Q3 2021 Peyto Exploration & Development Corp Earnings Call

November 10, 2021

Good day, and thank you for standing by.

It comes at a P times Q3, 2021 financial results conference call.

At this time all participants are in a listen only mode.

After the Speakers' remarks, there will be a question and answer session to ask a question. During this session you will need to press star one on your telephone.

Yeah.

Okay.

And they're all here only one missing today is Derek number our VP of land.

Home with the flu I believe but I suppose it's that time of year.

Before I get started with my comments today about our results I do want to recognize the efforts of both our office and field personnel this past quarter.

We had a really busy quarter of operations and we drilled some fantastic wells in the quarter just in time for the winter heating season in the most recent rally in natural gas prices.

So kudos to the team for continuing to deliver the reliable energy that albertsons need to keep them warm this upcoming winter.

And we did it with a terrific score for safety and environmental performance, so great job everyone.

Onto third quarter results operationally as I mentioned it was a busy quarter, we picked up a fifth drilling rig in August and it's been getting up to speed doing things the paid away. So.

So now we have five rigs that can run steady throughout next year.

This was important because we are seeing a real challenge in the Canadian industry. These days, both with available equipment, and especially with getting qualified people to work on that equipment.

And that is not really a problem that goes away. If COVID-19 goes away. That's an issue that is likely here to stay for some time and it will likely put a cap on activity levels and the development of new production, regardless of what the commodity prices really do so the fact that we have paid or have the capability to drill more and develop more.

Be a big differentiator going forward for us.

We did drill some great wells in the quarter and two of our expansion areas down in South Brazeau and an area. We call Chambers, we continued to delineate out several different plays there which is important because it supports the long term supply for them for.

The new 50 million a day gas plant we are building there.

In our Cecilia area, which is an area we acquired it started the year.

We've had some great results up there that are completely filled the half empty gas plant there.

So now we're offloading incremental volumes to other plants in the area that have excess capacity, but we're also looking at expanding the Cecilia plant with more compression to move more gas through that plant a little later so.

But can very good up there as well.

So production grew nicely throughout the quarter, we had said that we expected to hit 100000, Boe's a day by the end of 2021 and it looks like we're likely to hit that number sometime in mid to end of November.

So about a month early.

And of course, we're not stopping which means we should exit this year at something slightly higher than that it will really depend on how many wells we can get tied in before Christmas.

And then we have a little bit of a Christmas break and then we'll keep that momentum right into the new year and throughout 2022.

Commodity price realizations in the quarter.

Especially natural gas prices are rising.

And they're continuing to rise significantly from this third quarter into Q4, 'twenty, one and on into 2022.

As we indicated in the release, our Q4 hedge price is 55% higher than what we just got here in Q3, and our Q1 2022 hedge prices over 80% higher than what we received in Q3 so.

That higher price combined with more production is going to result in very large increases in revenue and cash flow for the quarters coming up.

And really our hedge program is still catching up to the spot price. So we expect to see rising fixed prices for a while as we continue to hedge out the forward curve.

For this winter our gas is around I think 71% hedged with a fixed price for next summer where about 69% of our volume has a fixed price on it.

So really that gives us a high level of confidence in our projected revenue and cash flow that's going to fund our capital program for 'twenty two and.

And our debt reduction program and our dividend that we just announced.

So with this quarter I think we can finally say that the weaker natural gas prices that we've seen over the last few years are finally behind us.

Cost wise I'm happy to report we held the line on costs in the quarter, obviously royalties were much higher due to higher commodity prices and that was really responsible for almost the entire increase in cash costs from a year ago.

And op costs were good they would have been lower but we did 10 plant turnarounds in the quarter. So.

That obviously had some costs associated with the Todd can perhaps talk more about those later.

Transport costs were up and will be for the next year due to some physical transport that we signed up for at the border at Empress and on the mainline to Emerson.

And then those contracts will start to roll off as we put some other diversification.

Efforts in place.

G&A costs in the quarter of course were minimal.

Pedro small team and relative size of our capital program and production base.

Our interest costs were down quite a bit as both our debt and our interest rate dropped and thats because of a falling debt to EBITDA ratio this past quarter.

This interest charge should continue to fall pretty steadily as we move forward with the lower interest charges of the new credit facility and as our debt has materially reduced.

And that lower interest charge should really help offset the higher royalty costs due to the rising commodity prices.

In total, though I think we're doing a good job of maintaining our significant cost advantage over the industry.

I think the other advantage, we're maintaining over the industry as our environmental performance quite frankly, we've accomplished a lot over the last five years with methane emissions reduction.

After we finish up working on the individual well sites to reduce virtually all of the methane emissions. There we can turn our attention to our facilities and see what we can do to lower <unk> at those locations with that equipment.

We mentioned in the release I believe long term that we're going to be able to capture the majority of Sidoti <unk> from our facilities and dispose of that Cotwo and deep underground storage reservoirs of.

Of course, that's going to take some time, it's going to take some money and perhaps a bit of innovation even to accomplish all of that but that would be our long term goal and that should ensure that Pedro and its natural gas was around for a long time to come into the future.

Speaking of a long time it's.

I've been the president of Peyto for 15 years now and it's finally time to recognize a guy that's been responsible for peyto behind the scenes and that is J P. The chance.

John Paul.

So this quarter as part of our longer term succession plan, we decided to make that recognition official by promoting J P to the position of president as well as being the Chief operating officer that he was before.

Of course, JP has the whole <unk> team behind him for support as well, which has and he has the very experienced and seasoned management team in this room to help him lead <unk> into the future.

And ill continue to be here for a good while yet serve as CEO and to make the leadership change seamless and smooth.

And lastly, and probably most excitingly for the quarter.

As part of the quarterly release, the board decided to reinstate the monthly dividend shareholders at <unk> <unk> per share or about $100 million annually.

We've managed to earn close to 150 million over the last four quarters, while also reducing our debt and considering the free cash flow that we're projecting for 2022, we can afford to pay a much more significant dividend now while still achieving our ongoing debt reduction targets, so great to see that that dividend bump.

Anyway, that's pretty much a quick summary of the quarter very solid quarter, both operationally and financially.

And so I just wanted to.

Get to any questions from listeners.

That are participating today, so celine maybe we can throw it open to questions from those listening in.

Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

Again that is star then the number one on your telephone keypad.

We will pause for just a moment to compile the Q&A roster.

We have our first question coming from the line of Chris Thompson.

Your line is open.

Good morning, and thanks, everyone.

So darrin outside of the 15% inflation that you highlighted in your 2022 preliminary budget expecting any other inflationary impacts.

Whether it be in your operating costs G&A or otherwise.

Yeah.

Yes, that's a good question and it's obviously topical these days.

Theres, probably two places that inflation comes in.

Lee maybe you can talk a little bit about the operations drilling and completions on the capital side about inflation.

Maybe we can turn to Todd and he can talk about some of the operating cost inflation that we might be exposed to.

Yes sure.

I mean, what's going on right now is just a classic pricing response to low supply and increased demand.

Lack of supplies is the main driver right now and I think whether you are out there shopping for us for a new F 150 year Youre looking for a string of casing.

Youre suffering similar consequence.

Struggling right now as an industry to keep 170 rigs running which is.

