Q1 2022 Peyto Exploration & Development Corp Earnings Call
Good day, and thank you for standing by and welcome to the Peyto is first quarter 'twenty to 'twenty two.
Results Conference call.
At this time all participants are in listen only mode. After the speaker presentation. It will be a question and answer session to ask a question. During the 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 conference over to Stuart you today.
<unk> Chief Executive Officer. Please go ahead.
Alright, well good morning, everybody and thanks for tuning in to pay those first quarter of 2022 results conference call.
Before we get started today I would like to remind everybody that all statements made by the company. During this call are subject to the same forward looking disclaimer and advisory set forth in our news release issued yesterday.
We've got a big room full of Peyto management team here to answer your questions today in the room with me is our president and Chief operating Officer J P. The chance Kathy Turgeon, our Chief Financial Officer, Scott Robinson, our VP of business development is here, we've got Dave Thomas VP exploration, Todd Burdick VP of production Lee Curran, our VP of drilling and.
<unk> <unk>, our VP of land is here too in there.
Our new VP of engineering Riley frame is here. So we're all here to answer your question, so feel free to pepper us with questions. When we opened it up.
Before I get started just commenting about the quarter, though I do want to recognize the efforts of our office and our field personnel this past quarter.
For those that care to recall, we had a fairly bitter winter in Alberta.
Over the first quarter with lots of minus 40 out in the Edson area, particularly right after Christmas.
And while most of us basking in the warmth of our homes. It was only because of the hard working people in our industry that kept the gas flowing and the heat in your furnaces and that included the hardworking people at Peyto, particularly our field staff that had to brief that whether to keep the gas flowing and clients running.
So feel free to send me a note of gratitude and I'll pass it along to them I for one was very glad to come in from all the cold winter to a nice warm house heated by natural gas.
Yeah.
And not only did the payroll staff keep the gas flowing but they grew production in the quarter. So that we have BARDA consume so thank you all for that.
Onto the quarter, we had a very busy quarter with drilling and completions pipelining and facility construction all going on throughout the quarter.
Of course, the economics of new capital projects were the best we've seen in a very long time, and so we tried to put as much capital to work as we could.
All of that work resulted in production growing from 97000 in the fourth quarter to 101 five in the first quarter.
And we really didn't see the full effect of the first quarter activity until mid April when we brought on the chambers plant and finished up with all of our Italians.
And then production jumped to 106, and that's about where it's been.
We expect we can hold at that level until we come out of breakup and start completing and tying in the new wells that we've been drilling through breakup.
And so hopefully production will keep climbing from there.
Of course, all of this new production is exposed to spot price and that is way up and it also pays at the minimum 5% royalties. So it has a big impact on our cash flow going forward.
As part of our drilling in Q1 about half the wells were Cardium and that of course was driven by where we had available capacity and wild he and Brasow chambers and it was partly driven by very high oil prices that drove high condensate prices. So we wanted to take advantage of that.
As we move through the balance of the year, we will drill a higher percentage of spirit River wells that will take advantage of the now higher gas prices.
Look to be very strong throughout the summer.
Technically we only drilled three extended reach horizontal wells in the quarter I'm just that's the way the lineup came together, but one of them was a record for us over 6000 meters in total length six kilometers of drilling and over 3100 meters of horizontal lateral.
So that is a an enormous technical feat with the drilling rig and perhaps Lee can tell us a little more later about the challenge of pushing.
Pushing that rope all the way out 6000 meters.
Scott's team was busy in the quarter, taking down another acquisition. This was a corporate acquisition. This time, so we accounted for it a little differently.
You could ask Kathy how that happened.
And this deal had some interesting aspects for peyto. So it wasn't just the purchase of you know some producing wells and undeveloped lands.
Like we did last year, and Cecilia, which actually turned out to be a great deal for us by the way.
But feel free to ask Scott about this latest one.
