Q4 2021 Peyto Exploration & Development Corp Earnings Call

Good day and thank you for standing by welcome to the pay those year end 2021 financial results Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session you'll need to press star one on your telephone.

I would now like to hand, the conference over to your Speaker today, Darren Gee, Chief Executive Officer, you may begin.

Well, thank you very much Kathryn and good morning, ladies and gentlemen, thanks.

Thanks, everybody for tuning into Pedros fourth quarter and full year 2021 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 that was set forth in the company's news release issued yesterday.

In the room with me today, we've got the entire Peyto management team, our president and Chief operating Officer J P less ounces here to answer your questions.

Kathy Turgeon, our Chief Financial Officer.

We've got Scott Robinson, our VP business development, Dave Thomas our VP exploration, Todd Burdick, our VP production. So you can ask them all questions about the the operations are there going be current our VP of drilling and completions is here to answer your questions Derek Denver or VP of land this year as well and then we've got our newest V. P. Reilly frame who's our VP of engineering.

They're all here to answer your questions.

For both the quarter and about the ear at about payroll.

Before I get started with my comments about our results today I do want to recognize the efforts of both our office and field personnel this past quarter and for all of 2021 for that matter.

<unk> had a busy quarter of operations, we drilled some fantastic wells and we hit all of our year end targets for production and costs. So kudos to the team for continuing to deliver reliable energy dwell burdens.

It's life saving energy if the truth be told and considering we had several minus 40 degrees C days in Alberta This past winter.

I know I for one I'm very appreciative to be able to come back inside my Nice farm house, when it's like that outside.

And it's something that really none of us should take for granted and the reason that we have that luxury is in no small part due to the hard working people here at Peyto.

So great job everybody.

Okay onto our fourth quarter results.

Operationally as I mentioned, it was a busy quarter with the strengthening natural gas prices, we shifted more of our drilling to leaner gas formations in the spirit River.

How to queue in the filler the oil rich formations made up close to 70% of the targets that we drilled in the quarter.

That of course brought on more gas and liquids in the quarter and then we also had an outage at a frac plant during the quarter so that.

Forced us to.

Keep some of the liquids in the gas stream.

Our species mix of formations has changed once again the first quarter 2022. It is more focused now on liquids rich Cardium I think we've got about a 50 50 split between Cardium and Spirit River in the first quarter.

So that we can take advantage of some of the high oil prices and the flushed condensate that comes from the Cardium well. So we should see our our liquids percentage rise again as those wells come online.

The five drilling rigs that we have running they ran well through the fourth quarter and we exited the year above just above our 100000 BOE a day target, which was really just in time for winter gas prices to take off.

We were also active buying new land in the fourth quarter, that's something that we hadn't been doing for a while particularly when land sales were shut down.

So we added a more drilling inventory to the hopper for the future.

75 locations that we internally identified.

Our on those lands.

And I think sometimes people forget that a big part of the Peyto strategy to go out and find our own drilling prospects that we can develop ourselves.

But that's the way we've always done it for the last 23 years and I suspect that's how we'll keep doing it for the next 23.

The other thing we do ourselves just build our own facilities and we started construction of our 11th gas plant in the quarter down into a new area itself the brazeau called chambers.

We prep the site and pounded piles and got ready to receive all the equipment that we were moving out of inventory.

That work has continued into the first quarter and hopefully we will have that new plant in service by the end of the first quarter.

And have more processing capacity down there.

I think the team did a great job controlling costs in the quarter as well outside of royalty costs of course that rose with commodity prices all our other cash costs were down 10% year over year.

Aggregate had much lower interest cost and lower G&A that offsets a little higher transportation costs.

Or is that a higher transport got us some higher prices.

So that was worth it but it's all it all or our cash costs before royalties were just 79 cents per mcf.

For Opex transport G&A and interest are by far the lowest in the industry.

And we think we can keep those costs before royalties close to that level in 2022.

So a fantastic job guys controlling costs.

Part of what's helping there of course is better utilization of our facilities. We have this incredible.

The incredible infrastructure.

Asset that we get to fill up.

We have capacity in it and so we're filling that up and of course as we fill that up we get much higher utilization.

