
But.
Yeah, we've got a really strong infrastructure in the greater Sundance area.
We will that will be one of our key focus is how we can work that infrastructure into the future of the company.
Building upon the lands that we already and that we.
As you pointed out we were able to suggest we do this past year more from a organic crown sale perspective, but.
There may be.
Property corporate deals that emerged here that really fit well within what were up two there and we've talked to many not by looking at a value chain vertical.
Not just.
Developing resource in the ground, but trying to make more money out of that resource that we already have developed a in terms of market exposure.
Other value propositions.
Okay perfect guys. Thanks.
You bet bank.
Thank you and as a reminder, if you'd like to ask a question you May Press Star then one on your touched on telephone to withdraw your question press the pound key.
Our next question comes from Adam Gill with a capital your line is now open.
Hi, Good morning, guys I'm, just with the new tie in to the bread. So area how much more activity do you expect in that area that just got tied in and is there a notable effect on corporate operating costs moving away from those from that third party processing.
Yes, certainly we've got a rig running there now we plan to run a rig too.
[music] break up the ideally if if weather cooperates with us. So we'll have a rig steady down there. So there's lots of inventory in both the well in all three stride as Dave can comment on that little bit more but sorial three strata, we see spirit River. So you know, including not kuna Willbridge and Cardiomes that we can chase down there.
We had a good position for that yes, we were paying a much higher fee to go to another third party. So so we will see it braziller reduction on our operating costs, Todd I don't know well get into the numbers, specifically, but certainly anytime we can get total facilities. It makes sense right.
Okay. Thank you guys.
You know I'd add to that that.
That's an organic.
Growth area I mean, we picked up lands down there count auction, we've done little bit of corporate farm in type deals down there.
You know this is that sort of traditional pado development, where we're constantly looking at new opportunities.
Inorganically building, new inventory finding ways to pick up the land and then getting a drill and then build infrastructure down to take care of it so.
That that's kind of area is it's it's just sort of.
Our normal course of business.
Which were always doing right like it it's not that.
We've stopped doing this this sort of normal practice of of going in finding these new opportunities and inorganically developing them.
That's going to continue with the company for a long time and were particularly good at it farming. This large swaths within the basin. So.
Its its.
You know, what's exciting and it's a new area, but I would say its a.
It's really the bread and butter that has made paid or what it is today. So.
From that perspective, it's.
It's just more of the same.
In this new area that we're talking about two or were shooting seismic or we shut the seismic and we're evaluating that that's another example of another beachhead that we know that we are excited about we'll see.
Thank you and I'm showing no further questions in the queue at this time I'd like to turn the call back to chairman chief for any closing remarks.
Oh, Okay. We did have a couple of questions coming in over the emails or info at Peter Dot Com investors site, So I would like to maybe.
Address those.
Maybe I'll get Kathy.
One of the questions. That's often asked is all with respect to our balance sheet. We quoted that we pay down 78 million of net debt and yet.
On the balance sheet. It shows that our long term debt went up year over year, and so that seems to confuse people cost can you just maybe explain that quickly.
Well in 2018, we had $100 million Uh huh.
Yeah, I know payable that we're in the current liability portion of the balance sheet and again, we placed though.
I know, it's when they became due January 2019, we have seven year, 4.39% no moving it back down its long term debt section, but overall, we paid down $30 million on our no and or credit facility. We also reduced to further 48.
In dollars just on the capital a working capital deficit.
So our assets hurt our larger in our liability current liabilities are smaller.
Okay. Good.
Pardon the interruption speakers I do have two questions that did it come up on the phone Keith would you like to take them.
Sure I have a question from credit Gregory we didn't with G.R.W. holding your line is now open.
Yes, hi.
I'm just curious what the noncore no.
The NC I beat that.
Some initiated last year, what was the success of that and are you buying a lot of stock nailed that the price of the shares are so low.
Oh. Good question. So we've had and then see I'd be in place for the last so a couple of years in fact, we've we've put in place as a bit of an option for us.