What else happened in the quarter Oh, Yeah. We are we did record funds flow at over $200 million, that's a new high for us.
The previous record was in Q4 of 2014, when we had I think it was 179 million in funds from operations.
So there's 200 million.
<unk> is now broken and hopefully we can continue to beat that and in subsequent quarters. This year and continue to grow our cash flow.
Our mechanical hedging activity meant that we gave up some opportunity this quarter.
We had a bit of a hedging loss of course, but we all have to remember that we do this mechanically every week every month every quarter and we continue to take that future price off the table and considering that we have close to nine years of producing reserves. We don't really have a lot of it forward sold I think it works out to about a 13% of our.
Our PDP.
PDP reserves that have a fixed price on it today, so there's still a lot left over that.
It gets the option of higher gas prices into the future.
Overall, we're we're finally back to our historic operating margins of greater than 70% and the profit margins of around 35% that's always been.
The strength of Peyto is really high margins.
I'm glad to see that we're back at that level, we've managed to get higher commodity prices and hold onto our cost structure.
So that we're really seeing big margin expansion right now.
And I think if we can hold at these levels that will ultimately drive our return on capital employed into the high teens again, where we've historically been and what we're striving to deliver for shareholders.
I can also say that with.
With where things are going in the commodity price outlook today that we're eager to get to the end of this year.
We will be bringing down our net debt significantly this year and being at the end of the year at a really strong position to look at boosting our dividends to shareholders.
Other means of returning a returning capital to shareholders. So it's an exciting year for us we're off to a great start with this first quarter.
Things are looking really good.
So Victor that's probably enough for me why don't why don't we open it to questions from those listening in.
Alright, 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.
And by the compile the Q&A roster.
Our first question comes from the line Michael Harvey.
B C capital markets. Your line is open.
Sure. Good morning, everybody. So just a couple of bigger picture questions on capital allocation. So the first one is on <unk>.
Cash taxes, obviously, the byproduct of a profitable business, but you got to pay some later this year.
Does that change any of the drivers of how you're running your business that could mean buying other.
Producers for for those Nols are drilling more to get more deep pools or is it just kind of a cost of doing business and I guess the second one is just on the use of cash obviously the market is pretty fixated on dividends and buybacks, but the returns youre getting on your projects could suggest that youre going to get a better improvement to your return on equity despite by drilling those up as opposed to dividend.
But would love to hear just how those discussions play out kind of a.
In the boardrooms as it relates to how to allocate that capital.
Yes, good questions Mike.
The first part in terms of cash taxes.
We do expect that we will pay a little bit of cash tax probably in 2022, we will see how the commodity prices play out but with some of the really high prices that we're experiencing today and if those carry forward into the rest of the year.
Even with the good tax pools that we have accumulated over the years with all of our capital investments.
And even with the accretion of <unk>.
Some pools from this acquisition that we did it started the year, we might have a little we tax bill at the end of the year.
But that doesn't really influence our our investment decisions I think they're.
The rates of return that we're looking to achieve with the capital are both before and after tax good good rates of return both before and after tax so and quite frankly, the economics that we're looking at today with the commodity price forecast and where our cost structures are and the types of wells that we're getting.
We're just driving some fantastic returns regardless of whether we're paying tax on those or not so the incentive is definitely there to put as much capital to work in the ground as we can.
And so the second part of your question in terms of capital allocation.
We would love to do more we would love to take more of our cash flow and put it to work for shareholders because thats, how we truly create value for them.
Giving them back the.
The profits that we're earning on previous capital investments that's great. We've always done that.
With our dividends matching to our earnings.
But in terms of returning more capital to them.
Just means they have to go and find some place to invest it in a the type of returns that we're able to generate by investing it in the ground today are probably better than they can find anywhere else.
We'd love to be able to invest it for them drilling wells. The challenge of course to do that is we're kind of at the limit of the people and the equipment and.
