Q3 2020 Peyto Exploration & Development Corp Earnings Call
Once again please.
The press Star one on your telephone if you have a question during the conference. If you require any further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today guarantee President and Chief Executive Officer. Please go ahead.
Good morning, Thank you Sidney and ER.
Thanks for everyone for tuning into the Tito's third quarter 2020 results conference call.
Before we get started today I would like to remind everybody that all statements made by the company. During this call are subject to the same forward looking disclaimer and advisory that we set forth in the Companys news release issued yesterday.
In the room with me today is.
The entire Peto management team were maintaining our social distancing here, but we've got everybody on the call. So catheters are on our chief financial officers here JP the Sean So our Chief operating Officer, Scott Robinson VP of business development got Dave Thomas our VP exploration leaker in or.
Drilling and completions.
Tim Lugo, RVP landed and Todd Burdick, our VP of production.
Before I get started with comments about our quarterly results I do want to recognize the efforts of our of our staff and field people.
Our fuel people continued to conduct operations in the quarter with safety foremost in mind.
You think especially with covert risks increasing as we head into the fall.
Both our production operations field people and I think our extended service providers on all our drilling rigs and frac crews and pipeline spreads.
They all worked efficiently and safely throughout the quarter with no lost time accidents and with very few issues at all so.
Hi successful operational quarter.
I think all of those working for Pado, we're proud to continue to provide albertans with reliable and affordable energy that they need everyday and the fuel to heat their homes, especially as we enter into another cold dark winter here in Alberta.
So a big thank you to all our people both.
Over here in Calgary and out in the field for continuing to keep both the lights and the heat or.
And also before I forget it we'd like to take this opportunity to thank Tim Louie RV PLM for nine years or due to full service to Pedro.
Half the board shareholders and employees, we wish him all the best in his retirement.
Okay, so onto our third quarter results operationally the third quarter were quite well, we drilled some very good wells and grew production from 78000 barrels a day to about 83 by the end of the quarter.
And that growth isn't stopping here as we head into the end of the year.
We did get some planned turnarounds during the quarter actually so our gear has been fully.
The service.
It is ready for another year of operations.
As mentioned in the release, we we celebrated our 1000 horizontal well in the quarter.
That number still continues to blow me away, especially since I was here as many in the room were back when we drilled our first horizontal well over a decade ago.
Our first horizontal well is it meant dates back to 2009 in the fall of 2009, I think is when we drilled our first one and since that time, we've drilled a total of 4.3 million meters of whole.
Which is an amazing statistic, that's basically the distance from Vancouver to Halifax.
So one could say that we've drilled our way across Canada over the last decade.
And I don't think too many companies can make claim to that.
We've we've tested out some spirit river plays and some cardium.
In a few different areas this quarter and I think we're very pleased with the results. So far in fact, our average product.
Productivity this year seems to be better than we've seen in the past few years.
I think thats also due to the fact that we're drilling longer horizontal laterals and opening up more reservoir on average as well.
And of course, the best part of those longer laterals is that we're also doing a cheaper.
So when you combine the better productivity and the greater reserve.
Curves with lower costs, you get much better rates of return.
And when you pile on top of that higher gas prices well then things are really starting to look up.
Sadly, however, we weren't able to realize a better gas price for all our production, though we still have the carryover of some expensive eco to Nymex basis deals that were.
Were put in place back in 2018, when the ankle market was completely broken.
That cost us around $27 million of cash flow for the quarter, which is a painful pill to swallow.
We're still going to have to live with a few of those deals for a few more quarters before they're gone and we start to see much higher realized prices, but were eager to get there.
Other than that I think financial results were more or less in line with what we expected cost for generally good. Although we are looking for some help on the government fees and taxes part of our cost.
More and more of our fixed costs will be our fees in the unit is municipal taxes, and Alberta, I believe needs to be.
Adjusted EBIT to reflect the realities of today.
We're working with industry groups to try and make that happen and I think we are finally, starting to make a little bit ahead of me there.
As noted in the release, we did finally attract some third party production to one of our plants. So we should see some fee income in the future quarters that can help offset some of our costs.
It'll show up in our financials as a new revenue stream.
