Q3 2022 Peyto Exploration & Development Corp Earnings Call
Yeah.
Good day, and thank you for standing by and welcome to pesos Q3, 2022 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 will need to press star one one on your telephone please.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Darren Gee, Chief Executive Officer.
Great.
You kind of cut out there little bit Justin hopefully, we're still all with you.
Good morning, ladies and gentlemen.
Thanks for tuning in to <unk> third quarter 2022 results conference call.
Just and can I, just confirm that were coming in loud and clear.
Yes, sorry did you hear my introduction I apologize.
Not a problem you just cut out at the end I just wanted to make sure we didnt lose the lines of your lives.
Super well, thanks, everybody for listening in.
Before we do get started today I would like to remind everybody that all statements made by the company. During this call today are subject to the forward looking disclaimer and advisory set forth in the company's news release issued yesterday.
In the room today, we've got the entire Peyto management team, our president and Chief operating Officer JP lower Arps is here to answer your questions as is Kathy Turgeon, Our Chief Financial Officer got Scott Robinson, our VP of business development here, Dave Thomas Our VP exploration is here Todd Burdick, our VP of production and Lee Curran, our VP drilling and.
Shneur, both here and answer your questions on operations.
Derek <unk>, our VP of land or IV frame, our VP of engineering or here in our new VP of finance David Carlson. This year. So everybody is in the room ready and set to go for your questions.
Before I get started with my comments about our results, though I do want to recognize the efforts of both our office and field personnel. This past quarter, we had a very active quarter drilling and completions pipelining activity. We have some land deals. Some acquisitions. So we were busy firing on all cylinders, even our marketing guys where happiness.
Last quarter with all the volatility in commodity prices and egress opportunities that existed.
And of course, our exceptional field staff kept everything running smoothly. So a big thank you to all of those for that effort.
Particularly <unk> 20 below in Alberta, and we all rely on natural gas to keep the lights on and heat our homes and survive the winter.
So on behalf of all El Burton. Thank you all for giving us that security.
And I suppose speaking of security in that freedoms, we all enjoy I would also like to thank all those that have fought so valiantly to give us that freedom Tomorrow is remembrance day, which is the official data remember, but we are thankful everyday for their sacrifice.
So please remember that with us.
Onto the quarter as we mentioned in the release, we drilled in most of our core areas and into many different formations in the quarter.
That's important because we.
As we diversify both.
Geographically, adding geology, we eliminate a lot of the contingencies between wells and we tend to reduce the risk in our overall drilling program.
It really allows us to pick the very best of each area in each area and each zone.
And those results are starting obviously to show now we drilled some great done vegan wells in our Cecilia area, which is a new play for us and we drilled in several different zones in brazeau that proved up even more of the future inventory down there.
Our average well in the quarter. It was almost 5000 meters measured depth, which is the longest we've had on average and thats amazing over 600 meters of horizontal lateral on average.
And of course that average was up because a large percentage of wells and brasow or were in <unk> and the formations are very deeper there. So we have to drill a little bit deeper to get to them.
Our average well cost was also a bit more expensive because of those deeper wells, but there are some big wells down in Brazil to make up for it. So there is a reason where we're going deeper.
We also saw our costs on a per stage and per meter horizontal lateral were up.
Partly due to service cost inflation and partly due to increased frac intensity.
So because of the increase in more expensive wells that we've chosen to drill in <unk> and because we've built a disproportionate amount of facilities and large diameter pipeline for this year, we've had an increase to our capital budget for this year.
But thats, Okay. Riley assures me that the rates of return we're generating on all these wells and Brasow are fantastic.
And some of these new place we are proving up and all of this infrastructure, we're investing in will serve us well for many years to come.
We also closed a very strategic property acquisitions <unk> during the quarter with some very exciting drilling inventory audit.
We've already drilled two big wells on those new lands and they were brought on.
This week I believe so.
That's nice that we can jump on those opportunities right away. These new lands plug in quite nicely to our existing land base.
We'll use a lot of this inventory to fill up the Aurora gas plant that we purchased earlier this year.
There's a good slide in our corporate presentation that illustrates where all these lands and facilities are and how well they fit in so please check that out.
On the financial side of things commodity prices, particularly gas prices were while during the quarter or at least acre was the daily Eco high in the quarter was I think over $6 50, Giga Joule and the low was negative 19.