The amount that we can go and do you know we've got the five drilling rigs running today, we've been keeping them very busy I'm glad we picked up that fifth rig.
The last year and brought it into the fold.
That was a very smart decision I think on our part to get that equipment going.
We're going to do as much as we possibly can with those five rigs. This year I think the decision to drill through breakup as part of that we will see if we can get more done and then if that frees up room to do even more later in the year then great. You know, maybe we look to expand our capital program in the back half of the year, we have that option.
To try and do more if.
If the economics are still looking as good as they look today.
The industry, though is it's kind of topped out.
The good quality rigs the good people that can get you the efficiencies that you want to drive these type of economic returns are all working.
And until we really build up a lot more capacity in the industry I don't know that there's a lot more that we can do.
There is always the issue of egress too.
Thank God producers are keenly.
Aware of the fact that last time around we built out far too much supply in advance of expanding egress that just didn't happen fast enough and we call. It ourselves in the gas price took it on the chin as a result, so we don't want to do that again, we want to make sure that the egress is at least expanding as fast as the base and is growing or maybe.
Even faster that would be more comfortable place for a lot of the gas producers. So I think collectively we still have that fresh in our minds and nobody wants to overbuild.
Till the until the takeaways there.
Got you thanks for that.
You bet. Thanks for the question.
Our next question comes from the line of Travis Wood from National Bank. Your line is open.
Yeah. Thanks, good morning.
I wanted to hear you kind of walk through the inflationary pressures you mentioned.
We expect our metrics to continue to improve just despite some inflationary pressure.
Could you unpack on the capital side kind of where you're seeing that on that on the capital spending equation and then could you help us kind of get a better understanding on where you're seeing that as well on opex.
Yes. Good question, Travis so I'm going to turn that over to both JP here talk a little bit on the capital side and maybe even Todd can talk a little bit on the production side about the inflation and how we're mitigating that.
Yeah, So like I think like all companies and businesses, we're feeling the effects of obviously, a rising supply costs.
Everything everything from steel Frac sand and ethanol at all has a different sort of factor here that's going on so.
You know when you think about that all of that stuff has to get trucks are trained as well. So we're seeing a significant increase obviously and they play a role of a transportation cost to get the stuff to to us. So we can use it right all of that is playing out.
And we're seeing that of course, we have a steady had.
State program over the last several years. So the strong relationships, we have with our suppliers, we recognize that they have to flow some of that through to us. So we get that but overall I think we've seen about 10% to 15% certainly on the cost on the capital side so far.
And in Q1, we expected that we budgeted for that so when we look at our program. We you know in our returns.
<unk> out our future returns and the prices that we put into our models into our type curves. So we kind of budgeted for that in our cap efficiency, we are expecting that to be a little higher this year for sure.
I'm hearing a lot about how companies have.
Mitigated their higher cost with improvements to the cap efficiency you went to their to their actual the work they are doing out there but.
You got to remember that we you know one of the lowest cost producers in the basin, where the lowest cost producer in the basin from an operating perspective, and so I think that.
You know Kathy efficiencies are a focus for us each and every day, it's not something that's changed over here. So.
Our natural installation to this sort of rising cost is just the fact that we're starting lower than everybody else.
So you know.
Just the same we're going to continue to do stuff like drilling extended reach Horizontals will will will draw off many as many pads as possible, we'll make use of our tele double rigs versus more expensive triples, and you know, we're certainly going to help that will help mitigate the costs as we go forward.
But you know the prices here still make great returns and we're seeing some fantastic payouts just the same so.
One of the things that we have to remind ourselves and our service providers is that.
Despite the sort of most recent quarter.
These are all forward looking prices and we haven't realized them yet so.
We shouldn't get too far over our skis here with cost creep, if we could control.
That's good I guess, that's more around the capital side, a little bit of the operating costs discussion, maybe Todd you can add a little bit on what you're seeing.
Yes, I think.