Startling the biggest elements, we're dealing with right now with the shortage of personnel and steel specifically tubular casing and tubing.

This is going to keep a pretty short leash on industry.

And it's going to in turn create a supply issue with our goods.

The net effect is to meet higher commodity pricing.

Trolling inflation itself.

So one of the things we've put up.

10% number and I think Thats conservative.

But in reality, it's going to be secondary.

For most operators.

Relative to simply getting what they need to fill fulfill ambitious capital plans.

This contract has been struggling for several years.

<unk> got ambitions to returned earnings along with that they're experiencing direct inflationary pressures there labor is going up they're consumables are going up.

And a lot of the equipment sitting in this industry in the basin has been sitting rack.

Has been serving as a parts depot and Thats been pilfered to the point, where it's going to take a lot of capital to get some of this idled gear back up and running.

It hasnt been any injected for so long it's.

Yes.

Its equipment that you can activate at the snap of the fingers. So so our approach really we started gearing off on a different path to most other operators a few years back.

This industry is notorious for this push and pull relationship between operators.

And contractors.

Everybody kind of trying to hold the upper hamblin when the environment is right. So we kind of veered off a couple of years ago.

And we had stable active capital program.

We continue to demand the highest quality personnel and execution and with that we were offering at.

At the time, a fair level of compensation that certainly wasn't bolstering anyone's bottom lines, but we allowed our contractors to survive for the better days ahead in most of those days seem to be on our doorstep now so.

We need these guys.

And we reminded them of that throughout.

The entirety of the last couple of years.

We've had long standing and very transparent relationships and we're confident we're going to see some headwind.

Tejas treatment and.

In regards to both supply and pricing on this upswing.

Right now the 15% estimate is just that it's an estimate.

I know that anybody has a crystal ball on where this is going to land.

Price increases on our tubular is alone of swallowed the lion's share.

Share of that already.

So that's not to say we're kind.

Kind of telling everybody that they can hit us with a 15% price increase right now.

We expect tubular to start normalizing towards the end of Q2 or early Q3 and.

And that should provide a buffer to allow some of those services.

At that point in time to maybe bump up some pricing when we have when we see.

See the.

Some reprieve in our steel price and that should coincide that coincides with there.

Drilling rig contract renewals. So so we're kind of locked in on rates. There, we had a little bit of a bump on pricing with with labor increases wage increases.

So we will see I think I think we're sitting pretty good through the winter.

We're working hard to manage expectations with our contractors and these guys. All I think recognize that feels capital program and.

And our position on pricing through the last several years as.

Many of them are flow, so regardless, regardless of the broader inflationary picture, we expect to remain.

And our top position relative to the rest of the industry.

What else I can really.

And Chris you, probably remember couple of years ago, when we talked about the fact that even though our capital program has shrunk quite a bit we were spreading it around we had four rigs running at sort of 50% run rate to try and keep the equipment warm and that people employed in the air.

So that we didn't lose them.

So that's serving us well right now because now we have those same people and that same gear and we can run the plateaued and a busier environment.

But we're not as subject to some of the other.

Inexperienced that's starting to creep its way back into the industry and that kind of thing so it's.

I think that was a good plan back then.

Reaping the rewards of that now.

To further answer your question, maybe Todd you could talk a little bit about operating costs with some of the inflation, we might be seeing there yeah for sure I think.

To Angola.

We said inspired.

This service provider that we have out there similarly on the operating side with with some of the contractors better out there.

Forming services breath, we kept them.

And we've looked after them so.

I think we'll continue do that.

With that promise that we'll continue to keep them working I don't think well see.

Significant increases maybe a fuel surcharge here, there and that sort of thing, but nothing that should.

Impacted in that way.

Something's chemicals, we've seen.

Efficacy pricing increase done on math at all for example.

Sure.

Margaret marketplace.

Double what it was a year ago.

We have locked in.

Really good price we did that in August we typically do that in August when the prices are lower.

So thats been our protector.

For the remainder of the year significantly although it.

And with the higher locked in rate higher than a year ago.

It's protecting us a little bit lubricant, we use a lot of oil a lot of a lot of lubricating oil.

That obviously floats with the price of <unk> due in large part a little bit with TPI as well so.

We do anticipate seeing a little bit.

Increase there.

Power's another one.

At the top one.

Alberta producers.

70% of its power through natural gas.

Generation, so our pricing is high.

And we're making more money selling natural gas, but however, we.

We.

Generate power through the grid about at about 90% of our usage.

We're going to feel that on the operating side.

That surpassed significantly incremental revenue that we're seeing so overall I don't think we're going to see some inflation, but I don't see it being anything thats kind of really shocked.

Great great. Thanks for the color.

Next question for me just.

In terms of well abandonment and reclamation.

Haven't seen any cash outlays come through on your financials with that so perhaps you could add a little bit of color on company strategy for how it manages its abandonment liabilities.

All our wells are still producing Chris they are not ready to be abandoned, yes, theyre going to produce for decades more.

This is getting I mean, we do have.

Odd well that.

Might be a candidate for development that we're looking at.

You guys want to jump in on that sure I think that.

Every year, we spend.

Roughly about $1 million.

Tenements or Germany suspension generally lead to abandonment.

Not so much reclamation work, but and we have targeted for the next.

Two or three years to continue to spend that.

The recent announcement by the Alberta government around.

Expectations.

From the EUR would be to.

For us to spend around $100 million next year. So that's in line with our budgets.

We'll continue to spend but as Jeremy indicates we don't have a lot to do really.

No.

Yes.

Are in the process right now of consuming our.

Our SRP allotment.

As well, so we're well into that program.

Probably another in total with with our Phase 500, close to 2 million Bucks.

We're active on that right now.

It's just not significant Chris because.

I would say that facetiously, but the reality is that almost all of our wells are still producing today.

Especially with the higher gas price, even the lower rate wells are still very commercial.

So we just we don't have that liability.

Got you okay.

And sorry last question for me.

In terms of debt levels, so for 2022.

What are you targeting in terms of.

In absolute debt level, and then I guess.

On your estimates what does that translate to in terms of relative debt levels of cash flow.

Yes.

For us it is more of a debt to cash flow target that we're looking at.

And it should be because we could see some commodity price changes throughout the year right.

Our cash flow projections, but I think.

We are looking to be.

One times debt to EBITDA by the end of next year, I think thats a reasonable expectation.

That's sort of where the industry is gone I think in terms of deleveraging.

And we've got the majority really a 2022 cash flows.

Locked up with a lot of hedging and that we're continuing to do into 2022. So we feel quite confident about where we're going to get to in terms of the balance sheet.

And that was obviously one of the big drivers in deciding how much dividend we can afford.

Okay. Thank you I'll turn it back.

Great. Thanks, Chris.

Thank you we have our next question coming from the line of David Sandler Your line is open.

Good morning, I wondered if you could give us an update on the.

Construction of the gas fired electric and.

Generating plant youre going to be supplying.

And some information about.

How you plan to increase production to.

To supply that plant and just review how the gas is going to be a price didn't have that.

Pricing fix and Covid diversified.

Marketing structure, you've been developing in the past couple of years.

Yes, Thanks, David.

Net.

Cascade power plant, that's being built by Qinetiq core.

As close to our Swanson plant.