Let's take a while but we did finally convince an operator in the area that we can produce their gas for cheaper than they can we can both share in that benefit. So hopefully we can.
We could do that with some more operators in the area.
Also as noted in the release, we are contemplating a.
Our capital program in 2021, we have a lot of very profitable looking drilling locations that we'd like to drill and think that the combination of higher production from that investment and higher gas prices will give us higher cash flows and lower debt to cash flow ratios.
And then if we hold production at those higher levels will be generating a lot of free cash flow beyond next year.
Or that we can use to pay down debt and de lever our balance sheet and also pay our dividends.
And thats actually even considering that the gas price strip right now is in backwardation beyond 2021, where it's actually falls.
For the next few years.
The back end of that futures curve does come up to.
Flatten out as we've seen on the front end, then we're obviously going to generate even more free cash flow.
But we're not going to leave the commodity price purely to chance of course, we do have an active hedging program that is designed to get us fixed prices for much of our cash flow. We currently have approximately 72% for this winters.
Hedged already and close to 60% of next summer.
Those have hedge levels fall back to about 40% for the winter of 22 and 20% for the summer 22, but we are still actively hedging and we'll continue to bring all those levels up to our 75% target.
Before we enter those seasons so.
We won't leave.
How much to chance when it comes to natural gas prices and fixed prices going into those capital program. So we should know.
With confidence what our revenues are going to be and what our cash flows are going to be to fund those.
So all in all I'd have to say the future is starting to look much better to us assuming we can get through Cobra doesn't scale.
So far thats been the case.
And while this quarter was a tough one I think from a price and cash flow perspective, we do expect things are getting much better from here.
So maybe that's where I should leave it in terms of comments on the quarter and Sydney, maybe we can take this opportunity to throw it open to questions from those listening in.
Certainly ladies and gentlemen, if you have a question at this time. Please press the star in the one can you tell us.
Our first question comes from Jamie Gray with Raymond James Your line is open.
Okay. I was curious just with the improvement in gas prices. How much you are looking to ship to capital budget for next year do more.
Dry gas wells, like you're well rich and that versus what you've historically done in the last couple of years just in the Cardium.
And if there is any other dry gas plays that you're looking at here.
Yes, Jeremy I think.
You know this year's program is a fairly balanced one in terms of species mix.
Both cardio and others.
The spirit River zones that are in there.
We're continuing to work those same zones that we always have really from the Cretaceous all the way up the blue Sky.
Well rich the flares did not UQM.
The odd.
Others only in there as well as the Cardium, so it's a fairly balanced.
Mixed which is kind of nice and it's spread out geographically across our asset base as well, which.
Maybe isn't quite as easy for for Lee and the drilling group in terms of taking advantage of pad drilling and less moving up the drilling rigs, but it does allow us to diversify the program.
Across different geographic areas that are not interdependent and then across zones that aren't interdependent as well. So we can move slowly and carefully with a lot of these plays in these areas.
And get good results.
And information back before were making the decision to drill the next well, which is something we really like.
All.
At the same time, though we're taking advantage of our existing infrastructure within the greater Sundance area to type stuff in quickly and.
To keep costs down so.
It's sort of the perfect storm, when we do get to spread it out.
And I think through 20 to 21.
This species mix JP, maybe you can comment on the species mix.
Six whether there's both equivalent diversity or.
I thought there was but yes pretty close, but we're probably going to drill about two thirds spirit represent about one third cardiomes and you know we've always been returns focused right. So.
Gas prices being stronger is important but also.
How much is it cost us to get that as well so this.
All part of the factor in the Cardium still still uncertainly.
You know with the economics of it also because there are a lot cheaper to drill and and we've got some really good results recently on them too. So it's going to be is it will be more balanced, but I would say tips towards the spirit River for next year and probably beyond.
Okay, and maybe just.
Just a quick follow up question is lot have been a lot of talk on M&A with different conference calls here this quarter, what's your guys' view on M&A and.
The broader subject.
Yes, I talked about it at my monthly report this past month, you know I think obviously consolidation in the industry ultimately gets you.
Supply management.