You mentioned, 10% to 15% on the capital side and that's pretty much what we're seeing on a lot of the pieces of the operating costs, especially.
Chemicals are probably even higher were able to mitigate.
Methanol were probably about 10% lower than market just given the contracts that we've been putting in place each year in the summer time. So so that's helped.
For sure the market price of methanol in a lot of that corrosion inhibitor chemicals and stuff.
Derived from oil.
Oil and natural gas overseen 20% to 25%.
Market price increases on those but we were able to mitigate that.
I think.
Given that our assets are very.
Condensed close together that helps you guys.
You've got to pay chapters.
Got to buy fuel and that sort of stuff.
Up higher so we've worked some agreements with those guys who have been working with us for a long time, and we recognize that they're feeling feeling it and so.
It allowed them to split them.
Increases.
In place, but we've worked with them to make sure that they're they're in line with the with the with what they're feeling.
It will be able to drop it back hopefully win.
Fuel prices come back down.
It's about efficiency and just trying to be as efficient as we can to mitigate those costs.
Recall tier of that.
A couple of years ago.
A few years back now that we made of infrastructure investment.
In a lot of liquids handling pipelines.
We didn't have to truck as much and that investment is really paying us big time today, because when youre looking at.
Charges in trucking charges going way up.
We don't have that because we've already put in the pipelines that can take the fluids to the central locations, where we need them.
No.
We did that at the time to mitigate the trucking and some of the environmental impact of trucking and the cost of the carbon tax but.
It's going to pay us even more return here because the fuel charge as it gets mitigated as well.
And that's great color and maybe maybe one more follow up just on Capex.
The chambers plant.
That seemed like a pretty good cost considering everything that we just talked about.
Did that come in under budget or was that on budget.
No question it was on budget.
We didn't have a lot of equipment that we.
Hi.
I had planned for another plant until so we had held on to that equipment. So we got a great safe.
Phil maybe you want to look at it that way on that equipment, we had preserved that equipment and so.
We were able to do a little bit of work to it but the preservation keep things in pretty good condition. So I guess so.
So he came on budget some of the labor costs, we even saw costs increase come from the vendor during the construction, which we've never seen.
But they were losing guys sold so we needed to we needed them to keep the people. So we can get the plant done.
Great project all at all.
Recall Travis I wrote up at my earlier this past month about the chambers plant start up and.
That was one of the fastest plants, we've ever built in terms of timeline.
So a testament to the guys to have it all pre planned out and executed.
One time.
Budget.
And even faster than we've ever built a plant before.
You know I had to laugh because I got an email from an investor.
Who lives in Australia.
And he was just blown away that we had you know.
Basically put a plant down and got it up and running in a little over 100 days he.
He told me that you took him over two years too.
Well and tie it in down in Australia.
The speed at which we can move here.
It is important because it translates into more time, producing the cash back to pay for the investment in the first place and shortens our payout time and that obviously improves our rate of return.
So being able to move fast.
As an important feature and I think one of the leaders in terms of how quickly we can get stuff done.
Fantastic Thanks for the color and the detail there that's all.
You bet thanks for the questions.
The question comes from the line of Erin Wilkowski from TD Securities. Your line is open.
Good morning, Thanks for taking my question I have a couple of LNG related questions for you.
The first is we've seen a couple of the Canadian producer site GKN based contracts with Cheniere I.
I guess I'm looking to understand whether or not people would meet the requirements to be a counterparty for these types of agreements and I'm thinking from a size of resource and a credit perspective.
And if the answer to that is yes is this something that you would look to pursue.
I think the answer is yes, we're not as big as tore Molina and art the guys that have.
Signed up.
Some of those deals.
I don't know if the counter parties are looking necessarily for triple B credit with their with their counterparties or theyre looking for guys that have big resource.
Behind them I mean, if it's the latter then definitely we should be a consideration.