We have been sort of tracking their activity they have a website as well.

Can Google and find and they show updates to their activity on that website Todd.

Todd We've got guys that drive by there every day. So what are the guys seeing when they are out there in the field.

We're meeting with Cascade every now and then Theyre, giving us an update.

They're making great progress.

They showed us some pictures of the site this summer.

There.

It's pretty amazing, it's quite a big project and they have got a lot going on a lot of foundations already set.

Getting ready.

Put buildings and load equipment in as we understand it. This summer we put that final connection into their facility that final pipeline connection to about 350 meters. So that thats been there so that that accommodated some of the construction that they have going on and then we'll look to it.

Work on our pipeline later in 2022 early 2020, so yes, it's pretty impressive.

They're I think they're a mall or understanding their they're on schedule for their anticipated start up in late 2023.

Do you want to add.

Yes, not a whole lot to add.

It's been a very good.

Working relationship with Cascade, and we're really looking forward to.

Applying the gas one of your questions.

Nathan is it I think I think.

David David one of the questions was the sourcing of the gas.

We've got a very defensible diverse diversified and flexible portfolio. So I don't think that the real problem in meeting the needs.

Higher.

Infrastructure is very well connected up there and should be able to supply this gas for a very long period of time so.

<unk>.

We'll be drilling continuously into the startup.

<unk>, which is likely going to be it could be early.

Based on the progress they are making here, but it would likely be in 2023.

Yes.

It is impressive what these guys are doing they're starting to move into the big pieces of equipment right now.

We'll get them engaged on their completion time here in the next during 2022.

Yes, no no small construction project at one 1 billion six or something it's the capital expectation for that facility something in that order.

Contract Wise David.

Bound by confidentiality with our gas purchase agreement with kinetic core so we can't really divulge much.

Sure.

Needless to say, we obviously do have.

Ah contract that ties the Alberta power pool price.

To our realized price, we get paid and effectively in the electrical price, but that translate back to us.

Some sort of realized gas price, but we feel good that the.

The contract that we have with them.

Realize a fair gas price effectively for us with the types of power pool prices, we're seeing.

When we did the contract with them I think Alberta pool prices hovering around in this sort of 30 to $50.

Megawatt hour.

Today, Alberta power pool prices are 90, 90 to 100 140 140, <unk> hundred 50 at times. So I mean albertsons are definitely seeing that in their power bills every month.

That obviously translates into a much higher natural gas price realization for us.

Ultimately I think by probably 2023 and when this plant is up and running Alberto will have.

A very large percentage of its power being generated from natural gas will have turned off the majority of the coal fired power in the province, and Theres only a very small amount of renewables that really contributes and even that has to be backed up by the natural gas.

So there should be a fairly good tie between power pool prices and what the gas price is.

And hopefully we come out at least fair on that relationship. It is a 15 year commitment to deliver gas to them.

And we've we've committed about half of the volume that theyre going to need.

For that 15 year period, and like Scott said, we've got all of our gas plants interconnected. So that we can flow gas from pretty much anywhere in greater Sundance to this facility if need be.

And.

I would really say that we're so advantaged by being directly connected to them, we save a lot of cost pipeline toll.

Really anybody else, who wants to supply gas to them has to put their gaslog Novo Peter payer receipt tool to get onto Nova in Connecticut has to pay a delivery told to get off of Novo with that same gas and so we save both pieces of that tool by directly connecting to them and I think likely we will supply more than just the 50% debt.

That we've committed to it makes economic sense for us to supply more so whether we.

We supply something for the others that have committed gas to them and in exchange, we do some sort of relationship with those parties.

We'll see but.

Yes, we're excited for the plant to get up and running and excited to be a very significant part of the Alberta pool grid here when it comes to electricity.

Turning to capital costs.

Yes, and the last thing that the plant efficiency this plant will be.

State of the art.

One of the best efficiencies environment, we in terms of the.

Energy output curve energy inputs.

Bode very well on the pricing grid as well.

And the capital cost of any incremental production be funded internally by cash flow.

Absolutely David.

Our plan is obviously to have a portion of our production dedicated to this facility.

And it's a portion of our total that we're projecting.

If you've looked at our marketing slide section of the presentation you can see that we've already provisioned for the wedge of volume that's going to go to a court much like any other diversification that we would look at this as the industrial piece that we'd like to get.

In our portfolio, we want to have some gas obviously exposed to.

Eastern Canadian market, some exposed to the U S markets some exposed to the industrial Heartland here in Alberta, and then eventually may be even some exposed to west coast LNG.

It's just a part and parcel of our total diversification.

Okay. Thanks, a lot.

You bet great question.

Thank you we have our next question coming from the line of Nathan Schwartz. Your line is open.

Hi, My question is about pay those green initiatives.

Pedro has done a great job, reducing scope two and scope three emissions. My question is really about scope one emissions from fuel combustion.

The Alberta hydrogen roadmap has talked a lot about things like blue liquid ammonia and blue hydrogen and my question really is how do you look at scope, one emissions and how and when might.

Pedro start focusing on that challenge.

Yes, so youre right Nathan.

Scope one emissions for us are defined as what I thought.

Thats basically whats coming out of our plant.

Burning off.

Natural gas or fuel.

So.

Patrick.

The energy, we consume to produce the energy that we sell and in fact right. So we know that every truck that drives around in our field earns fuel we know that every drilling rig burns fuel every frac pumper burdens fuel in.

Those are emissions and then all of our plants obviously.

Ron we have gas fired compressors at all of our plants none of them are electric so it's the exhaust from those gas fired compressors.

We have power generation at those plants and the gas that we burn to generate our own electricity.

That is the emissions there and.

And so we talked in the press release about the fact that our first goal when we started to really address our environmental emissions was to look at the fugitive invented emissions at the well site, we knew that there was.

An opportunity to replace them equipment at our individual well sites to eliminate to try and eliminate the majority of that little bit eventid methane because that has obviously <unk>.

Significant impact in terms of environmental emissions methane being more potent <unk>.

And so we started there and we've been actively working on that program trying to get our field out at the well sites as clean as possible and now we're starting to look at our web site.

Our gas plants in our major facilities and those emissions and so when we look at that we're looking at capturing of course any.

Releases at those sites, but also any consumed fuel at those sites.

Exhaust <unk> if you will.

That's a little big bigger challenge obviously.

Not unlike trying to capture the <unk> emissions from the tailpipe of your car.

We're trying to do it on these great big engines that run our big compressors.

Okay.

It takes a significant amount of capital obviously to not only capture the exhaust but then to purify it into the components that we need to dispose of and then we've got to dispose of that component.

So we're just starting to look at that now we've done a big study to evaluate where we are going to put it all in.

We've got a lot of deep Devonian reservoirs below all of our greater Sundance area that can easily accommodate all of these emissions once we try and capture them.

So that's good.

A lot of cases, a lot of producers don't have that available disposal reservoir or theyre going to have to ship it.

Two a distant location to have disposed of them, that's going to be awfully expensive.

So we're looking at right below us.

We would need to drill some in disposal wells, obviously, but.

Kind of practice to drilling wells.

Having done it for 23 years now.

And really we're looking at bolting equipment onto our existing gas plants to try and capture that.

That technology still kind of at its infancy.

But.