So extreme volatility, which is exactly why we've chosen not to have any exposure to the ACO market.
The Nymex was much more stable it had a daily low of $5 65 in the daily high of 985.
And the average was I think 7% higher than the previous quarter. So a lot more stable there.
Although we have almost no exposure to <unk>, we did have some previous hedges to contend with which is why our realized price is still lagging the spot market will all be glad to put those behind US which is also why we expect such a nice jump in funds flow for next year, Despite lower strip price.
As those hedges roll off.
Of the things, we do control we did a good job our cash cost before royalties were right in line with the previous quarter at 87.
A bit higher transportation costs offset by a bit lower interest cost.
We're forecasting our interest costs will continue to fall as our debt falls and that's despite the rising interest rate environment.
We signed up a new bank deal in Q3 that comes with it lower staffing fees. So that will help offset the rising bank of Canada rates.
The future strip for both oil and Alberta power has both of them falling into the near future. So I guess that's helpful for our operating costs as both oil price and diesel in Alberta.
<unk> pool prices drive a lot of our operating costs.
As we continue to fill up our gas plants and increased utilizations, though we should see some improvement in op costs on a per unit basis.
But the reality is we use a lot of diesel to run.
The trucks and heavy equipment in the field, including drilling rigs and Frac puffers in.
Everybody driving around to.
To develop all of this natural gas and Thats driven by oil price, so higher oil prices do drive higher cost for us.
We've been watching closely the evolution of natural gas powered equipment like drilling rigs and Frac pump <unk> and CMG, our LNG powered semi trucks.
Eager obviously to adopt those to use the fuel that we produce.
When they are ready, but as of yet the economics just arent there.
<unk> been following that closely so feel free to ask some questions about that if you'd like.
Overall, our financial performance in the quarter was good but as I mentioned it will be so much better when our hedges roll off and we don't have a $92 million hedge loss in the quarter as it was though we achieved 71% operating margin and a 30% profit margin.
And those are going to help to drive record cash flows and earnings for this year.
And despite the extra 26 million capital outlay for the acquisition in the quarter, we still reduced our debt in the quarter.
That's eight straight quarters, we've reduced our debt and we plan to keep knocking it down.
Until the amount that we really have exposed to any higher interest rates is significantly reduced.
Remember, though we have around $420 million of.
Sure.
That is has fixed interest rates on it that's about 45% of our debt right now and those fixed interest rates or right around the 4% so.
That portion has no risk of rising rates associated with it.
We also announced our plans for 2023 yesterday and Thats exciting we've got.
A great lineup of drilling plans.
But we're going to schedule it to try and take advantage of a less busy summer season. So that we're not competing with all the winter guides in the winter only drilling that happens in the province.
We'll be following up on our successes this year and greater Sundance and greater Brasow as always and also building out a brand new core area. That's in between those two it's called Whitehorse, We announced some details about that in yesterday's press release as well and there is also a good slide in our presentation that shows where that is.
So we're excited to get on to those plans.
And then of course lastly, we announced a return to a much higher dividend for 2023, and I am sure many of our longstanding shareholders or happy to finally see that.
Of course that doesn't mean revert any plans to continue to strengthen our balance sheet just means our free cash flow position for next year is expected to be even stronger than this year. So we can finally start to flow some of those outsized earnings that we've been generating.
To our shareholders are the profits that we've been generating all this capital we've been investing.
And of course, we fully recognize some of the extreme commodity price volatility that we've had over the past few years, which is why we need to have the security of pricing going into the decision to increase the dividend.
We now have over 50% of our gas sales for next year already sold and with that hedge protection. We know we can fully fund our capital program and dividend.
Even if the spot price drops well below $3 in <unk>.
Since we're only exposed really to Nymex prices thats the price we're watching.
Spot prices right now, though for next year and the futures curve for next year has been cycling right around that $5 50, so substantially more.
And Thats why we are quite confident in the funding that we have going into next year.
But we will continue with our hedging practice of locking in future prices as we move forward in time to ensure that we all have that funding going forward.
Anyway that's.
That's a lot of talking for me I'm sure investors in those listing and have lots of questions. So just maybe I'll stop and we can turn it over to questions from those listening in thank.
Thank you as a reminder question Youll need to press Star one on your telephone please.
These standby, while we compile the Q&A roster.