Which everybody is looking for a better price these days and so if that kind of discipline needs to come through consolidation than I guess, that's what are the main drivers I think that we're seeing.
We're already a fairly consolidated group of companies in the Western Canadian Basin.
Over 50% of production control by 10 companies alone so.
And we've seen as you point out a lot of more recent consolidation to specially in the DJ basin and the gas.
Industry.
We have looked at a lot of opportunities ourselves and we always compare that.
Central returned to what we can do with the drill bit.
Our default tends to be and historically has definitely been to continue to work with the drill bit organically.
Rather than go out and buy other people's assets.
But we always look Scott's group is constantly moving through both property valuations.
Could and corporates.
Looking at that.
That other companies opportunities and comparing those to our own.
We haven't done anything material, yet, but we.
We do small deals tend to dominate what we do in any given year.
They kind of fly under the radar, but there.
Little farm ins or acquisitions here, there and around our existing areas that just strengthen our greater sand at its core area.
Or more than not but.
We haven't really found an opportunity yet beyond our existing core areas that we wanted to pounce on that.
We keep looking.
Okay, Okay perfect. Thanks.
Thank you and once again, ladies and gentlemen that star one to ask your question. Our next question comes from Travis Wood with National Bank Financial Your line is open.
Yes, good morning.
Give us an idea.
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Across the the gas plants and and maybe.
What the throughput is across the nine plants.
Versus capacity and of those plants, where you think.
Sure revenue grabs could could take place and and are you able to contract. Some of this third party Bowl.
Liam.
On a longer term basis are those producers willing to negotiate around that.
It's a good question.
You know I think the nameplate capacity of all of our existing facilities adds up to close to 850 million a day.
I think.
Today, we probably would have to restart some compressed.
Pressers and restarted some gear in order to get up to that level. So we've turned down some of our equipment to match our throughput.
That just optimize as costs for us more than anything but leaves us with that capacity availability.
We do see obviously over the next year volumes growing up.
To fill a lot of that capacity up but we will still have some excess for third party. If we can attract those third parties and I.
I think it's difficult today to get real long term commitments out of anybody.
Transcanada in fact is seeing a lot of their service getting turned back to them because people are not.
Prepare to make that kind of long term commitment.
For delivery.
And I suspect a lot of the midstream companies too are negotiating with producers.
Over existing contracts in both the term and the the cost to them because they are too onerous for companies to digest. So.
We're not asking for that.
We've got available capacity today, and we're offering it to those around us.
Very attractive cost, which we think beats a lot of their costs and were not requiring them to make.
Long term commitment.
But.
I think if somebody was prepared to look at a long term deal we.
Would be prepared to look at carving out permanent capacity for them.
But at this point, we just sort of stay flexible with that too.
Everybody gets a chance to see how the future unfolds without too much commitment.
Okay. That's great. Thank you.
You bet good question.
Thank you and ladies and gentlemen, sorry.
Further question at this time I would like to turn the call back to Dan for any further remarks.
Okay. That's great. Thanks for those questions.
We didnt have too many.
Imbalance on our websites to wear through if updated dot com.
Overnight.
I didn't get one question yesterday I wanted opposed to Lee correct.
Just to comment on.
Some of the technology that we're using today to drill so quickly.
We see the speed at which we're drilling these horizontal wells is.
Is amazing I can think back to when.
So began when we were drilling primarily vertical wells to the Cardium, we would take a lot longer than six and a half days to drill down to about 2000 meters and now were drilling.
Double that distance in that same amount of time so.
The what what is the.
The reason for the speed for the technology that we're using today.
Pay is it something that's here to stay or is it.
You know something that just has to do with the the industry stayed the industry today or.
And maybe further on that are there other technologies coming down the pipe that are going to improve it even more.
Sure.
I guess.
Yes.
It was we were very fortunate.
Actually this is record well coincide with our milestone of 1000 horizontal but some on that there were a number of small design changes that contributed.
Those include elements of our fluid program and bit selection. However, the primary design element that affected that performance was well.
I was pushing the model.
A more design concept and for those that are not completely familiar that means we were able to eliminate the intermediate section of the Wellbore and.
And that included eliminating a complete casing string from the well drilling that.