You know as most people I appreciate there's sort of several ways. We can return capital shareholders. One of them is obviously the buyback stock or other would be to pay down debt and then the third way would be to pay dividends back to our shareholders and so for the last couple of years, we really had all three at our disposal.
Yeah.
But considering the you know lack of liquidity in the in the energy space, particularly I'm not a lot of debt capital being offered in.
No equity capital really what's your prices being found it down so badly that.
We felt that it was more important to actually to to pay down debt or as a means of returning capital shareholders. We still paid a dividend, but we cut the dividend back over the last couple of years as well quite a bit.
And so we're really focusing on on bringing that debt down.
You know there's a.
A lot of fear I think in the industry with respect to leverage and so we wanted to make sure that we were strengthening our balance sheet going forward.
Gives us the most liquidity when it comes to turning around and using that balance sheet then.
If commodity prices turn and all the sudden there's opportunities to bite lands and and gain future development opportunity. We felt we wanted to have that dry powder in hand.
You know if we bought back stock for that.
And yes, we would reduce the float but.
We'd have to then rely on the equity markets to be there to fund some of that opportunity and we weren't quite sure whether <unk> equity markets will be back or not so.
The board decided at the time, that's a the best a use of that cash was going to be a focus on the balance sheet and so that's what we did over the last couple of years I.
I think that liquidity issues with respect to the industry have only gotten worse quite frankly over the last year.
So when it got to the end of 2019, a we didnt renew the NCB.
We could go back to the TSX and and apply but went back in place we want to but we just felt that the path that we were on with respect to paying down debt still going to be the past that we needed to be on for the next little while.
Okay, just with the up the valley the stock at $2, an eight cents a right now seems like it's an all time low with this not be an ideal time to be able to buyback your stock you'll never get a cheaper.
I don't disagree with you.
I think the stock is in my mind very inexpensive.
But the question is really how do we allocate that cash flow what do we what do we use it to do do we put it back into the ground to drill wells do we buyback or own reserves effectively with it or do we pay down debt with it.
What's the best a use of those proceeds and like I said the board at this point has decided that the best use the proceeds is to address the balance sheet and and pay down debt without money.
Okay. Thank you.
That's great question. Thanks.
Thank you. Our next question comes from Alex case, and whatnot trend. Your line is now open.
Thank you.
My question isn't the same area in the previous one.
There appear to be increased interest costs, driven by external circumstances, I think as much as you individual situation and there was always the risk called.
Involuntary refinancing that you may be forced with so.
The one area that you do control is hedging costs.
Which probably runs about 3%.
And I was wondering whether you have any policy in place that would deal with low growth track the prices for the commodity as well as.
The stock markets, which of course can go in either direction no matter how low the stock is.
Could you just comment on that.
Yeah, Alex another good question, we do have a very active marketing department and and we do have a hedging policy up peto.
As I tried to describe in the press release, we actively market every one of the products that we sell and obviously to secure future cash flows. So that we can plan with confidence our capital program. So that we can plan with confidence our dividends and and know exactly what and how strong.
Long or balance sheet will be throughout the year getting fixed prices on those commodities through hedging activity is important and.
Desired here at Peto in the past we've had much more of our production hedged quite frankly, you know if we roll the clock back two or three years.
For sort of near terms, we would have had probably 65% to 75% of our natural gas production with a fixed price on it.
Unfortunately, though with the disruption in the disconnection of the eco markets a couple of years ago.
We found that we had gas prices that weren't hedgeable it to be perfectly honest, we had gas prices that went negative on us in fact and so.
It was very difficult end to lock in.
Such a low price when you're dealing with such a disconnected market. So we put a lot of our efforts into diversifying our markets a wafer maaco.
We would put in place a bunch of pieces deals to get to Nymex, we picked up a bunch of.
Service to get off the Nova system and out of eco at onto their mainline system to get to other places like dawn.
We put Emerson service in place to get a part way down the mainline Ventura service in place to get to that hub.
And so we diversified a lot of the different places, where we were selling gas to rather than the acre market because it was so broken it could market it and disconnected.