And lower per unit costs, and that's just one of the benefits of owning your own processing plants.

On the commodity price side, we didn't realize the full benefit of the price rise over 2020 one as much of our production was previously hedged as per our mechanical hedging program.

But we will continue to take the future price off the table.

As we always do which secures our revenue for planning purposes, and so our realized prices are expected to continue to rise I suspect it will.

Probably come under some criticism for our hedging losses right now, but this program has delivered over the longer term we have been doing it this way since 2003.

And we're in this game for the long run.

We truly believe in natural gas is the future and so we need to be consistent with this program for it to pay off over the long term.

We.

To lower our debt with excess cash flow long term debt was down a little over $100 million in 2021, and really that's just to start we expect to significantly reduce our debt again in 2022.

So that by the end of 'twenty, two we should have less than one times debt to EBITDA, which is the strongest balance sheet paid or will have ever had in its history.

After that I expect we should be in a position to start raising our dividend again.

Especially since our earnings will have also grown very significantly over that time.

So all in all a great fourth quarter, a very good 2021, particularly considering where we were a year ago.

Cash flow is way up our earnings are way up and our margins are much better.

Our capital efficiencies, particularly on the organic side was the lowest ever at 8000 of flowing Boe.

This past year and our finding costs.

D. P. F. D&A costs were 97 cents, which is again the lowest in the last 19 years.

So efficiency wise, we're doing a fantastic job and.

We're in a I think a very strong and advantageous position right now.

And that's only going to get better as we go into 2022.

That's probably enough with me ramble on about the quarter Katherine why don't we stop there and throw it open to questions questions from.

Investors listening in.

Thank you as a reminder to ask a question you will need to press star one on your telephone.

To withdraw your question press the pound key.

Again, if you would like to ask a question press. The Star then the one key on your Touchtone telephone.

Please standby, while we compile the Q&A roster.

Yeah.

And again, if you would like to ask a question press. The Star then the one key on your Touchtone telephone.

Okay.

Well, we have a question from Nathan Schwartz with he's a private investor Your line is open.

Oh hi.

Two questions in the past you've written in your monthly report about.

Potential to term out more of the debt.

I Wonder if you could give us an update on that your efforts there.

Second question is with the stock where it is I wonder whether stock buybacks or potentially in the mix.

Thanks, Nathan great questions. So first on the term debt.

We do have a $415 million.

Sure of term debt right now.

Got it.

Our total debt just a little over $1 billion, so not quite 50%, but a very good portion that's termed out various renewal dates over the next I think about seven years on average I think the interest rate is just around 4% on that.

So a good coupon rates.

And yes those are with.

A few large insurance.

Insurance companies so good counterparties.

They have.

Indicated they're very supportive of Peyto and want to continue the relationship we have with them.

Specifically, we termed out a renewed I guess one of the notes.

When was that last October .

For another.

Seven years, so we have good support from them and Theyre offering us pretty good terms.

We're sort of aggressively paying off our revolving debt right now.

We will lower that quite.

Quite significantly in 2022.

So we really have to I think decide at some point probably towards the end of 2022, just how much debt we want to carry going forward.

And what that blend of debt will be in terms of whether we want long term fixed debt or whether we want revolving debt. The easy thing obviously used just to keep paying off the revolving debt and then we could retire the term debt as it comes due.

But you know some of that term debt is quite attractive capital very low coupon rates and I think if interest spreads don't blow too badly and we can continue to access capital at that low cost than.

And then it makes sense to.

To take advantage of that.

As I mentioned, our balance sheet is going to be the strongest it's ever been by the end of 2022 and so.

You know I don't think we have to pay off more debt necessarily.

But.

We're all aware of the sort of define the oil and gas movement. That's behind the scenes, that's putting pressure on the banks in particular, and we definitely don't want to get caught up in that so we wanted to make sure that where.

We're in a strong position moving.

Moving forward with respect to our debt.

But the other thing is as we're growing.

Probably going to be close to 110000 Boe's a day by the end of this year.

And we're planning a similar capital program at this point, probably likely for 2023, so that would deliver some more growth.

And that would really put us in a position.