And again that is star one if you would like to ask a question.
And one moment for our first question.
And our first question comes from Chris Thomas from Ci BC. Your line is now open.
Hey, good morning, everyone and thanks for taking my questions.
My first one for you how are you thinking about natural gas egress capacity out of the basin that's fair.
Maintenance disruptions that we saw this past summer and then that's it.
Follow on to that can you maybe walk us through the mechanics of how pay those gas molecules floater market.
Sure.
<unk> sure yes. Good question, Chris Yes, so as you know we're very diversified we have.
Got a lot of our gas pointed at different markets and we've done that in different ways.
One of the ways one of the one of the locations, we're pointing to as Emerson. So we have physical transportation that covers us to get to Emerson.
And with that we also have the <unk> piece is the piece that gets across the border from the <unk> into the mainline. So we have those physical transportation context.
To last us for pretty much as long as we like the Emerson deal as a renewable contract. So we're allowed to renew that every year.
And then we have more than enough emphasis to cover that piece of the transportation and then some and that gives us some flexibility. So that we can sell either at April <unk> at across the border into Empress So.
For relatively cheap insurance, but the rest of our of our diversification. As you know is is more around basis deals or what we like to call. It synthetic transportation. So that's to these other locations like.
Henry hub.
No in venture Dong.
And those are all.
Set up with marketing arrangements that get us to price at those locations that those markets, but how we get there is embedded in marketing or basis deals. So we really only have to physically deliver 10 into.
Into the NGL system here in Alberta, and so that allows us to maybe not take on those long term transportation arrangements in that case.
And by doing that we just have to make sure we have enough physical transportation here in Alberta, and we had about 15 or 20% excess firm in the NGL system right.
Right now and so that allows us for the future growth of the company as we see going forward.
Next year near the end of next year when we.
Start delivering to the Cascade power plant will have an additional $60 minimum additional 50 million a day of capacity that we won't have that we'll have available as FTR service.
We bring that gas directly to from our Swanson plant directly down to the Cascade power plants. So from a from a transportation perspective.
We've got more than we need and ability to grow into that and the nice part about this to us.
We're basically are diversified away from April so we won't be subject to the summer price swings that we see and as Darren mentioned earlier, how prices go negative in the summertime.
Chris I'd add that.
<unk>.
NGL just released it maintenance scheduled for next summer.
Maybe surprised everybody at the amount of impact.
What's going to happen to the system.
And really their mechanism for dealing with tumor path on the system when they're trying to do that maintenance obviously is too.
As to cut.
Access to storage and Thats, where the price gets very volatile.
Thankfully, we've got coverage for all of our volume and then some actually to be able to get out of the province, and not be exposed to that that price volatility, particularly in the summertime.
We signed up as J P mentioned several years ago for a whole bunch of them for service delivery service off of Nova onto the mainline that gets us.
All of our gas and enzyme.
So we've got lots of coverage lots of protection against the impact of things like that maintenance schedule.
And the volatility upgrades.
Okay just to clarify on the.
The comment on having coverage for your volumes.
So that's <unk>.
10% to 20% of FTR in excess of.
Your gas production according to 'twenty 'twenty three guidance.
Correct. So that's the FTR to get onto Nova receipt service to be able to deliver onto net and.
And then of course once Youre on Nov that then you are exposed to the acre price how do you get away from that then you've got to have the diversification either the basis deals or the firm service delivery service often out of the system to get outside of VA co market and so we have both pieces.
In excess actually.
Okay.
My next question for you what percentage of your 2023 capital spending will be directed towards facilities and pipelines.
Yes.
I bought the same as we did this year we have a few.
This is GP, we have a few major projects, we still plan for next year, we have the Cascade.
Pipeline I, just mentioned that we have to build down too.
To cast to the power plant down and that's both.
Or is it roughly both.
21 kilometers so a fairly large large diameter line down to 21 kilometers and then we have the plant the plant, although we're saving some costs in the plant might be using some equipment, we still have a fair bit of cost spend there. So it's roughly going to be around that same range, Chris in that 15% to 20% range, probably closer to the 20% range in our budget 20 years out a fair number.
Okay.
Okay.
Then where do you see cash taxes.
Coming in for 2022, and then in 'twenty three.
Hi.
I think we're budgeting right now a little bit of tax just here in the fourth quarter to end the year.
