Q2 2021 Peyto Exploration & Development Corp Earnings Call
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Yes.
Hello, Thank you for standing by and welcome to Peyto second quarter 2021 financial results Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session basket question. During the session you will need to press star one on your telephone please be advised that today's conference.
May be recorded.
Any further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today, Darren Gee, President and CEO. Please go ahead.
Alright, well, thanks, Josh and good morning, everyone. Thanks for tuning into our Pedro second quarter 'twenty 'twenty, one 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 forward looking disclaimer and advisory set forth in the company's news release issued yesterday.
In the room with me today, we've got pretty much all the Peyto management team, we've got J P. The Charles our VP Engineering, and Chief operating Officer, Kathy Turgeon, our Chief Financial Officer.
Scott Robinson here, our VP of business development, Dave Thomas our VP of exploration.
We've got Todd Burdick, our VP of production here Derek number our VP of land.
The only one missing is Lee Curran, our VP drilling and completion he's tied up this morning, covering some operations on the drilling side.
But before I get started with the comments about the quarter today I do want to recognize the efforts of both our office and field personnel this past quarter.
We continue to conduct operations with safety foremost in mind, and although we're coming out of the Covid pandemic, that's still very much in everybody's mind.
In terms of health.
Health and safety of our people and of course as always we've got operational risks when we've got a lot.
Rigs running as we do now.
But we have to keep track of on an ongoing basis.
We haven't had any major incidents or outbreaks of covid that shut us down which has been really good especially.
We do have active drilling crews and frac crews and pipeline crews are working.
Within our areas of operations in our own people, obviously working in and around plants.
Doing turnarounds this quarter, particularly.
And even into Q3 here and so we've we've done a great job I think keeping the pandemic pay and it was another strong safety quarter, so well done everyone.
On the second quarter results, so operationally drilling and completions were very successful in the quarter with breakup, obviously shutting us down in the middle of the quarter I think breakup. This year was more or less normal in terms of.
How long we have to stay shut down to see the profit come out of the ground and to drive everything out so we could move around again.
We did shut two rigs down during breakup for some maintenance and upgrades and I kept them on the sidelines unfortunately longer than we had hoped.
We were getting some upgrades that we're making them more efficient. So we're happy to see that but we were hoping to get them back to work a little sooner than that.
And we came back after a breakup, obviously, a little bit behind our capital program in our drilling schedule.
That combined with some unexpected participation by.
One of our partners meant that our net drilling activity was a little more behind than what we were scheduling in Q2, and we want to catch up to that so we've added a fifth rig as of the start of August.
And that fifth rig should help us catch up.
Even more than what we missed there by the end of the year. So it will be in good position going into the winter for some.
Strong gas prices.
Production held up pretty well in the quarter. Despite the fact that we didn't add as many new wells. Obviously in Q2 typical with breakup than we do in Q1 or other quarters.
And our run time was really good other than that really hot we can june that impacted both ours and even more so the northern gas plants is throughput.
What happens in the hot weather is that the big engines on those gas compressors to begin to labor due to high temperature and end up getting either slowed down or even shut in.
And we definitely saw that in that last week of June where at times. We saw an over receipts dropped from 12 Bcf per day to eight Bcf a day in the heat of the day.
And so on.
Our compressors are designed for some relatively hot summer days, we've got some fairly big cooler fans on them. It does has experienced some pretty good heat in the summer. So we didn't see that kind of an impact necessarily on our production, but we did see some.
And of course, everybody, including us.
All the all the houses in Alberta saw the effect on power prices in the in the province for that week.
We took a bit of a hit obviously on our op costs in the quarter due to the spike in pool prices.
For that week I think we saw prices jumped from about $50 a megawatt hour to times.
Dollars a megawatt hour so.
Unfortunately pool prices.
Took a hit and since we do consume sunpower for refrigeration plants.
Our operating costs were a little bit higher in the quarter than what we would've liked but those will obviously come back down again.
In general I'd say, well results continue to come in better than expected, particularly our extended reach horizontal wells that we're doing.
And our drilling down in the chambers area.
It's been very successful.
Finally, you're seeing obviously the.