To look at what were what sort of debt rating, we'd be at and I do believe that probably sometime in 2023.

We'd probably be very close to being triple b minus or.

Investment grade, which opens the door even more for.

Attractive.

Very attractive pricing on longer term debt.

I think that's something we definitely want to look at.

So it's a that option is for sure on the table.

But again, it's all competition for capital or for or for our cash flow I should say I mean, do we do we put the money into the capital program do.

Do we pay down debt with that do we.

Payout dividends with it or to your second question do we buy back stock and so share buybacks, we've had and in CIB in the past we didn't act on it but we have had that in place in the past you know that.

One other lever, we can pull to return capital to shareholders.

Debt repayment dividends and share buybacks.

And so it's nice to have all this competition for the capital.

And quite quite frankly, the capital program and the returns that we're generating on dollars that we're putting to work are fantastic as well so.

That's great tension to have on the cash flow.

I think we will get this this debt reduced in 2022 and then we'll look at does it makes sense with where the share prices at to put in an NCI would be.

Okay. Thank you very much.

You bet. Thanks for the question.

Thank you and I'm showing no further questions I'd like to turn the call back to Darren Gee for any closing remarks.

Okay. We did have a few questions emailed in overnight. So I do want to address those the first one was with respect to our big Sunny storage reservoir was there any update on that and I.

I think for an answer there I might just turn that over to Scott Robinson, our VP of business development, who has been looking after our big Sunny play.

Hey, Scott can you tell us what their thinking is sure Darren Thanks for the question whoever has stood out there.

Big Sunny.

We.

We acquired that asset a few years ago.

<unk> market was.

In turmoil.

We still look at it as being a very.

Valuable future component.

<unk>.

The cost to convert it to a full storage scheme, but we haven't acted on any of that at this point in time I think were just reserving it for that purpose, we spoken in the past as well.

Although possibly deploying that for speeds for <unk>.

Storage and sequestration.

Since that time, we've studied a number of other reservoirs and I don't think big Sunny would play into that although it is situated by one of our gas plants. So you never know, but I think our preference would be to continue to keep that reservoir on the excuse me on the shelf as a potential future gas.

Gas marketing diversification.

Asset.

If we choose to invest in it so.

The gas market is very dynamic has been over the last few years I think we'll just watch it for a little bit further here.

Make any commitments to.

Firm direction on that.

Yeah.

Okay. Thanks, Scott.

Yes, definitely the basin is growing so.

Likely over the longer term, we are going to need more storage.

So thats the exciting asset has always wanted to have in our back pocket.

Second question that came in was with respect to the Cascade power plant and our ability.

<unk> to potentially supply more than just our contracted volumes there.

Todd do you want to talk a little bit about where we're at with hooking up to Cascade, where they're up maybe sure. So.

We get.

The updates and everything appears to be on schedule from there and as far as the information that we get.

We've purchased most of the pipe for the pipeline that we will start putting that in.

Q4 of this year.

They'll have enough.

Infrastructure to provide.

More than what we've contracted with Cascade now so.

Allow for some flexibility in the future depending on.

Sort of play out.

Going forward.

We didn't get any connection to them in the summer time, I think we talked about that.

Q3 announcements.

We do have insight to their site.

Sort of waiting for them to go.

Contact us when they are ready to start.

Yes.

We'll be there when they're ready.

What is the latest data we've seen from them.

Their project however, they do they've got all their major equipment would suggest.

And I think.

The turbines in.

Working on there.

In January or so.

A lot of the buildings are.

Alright.

Some of the buildings can be put on until they get that.

Thanks.

But.

All of the meeting.

Yes.

So they are not expecting any major delays or no.

Quite exciting this teach that they're at right now.

A lot more certainty.

That's a 2023 startup.

They mentioned they were at their full.

Pete manpower right now.

Yes.

Overtime.

Okay, that's great to know considering how tight manpower is out there that you guys have really got all their people in place.

Just as a reminder to those listening in that Cascade project.

Contracted to send them 60000, Giga joule today gas purchase agreement, we have with them for 15 years.

And considering where power pool prices have been over the last year.

Realized some very attractive.

Natural gas price realizations for that Guy So we're quite excited about.