Fortunately.
This past summer both industry and the government developer to came together and put together a proposal for a a temporary service protocol that would be in place in the summer times, when we don't have access to storage and.
And so that helped connect equal market back up again corrected the eco markets. So that's a much better more transparent market.
And a place where we could actually start hedging again.
And so we've we've done that are somewhat we put some more eco hedges in place, but we're behind really on our hedging schedule.
Because there was quite a long period, there where the prices were just not hedgeable.
So.
That's kind of a long winded answer, but hopefully illustrates why we don't have as much hedges in place today as we would've wanted too and as much security on the prices we would've wanted to.
But our strategy long term would be to get back to having a lot more of our products are hedged with a fixed price on them.
So that we do get that confidence in the planning.
My second question is on your flexibility and going back to a larger mixture of gas versus liquid if the prices diverging the opposite direction direction as I guess, they will have been doing a little bit yeah over the short term.
Yeah. So.
Peter was principally a natural gas company, that's always been our focus we're in the part of the deep basin that is gas saturated we we haven't been an oil company before.
And the liquids, we really do produce or the associated liquids with natural gas production so natural gas.
Liquids, the whole sort of realm of condensates and Pentanes.
[noise] Butanes and Propanes.
All of those baskets liquids that come up with the gas out of the reservoir.
You know, obviously with the huge disconnection between gas and oil prices.
The supposed to trade at six to one times, they've been trading at 35 or 40 to one.
So we've obviously had to focus more on the on the liquid side of our business and cheap natural gas deposits and reservoirs that have higher natural gas liquid components to them. We havent gone. So far is to start drilling oil wells, which maybe we'll have to do if the disconnection between gas and liquid prices.
Persists for a long time.
We may have to become a more balanced producer that has you know 50% gas production at 50% oil production.
I think most of the gas producers in North American factor found that the current commodity price doesn't justify dry gas development and thats become the biggest challenge and so anybody who is a gas producer has had to get a chunk of of either natural gas liquids or oil in their portfolio to to survive.
And that's pushed people into that more liquids.
Rich realm.
Yeah, I would hope that gas prices.
Can strengthen and and take the rightful place in the you know in the commodity complex as they should from a heat content perspective.
You know, it's a cheap fuel today and so the demand for it should continue to rise dramatically because it's a lot cheaper than all the other fuels.
So you know all that being said, we do have a drier gas opportunities that we've kept on the shelf.
One of the examples would be Cadam information.
Which is.
As a formation, we used to drill a decade ago.
It's quite a bit dryer, but there's a huge resource sitting underneath the underneath us I dunno, David it's like close to a tcf of reserves recoverable resource underneath all of our lands that we have access to that we haven't been drilling because you know dry gas just doesn't capture the enough snapped back.
That's a these low sub two dollar prices to justify the development of it but it's it's a massive resource that we hopefully we'll be able to get to at some point in time, when when gaskets appropriately valued.
Thank you not not only.
Is it in.
Fine resource it's cleaner.
I totally agree which is why we've been gas company for 20 years.
[laughter].
Okay.
Thank you again best of luck.
Thanks for that question out.
Thank you enter next question comes from hang on a private Investor. Your line is now open.
Hello. Thank you first of all I should I apologize I joined the call a bit later so in case the questions I'm asking.
Or would you be us, though I apologize.
So I think totaling on on your earlier comment about how.
Could you called it is too.
Managed dependent cheap.
I didn't give seat before that.
Hope is not the strategy and I didn't see is Ah, we should never depend on the kindness. So string just so.
In line with those comments I think there are several things if you got to balance sheet management that I'd like to Leach.
One is a I'm not sure, but but the I saw this correctly I think I saw that you ought to be facing.
The Longtan bought the term debt.
By paying it off.
The thing that.
Now it seems counter intuitive to me like a is it better to have some debt than two heads are being that which is.
More easily be called the book.
That's a good questioning.
So the termed out we had was with ER.
As a certain note holder in fact that we paid off.