We definitely see that's the path forward to capturing the majority of our Sidoti <unk> at our gas plants.

Okay. That's helpful. Let me just quickly follow up I suppose my question is more broadly.

About the energy that you sell.

And in the past you've talked about using big Sunny.

Part of our Blue hydrogen strategy and what I'd ask is.

How do you view the path to blue hydrogen or two blue liquid ammonia.

Product that you sell.

Yeah really it's that path I think is demand driven.

As there's more and more uptake for those types of fuels.

Then our industry and ourselves will be well positioned to respond to that by turning our natural gas into those fuels for consumption.

That obviously requires some process.

Refining process, if you will or further facility process.

We can look at either being the <unk>.

Owner of that process or we can look at outsourcing that similar to say, how we outsource fractionation.

Our LPG.

So I think.

Obviously, we're going to work part and parcel with the industry.

And with even some of the government initiatives on that.

But I think a lot of it too has to be driven by the demand side.

There is no point in producing whole bunch hydrogen if no one's going to buy it.

And we have to see the demand side pick up and there be a call for that type of fuel and I think we will be able to respond as an industry quite quickly to that call as it evolves.

Yes, there is.

Interesting you ask about ammonia there is early stage project concept.

Our area should that project.

Get some traction and move forward, we certainly would be.

A candidate to supply gas, but like Darin says most of these things are beyond our scope.

<unk>.

The methane.

The carbon hydrogen bonds to continue the energy, we can supply that to whatever process. It is vida syngas process that makes methanol or that makes.

Essentially ammonia or or hydrogen those are all exciting opportunities that lie ahead, but there are several steps.

In between now and when that happens I think.

There is there is this one project and we're in early stage discussion on it.

Great. Thank you and I. Thank you for being such a good steward of my money.

Youre welcome.

You're going to get.

Okay.

Thank you and there are no further questions on queue presenters. Please continue.

Well great.

We did have a couple of questions coming overnight.

One of them was about the.

The statement that we made in the press release about how our internal rate of returns.

Extremely high right now.

J P. I wondered if you could maybe.

Expand upon that comment.

Sure. Thanks, Darren I think.

At this time a year every year, we have a tendency to go look back at our program that we've drilled to date and have a close look at it at the results and it.

It's a precursor it's a requirement it sets up our plan for next year. So it's an important process that we do every year and we look back at about 61 wells. So far this year that we have some production history.

Thats made up of about third.

Not a Q and a third cardium and a third of our well rich predominantly our extended reach horizontals.

So when we look at that program to date.

Pleased to see that the rate of return of that drilling program. It looks like it will yield us around 112% rate of return, which is pretty impressive and important part of that too is these wells.

We expect will somewhat paid out already and we will we expect a lot more to payout by year end and into early.

Early next year. So the program has certainly been very successful and of course that includes.

Provision for other costs outside of just the drill complete and tie in of those wells to the pipelines and the plant work that we've done is included in that is sort of a guide.

The measure of full cycle economics, so certainly a good program.

These successes have happened all across those assets.

Standouts clearly as you've indicated down earlier in the non acute in.

Cecilia Cardiome and chambers.

Of course, our will rich extended reach Horizontals are working out quite nicely and thats both in Sundance in the brazeau area so quite.

Quite pleased with that.

Clearly prices a reason why these economics are so good.

But the team has also managed to get both our productivity of these wells up and the costs down when we look at cost per meter cost per stage cost per ton.

They are all lower across across all our key species.

And then when you factor in the purchase that we made earlier this year the <unk>.

$35 million, we spent on buying this is sealy assets and you and you're adding the base production that comes along with that our total capital program. This year should yield is around 100% rate of return. So that's certainly the best returns that I've seen since I've been here and.

Why is that important well looking forward to 2022, and we plan to drill a similar program similar sized program similar mix of the species that we drilled this year.

<unk>.

Obviously, adding some inflationary costs.

Lee alluded to and Darren than we did in our press release, but even with those costs.

<unk> costs in there we see a lot of these species.

Turns are in that 100% range, and we expect that and those payments will be less than a year. So it helps take some of the pressure off with respect to.

Commodity price risk as it were.

And we hope to actually partially mitigate at least.

The cost inflation with operational efficiencies as well so does that factor as well so I think the team.

We're ready and we're excited about the 22 program.

Certainly pleased with the results so far this year.

Okay. Thanks JP.

The one other question that came in overnight with respect to.

Our debt profile.

Rising interest rates potentially.

The response to inflation.

We issued that note.

I guess it was after the quarter, but.

It was included in our press release.

Pretty good priced interest rate, but.

How much interest rate risk do we have with.

Sort of some of this inflation pressure, though.

We're all talking about.

Well that's a good question Darren.

Obviously, the interest rate or.

Forecast arrived Canada.

Canada rates probably need.

And that is going to affect the underlying interest rate that we pay on our revolving debt.

So as.

As part of our strategy.

Repayments.

So we're seeing our revolving debt or variable rate debt declining from about $700 million right now.

<unk>.

Down significantly.

The end of 2022.

Our fixed question that that is actually going to start to become more.

Higher portion of our mix and thats going to expose that.

And the lesson.

Variable interest rate risk so by the time.

Interest rates really ramping up in 2022 and 2023.

Just the actual dollar amount.

We will see.

Most of that would be great.

Therefore.

Well, it's certainly fair.

It's not going to be done.

Materials.

Okay. Good.

And then maybe just a final question Dave.

Maybe I can ask you about some of the.

Future drilling inventory that we're looking at.

We obviously drilled its started to drill on.

That new acquired property in Cecilia we've had some some good results there.

Without giving too much away, maybe you could speak a little bit about.

What plays we've started to delineate maybe what interesting things we found in.

What's our inventory looking like up in that area.

Sure sure Darrin.

No.

The Sealy acquisition is really turning out to be a big success story for us.

It's one of those instances, where the upside is unfolding just as we'd hoped and perhaps even better.

The wells drilled table in the press release really doesn't tell the story of the table groups.

By which gas plant they flow too, but <unk> located wonderfully smack dab in the midst of.

Our infrastructure, so gas has a choice of several plants to flow too.

So we've actually drilled eight wells, so far six not accused to outbid for layers.

On what we term as the Cecilia lands plus we have two more non acuity to finish up drilling here in Q4.

There is also a three additional wells that were drilled further.

Further south in.

In the ancillary areas those lands are actually also linked to the the Cecilia acquisition.

And next year, we will have one one rig dedicated pretty much entirely to Cecilia and we hope to drill about 18 wells.

They're in the budget.

They are mostly non acuity.

But we plan to.

To also.

Also test the liquids rich than vegan. So that's that's that's really going to be a first for us in the.

In the greater Sundance area. So this is due to the islands.

Fair enough up north to it.

Includes have done vegan opportunity.

The actual inventory at <unk> was.

It was estimated to be just shy of about 100 wells.

Including 30 non <unk>.

50, cardium, but.

What we're seeing so far giving.

Giving hints that the depth of the non acute inventory may actually be underestimated.

That's really important because theyre not accuse we've drilled so far if it turned out to be very prolific.

Several estimated to payout in less than a year.

All in all it's a great success story.

I'm sure you'll be hearing more positive updates in the future.

Alright, good stuff.

Thats.