The results down there and we're also seeing the first of our results on the acquired loans and Cecilia and those look really good.
We do have a couple of turnarounds to finish here in August and then all of those are.
Great Wells that we've been drilling we will start to come on stream and boost our production from around the 90000 barrel a day mark up to the year and where we expect to exit around 100000 barrels a day just in time for winter.
Speaking of gas price the future strip has strengthened a lot over the last quarter or so such that our type well economics.
Look even stronger.
Exceptionally strong in fact, those new economics are shown in our updated presentation on the website.
We didn't get to see obviously, the full effect of that increase in our realized prices and on our cash flows this quarter due to existing hedges, but as those hedges roll off our realized price will rise substantially.
That's also showed in the presentation.
That said our realized <unk> prices were still way up from a year ago and that helped lift our cash flow close to 150% from $33 million in Q2, $2000.20 million to $82 million this past quarter.
And we should see substantially.
Greater lift even as we get into this winter.
Some of our basis differentials roll off even more.
Cash cost per Mcf were a little higher than what we want mostly due to royalties and transportation, which are a couple of things. We don't have a lot of control over.
We should see our opex and interest costs continue to fall as we go forward, especially as.
Our volumes go up but also as our net debt comes down and we will see lower interest payments.
We are still according to my check at the industry the lowest cost producer in the industry as far as I'm aware. So we're still well ahead of the rest of the industry at least be the royalty costs have gone up substantially with higher commodity prices and thats affecting everybody's cash costs, but.
Those controllable that we have where we're keeping those costs down.
So good job for the team.
The team in keeping those costs in check.
As far as maybe a more recent update goes we're excited that we're building a new gas plant again this is <unk>.
Down in our chambers area.
Uses a lot of equipment that we already have in inventory.
It will make production in the Brasow area more efficient.
Right now our gas has to travel quite a distance to get to our plant.
And we're putting this plant basically right on top of the reserves that were developing down there.
We're excited that this is.
Going to be our most environmentally friendly and efficient plant that we've ever built we're going to put as much new technology into this plant as we possibly can to lower its emissions intensity in.
And of course, this planned increases our infrastructure footprint in the brazeau area significantly which.
It tends to give us strategic control.
And provides additional processing flexibility really for the area because of our two plants now.
Flexibility, both to us and arguably processing capacity, even for others in the area.
Speaking about environmental performance, we released our first ESG report in the quarter. That's also up on our website and it talked at length about all the environmental initiatives that we have on the go to lower our emissions intensity going forward things, we're working on today and what we expect into the future.
All of which contribute to making our production even greener.
Natural gas obviously is just one of the greenest hydrocarbon fuels that we have at our disposal today and we're trying to make ours is clean and green as possible for consumers.
Longer term.
We stated that we are investigating several options for carbon sequestration in underground storage.
We have our big Sunny empty storage cavern right underneath our main operations in the greater Sundance area that could come into play for that we've also been investigating several deep Devonian REIT complexes that sit underneath the greater Sundance area that we can potentially use for COPD.
Oh, two disposal and sequestration so.
Lots of good technology coming down the pipe.
And I think candidate will likely be a leader in the world when it comes to capturing and sequestering cotwo, making our hydrocarbon industry one of the cleanest in the world. So we're excited to be part of that.
Anyway, that's pretty much it for the quarter. It was I think both the solid quarter operationally and our financials are starting to improve.
We're looking excitedly into 2022 when things get.
Significantly better for us, even and so that's pretty pretty exciting.
Josh why don't why don't I stop there and we'll throw the call open to any questions from those listening in.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw.
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Our first question.
Comes from Dan Nelson Private Investor You May proceed with your question.
Thank you.
Just wondering if you could give us a quick update on your capex spending for the full year now that you've added.
Another drilling rig.
Start on the new gas plant this fall.
I think the old range was what 300 to 350.
Yes, that's right Dan.
And I think we're still sort of targeting that upper end of the capital guidance at about $3.50.
We'll see towards the end of the year how much.
Hartner participation, we see in some of the joint wells that we've got that's a bit of a tricky thing to for us to try and forecast.