Mostly to the one note holder that we have we we determined that we have is any I see two notes or at least originally issued as any I see two notes and we had I think five.
Different noteholders. So it was a bit lumpy that we didn't have a huge syndicate of noteholders. There was just a few.
And.
Because of our share price drop.
The any I see rating on our notes dropped from any I see two Didier I see three.
And as a result, the the noteholders actually have to put up a more capital against that to a secure and.
So we knew that as change had happened and or the notes that we did buy out at least one of the big ones I think $120 million one was coming due at the end of 2020 anyway.
So it was really moving from long term debt to current debt and it was gonna have to be renegotiated renewed or are we gonna have to do something without pay it back and so that one was a logical one the to approach that older on and say you know what what would you like to do with this do you want to refinance it or do you want us to pay you.
Out of it.
And so we we paid out that note a yearly but not.
A lot early relative to when it was due to be renewed.
And then we at the same time offered.
To those guys that if you know they want it's a clear often either other notes that they had with us that that was an opportunity for them to take advantage of that so.
They chose to do that.
And quite frankly, the interest rate that we're paying on the bank revolving debt, especially with the rate cut now is a is quite a bit lower than what those long term notes were.
We are costing us and so we actually ill save a little money on the interest.
And then I guess, the last thing would be that the.
The capacity of the revolver. The 1.3 billion that we had even though we don't need drawn about half of it.
We did have to pay standby fees for the remaining part of it.
So by using the revolver or rather than having the long term notes outstanding we do save the standby fees on that amount and that is beneficial to us as well.
So there was a few reasons that it it looked good.
To us to do that.
You know I think the the change in reading was ER was an important trigger there too though.
So you know all in all I think it was a it was a positive move for us.
I can kind of following up on debt and just to clarify.
Do they have to option to Oh.
Yes.
So to pay back to feed on the debt because today, we can change.
No. They don't so it's a bold in three studied redemption.
Yes, that's the most voluntary redemption on our part yes, and so you know we're not.
We were looking for for any of that transfer to cost us a lot of money.
So we made sure obviously that wasn't going to be a negative from that perspective, but.
You know the rating change was.
A bit of an important trigger.
Oh, Okay. Thanks. Thank you I have a couple other Christian I guess, if yeah no other people into Q it'll get you've I just continue with my question No go ahead.
So there was just one the issue with aging and I think you mentioned that you've done less aging recently.
And I think we've seen that with the.
The U.S. marketing.
Pot.
By not hedging I think we kind of I'm.
Glenn you end up.
With some issues.
With that with a synthetic hey, just I think it doesn't look like they're good work very well.
So I'd like to get a sense of what the strategy is going to be going forward because it looks like the U.S. oversupply situation, it's not going to get so if we sold.
For the next one or two yes, I mean, maybe I'm a bit too pessimistic.
I'd like to get become a comment please.
Yeah, I mean, I think most of the market is anticipating more resolution more quickly on the U.S. supply situation, but I hear you I mean, we've been dealing with an oversupplied U.S. market for quite a while the shales just continue to grow volume regardless of the fact that they're driving their commodity price down further and further.
The basis deals we put in place a you'll recall, we did about 18 months ago. It was just sort of in the right in the middle of the the worst market disconnection with respect to the acre market and so we needed to get away from Aiko you know it looked like the eco market was not going to get there.
Next anytime soon and so we needed to diversify our markets away. Unfortunately, we were doing it at the worst possible time quite frankly.
So rather than just take the short term basis at the time, which was extremely expensive I think the basis between aiko in IMAX at the time was about $1.90 U.S.M.B. to you.
We blended the a three year piece together at about $1.35 on average a and then we actually hedge the near term with respect to the Nymex against <unk> dollar 35 basis, but that volatility by basis does.
Carry out into 20 wanting to EUR 2020 in 2021 for the most part.
Tapers down into the future, but you're right it looks pretty ugly now relative to.
Summer Nymex prices that could be sub $2.
It doesn't look like we realize a lot to that and and so.
So there's a couple of different strategies, we could do to deal with that and.