Small payment and then next year, we're going to start making quarterly.
Quarterly progress payments on our tax bill as we move throughout the year.
We're obviously still converting pools that we've accumulated through our capital.
Historically as we go along in.
The capital program next year also adds to that base.
But.
We just don't have enough obviously.
Honestly to shelter all of that.
All of the income that would be taxable in the year. So we will pay some taxes.
I think we were looking at an average of somewhere.
Brown, 12% of cash flow.
Okay.
Okay and then.
Final question and I think you may have mostly answered this but in terms of how you think about dividend sustainability.
And your capital program I think I heard you say down to $3 <unk> in the Btu Nymex in 2023.
Yes, even less so.
So we run a bunch of sensitivities on commodity price, obviously, we want to make sure that.
We can fund all of the all that we want to accomplish.
And that reduction is one of the things we do want to accomplish so we want to make sure that we've got.
The free cash flow for that.
A dividend and obviously to fund the capital program.
Now.
But if we did see a large dropping the commodity price.
Likely we would see a follow on drop in service costs and so the expectation is our capital program would cost us quite as much because we can see everything backing out.
Activity levels, if commodity prices dropped tend to drop off and so did the cost structure out in the industry.
Over the past year, we've experienced kind of the reverse right. We've seen rapidly rising commodity prices and we've seen service costs going up.
With them so.
I would fully expect to reverse to happen but.
That's not what the future strip is showing us obviously, it's months a big much bigger than that but we've seen so much extreme volatility.
We need to be prudent and make sure that we have.
We can handle all of it at whatever we get thrown.
And we feel very confident that we can.
Okay. Thanks for taking my question, so I'll hand, it back.
You bet Thanks, Chris.
And thank you and again if you have a question that is star one one again, if you'd like to ask a question that is star 111 moment, while we compile the Q&A roster.
And I am showing no further questions I would now like to turn the call back over to Darren Gee for closing remarks.
Actually Justin.
We'll take a quick moment here, we had a couple of questions.
Come in over the wire understood.
So I did want to address a couple of things.
One was with respect to the acquisition and so Dave maybe I could hit you up.
Just to comment a little bit on this acquisition, we did in Q3.
As we noted we bought some land and a little bit of production.
Can you maybe talk a little bit more about the evolution of.
This acquisition.
What opportunities, we really see the long term.
Yes sure.
Sure Darren.
Yes.
As mentioned in the press release, we spent $26 million to purchase 49 gross 42 sections of land in the Brazos area.
I think there's three main takeaways regarding the deal.
First is that.
They have really good upside.
Its top tier upside in several of the key zones, we target we mapped.
<unk> 40 upside locations, so far with 18 of these being non acute and most of the remainder being below Richard Valera plus a few guardians.
Non accumulates in particular as we saw epithelia in that acquisition last year they have the capability.
Quite high impact wells.
On this new <unk> acquisition, we've already drilled and completed and tied in the <unk>.
<unk> and they become close to filling up this bear.
$30 million of processing capacity.
Aurora gas plant.
And we're currently drilling a.
Horizontals and after that we'll move to drill five additional especially license does not accumulate.
No.
The acquisition will.
A significant role in the 2023 Capex program.
The second takeaway is that the new acquisition really nicely complement the corporate one we did earlier in the year. In that example is sort of already talked about it.
The Aurora gas plant it came.
A lot of excess spare capacity from Australia acquisition.
Yeah.
The.
The land base will fill is up nicely, but the third takeaway sort of linked to that.
So obvious until you look at our map.
Our land and the pipelines in the area.
Yes.
<unk>.
The new lands really filling a significant gap between our chambers in Brazzaville gas plants. So now we have a continuous swath of almost 100% Peyto land is stretching spent 30 miles.
And the new pipelines that come with this deal along with the pipelines that came with the earlier acquisition plus F. Three gas plants, perhaps a cambridge in Aurora.
To give us a call.
A dominating infrastructure positioning here.
And that should really help us to.
Can you give us an edge as we continue to look for opportunities to grow here.
So all in all this.
A big win I think for us and thanks to all the people who participated in and making this happen.
Okay great.
First thing I see it as a hedge.
<unk> is there a question from one of them.
Yes, yes, Sir one moment.
Our next question.
And our next question comes from Michael Biehl from Davenport. Your line is now open alright. Thank you.