We have little over half a bcf a day of production. We do have a very long reserve life. So we can look at long term contracts 15 year type dedications, we did that with our Cascade power co.
Contract, obviously, we've got a 15 year contract dedicating gas to that power plants. So.
I wouldn't think that a long term contract to an LNG offtake.
In that order is out of the realm of consideration for us.
That's why we're we're part of the Rockies LNG group is to look at those kind of things.
I think we still have optionality in terms of which direction, we might look for LNG export.
The West coast to BCE I don't think is a given necessarily.
Because we've just seen that western Canadian producers can also get the transport through the pipe down into the Gulf.
Look at that as an option for LNG export.
Obviously, that's moving a lot faster than the western coast of British Columbia.
It doesn't seem like we're seeing the same kind of cost overruns in the Gulf of Mexico in terms of those LNG facilities in the pipe to get to them that we're seeing to go to BCE. Unfortunately.
But I was just at an LNG conference on Tuesday in Vancouver, and there is a lot of enthusiasm still for BC LNG exports.
There's a lot more.
I'd say pull these days from the.
The Asian markets that would would take most of that BC LNG.
$30 LNG prices around the world as opposed to 15 last time, we were at these kinds of conferences talking about new BC LNG projects. So I think theres a lot more interest in Canada.
And there is still like I say, a lot more pull from the buyer today to hopefully get these projects across the line get things up and running.
This decade is going to be a real interesting one because I think once the first project comes on.
We're going to get a chance to see how quickly as an industry, we can move to accelerate and advance that.
The U S was only exploiting <unk> a day in 2019.
And here, we are looking at 2022, and they're up to 12 go into 16 Bcf a day.
Near horizon, so they have ramped up really fast.
And.
I hope that Canada can do the same once we get going in.
From <unk> perspective, we've got long reserve life, and we'd love to be aligned with some of that export for sure.
Thank you Sir.
You bet. Thanks for the question here.
Our next question comes from Chris Thompson from C. D. C. Your line is open.
Hi, good morning, Thanks for taking my question.
In terms of accelerating the capital spending how much of your original guidance would you then plan to be through by the end of Q2.
And then the second part of the question is how are those working rigs contracted.
Or keeping them working in the latter half of the year I mean, it would seem that the capital increase therefore, it seems likely unless youre going to give up those rigs.
Oh, yes. So good question Riley why don't I turn to you asked you about the allocation of capital and how that budget looks playing out right now.
Don't exceed our capital guidance.
The next couple of quarters look like and I guess, what would it look like to obviously, we would have to exceed our capital guidance. If we keep them running and then maybe we can ask Lee here about the contract yes. So.
As Darren mentioned here, we are going to stay more active through Q2, we're just going to pull some of that capital forward.
Obviously, the reason for us doing that are pretty obvious with.
Prices being where they are right now so.
We will expect to spend a little bit more capital in the next.
Next quarter in the next two quarters than we would have initially as we rollout a breakup here I think we will we'll be ramping back up to five rigs.
And I think the.
The activity will be obviously two rigs in Brazil with the study.
Steady diet of trying to fill up our Cambridge facility and Brad facility three rigs in the greater Sundance area and with that activity levels will be pushing I think towards the higher end of our guidance here at $400 million as we come towards the end of the year. So.
Yes.
I think we had scheduled Chris that.
Q4 capital now is lower than what we had originally envisioned.
Which would be I guess a bit of a slowdown there Lee.
Typically we go into the end of the year and Theres a bit of a Christmas break and sometimes we do shut the rigs down for that Christmas break in mid December that slows things down a little bit.
But the rig companies are going to have worked pretty hard all year long for us is that is that going to be a big issue for them. If we have a little bit of a slowdown in the fourth quarter or Conversely.
Are they ready to just.
Terry right through.
Winter full on no break yes, I think the appetite is going to be strong to keep operating so we'll have to monitor that.
You got to remember these rates have been and are stable some of them for better than a decade.