To be perfectly honest.
You know, we eco looks okay today, but.
We could have.
Similar things happening in the future with respect to Aiko that have happened in the past, particularly the summer of 2021, we have this temporary service protocol procedure in place for the summer 2020, which strengthen Diego market and reconnected Diego market and gave everybody confidence that the market is going to work effectively but we don't have anything in place for the summer.
21.
And while the current forward strip looks okay for the summer 21, it could be that we have just as much disconnection with respect to eco in the summer 21, So our basis position that gets a lot of our gas out of the vsan into that IMAX market for the summer 21 may still proved to be valuable even though it's out of the money today.
It may still proved to be quite valuable if we don't have a solution for.
Distorts situation in the summer of 2021 in Alberta.
But that being said the.
The the market the forward curve the forward strip for the those pieces deals starts at a boat.
I think 90 cents and goes down to about 85 cents into the future. So it is quite cheap to diversify away from the echo market it into other markets right now.
And so we have been taking some basis deals in 2022, three in 2024, and then blending those low cost basis back into the higher cost basis in the near term.
So that allows us to sort of average down overtime, a little bit with respect to those basis and allowed us even to a hedge some of the summer of 2020.
So we've got a graph on our website under the marketing.
Section and it's in the presentation to I need to updated its always changing constantly and I need to get it updated again, that's sort of illustrates some of that activity that we've done to try and blend away. Those are those pieces prices and get a realized price. Obviously, that's that's workable here Peter.
Understood.
One other comment one other comment to you asked earlier suggested the recovery.
You asked market might be two three years.
Forward strip doesn't show that it actually shows the next two winters is being quite a even this coming winter of 2020 has been quite a bit stronger than it is right now.
You know that must be meat in the markets read is that supply will be.
We'll be pulled back yet and prices will recover back towards that goal and 50 sent to us for.
Mm you level. So it does look promising for a correction you're in a in a much shorter period of time.
Two to three years.
What what what do the forward strip or what are the forward strip prices.
I think for a winter coming up so if you look at winter 2021.
The Nymex.
Nymex on 2021 is.
Right around 40.
For November Nobody March yeah, So there's definitely a contango in the forward curve right now meaning is it's an upward sloping pricing.
And you know obviously, we're watching that very closely because now we have a significant vested interest in the Nymex price but.
We're also watching the behavior of the U.S. gas producers, the shale production growth or or not in some of the basins or some of the leverage situations with respect to a lot of those us a gas producers there.
There are generally much higher levered than the Canadian counterparts, and they've got a lot of debt coming due in the next year. So so it's it's termed out that that now becomes current debt that they're gonna have to deal with in either refinance or cut their capital programs back because if they lose that capacity then they don't.
I have the same capital that they had before.
And you know a lot of that observation anyway from our perspective is that a they're gonna have to slow down they needed a better price at the end of the day and I think that.
We are going to see a supply response quicker than perhaps even the market is currently anticipating.
As you know the decline in the U.S. shale is very steep and so it requires a lot of new production Bill just to hold it flat.
And that's going to require a lot of capital that if they don't have access to that capital.
The backfilling of that decline Kathy.
Yeah, but [laughter] excuse me, but that's offset to some extent by the associated gas that's being produced in the Permian.
You're absolutely right and so.
That's what are the Wi Fi price of $47 is is actually constructive to gas price recovery, because it'll it'll keep oil drillers from drilling as much in the Permian and they won't be building as much then of the associated gas.
What about the Canadian supply situation to the supply response to low prices has been quite quite slow and didn't food and.
Has strength for for a while I guess part the popular reason is because you have a liquids rich produce is continuing to produce as well as.
Some producers who marketed or that production in the U.S. being able to to continue producing do you beat the situation now do you see this produces a Canadian producers now cutting back on.
Capex and drilling.
You're you're absolutely right with those observations.
I think are oil.
Oil price effect on those liquid rich producers is gonna be the same as though the effect on the Permian or the associated gas in the U.S.