Pretty good note maybe to end on.

I don't see any additional questions. So.

Thanks, everybody for listening in.

It's been an exciting quarter for us and really the start of I think the next chapter of payroll, which is looking very interesting we've got some.

Fantastic commodity prices driving some incredible returns.

It's a inventory.

We've got the gear to get it done and the people as well so we're pretty excited about the next 12 months.

We're going to put our head down and.

And get that activity done and make sure that we can achieve those fantastic looking financial forecast that we have.

And we'll be back to you every quarter to update you on how thats going.

So encourage everybody to listen in and check the website often.

I'll keep the monthly reports coming.

Thanks again for listening in this morning.

This concludes today's conference call. Thank you for participating you may now disconnect.

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Good day, and thank you for standing by and welcome to the pathos Q3, 2021 financial results conference call.

At this time all participants are in a listen only mode.

After the Speakers' remarks, there will be a question and answer session.

To ask a question. During this session you will need to press star one on your telephone.

If you require any further assistance please press star zero.

I would now like to hand, the call friends over to your speaker today, Darren Hayes Chief Executive Officer. Please go ahead.

Okay.

Well, thanks, Peter and good morning, everyone.

Thanks for tuning in to <unk> third quarter 2021 results conference call.

Before we get started with the call. This morning, 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.

With me in the room today is almost all the Peyto management team, our newly appointed President and Chief operating Officer J P. The chances here to answer your questions.

Kathy Terry John our CFO, Scott Robinson, our VP of business development is here, Dave Thomas our VP exploration, Todd Burdick, our VP of production Lee Curran, our VP of drilling and completions are all here only one missing today is Derek Zemba, our VP of land Who's a home with the flu I believe but I suppose it's that time of year.

Before I get started with my comments today about our results I do want to recognize the efforts of both our office and field personnel. This past quarter, we had a really busy quarter of operations and we drilled some fantastic wells in the quarter just in time for the winter heating season and.

In the most recent rally in natural gas prices.

So kudos to the team for continuing to deliver the reliable energy that albertsons need to keep them warm this upcoming winter.

And we did it with a terrific score for safety and environmental performance, So a great job everyone.

Onto third quarter results operationally as I mentioned it was a busy quarter, we picked up a fifth drilling rig in August and it's been getting up to speed doing things to pay their way.

So now we have five rigs that can run steady throughout next year.

This was important because we are seeing a real challenge in the Canadian industry. These days, both with available equipment, and especially with getting qualified people to work on that equipment.

We'll be a big differentiator going forward for us.

We did drill some great wells in the quarter and two of our expansion areas down in South Brazeau and an area. We called Chambers, we continued to delineate out several different plays there which is important because it supports the long term supply for them.

The new 50 million a day gas plant we're building there.

In our Cecilia area, which is an area. We acquired it started the year. We've had some great results up there that are completely filled the half empty gas plant. There. So now we're offloading incremental volumes to other plants in the area that have X gets excess capacity, but we're also looking at expanding the Cecilia plant with more compression to.

Move more gas through that plants, a little later so.

But can very good up there as well.

So about a month early.

And of course, we're not stopping which means we should exit this year at something slightly higher than that it'll all really depend on how many wells we can get tied in before Christmas.

And then we have a little bit of a Christmas break and then we'll keep that momentum right into the new year and throughout 2022.

Commodity price realizations in the quarter.

Especially natural gas prices are rising.

And they're continuing to rise significantly from this third quarter into Q4 dollars 21 and on into 2022.

As we indicated in the release, our Q4 hedge price is 55% higher than what we just got here in Q3, and our Q1 2022 hedged prices over 80% higher than what we received in Q3 so.

That higher price combined with more production is going to result in very large increases in revenue and cash flow for the quarters coming up.

And really our hedge program is still catching up to the spot price. So we expect to see rising fixed prices for a while as we continue to hedge out the forward curve.

For this winter our gas is around I think 71% hedged with a fixed price for next summer where about 69% of our volume has a fixed price on it so really that gives us a high level of confidence in our projected revenue and cash flow that's going to fund our capital program for 'twenty two.

And our debt reduction program and our dividend that we just announced.

So with this quarter I think we can finally say that the the weaker natural gas prices that we've seen over the last few years are finally behind us.

And op costs were good they would have been lower but we did 10 plant turnarounds in the quarter. So.

That obviously had some costs associated with the Todd can perhaps talk more about those later.

Transport costs were up and will be for the next year due to some physical transport that we signed up for at the border at Empress and on the mainline to Emerson.

Then those contracts will start to roll off as we put some other diversification.

Efforts in place.

G&A costs in the quarter of course were minimal.

Due to the small team and relative size of our capital program and production base.

Our interest costs were down quite a bit as both our debt and our interest rate dropped and that's because of a falling debt to EBITDA ratio this past quarter.

This interest charge should continue to fall pretty steadily as we move forward with the lower interest charges of the new credit facility and as our debt has materially reduced.

And that lower interest charge should really help offset the higher royalty costs due to the rising commodity prices.

In total, though I think we're doing a good job of maintaining our significant cost advantage over the industry.

I think the other advantage we are maintaining over the industry as our environmental performance quite frankly, we've accomplished a lot over the last five years with methane emissions reduction.

Like we mentioned in the release I believe long term that we're going to be able to capture the majority of Sidoti <unk> from our facilities and dispose of that Cotwo and deep underground storage reservoirs of course, that's going to take some time, it's going to take some money and perhaps a bit of innovation even to accomplish all of that but that would be our long term goal.

That should ensure that Pedro and its natural gas is around for a long time to come into the future.

Speaking of a long time it's.

I've been the president of Peyto for 15 years now and it's finally time to recognize a guy that's been responsible for peyto behind the scenes and that is JP vishal.

John Paul.

Course, JP has the whole peyto team behind him for support as he always has and he has the very experienced and seasoned management team in this room to help him lead data into the future.

Well continue to be here for a good while yet serve as CEO and to make the leadership change seamless and smooth.

And lastly, and probably most excitingly for the quarter.

As part of the quarterly release, the board decided to reinstate monthly dividend shareholders of <unk> <unk> per share or about $100 million annually.

Dividend bump.

Anyway Thats.

Pretty much a quick summary of the quarter very solid quarter, both operationally and financially.

And so I just wanted to.

To get to any questions from listeners.

That are participating today, so celine maybe we can throw it open to questions from those listening in.

Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad again that is star then the number one on your telephone keypad.

We will pause for just a moment to compile the Q&A roster.

We have our first question coming from the line of Chris Thompson with CIBC. Your line is open.

Good morning, and thanks, everyone.

So darrin outside of the 15% inflation that you highlighted in your 2022 preliminary budget are you expecting any other inflationary impacts.

Whether it be to your operating costs G&A or otherwise.

Yes, that's a good question and it's obviously topical these days.

Theres, probably two places that inflation comes in.

Maybe you can talk a little bit about the operations drilling and completions on the capital side about inflation.

Maybe we can turn to Todd and he can talk about some of the operating cost inflation that we might be exposed to.

Yes sure.

What's going on right now is just a classic pricing response to low supply and increased demand.

Lack of supplies or is the main driver right now and I think whether you are out there shopping for us for a new F 150 year Youre looking for a string of casing your.