Being able to supply the gas for some very clean some of them most efficiently produced electricity in Alberta.

We're looking for even more opportunities to do that here at Peyto.

One one other question that was brought up but maybe I'll ask this of of Derek Kerr VP of land.

We talked a lot about our Cecilia acquisition over this last year, how successful we've been with that.

We just obviously closed another acquisition here a small one tuck in that it gives us opportunities.

We bought a bunch of land in the year 44 transactions we noted.

But we do we do other deals Derrick behind the scenes that we probably don't talk much about it can you elaborate on any of those yeah for sure.

In addition to the 54 gross actually requiring Cecilia.

And the 44 sections acquired account sales. We were also able we're also active on the smaller tuck in deal front.

In total we added an additional 24 sections through farm in swaps Poolings and on these lands pedal is currently identified drilling.

Drilling locations in which we were already able to drill a total of 14 wells from multi year.

While the business development team continues to pursue pursue larger asset deals like sincerely in Brazil.

Our various teams continuing to complement those efforts in 2022 with ready to drilling inventory through farmers cooling swaps landfills and other.

Tuck in type acquisitions.

Oh, that's awesome.

Okay.

I guess the only other.

Question I had actually came from an analyst last night.

They were asking about.

With these current commodity prices that we have and obviously they are changing quite dramatically week by week here as geopolitical events unfold around the world.

But the question was.

Payout times have shortened even more for a lot of the oil guys.

And you know how our economics in terms of our.

Future payouts in our rate of returns looking and so maybe I'll ask our newest vice President Riley if he could provide a little color on just what are the sort of most recent.

Economics that we're running based on the strip that we see today and what kind of results are those showing us for type curves Riley yeah. So we're seeing some really good rates of return across almost all of the species, both liquids rich and the gastric stuff.

Almost everything that we're doing is over 100% rate of return with with payouts under a year here. So our program for the 2022 year here is going to look a lot like last year as far as what we're going to Darryl and <unk>.

Despite the.

New plant capital that we have in the program as well as some inflationary pressure, we expect to see some great returns. So the team is looking forward to another strong year here in 2022.

Awesome.

Alright, well.

If theres no more questions Catherine.

I want to thank all the listeners for listening into our conference call. This morning.

We do have one question from Michael Beall with Davenport. Your line is open.

Alright, sorry, sorry for the late entry.

If you could just remind us I'm sure. It's in here somewhere roughly what percentage of our 'twenty 'twenty. Two output is currently hedged and then if you could just talk a minute about the longer term opportunities for gas from ire fields.

Finding their way into the export markets, just kind of remind us.

What's going on in that world and maybe the timetable sorry for waiting till the last minute.

No problem, Mike good questions. So yeah, we've got about a 68% of our gas hedged for this winter.

We're hedges that we started putting in place a year ago, and we sort of slowly layered in over time.

To protect us, we hear and obviously the price rose a lot as well.

Went through last summer and into the fall.

But we've got.

A pretty nice.

Tractive price for that.

The remainder that's floating about a third of our gas that's floating through this winter.

Has.

Basically diversification to three other markets, we've got a little bit exposed to the eco spot market.

And we always need to have just a bit exposed even though it is covered through summer Empress service at the border and case Eco disconnects.

We do need to have a little bit of operational flexibility. So we don't want it to physically commit some of that volume just in case, we have a plant go down or something on any given day, but we do have more than enough service at the border to make sure that we don't get caught with any equal price disconnections are about half of that unhedged volume this winter.

Headed down the mainline halfway to Emerson.

And then we compare that with other synthetic when we choose to get it to dawn or great lakes or wherever you'd like to send it and then about 12% to 15% of that volume.

Unhedged volume heads off to the venture market. So that's just outside of Chicago.

This coming summer, we've got a little over 75% of our gas already hedged fixed prices on that.

I think the average price there is just a little close to three box.

So it's less than the strip, but still a very attractive price for our economics and relative to what we've seen in the past too.

And we'll see what happens with this summer. Despite the fact that the strip today might choose something better than that you. Just don't know until you get through the summer what the prices will actually end up being.

The 25% that isn't hedged over the summer again, a lot of that heads down the main mine to Emerson.