And I think you're right that a lot of transportation and processing commitments were made by Canadian producers and they're trying to keep those bull as best they can but it really all comes back down to available capital to invest and so when prices are soft and cash flows are falling and bank lines are tight.
And perhaps there's no capital available either through equity market or debt markets.
Then a that has to result in a supply response.
And I think in the past when Weve expected a supply response to commodity prices, we were underestimating the amount of excess capital that was available to those producers.
Today, I think that its its.
That excess capital just not there and so those producers have to respond they can't keep drilling the way they were.
And you know we were seeing it for sure in Canada now over the last six months, even with the strengthening of the eco market. The reconnection of the acre market and what was supposed to be you know a pretty exciting winter from a gas price perspective, we just didnt see a lot of new supply coming on.
The north Montney mainline.
Came on stream early in the year and it didn't look like it had any incremental volumes and it hardly.
Volumes that were headed down the alliance pipeline of drifted off and shrunk quite a bit the spectra system is seeing the quite in volume so.
You know people are switching from other pipes that took them out of the vsan back to the Nova system that leaves them in the base and just because the eco price actually looks.
As good as anywhere else.
But ultimately you know I think the volumes on the noble system, we're going to continue to fall as well.
Thanks for the color I think certainly yeah, okay. It looks like it's not all completely doom and gloom.
I just thought.
Okay with it got better obviously.
Out another comment against the backdrop of this.
Supply constraint or discipline that we expect people to counted in the U.S. we.
We can't forget the demand is continuing to grow its been impressed and a very impressive growth.
I don't want and need for gas so to the board and in Canada. Your as we convert a coal fired power to natural gas and reinstitute additional.
Petrochemical project so.
Where are we to have a very strong winter weather event, coupled with those other dimensions of demand growth I think it bodes very well for for the future of natural gas.
Don't forget that.
Just a bone cutting supply, it's about making sure that we can respond to those balances continue to develop in the future.
Well I I agree I I shared optimism over the medium to I'd is just sit in the shopped and it seems like that but if you slow situation, where it gets spices worldwide catering and so that's going to affect the LNG X.
What we've seen.
A couple of Ah by is.
The reach refusing to pick.
The LNG shipments from from the U.S.. So if that's an export the LNG.
Export this had the problem in the U.S.
It's going to come back and affect the so I get it into the deciding what matters is how quickly. This does we see a supply response or in the U.S. intended in Canada.
Doug will detail I mean, what how prices or play out in the shopped at <unk>, which is quite good to go from <unk> point of view.
Yes, we tend to agree with that thesis as well and so we have tried at pado to be as nimble as we can possibly be to to maintain as much optionality and flexibility as we can to strengthen our balance sheet to be in a defensive position to to be able to withstand.
This short term pain in order to get to the long term gain that we all see.
You know that it's going to be upping full year 2020 for for many producers for sure who aren't as nimble as we are and aren't as prepared but ultimately you know the quality of our asset base are extremely low cost structure.
And that nimbleness with respect to capital deployment I think is.
Are the best tools that we've got going forward.
Sorry, David if you can just pay me I just have to too.
Two other points to make one is that I was thinking for your P.M. I don't I don't mean to a few to food to.
Additional unproductive, what but I thought it'd be quite interesting if you could do a study of.
How what the industry booked into you listened in Canada, a spending on capex. So that we can get a sense of.
The the supply best ones, if you know what it means.
You bet and I'll tell you if I can find some data on that to report to shareholders I.
I think as we get through the end of the year here and all the companies have reported particularly the publicly traded ones that have to do financial reporting disclosure.
You know a lot of the analyst community picked that data up and reproduce it out and I get to see a lot of that so I'll try and put that into a monthly report and get that out to shareholders to.
Try and broaden the education on just what those U.S. guys are doing.
A lot of those guys are still promoting growth, even though probably internally, they're looking at their balance sheets going that's not going to be possible.
So there is a little bit of a difference between what they want to do it would like to do and what they're gonna have to do.
And and we'll have to see that somewhat play out that may not be clearly evident in their disclosures, but I.