Youre suffering similar consequence.

We're struggling right now as an industry to keep 170 rigs running which is.

Starting late the biggest elements, we're dealing with right now with the shortage of personnel and steel specifically tubular casing and tubing.

This is going to keep a pretty short leash on industry.

And it's going to in turn create a supply issue with our goods.

And that effect has to meet higher commodity pricing.

Drilling inflation itself.

So one of the things, we've put a 15% number and I think thats conservative.

But in reality, it's going to be secondary to most for most operators.

Relative to simply getting what they need to fill fulfill ambitious capital plans.

And those contractors that are struggling for several years.

Got ambitions to returned earnings along with that they're experiencing direct inflationary pressures there labor is going up they're consumables are going up.

And a lot of the equipment sitting in this industry.

The basin has been sitting rack.

It's been serving as a parts depot and Thats been pilfered to the point, where it's going to take a lot of capital to get some of this idle gear back up and running.

Has it been any injected for so long it's.

Its equipment that you can activate at the snap of the fingers. So so our approach really we started gearing off on a different path to most other operators a few years back.

This industry is notorious for this push and pull relationship between operators and contractors.

Everybody kind of trying to hold the upper Hamlin.

When the environment is right. So we kind of veered off a couple of years ago.

We had stable active capital program.

We continue to demand the highest quality personnel and execution and with that we were offering.

We need these guys.

And we reminded them of that throughout.

The entirety of the last couple of years.

So we've had long standing and very transparent relationships and we're confident we're going to see some had been advantageous treatment.

In regards to both supply and pricing on this upswing.

Right now the 15% estimate is just that it's an estimate.

I know that anybody has a crystal ball on where this is going to land.

Price increases on our tubular is alone up swallowed the lion's share of that already.

So that's not to say, we're kind of telling everybody that they can hit us with a 15% price increase right now.

We expect tubular to start normalizing towards the end of Q2 or early Q3.

And that should provide a buffer to allow some of those services.

That point in time, maybe bump up some pricing when we have.

Steve.

Some reprieve in our in our steel price and that should coincide that coincides with our drill.

Drilling rig contract renewals. So so we're kind of locked in on rates. There, we had a little bit of a bump loan pricing with with labor increases wage increases.

So we'll see I think I think we're sitting pretty good through the winter.

Sure.

We're working hard to manage expectations with our contractors and these guys. All I think recognize that <unk> capital program.

And our position on pricing through the last several years as many of them afloat, so regardless, regardless of the broader inflationary picture, we expect to remain.

And our top position relative to the rest of the industry I don't I don't know what else I can really.

Well Im Chris you, probably remember couple of years ago, when we talked about the fact that even though our capital program had shrunk quite a bit we were spreading it around we had four rigs running at sort of 50% run rate to try and keep the equipment warm and that people employed in.

There so that we didn't lose them.

So that's serving us well right now because now we have those same people and that same gear and we can run the plateaued a bit.

<unk> environment.

But we are not subject to some of the other.

Inexperienced that's starting to creep its way back into the industry and that kind of thing so it's.

I think that was a good plan back then.

We're kind of reaping the rewards of that now.

To further answer your question, maybe Todd you can talk a little bit about operating costs with some of the inflation, we might be seeing there yeah for sure I think.

To echo some of what we said is fires.

The service providers that we have out there similarly on.

On the operating side with with some of the contractors that are out there.

Forming services for US we kept them in.

And we've looked after them so.

I think we'll continue to.

With that promise that we'll continue to keep them working I don't think we'll see.

Mccain increases maybe a fuel surcharge here, there that sort of thing, but nothing that should impact that way.

<unk> chemicals, we've seen.

Significant pricing increase done math at all for example.

The market market prices.

Double what it was a year ago.

We have locked in.

We did price we did that in August we typically do that in August when the prices are low.

So thats been our protector.

Net of the remainder of the year significantly although.

It was a higher locked in price higher than a year ago.

It is protecting us a little bit lubricants, we use a lot of oil.

Lubricating oil.

That obviously floats with the price of <unk> to a large part a little bit with CPI as well so we do anticipate.

Increase there.

Powers and the other one.

It's a tough one.

Alberta producers.

70% of its power through natural gas.

Generation, so our price is high.

And we're making more money selling natural gas side. However, we.

<unk>.

Generate power through the grid about at about 90% of our Houston itself.

We're going to feel that on the operating side.

That surpassed significantly.

Dental revenue that we're seeing so overall I don't think we're going to see some inflation, but I don't see it being anything thats really shock.

Great great. Thanks for the color.

Next question for me just in.

In terms of well abandonment and reclamation.

Haven't seen any cash outlays come through on your financials with that so perhaps you could add a little bit of color on company strategy for how it manages its benefit liabilities.

All our wells are still producing Chris they are not ready to be abandoned, yes, theyre going to produce for decades more.

This is getting I mean, we do have.

Odd well that.

Might be a candidate for advancement that we're looking at.

You guys want to jump in on that I'm not sure I think that.

Every year, we spend.

Roughly about $1 million.

Benjamin's or Germany suspension generally lead to abandonment.

Not so much reclamation work, but and we have targeted for the next.

Two or three years to continue to spend that.

The recent announcement by the Alberta government around.

Expectations.

From the EUR would be to for us to spend around $100 million next year. So that's in line with our budgets and what we'll continue to spend but as Jeremy indicated we don't have a lot to do really.

No.

Yes.

In the process right now of consuming our.

Our SRP allotment.

As well, so we're well into that program and Thats, probably another in total with with our phase 500 close to 2 million Bucks.

We're active on that right now.

It's just not significant Chris because.

I would say that facetiously, but the reality is that.

Almost all of our wells are still producing today.

Especially with the higher gas price, even the lower rate wells are still very commercial.

So we just we don't have that liability.

Got you okay.

And sorry last question for me.

In terms of debt levels, so for 2022.

What are you targeting in terms of.

In absolute debt level, and then I guess.

On your estimates what does that translate to in terms of relative to that level of free cash flow.

Yes.

For us it is more of a debt to cash flow target that we're looking at.

And it should be because we could see some commodity price changes throughout the year rates that would change our cash flow projections, but I think.

We are looking to be.

One times debt to EBITDA by the end of next year, I think thats a reasonable expectation.

That's sort of where the industry is gone I think in terms of deleveraging.

And we've got the majority of it really a 2022 cash flows.

Marked up with a lot of hedging that we're continuing to do into 2022, So we feel quite.

Confidence about where we're going to get to in terms of balance sheet.

And that was obviously one of the big drivers in deciding how much dividend we could afford.

Okay. Thank you I'll turn it back.

Great. Thanks, Chris.

Thank you we have our next question coming from the line of <unk> <unk> Sandler Your line is open.

Good morning, I wondered if you could give us an update on the.

Construction of the gas fired electric and.

Generating plant youre going to be supplying.

And some information about.

How you plan to increase production to.

To supply that plant and just review how the gas is going to be a price didn't have that.

Pricing fix and Covid diversified.

<unk> structure, you've been developing in the past couple of years.

Yes, Thanks, David.

Cascade power plant, that's being built by Qinetiq core.

Is right close to our Swanson plant.

We have been sort of tracking their activity. They have a website as well that you can Google and find and they show updates to their activity on that website.