To venture and then we've got the rest exposed there at Empress.

And then next winter, we're starting to layer in hedges for that period to that price has come up.

We've been taking advantage of sort of the forward curve flattening out a little bit and rising. So we've got about 60% of next winter locked away I think the price. There is 345 $3 40, something like that so pretty good pretty good price for winter.

And we will continue to layer on on top of that so that by the time, we do get to next winter, we wanted to probably have about 75% locked up.

And then again on the <unk>.

The hedge portion is dedicated down the pipe to 90.

Nymex or venture Dawn market. So we're not exposed to really any ACO disconnects on any of that volume.

And then beyond that it falls off a summer 'twenty three we are starting to lay some hedges in again the curve is in pretty steep backwardation, so were slow and sort of picking up some of those future prices, but we do want to sort of layer those in over time.

As we always have and.

Is that forward curve flattens out a little bit and starts to rise on just overall north American demand and supply will continue to to hedge that period out as well, but we have very good diversification in until <unk>.

We get out into 2024, we do want to lease some more.

Probably basis deals into.

To Nymex and Chicago markets, two to protect against any dislocations in the ACO market and then really beyond 24, we've got the LNG, Canada project kicking in sometime in 'twenty five probably late 'twenty five.

That is going to be quite a dramatic change to the ACO market to have significant volumes heading the opposite direction you know.

The majority of the exports coming out of the Western Canadian Basin go either east yourself.

And so for us to have a completely new direction for exports going West I think is going to put some interesting tension on that eco market and so we may well want to have a lot more volume.

Right back here at home selling into the local market.

When that tension to rise.

We do have a little bit of oil hedged as well Mike.

We've got some <unk> that we've been laying in is well it's a good it's.

Not a perfect hedge for our products.

Condensate trades as a bit of an offset to oil but you.

Can't hedge the condensate directly so the <unk> is a slightly dirty hedge.

But we do lock, our butane and as a direct offset to <unk>. So when we walk the WTO then we get a direct butane price.

So we are starting to lay some hedges in on the oil as well. Obviously these are some fantastic prices for oil and the backwardation in the curve as it slowly slowly flattening out as well so it looks pretty attractive you know you can get to $97 oil rate out for four or five years now.

Alright, so thats.

Where we stand on the hedges you had a second question.

Second question dealt with the.

The 2025 time Horizon, you were talking about where.

You could hit a different direction and ultimately I guess, an export market I presume.

Yes.

One of the reasons in our diversification that we've used a lot of synthetic transport.

Because of those are short term.

Financial ways to access other markets, we like the basis deals.

They're just a fixed cost to get to a market and then you can you can hedge out that market or you can float at that market.

But it's short term and that's the great part about it if you were to do physical pipe deals typically the contracts are for much longer term 10 years or more and.

We need to be nimble, we need to potentially be able to redirect the gas in the opposite way.

Depending on how the market evolves here in Western Canada.

Uh huh.

Thank you and last question, while I've got you based on where we sit today would we expect to repay something on the order of 150 200 million in debt.

I think we have higher targets than that in mind.

Right, a bit maybe double or more than double that alright. So yeah. We've got.

With the free cash flow that we look like we're going to generate in 'twenty. Two obviously, that's based on the forecast with the strip pricing today and prices change, but yes, we're looking for a very material debt repayments in 2022, like I said that would take us down under one times debt to EBITDA.

For the year.

Just wanted to hear you say it thanks a lot.

Yes.

It's looking really good it's definitely one of the goals for 'twenty two.

Alright.

Good job. Thanks, so much thanks.

Thanks, Mike for your question.

Thank you and there are no other questions in the queue.

Great well, thanks, everybody for listening in 'twenty, two is going to be an exciting year. So check back in on the quarters. When we have our calls and we should have lots to talk about.

It's steady as she goes at Peyto manner.

Managed to survive some of the nasty gas prices over the last few years and it's time to really take advantage now because.

We've got huge margins that.

If we can keep our costs down and enjoy all of this price rally.

They're going to deliver some fantastic results for shareholders too so.

Thanks, again, and we'll be back to you here in a couple of months.

This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

Yeah.

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