So the relationships are pretty strong.
Individuals at the field level.
On a team of data was their homes. So there is an element of loyalty now.
We are very respectful of.
That relationship and the revenues that these contractors or are things so.
I think it's I think it's really tough.
Tough to play out until we get closer to that point in time lets.
Discussions about whether that capital program is going to be.
<unk>.
By all means the opportunity to window those rigs out to another operator will certainly be there.
Based on activity levels.
I don't think we'd have a hard time asking peer operators too.
Help us keep our rigs busy year.
And and then get them back in Q1, if thats, what it comes to but well.
We got to kind of wait and see how that shapes up our contracts are written.
We're in a kind of a spring cycles. So.
So we are pretty fixed on what those look like.
For the year I think you asked about some increased to rate. So we've just signed those doesn't make us immune from any flow through increases we have a labor increase another labor increase that will be the third one to crew wages in the last 12 months.
So we've got a labor increase coming on June 1st.
And we.
We understand that.
We've got to work with those pressures.
A tough game, where we're having trouble attracting new people to an industry.
When rolling around in a couple of hundred rigs if you remember back to 2800 rigs in this space.
Kind of scratch, our head world people, but.
So we have a little bit of insulation, we're not completely insulated from that cost creep we have to.
Two.
We have to continue to attract and retain people. So those things are going to flow through.
As far as increasing margins with our rigs were insulated on that front. So.
No.
Like all things its a risk, but but our relationships with these contractors are strong.
<unk> shown our loyalty over the last four to six years of down.
Downturn.
I think that puts us in a different category as many of our peers that are having to throw out top dollar to.
To just get anybody to show up in work.
Well.
I would add Chris that we have to be sensitive to the labor issue right now.
Sure.
As Lee pointed out a lot of the people that are working on these rigs that have worked for us for many years at the same people.
You.
You can't work people to the bone either.
We have to make sure that we're giving people enough.
Down days.
We're not.
Closing ourselves to safety issues are exposing them to any risk.
You guys have to have a break every once in a while and I know that you know.
Even though they maybe haven't worked enough during COVID-19 and they're trying to make up for some lost time.
We still have to be safe out there, we still have to have.
The <unk>.
Good people working for us and we have to respect their needs as well. So you know a lot of reason that we shut down our Christmas is to give you guys a bit of a break.
Make sure that we're not pushing people to heart through.
The winter program. So we may still have a little bit of down days, which would.
Make our fourth quarter, a little bit less capital than that if we were to flow right through but we have to remain nimble insensitive to that as well.
Dan if I could add to that.
There's one more point here you could we could add to that and that's regarding the fact that we would've budgeted for two rigs running through breakup anyway. So really what this is an acceleration of two rigs worth of work through the through the break up period. So you know that's you know maybe.
It may be eight wells or something like that extra beyond what we've planned. So it isn't it doesn't mean, we would have to slow down in the back half of the year, but certainly as Lee indicated do we have that ability if we needed to if we had to say yeah, we're talking about $25 million ish type in terms of capital.
Yes.
Okay.
And then.
Just on similar threat there.
As you do look at increasing your capital spending potentially that comes with additional production.
Is additional production going to have to come with additional infrastructure spending or should we just think about it as purely half cycle economics at this point.
For this year definitely it's the half cycle economics, I think great. We built out the infrastructure in the first quarter here.
That said we are drilling in some areas that are obviously have some long term plans in them and we.
We're hoping that those are going to lead to new plants and new infrastructure.
Our new facility constructions.
<unk> jumps to mind, we've got some wells already there and we're testing out that play area and we're going to drill some more and hopefully we can get to a critical mass there where we've got a new station going in.
Yep the meter station arguably a new gas plant going in.
Gear might be a little tough in terms of timelines. So we have to plan in advance and maybe we can shuttle shuffle around some of the existing equipment that we have.
We've got a Galloway plant, that's just sitting there.