Todd We've got guys that drive by there every day. So what are the guys seeing when they are out there in the field.

We're meeting with Cascade every now and then Theyre, giving us the update.

They're making great progress.

They showed us some pictures of the site this summer.

There.

It's pretty amazing, it's quite a big project and they have got a lot going on a lot of foundations already set.

Getting ready.

Put buildings and motor equipment in as we understand it. This summer we put the final connection into their facility that final pipeline connection to about 350 meters. So that that's been there.

<unk> accommodated some of the construction that they have going on and then we'll look at it.

Work on our pipeline later in 2022 early 2020, so yes, it's pretty impressive there I think from all our understanding there their schedule for their anticipated start up in late 2023.

Are you on that.

Yes, not a whole lot to add.

It's been a very good.

Working relationship with Cascade, and we're really looking forward to.

Applying the gas one of your questions.

Nathan is that I think I think.

David or David one of your questions was the sourcing of the gas.

We've got a very defensible diverse diversified and flexible portfolio. So I don't know.

The real problem in meeting the needs.

Higher.

Infrastructure is very well connected up there and should be able to supply. These guests for a very long period of time so.

Sure.

We'll be drilling continuously into the startup.

<unk>, which is likely going to be it could be early.

Based on the progress, we're making here, but it can and likely will be in 2023.

Yes.

It is impressive what these guys are doing they're starting to move into the big pieces of equipment right now.

We'll get a better gauge on their completion time here in the next during 2022.

Yes, no no small construction project at a $1 billion six or something it's the capital expectation for that facility.

In that order.

Contract Wise David.

Found by confidentiality with our gas purchase agreement with kinetic cores. So we can't really divulge much.

Sure.

Needless to say, we obviously do have a.

Ah contract that ties the Alberta power pool price.

To our realized price, we get paid and effectively in the electrical price, but that translate back to us.

Some sort of realized gas price, but we feel good that the.

The contract that we have with them.

Realize a fair gas price effectively for us with the types of power pool prices, we're seeing.

When we did the contract with them I think Alberta pool prices hovering round in the sort of 30% to $50.

Megawatt hour.

Today, Alberta power pool prices are 90.

<unk> two <unk> hundred 140, 140 150 at times, So I mean, El burdens are definitely seeing that in their power bills every month.

That obviously translates into a much higher natural gas price realization for us.

Ultimately I think by probably 2023 and when this plant is up and running Alberta will have.

So there should be a fairly good tie between power pool prices and what the gas prices.

And hopefully we come out at least fair on that relationship. It is a 15 year commitment to deliver gas to them.

And we've we've committed about half of the volume that theyre going to need.

For that 15 year period, and like Scott said, we've got all our gas plants interconnected. So that we can flow gas from pretty much anywhere in greater Sundance to this facility if need be.

And.

I would really say that we're so advantaged by being directly connected to them, we save a lot of cost pipeline toll.

Anybody else, who wants to supply gas to them has to put their gas at novo Peter payer receipt tool to get onto Nova in Connecticut has to pay delivery told to get off a note with that same gas and so we save both pieces of that tool by directly connecting to them and I think likely we will supply more than just the 50% debt.

That we've committed to it makes economic sense for us to supply more so whether we.

We supply something for the others that have committed gas to them and in exchange, we do some sort of relationship with those parties.

We'll see but.

Yes, we're excited for the plant to get up and running and excited to be a very significant part of the Alberta pool grid here when it comes to electricity.

Turning to capital cost.

Yes, the last thing that the plant efficiency this plant will be.

State of the art.

One of the best efficiencies environment in terms of the.

Energy output per energy inputs.

And that will bode very well on the pricing grid as well.

And the capital cost of any incremental production.

Internally by cash flow.

Absolutely David.

Our plan is obviously to have a portion of our production dedicated to this facility.

And it's a portion of our total that we're projecting.

If you've looked at our marketing slide section of the presentation you can see that we've already provisioned for the wedge of volume that's going to go to kinetic court much like any other diversification that we would look at this as the industrial piece that wed like to get.

In our portfolio, we want to have some gas obviously exposed to.

Eastern Canadian market, some exposed to the U S markets I'm exposed to the industrial Heartland here in Alberta, and then eventually may be even some exposed to west coast LNG.

So it's just a part and parcel of our total diversification.

Okay. Thanks, a lot.

You bet great question.

Thank you we have our next question coming from the line of Nathan Schwartz. Your line is open.

Hi, My question is about pay those green initiatives.

Pedro has done a great job, reducing scope two and scope three emissions. My question is really about scope one emissions from fuel combustion.

The Alberta hydrogen roadmap has talked a lot about things like blue liquid ammonia and blue hydrogen and my question really is how do you look at scope, one emissions and how and when might.

Pedro start focusing on that challenge.

Yes, so youre right Nathan.

The scope one emissions for us are defined as what Todd.

Thats basically whats coming out of our planet.

Burning.

Natural gas or fuel.

So.

Patrick.

The energy, we consume to produce the energy that we sell and in fact right. So we know that every truck that drives around in our field and fuel we know that every drilling rig burns fuel every frac pumper burdens fuel in.

Those are emissions and then all of our plants obviously.

We have gas fired compressors at all of our plants none of them are electric so it's the exhaust from those gas fired compressors if we.

We have power generation at those plants and the gas that we burn to generate our own electricity.

That is the emissions there and.

An opportunity to replace some equipment at our individual well sites to eliminate to try and eliminate the majority of that little bit eventid methane because that has obviously <unk>.

Significant impact in terms of environmental emissions methane being more potent than cotwo.

And so we started there and we've been actively working on that program trying to get our field out at the well sites as clean as possible and now we're starting to look at our web site.

Our gas plants in our major facilities and those emissions.

When we look at that we're looking at capturing of course any.

Releases at those sites, but also any consumed fuel at those sites the exhaust Sidoti if you will.

That's a little big bigger challenge obviously.

Not unlike trying to capture the <unk> from the tailpipe of your car.

We're trying to do it on these great big engines that run our big compressors.

Okay.

So we're just starting to look at that now we've done a big study to evaluate where we are going to put it all in.

<unk> got a lot of deep Devonian reservoirs below all of our greater Sundance area that can easily accommodate all of these emissions once we try and capture them.

So that's good.

A lot of cases, a lot of producers don't have that available disposal reservoir or theyre going to have to ship it.

Two a distant location to have disposed of and that's going to be awfully expensive. So we're looking at right below us.

We would need to drill some disposal wells, obviously, but we are.

Kind of practice to drilling wells.

Having done it for 23 years now.

And really we're looking at bolting equipment onto our existing gas plants to try and capture that.

That technology still.

At its infancy, but.

We definitely see that's the path forward to capturing the majority of our Sidoti <unk> at our gas plants.

Okay. That's helpful. Let me just quickly follow up on I Suppose my question is more broadly.

About the energy that you sell.

And in the past you've talked about using big Sunny.

Blue hydrogen strategy and what I'd ask is.

How do you view the path to blue hydrogen or blue liquid ammonia as a.

Product that you sell.

Yes really it.

That path I think is demand driven.

As there's more and more uptake for those types of fuels.

In our industry and ourselves will be well positioned to respond to that by turning our natural gas into those fuels for consumption.