In the past, we were sort of forecasting that partners weren't going to be participating in wells and then lately partners have been participating in wells, so that changes our net capital outlay.
So that's one of the things that can sort of provide a bit of variability to to what our capital forecast is going to be the new chambers plant.
We've got design underway going right, now, obviously and permitting and all the rest of it well underway, we own all of the existing equipment virtually all of it any way that we're going to be putting into that plant. So the early payments for new facilities. We don't have in this particular plant really a lot of.
The capital outlay is going to happen during the construction part of it where the labor obviously in the install.
As Don and I believe the majority of that is in Q1.
Just looking over to Todd Burdick, our VP production and he is nodding his head yes.
We would typically say that a brand new plant.
It might be at the upper end of cost about a dollar per million cubic feet of $1 million per million cubic feet. So 50 million cubic foot at a gas plant might cost upwards of $50 million to build.
I think the budget, but this one was lower than that probably closer to about 40.
But again half of it is kind of the installed cost and half of it is sort of the equipment cost and so with all the equipment is already paid for that really it's less than $20 million that we would be looking to lay out for the installation at this plant site.
I think we were thinking more like $17 million to $18 million I think you guys were kind of.
Expecting so really that $18 million of capital is likely to occur in Q1, not Q4. So it doesn't this gas plant doesn't really affect our capital program for this year at all.
The fifth rig as you mentioned.
Under normal circumstances, obviously would increase our capital spending, but again, we're sort of catching up to.
The capital that we didn't spend in Q2.
We will get get that deployed here in Q3 and Q4.
To catch us up to our schedule to get to that $3.50 number and then a little bit of uncertainty still just with respect to where partners are so that upper end of the guidance is where we're targeting but it could be.
Little bit higher than that it could be a little bit lower than that depending on participation levels by partners in the last half of the year.
Okay. Thank you.
Thanks for that.
So I'll comment on the possible free cash flow at current strip prices and your Capex plans over the next four years that was a nice little nuggets. So thank you for that.
Alright, Thanks for the question Dan.
Thank you. Our next question comes from Brent with Greenland Private Investor. Please proceed with your question.
Hi, Darrin.
Im wondering.
As you get new production brought on in the coming months.
If youre going to hedge that production or will you allow that new production to capture spot pricing.
You know Brett we have a pretty mechanical hedging program that sort of looks forward into the future. We've got sort of levels that we're trying to get to.
There's sort of a stair step profile that we're trying to continue to hold that.
We build out into the future. So we are still hedging small amounts into the future.
Obviously, a tough time to hedge because the current prices so much higher than the future price.
The forward curve is backward aided quite steeply.
As I indicated in the press release 2022 prices.
I think her.
What are they.
What I put in here, even $3.30 ish.
While.
2023, 276, so it does fall off pretty hard into the future but.
We're still taking those future prices off the table slowly.
This is a challenge obviously in a rising price environment youre going to see that backward dated forward curve in the spot price is always going to be higher than the future price but.
So that long term future price is still very attractive for us the economic return we generate on our on our drilling inventory is really good at $2.50, plus.
And so anything over that is a real bonus.
The spot price, obviously is higher in a rising price environment, that's going to be the case.
In a falling price environment, what we had for the last almost decade, we were gaining on our hedges and we would fully expect that probably in a rising price environment, we're going to be losing a little bit on our hedges on the way up because we're always going to be taking a lot of that future off the table, but.
I always have to remind everybody, including ourselves that our hedging program is not designed to win or lose its really designed just to smooth out the future volatility.
And if at the end of the day, we come out.
With zero gain zero lost and then it's achieved.
Everything it's supposed to achieve at no cost, which.
Future.
Confidence in the price by having a fixed price out there in the future is like insurance typically you have to pay a premium for insurance some sort of monthly premium but.
In this case, if we can get away with getting that insurance of commodity price and not having to pay any premium and I think we're doing really well over the long term but.
We fully expect to have hedging losses as the prices rising.
And we will have hedging gains as the price falls.
And Thats, just sort of the nature of how we are forward Sally.
But as I mentioned before the forward price every forward price, we look at it looks very constructive to our economics. So we're happy to be a price taker and just take those future prices off the table.