We've got probably some spare equipment and this Aurora plant that we purchased.
With the corporate acquisition so.
We can we can potentially take advantage of that to them.
But we don't envision any more big facility projects this year.
Just like you say half cycle economics.
We've got some running room.
Greater Sundance and.
Down in in Brian Chambers area with the Aurora.
And we've got room in Brazil.
We'll be able to get through the year.
Bill or up.
The plan.
Great. Okay. Thank you.
Thanks, Chris.
Thank you we have a follow up from the line of Michael Harvey from RBC capital markets. Your line is open.
Yeah sure. Thanks, just just a follow up here on I think Travis. This question. So you mentioned that 10% to 15% inflation, which would be pretty much close to best in class and I was just trying to line that up with the cost table you put in your release, which would seem to suggest drilling is up <unk>.
17% Fracs up almost 30, so I know, there's some differences in timing well type plagued all this kind of stuff, but maybe you could just sort of.
Square the circle for folks who might be doing the same simple math we are.
Yeah, you bet, Mike and that's why we made the comment that that was really driven more by species than it was.
By service cost.
Cardium well typically have shorter laterals.
We're trying to get as much frac intensity on them as we can but the extended reach horizontals, obviously dragged down that cost per meter.
Big way.
Both on a per stage basis and on a per meter drilling basis, and we didn't have much of that in the first quarter.
We plan to have a bunch more spirit river extended reach horizontals in the balance of the year and so that should help.
Stretch some of those costs out do you guys want to add to that.
I think if you'd look at the you look at that table that includes all of our all of the wells that we participated in so there's a couple of not.
So a few non operated wells that we participate into the costs were significantly higher so from what we control and going forward.
C cost.
Going forward much better than that I think Lee do you want to add to that yes sure.
Good point, there is a clear representation.
And the data we have that shows our relative.
Relative advantage on cost structure relative to our peers.
The opportunity to participate in some non op working.
That clearly illustrated.
The advantages of our cost structure relative.
To some of our peers up there.
Later brass area.
The biggest elements.
Cost creep that is a little concerning.
I wish I had a crystal ball on it.
Steel is <unk>.
We have watched steel alone.
Almost doubled basically doubles.
From its lows of about a year and a half ago.
Since that point in time.
Yes.
Mill capacities.
Has been a little restrictive they've scaled back obviously.
Global economic concerns.
Got us to a point, where there was really no.
Excess inventory on the ground. So we didn't have a position if we choose.
Chose to do so it's a really load up on LOE dollars pipe.
It had to be pretty predictive of how the future was going to unfold.
So now it's just in time delivery.
And with that comes some significant cost increases we're getting to a point.
I hope that that has stabilized and we start to see some retraction in that pricing capacities are expanding so.
I don't think we will see it until the last half of the year, but but we're optimistic about that.
But our cost is very sensitive to that on the capital friendly around a lot of a lot of pipe in these wells.
And with that we.
We're going to continue to evaluate designs and maybe scale back on.
On some of our designs and see if we can minimize the amount of pipe we are installing.
But that's a big factor in it.
A big Hunk of our overall inflationary pressures just as one single line item.
So Mike when you think about this decision to accelerate into the quarter, it's kind of an easy one if you say well, let's take $20 million or $25 million of capital that we were going to spend in Q4.
<unk> has some real risk of inflation on it and let's just pull it right into Q2, where we know where the costs are.
And we don't have to then risk it that it's going to cost a lot more.
When we get to Q4, if it turns out that the inflation isn't as bad as we feared then we can add some more capital as the program. If it's worse than we hear then are we glad that we did things a lot earlier in the year that when they cost cheaper.
The part about it with especially with this deal element is we have to remember.
We have Mel allocations.
There are a lot of.
Peers or competitors out there that simply can't get it.
So we have our allocations we have.
Trusted business relationships and so despite the price the price is one element of the ability to actually.