Surface casing point to TD interval as as one interval with OTA.
It's an intermediate step.
Now this.
This type of design carry some incremental operational risk and.
Often in the deep basin.
We can see conditions that are very unforgiving.
In regards to lost circulation intervals, Kohl's and other intervals of instability.
And.
And a lot of a lot of those areas demands that extra string of intermediate casing. So this isn't something we can apply as a blanket design change across all of our assets.
That said improved recent market conditions in a rapidly improving balance sheet is allowing us to invite a little bit more risk tolerance into our program. So so were going to push that Mona.
And were design concept a little further than we have on the deep targets.
Since drilling that particular, well, we've actually set the bar a little higher the final well drilled off of this this pad with the same Reagan same crews reached TD, albeit slightly shallower reached that in six states. So that's a full half the faster.
I want to be say that quickly half day doesn't sound like much but to keep that in context, that's an 8% time improvement so not only was it faster, but the full drill costs inclusive of construction and future reclamation expense was well under a million buys so.
This is really just the product of a team that truly embrace.
Races continuous improvement.
In our group.
Great is just not good enough thousand horizontal one.
Thousand horizontal wells designed drilled and completed by a relatively small focused and consistent team.
This is really the product of that we maintain a level of trade.
Mobile knowledge that is simply unparalleled in this industry and in my mind is the private beta.
The average tenure within our small DNC group in Calgary sets. It over 13 years of service with pay them so that speaks to.
That speaks to that tribal knowledge.
We've built.
Relationships with key service provides.
Is that embrace our culture and they truly see this as a long game.
Hard times in the market over the last couple of years have really driven to collaboration between.
Between ourselves and our our service providers that's kind of.
Taking that collaborative environment to a whole new level.
Our our drilling rigs are fit for purpose three of those four rigs have consumed nearly 8000 operating days with Pedro.
That's not to disregard the one new addition to the fleet that came to us in 2019.
As they they immediately fell into line and embraced that performance based culture.
Sure, but combined those four rigs have drilled nearly half of pay those thousand horizontal wells since 2009.
Our.
Our primary directional service provider. They exist is somewhat of an extension of of our of our company as well as Dave Dave Pocketed almost.
Almost 700 of those thousand horizontal.
So with that kind of experience under their belt, they hold and abundance of pride and what they've helped pay to accomplish.
Our our primary fracturing service provider, who really didnt come into the mix in a meaningful way until 2015 as fracked nearly half of those thousand horizontal wells. So the list continues.
I could probably go on for days about that but.
Whether it's in the office are out in the field. The concept of healthy competition has just kind of become part of our operational DNA.
And this overarching ingredient allows us to continue reporting these performance gains year after year that's.
Thats whats going to be the.
The recipe for success and improve performance in the future.
Sounds good to me.
Finally, we can get a little bit more collaboration with municipalities and maybe the numbered energy regulator, we'd even VR late or the races there too.
Thanks Lee.
One other question that came in that I did want to touch on before we end today.
Happy there was a question on our interest.
Costs in the quarter, they were lower than than some analysts expected.
Appreciate that we don't disclose.
All of our interest grid to in detail to the market, but can you comment a little bit on our interest cost for the quarter and.
Where they're headed.
Sure.
Aaron and so our interest cost for the quarter were as a percentage basis were actually higher than in prior quarters, which is to be expected under our new credit facility and also with the note purchase agreements we.
Our subject now higher staffing fees as we are in a higher.
Great.
Grid level however.
We are.
We've managed to maintain our debt to cash flow.
Yeah.
In a lower level than we initially had forecasted.
Months ago, just because prices are stronger and costs were were good and.
No all the the cost is really driven by chain.
Yes, just one small change anat in pricing level can have meaningful impact on the actual interest cost on our entire debt. So we managed to maximize.
The.
Our reduced the interest as much as possible.
And that.
As I said the strong prices really helped us going forward, we're expecting that as the cash flows continue to be strengthening and.
We're going to see a lot of reduction actually in our interest costs.
We should see probably about the same for the next quarter or two and then Adam.
As our position in the in the debt to cash flow grade comes down we're going to see significant reductions in our interest costs.
Okay, great. Thank you.