I think there should be some some interesting information with respect to reinvestment ratio.
I know I, what I did look last year.
Last year 2019, I think was the first year, where the U.S. gas producing community was finally approaching.
Living within its means just spending is cash flows and so that discipline in that sort of.
Behavior, we hadnt seen that they've been outspending their cash flows by a lot you know 120, 825%.
For the past several years and that obviously you drives growth, but if you're just spending within your means a it doesn't necessarily drive growth and if you're having to spend less than a year means because you're trying to pay down. Your your debt then that's going to result in the basin shrinking and.
As we all know.
Solution for low gas prices is usually low gas prices and that's probably what we're going to see this year.
Yes.
So Mike My last point news.
On my favorite topic dividends.
I didn't going back to the call Ben about how crucial it is to manage dependency.
Is at the time now what you can see the.
I'm doing a we've cut the dividend completely at least for.
The next year or two until the situation clarifies.
And one reason for for saying that is because I think dividend at the moment.
Fed you destroying from the show those point of view I Didnt show this up to be Texas on dividends.
And to the extent that the bucket bed use you on that end to price basis.
It'd be W.P. out there if it didnt.
The fixed to the buckets.
You know those are all.
Valid observations and I think that they are ones, obviously that our board is very aware of we debate as aboard the pros and cons of the dividend constantly.
We talk all the time about the dividend level and the appropriateness of having a dividend through various environments.
You don't want I think we've reacted over the last couple of years by obviously cutting the dividend back a lot.
Because of the environment. We felt we were headed into and we do as a corporation in the board feels strongly that they do have the flexibility to adjust the dividend.
As we as we go it as we see the market evolved and and play out and.
I think the dividend level that is out today, the absolute dollar figure isn't that substantial relative to the size enterprise and our cash flows so.
But it's still there and you're absolutely right that it's a lever that that the company could pull at any point. If we felt we needed to so I can only leave you with that it's a constant a topic of discussion.
The board talks about it more than just once every quarter.
Really it's probably reviewed by the board more like once a month.
And every month that it's offered up so I.
I think as things change into the future as we get some more clarity as to which direction we're headed.
We will respond accordingly, with the with the dividend level.
Yes, but I was looking at a net debt reduction last year, I think it's about 80 million and the dividend.
If you look at the dividends in relation to that you've made in the 40 million dividends, most or so it's quite significantly.
Yeah, and and as I mentioned earlier you know the.
The three forms of sort of capital returned to shareholders or paying down debt.
Paying out dividends or even buying back stock.
All in all three of those we've had at our disposal and we've chosen to really put the majority of the weight towards that balance sheet and the debt repayment.
With the with the lesser focus on the dividends than it used to be.
And trying to preserve as much liquidity as we can.
Thanks, Thanks delve into lot quota for the comments I I don't really appreciate it and I do want to give the wrong impression with my questions that I.
So you negative about Oh banishment has done I still think you have to go to best meet its a.
Oil and gas company of the and I Didnt Manish Min has done an excellent job.
Under the circumstances, so think thanks again very much.
Well, thanks very much for your for your questions thing and I appreciate that going indoor spent so we'll continue to.
To grind away into the very best job weekend in this volatile environment.
Because I'm showing no further questions in the queue at this time.
Great well, thanks, Jamie and thanks, everyone for listening in and a lot of good questions. Today, obviously, a you know we've come through a volatile 2019, and ER and had to react to all the changes in 2020 looks like it's gonna be another one so we're going to be very practiced at being nimble and reacting to a.
What comes down the Pike, whether its corona virus or it's a oil prices are gas prices or whatnot. So.
We're going to keep grinding away as we mentioned.
What we slowed our capital program down and pushed a little of that capital into the back of the year. So that we can hopefully.
Acton and.
And see some better commodity prices to drive some of that capital into and and see some more excitement in the back half of the year here, but well be back to add a couple of months a with first quarter reporting in may and we should have a call then to talk about that and what the of looks like so.
For tuning in and we'll talk to them.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your programming you may now disconnect.
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