Thank you very much Dan.
You bet. Thanks for the question.
Thank you and as a reminder to ask a question you will need to press star one on your telephone. Our next question comes from Jerry Makowski Private investments you May proceed with your question.
Hi, Darrin.
Okay.
Couple of questions, but the first is about bank costs.
Interest costs and the increased bank charges that had come on last year.
I noticed the in the report that the.
Bank costs seem to have come down a bit.
Prior conference call.
The expectation had been that somewhere around the fourth quarter the effect of the improvement in the financials and its impact on.
Extra bank charges did that wood.
Be seen in the fourth quarter and that that was somewhere in the vicinity of on an annual excuse me on a quarterly basis about $5 million a quarter.
So question. One is is that still the expectation or did some of that already come in question to also relates to that is.
If if youre able to cast further light on that.
Our plan in the new year.
Around that.
And.
For instance, there is a note coming up next September one of your higher cost ones, it's not bad.
And $25 million came in.
Extra this quarter.
I'm, just wondering what our debt repayment.
Our thoughts are so bank charges and debt repayment. Thank you.
Yes, great question, Jerry I'm going to look good coffee sitting beside me here to talk a little bit about.
The interest charges that were forecasting.
So cup.
Our grid is as.
Such as our debt comes down our interest charges go down that is correct.
But it comes down in staff.
As our leverage comes down.
Dan.
Then we have lower Stampede, <unk>, which is the major component.
So we have an underlying.
Interest costs, which as we all know its extremely low and then it staffing team based on that range.
It has been quite high.
As that comes down every reduction.
Leverage will generate.
Kind of a movement towards lower grid.
Steve adding stacks over the next while so.
When we came back in compliance under $3 five that generated a lower staffing fees not the lowest by any means that lower now.
Two we came under three times, which will now on a future basis generate.
Our staffing fee again.
And we see that interest rates come down and as we move down the leverage tier we move down the staffing fee cost and so we see all of our time and reduction in interest rates.
The normalized rate.
4% for foreign.
For the quarter and whatever including all.
No.
Our average rate, we're going to see that in 2020.
Morristown.
By Q4 of 2021.
We should be moving down to a pretty normal rate.
Yes.
So.
To go even further that's the interest rate, but as you mentioned, we are obviously, reducing the debt that we're paying that interest rates on as well right. So this year maybe.
Maybe not as much debt reduction as we are forecasting for next year next year, we're forecasting quite a dramatic debt reduction because our free cash flow jumped so much.
Get rid of a lot of these hedging losses and a lot of the basis.
Deals that we had in place that were high cost and our cash flows improved substantially and that gives us a lot of free cash flow then to apply to the debt that brings the debt down and at the same time the interest rate charged on that lower amount of debt is lower so those two compounding factors, obviously, bringing our total interest charges down every quarter that.
We're going out into the future by quite a bit.
Right.
Yes.
No.
The first name.
<unk> September.
Yes September of 'twenty two.
<unk>.
So we're looking at options.
<unk>.
Any discussion between revenue.
EBIT rate.
Our charge is going to be a big factor.
Free cash flow would be a factor.
Still a bit in Q.
Many of the plan.
The balance sheet is obviously getting quite a bit stronger and so the concerns of that going forward are mitigated quite a bit.
There is still I guess overall, our underlying concern with respect to inflation and rising interest rates and how much debt, we want to carry into a rising interest rate environment. If that's what we ended up getting.
And we're looking closely at that I think with obviously all the debt at all of the countries in the world have racked up there is the expectation that we will get inflation and higher interest rates out there.
We need to make sure that we prepared ourselves for that.
Ensure that either we can lock in lower rates or we're paying down debt to reduce our total indebtedness that we have to pay interest on.
Thank you for that answer.
To answer your question.
Thanks, Yes, it did very good thank you.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Darren Gee for any further remarks.
Okay. Thanks.
Josh we did have a couple of questions coming in overnight.
From analysts and investors that we would like to address.
One of them I want to point to Dave Thomas our VP exploration.