The goods is pretty critical right now too, which becomes a natural governor on the industry activity.
I mean, you can't drill well, if you can't get the casing and tubing.
Right. So is it fair to say that.
The Frac cost is.
Is considered the increases in frac costs are considerably more than those of the drilling cost even.
Including the effect of casing prices is that fair or maybe I'm, just pulling too much.
Applicable.
Were just reading into the math for the quarter there just the stage count numbers.
The individual wells that we drilled.
Some of them might've been a little shorter and lateral lengths and so then you don't get as many stages off that you want to in those wells.
So just the average math this is skewing the numbers a little bit I think let's not read too deeply into that ratio just for this quarter.
Let us.
Get the rest of the quarters for the year done and I think we'll see that.
Per metric costs actually come in line with.
And along the same lines as the type of inflation that we're expecting.
Makes sense thanks for that.
You bet.
And once again Thats star one for question number one.
Our next question comes from the line of Nathan Schwartz is a private investor Your line is open.
Yes, a quick question about share count can you provide.
Provide some detail on the dramatic increase in basic and fully diluted shares outstanding.
Should we expect going forward for the dilution.
Second dilution to be an annual event.
Oh, that's a good question Nathan and we have seen our share count creeping up here over the last few quarters.
Directly resulting from our compensation program, our stock option program.
So employees.
Who have receive stock options over the last couple of years at a much lower share price are now starting to see their options in the money and so they're taking advantage of those.
Glad to see it. It also means our share prices going up so shareholders are enjoying that rise in share price.
Typically our option program out in front of us.
Our expectation is we're going to have.
No more than about 5% dilution on the whole thing.
But stock options are.
Performance based compensation.
<unk> that is used throughout our industry.
Tend to have them.
Here at <unk>, not only to Incent everybody to.
Do their best to deliver the results that should make our share price go up but also you know it is.
It's hard to hire people away from other companies that have stock options. If you don't offer the same so.
In terms of the compensation package, we have to somewhat be aligned with the rest of the industry to be competitive.
For for new employees.
But that dilution that you are seeing when we calculate fully diluted.
Metric, we're assuming that all of the outstanding options are exercised.
If theyre in the money, which.
The current time, they all are new options that are awarded today of course, our share price has to go up for them to be in the money.
And we fully hope and expect that if we continue to execute as well as we have been at our share price should should reflect that success.
Okay, great. Thanks.
You bet.
Thank you once again to everyone for questions.
We have no further questions in the queue I'll turn the call over to Dan for any closing remarks.
Okay, well that was.
Good call lots of good questions on the quarter.
It's been a busy.
A busy quarter of releases and today I think it's a busy day in terms of conference calls and whatnot. So.
I think we will probably just wrap it up there I think we covered.
Most of the pertinent issues of the quarter.
We had a very good quarter.
By all measures.
We're pretty excited about the balance of the year as you can hear in the voices here.
We are we don't need these fantastic gas prices to carryforward, even $4 on the.
The far end of the futures curve is has a fantastic price in terms of our economics, but.
We're sure going to love it when we can get seven or eight bucks too.
This is.
A bit of a whole new world for us and it happened quite dramatically.
We we only made $212 million of cash flow in 2020, and we just posted $203 million. This quarter. So that's an enormous gain in the last couple of years.
And we really didn't even get the full a full bank for our Buck yet, which we'll get to you in subsequent quarters. So it's an exciting time to be a gas producer.
We're going to keep doing our part to try and have.
A lot here in Western Canada that we can hopefully share with the rest of the world.
The screen responsibly developed natural gas energy that.
Peter was known for so.
So thanks for tuning in and we'll be there.
Back to you in August with the second quarter results after breakup.
All of our drilling results and how we're doing and of course watch our website through my monthly report.
You can follow along how how it's going.
Thanks for tuning in and we'll talk to you next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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Yes.
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Okay.
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