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Maybe lastly, I can just hit up JP here.
We did talk in the release, obviously both the.
Arteries length some increased to.
Intensity in terms of stimulations, which is driving.
Slightly better productivity this year.
So we're doing that for much lower costs, which Lee talked about how we're getting those.
JP, maybe you can elaborate a little bit on.
The direction were take.
Income here so.
Some might argue that this has been a slower uptake in terms of pushing the envelope.
For length and stimulation intensity to get better results, but we've been pretty measured in that approach any comment on.
Where we're headed.
Sure you know for context here Darren.
Well rich.
Okay Graham we when we started drilling slightly longer horizontals at the beginning of the year with our first six averaged around 1600 meters, but our last days have been closer to 2200 meters on average it with the longest one being around 2700 meters.
This compares to previous years, where we typically drilled 1300 to 40 nanometer lateral.
Cross.
We've also increased our frac intensity in the oil rich up to about <unk> 0.8 tons on average will sort of 20 tons per meter.
On our last eight wells.
Well, that's been closer to <unk> 0.42, 0.5 in the past tons per meter.
And then on to Q1 in the flare Spcs Weve.
We haven't been quite as.
So on the length.
We've pushed our intensity up 12.8 tons per meter as well, which was up from a low 0.6 tons in the previous years. So.
Of course as you indicate you know these increases.
Also come with lower costs and Thats important overall costs are lower so.
Correct.
Our unit costs are way down as well, but of course that doesn't matter. If we haven't got the productivity improvements are those productivity improvements don't show up so I'll refer back to the table in the press release, where we show that our 2020 program has demonstrated.
Some impressive.
Results in aggregate and on the first six months of initial.
Cost production from our from our previous years.
When you combine that with a stronger outlook on prices, we expect our 2020 program to yield us.
Something in the order of around 40% rate of return full cycle.
Which is certainly one of our best years in a while so we're going to continue that.
And we expect those efforts.
Revenue through 2021, we'll continue to deploy this kind of program.
And expect same kind of improvements in that program next year.
To answer your question on what took us along.
It would increase the lateral lengths and increased profit intensity.
We didn't do this overnight and we have been experimenting over the last little.
While with different designs as Lee alluded to.
However, we have been very always been a very cautious.
Cost conscious company and we've been cautious on increasing risks with our operations.
He alluded to that some of that already.
As we push out our longer laterals and contempt more stages of profit we've.
Wanted to be sure that we could execute in a way that was.
Minimizing risk and still doing a cost effectively so.
We may have been a little short on the uptake, but the other thing too to think about is.
We have been drilling mostly cardium over the last couple of years. So now with our new focus on on the dryer Spirit River program in 2020 again.
Little we've continued to evolve it.
No one other consideration here is that we are drilling the deep basin and the Arctic tight sands, but we're not dealing with 100 100 meters will of rock layers of rock like the montney. So staying in his own or we're in a good stuff, it's important to manage that risk right.
So hats off.
To date and his team of Geoscientists both.
Open the office and the field.
It helped to reduce those risks and keep us in the zone. During these longer laterals. So we don't have to pull back and sidetrack too often when we get in trouble often that happens at two in the morning.
So it's been a real team effort tangible plan and execute.
The improvements the 2020 program and as I said.
I expect that will continue through 2021.
Okay. Thanks JP.
All right well that I think pretty much wraps up our call. This morning.
As you've heard this morning, I think the the Pado team is really firing on all cylinders here.
We are achieving good results and we're headed into.
A little bit more.
Acceptable gas price environment going forward for us and that's really going to translate into some growing cash flows and a much better balance sheet. So we're going to feel lot stronger here as we head into next.
Year.
And we're looking forward to.
Coming back to you with those results quarterly as the transpire and updating you with how we've been doing so please stay tuned and keep watch out on our website for.
My monthly report and our quarterly reports and any other news that we've got show.
The.
Latest marketing information updated there and an updated presentation should be up shortly.
With some additional color on what's going on in the industry and with beta.
So thanks again for listening this morning.
Ladies and gentlemen concludes today's conference call. Thanks.
Thank you for your participation you may now disconnect everyone have a good day.
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