There was a question just about our chambers plant and the inventory future inventory, we have down there to support that brand new plant. Dave can you maybe address that question.
Sure Darrin.
We have close to one.
150 drilling locations on our chambers lands.
It's a really good mix of Cardium, not acumen and will reach targets.
Sure.
That includes over 50 extended reach.
Lateral wells.
Assuming the outcomes, we remain similar to our current results, we could keep the new chambers plant Boe.
For over 10, five years with just that inventory.
And that leaves plenty of scope to continue flowing extra gas up to our <unk> plant.
Or to expand the chambers plant at some point in the future.
We will also continue to grow our chambers land position to add to our existing inventory just as we've done for years at all of our other plants.
So this is just a snapshot in time, but it's definitely looking.
Quite good down there right now.
That's great. Thanks, Dave.
One of the other questions that came in was.
With respect to.
Our ability to generate so much free cash flow for the next.
For years that we can completely eliminate our debt and the fact that.
At current strip prices any way our economics.
Look very attractive so JP, maybe I can look into this question.
The question is really if our economics are so good and we've got so much free cash flow why aren't we putting more capital to work.
Drilling more wells growing production faster.
Yes. Good question I guess first of all our type well economics as we look at them today or at the latest strip.
Actually this is put on our website now this information is out there.
Simply.
Returns on a great month.
Lot of these wells are showing less of a year, where just a just over a year. So let me obviously.
That's something we haven't seen for quite a while I mean that philosophy deal with price, obviously, but also with the efforts.
Folks here trying to.
Get costs down and improve results too.
The <unk> certainly helped with the with the capital allocation decisions.
Since you can take to price uncertainty off the table, obviously, but your question Neal So why don't we do more.
Firstly I think we should look we looked at our five year plan here a model, where we continue to spend at the levels. We're at.
This year, so roughly $350 million of capital investment over the next five years. This year in the next four years.
It shows we can grow our production roughly about 7% per year.
Depending on capital efficiency and decline assumptions, but.
That we can do well again.
Our projected cash flows and we will have significant free cash flow available after that but.
We have to temporary enthusiasm.
One of Canada's larger natural gas.
Producers, we certainly don't want to flood the market until.
<unk> built out and drive prices down so.
Clearly the backward dated strip is expecting producers to do just that.
And so we'll need to have some strength.
These great returns.
Wei.
Yeah, No question and I think Thats, a common theme amongst the larger gas producers.
In Western Canada right now.
Which is probably led to the consolidation of.
More of the.
Gas production in the basin.
We did a small acquisition at the start of the year and Scott one of the questions. We got in was.
Are we looking at more acquisitions or are we looking to consolidate the basin more or are we content with our land based today or what kind of opportunities are out there on the M&A side for us.
Yes Darren.
Thats the Sealy acquisition.
<unk>.
What is a very nice one.
In retrospect.
As time nicely with the gas price increase so we like yet fit in very well seamlessly to our existing operations.
And the upside I think because.
<unk>, we started to tap into that.
It's coming to fruition. So we're looking at more of that stuff that plugs.
<unk>.
You've looked at.
Look at our past, we havent done a lot of acquisitions, we haven't needed to do a lot of acquisitions and Thats one of the nice things about right now.
Certainly we're not in a position to have to do anything and we've got an extremely rich inventory as Steve has pointed out in chambers and other areas. So it's nice to be in that position.
Two.
Be very selective on what we what we look at and we're looking at stuff in the five to 10 year range here to complement what we already have.
The Bolton stuff that fits in income and conforms to.
The attributes that we look for LOE cost infrastructure strengths.
The expertise that we have in Germany needs.
Cretaceous formations.
But having said that we're also looking.
And longer term at some other potential new core area. Please.
We're not going to force that we'll look at the opportunities that.
That makes sense within the capital efficiencies and the use of our capital across the broad investment spectrum.
It's become a little tougher obviously with gas prices going up to get the deals and we're seeing that in property transactions.
Back when gas prices are and where we're looking at deals done in that 10000 per flowing barrel range, that's more or less doubled here.
Gas price increases.
We will continue to chip away at the areas that makes sense, where we have.