That obviously requires some process.

Refining process, if you will or further facility process, we can look at either being the owner of that process or we can look at outsourcing that similar to say, how we outsource fractionation.

Our LPG.

So I think.

Obviously, we're going to work part and parcel with the industry.

And with even some of the government initiatives on that but I think a lot of it too has to be driven by the demand side.

There is no point in producing a whole bunch of hydrogen if no one's going to buy it.

And we have to see the demand side pick up and there be a call for that type of fuel and I think we will be able to respond as an industry quite quickly to that call as it evolves you want to add.

Yes, there is interest and you ask about ammonia there is early stage project concept.

In our area and should that project.

Get some traction in.

Forward, we certainly would be.

A candidate to supply gas, but like Darren says most of these things are beyond our scope.

<unk>.

The methane.

The carbon hydrogen bonds to contain the energy, we can supply that to whatever process. It is beta syngas process that makes methanol or that makes.

Essentially ammonia or <unk>.

Hydrogen those are all exciting opportunities that lie ahead, but there are several steps.

In between now and when that happens I think there is there is this one project and we're in early stage discussion on it.

Great. Thank you and I. Thank you for being such a good steward of my money.

Your own.

Youre going to get.

Okay.

Thank you and there are no further questions on queue presenters. Please continue.

Yes.

Great.

We did have a couple of questions coming overnight.

One of them was about the.

The statement that we made in the press release about how our internal rate of returns.

Extremely high right now.

J P. I wondered if you could maybe.

Expand upon that comment.

Sure. Thanks, Darren I think.

At this time a year every year, we have a tendency to go look back at our program that we've drilled to date and have a close look at it at the results and it's.

That's made up of about third.

Not a Q and a third cardiome and a third of our well rich predominantly our extended reach horizontals.

So when we look at that program to date.

Pleased to see that the rate of return of that drilling program. It looks like it will yield is around 112% rate of return, which is pretty impressive and important part of that too is that these wells.

We expect it will somewhat payout already and we will we expect a lot more to payout by year end and into early.

Early next year. So the program has certainly been very successful and of course that includes.

Provision for other costs outside of just the drill complete and tie in of those wells to the pipelines in this plant work that we've done is included in that is sort of a guide.

The major full cycle economics, so certainly a good program.

These successes have happened all across those assets.

Standouts clearly as you indicated earlier the non acute in.

Cecilia Guardian and chambers.

Of course, our will rich extended reach Horizontals are working out quite nicely and thats both in Sundance in the brazeau area so quite.

Quite pleased with that.

Clearly prices a reason why these economics are so good.

But the team has also managed to get both our productivity of these wells up and the costs down and when we look at cost per meter cost per stage cost per ton.

They are all lower across across all our key species.

And then when you factor in the purchase that we made earlier this year.

$35 million, we spent on buying this is sealy assets.

And you're adding the base production that comes along with that our total capital program. This year should yield us around 100% rate of return. So that's certainly the best returns that I've seen since I've been here and.

Why is that important well looking forward to 2022, and we plan to drill a similar program similar sized program similar mix of the species that we drilled this year.

And.

Obviously, adding some inflationary costs.

Lee alluded to and Darren than we did in our press release, but even with those costs.

<unk> costs in there we see a lot of these species.

Turns are in that 100% range, and we expect that and those payments will be less than a year. So it helps take some of the pressure off with respect to.

Commodity price risk as it were.

And we hope to actually partially mitigate at least.

The cost inflation with operational efficiencies as well so does that factor as well so I think the team.

We're ready and they're excited about the 22 program.

Certainly pleased with the results so far this year.

Okay. Thanks JP.

The one other question that came in overnight with respect to.

Sort of our debt profile.

Rising interest rates potentially.

Response to inflation.

We issued that note.

I guess it was after the quarter, but.

It was included in our press release.

Pretty good priced interest rate, but.

How much interest rate risk do we have with.

Some of this inflation pressure, though.

We're all talking about.

Well that's a good question Darren.

Obviously, the interest rates are forecast.

Forecast arrived Canada.

Canada rates probably.

Next year and that is going to affect the underlying interest rate that we pay on our revolving debt.

So as.

As part of our strategy.

Repayments.

So, we're seeing our revolving debt or variable rate debt declining from.

<unk> $700 million right now.

Three down.

<unk> significantly.

By the end of 2022.

Our fixed portion of that is actually going to start to get more.

Higher portion of our mix and thats going to expose that.

She left there.

Variable interest rate risks so by the time.

Interest rates really ramping up in 2022 and 2023.

Just the actual dollar amount that we booked.

Being exposed to that would be quite small.

Therefore.

Well, it's certainly fair.

It's not going to be done.

Material to us.

Okay. Good.

<unk>.

And then maybe just a final question Dave.

Maybe I can ask you about some of the.

The future drilling inventory that we're looking at.

We obviously drilled its started to drill on that new acquired property in Cecilia We've had some some good results there.

Without giving too much away, maybe you could speak a little bit about.

What plays we've started to delineate maybe what interesting things we found in.

What's our inventory looking like up in that area.

Sure Darren.

No.

The Sealy acquisition is really turning out to be a big success story for us.

It's one of those instances, where the upside is unfolding just as we'd hoped and perhaps even better.

The wells drilled table in the press release really doesn't tell the story of the table groups.

By which gas plant they flow too, but <unk> located wonderfully smack dab in the midst of.

Our infrastructure, so gas has a choice of several plants to flow to.

So we've actually drilled eight wells, so far six not accused to outbid for layers.

On what we term as the Cecilia lands plus we have two more not accused to finish up drilling here in Q4.

There's also a three additional wells that were drilled prior to itself.

In the ancillary areas.

Plans are actually also linked to the.

Cecilia acquisition.

And next year, we will have one one rig dedicated pretty much entirely to Cecilia and we hope to drill about 18 wells.

They're in the budget those are mostly non acuity.

But we plan to.

Two.

Also test the liquids rich than vegan. So that's that's that's really going to be a first for us.

<unk>.

In the greater Sundance area. So this is <unk>.

Fair enough up north.

<unk> includes <unk> opportunity.

The actual inventory at <unk> was estimated to be just shy of about 100 wells.

Including 30 non acuity.

50, cardium, but.

What we're seeing so far are giving hints that the depth of the non acute inventory may actually be underestimated and that's really important because they are not accuse we've drilled so far have turned out to be very prolific.

With several estimated to payout in less than a year.

All in all it's a great success story.

And I'm sure you'll be hearing more positive updates in the future.

Alright, good stuff.

Pretty good note maybe to end on.

I don't see any additional questions. So.

Thanks, everybody for listening in.

It's been an exciting quarter for us and really the start of I think the next chapter of payroll, which is looking very interesting we've got some pretty fantastic commodity prices driving some incredible returns.

Lots of inventory we have.

Got the gear to get it done and the people as well so we're pretty excited about the next 12 months.

To put our head down.

And get that activity done and make sure that we can achieve those.

<unk> fantastic looking financial forecasts that we have.

And we'll be back to you every quarter to update you on how thats going.

Encourage everybody to listen in and check the website often.

I'll keep the monthly reports coming.

Thanks again for listening in this morning.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q3 2021 Peyto Exploration & Development Corp Earnings Call

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