A real competitive advantage.
Others.
Super.
The question always comes in about inflation.
Obviously, that's very topical today.
Both in the broader economy and also as it pertains to our business and are we seeing any inflationary pressures on our cost structure and so we did obviously as we.
Noted in the press release, we pre bought some equipment well site equipment.
We pre bought some pipe.
We've got good relationships with our service providers, but Todd maybe you can at least not here to comment, but maybe you can.
Talk a little bit about.
How we are mitigating some of that inflationary pressure if we are seeing it in.
How long.
We start to see some of that trickle into our business.
And maybe.
You can speak a little to about.
Our.
The environmental initiatives that we've got going forward.
Obviously, we are spending some money on lowering our environmental footprint lowering our <unk> intensity.
We obviously are sort of killing two birds with one stone buying lower emissions intensity, well site equipment and buying it today to offset the.
Potential of inflation so.
Can you speak to those two topics a little bit yet for sure.
Yes.
When.
Some pretty major.
Supply chain disruptions with Covid and other I guess worldwide factors.
We are starting to see some price pressure, especially anything steel related.
Whether it's to the casing.
Line pipe now that sort of thing so we.
We had an opportunity basically Q1 Q2 too.
Get our hands on pipe that was on the ground already or get at least in.
In the Q4 for pipe.
Yes.
About to come out of the mills.
We're able to secure some pretty good pricing on that front similarly with the.
The equipment that they.
It goes into building separated packages.
Heads and shelves and that sort of thing.
Getting ahead of that will help us for the next year.
With the chambers plant.
I guess, it's fortunate that we bought in bulk of that equipment five six years ago.
I think where we can buy it today, we'd be looking at quite a bit.
Cost for this plan probably closer to that 1000.
Dollar per million diluted too.
As far as.
The environmental front so.
We've been trialing in refining needs low emission electric skins for the past two years.
They went through two winter seasons, we really wanted to make sure that there would be no major issues.
Yes.
Through the winter and we saw some pretty cool temperatures through that winter and we've really been.
Moving towards more electrification since 2016, when we started putting.
Even earlier when we.
Move to scale and that sort of thing, where we're running solar panels and battery.
So we're learning and we've been learning for quite a while and so.
We were ready to really jump into the water and if you look at if you want to put it that way.
<unk> still.
The first two.
<unk> installed on a two well pad that comes on this week.
And.
As far as how far the last we expect probably the end of Q2 next year. So.
So it will be probably early in 2022 will be looking again to secure some some good pricing by ordering ordering bulk.
From an admissions perspective, these installations should reduce our total emissions by about four kilograms per Boe, which translates.
To just over 2% and Thats, our total emissions intensity.
And in addition to that we saw an incremental 40000 <unk> of gas per year that normally would have been amended.
Into the atmosphere so.
And of course, not further contribution to our goal.
An incremental reduction of our total emissions intensity by 25% by 2023.
Other things that are drilling on retrofitting pneumatic pumps in the field.
The things, we're going to be doing it at the chambers plant.
Net.
Sure.
Describing in the announcements or at all.
Paul.
Less towards that 25% reduction.
Yes, that's awesome.
Alright, well I think thats.
That's all the questions that we had and I don't see any more up there Josh so.
Thanks, everyone for tuning in to the call today.
Where we are.
Eagerly anticipating getting through this summer.
Particularly with respect to gas price realizations in some of our hedge losses and into next winter fall looks really good and our our fourth quarter projections into 2020 to look really strong. So we're excited to get there.
We've been waiting for this for these.
LOE realizations to get past us for a bit so.
It's good to finally put them in the rearview mirror and get moving forward. Our 2022, right now looks fantastic as far as what we're projecting.
I think Pedro might actually generate record cash flow in 'twenty two based on the current strip. So we're very excited about that.
All of that that brings getting back to the days of old.
When we were.
Financially much stronger so.
Things have definitely looked up and picked up and are looking really good going forward and we'll be excited to.
Get back to you in November with Q3.
We'll be well underway into the winter by then.
And be even more excited about what's happening in 2022, so thanks.
Thanks for tuning in and we'll talk to you then.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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