In regards to the distribution increase.
A lot of E&P companies have a base plus variable.
Maybe not as many in Canada. The U S. So as a shareholder should we think about this new rate being a base that we hope to.
Not reduce for.
A long time or is this sort of looking a year forward.
And in essence.
A variable dividend.
Okay.
Yes, it's a good question.
Mike.
We work in a volatile commodity industry. So sometimes I have to laugh when people talk about base dividend and oil and gas just because.
We've seen the commodity price actually go to zero, so nobody's dividend as a base dividend when you have no commodity price, but and everybody ends up cutting those.
But the reality is we have good visibility into our business.
We operate 99% of our production all of our capital that we invest every year is in our home control.
We have.
Very good handle on how our business is expected to perform so.
And quite frankly, how our capital program.
We expect it to perform.
The one variable being the commodity price.
That's partly why we do as much hedging as we do to try and take that commodity prices.
Variable out of the equation as much as we can and so what our board.
Decides on the dividend level, it's with all of that information in mind.
Obviously, we don't want to be.
Reducing our dividend.
We expect fully that as we go out into time.
All of the activities that we have planned and with the future strip, we're going to be able to continue to increase it over time.
But.
That obviously is subject to the future.
As we hedge and continue to move along locking down those commodity prices and taking some of that risk off the table, we get higher and higher confidence in what we're able to deliver.
We have a few levers obviously that where we're playing with with all of this cash flow that we're generating we've got a capital program. We've got that we want to take down and we've got our dividend.
And we're cognizant of the profits that the business is throwing off.
The ability that we have to reward our investors.
With those profit.
So.
So sort of a long answer winded answer.
I think we don't have to be us.
I don't know.
Noncommittal with the dividend I guess that's.
Maybe not the right word to say using both our base and variable piece, because we have a lot of volatility that we can't attribute.
We have I guess higher confidence in the business and so we've never really considered.
A variable component of dividend we've just.
<unk> done our best to be able to set the dividend at what we believe to be an achievable level.
You didn't.
Buying in stock and we're not saying that.
A wrong thing to do but the.
Looking at the long term present value reserves year drilling inventory.
You didn't.
<unk> that is being one way to return capital.
What's the thought on that.
Yeah, we don't we haven't ever done.
Exercise or share buyback.
Our thought is as youre paying us to drill wells.
And to <unk>.
<unk> profit off of that investment.
And that profit we can return back to you in the form of a dividend and you can then buy the stock.
Arguably.
Probably a terrible stock picker.
Probably not the person to consult as to when to buy stock and sell stocks.
But hopefully we're pretty darn good at drilling wells and making money at that.
And really Thats, what you are paying us to do so that's what we focus on.
Last question as it relates to your drill inventory roughly how many years do you say, our drill and I know a lot of variables go into it.
How many years' worth of drill inventory do we have especially in light of these recent purchases.
Just a range or a round number.
Yes, we highlight that in our presentation as well I think we're carrying about <unk>.
<unk> hundred locations or probably will be more by the time, we rack. It all up at the end of this year on our reserve books, that's really limited just to.
A handful of years out into the future. We're scheduling those wells. We believe we've got much more inventory beyond that at least double that amount.
So that puts it up over 2000, maybe 2500 locations on the lands we have today.
We are drilling less than 100 wells a year. So that's that's a lot of years of drilling inventory into the future.
That said, we don't just sit back and harvest that opportunity. We are constantly looking for new stuff to do as well that is even better than what we currently have so if we can continue to every year.
AD.
And increase the quality of the inventory that we have with new ideas and new locations.
Then we're never going to catch up to all of that inventory I know over our history.
Sort of an example in a look back we've typically added two locations drilling inventory locations for every location we've drilled.
And when Youre, adding at twice the rate that youre harvesting it youre never going to catch up to that all of that inventory.
So as long as we can continue to do that we're doing our job.
Always got some really good quality stuff to be developing.
Okay. Thank you very much.
You bet. Thanks for your question.
And thank you and I'm showing no further questions I would now like to turn the call back over to Darren Gee for further remarks.
Thanks, Jonathan.
We had one other question that came in overnight.
And this isn't something we necessarily highlighted in the press release, but it was in the financials and MD&A and that is with respect to this new credit facility.
And the question was that we lowered our.
Our bank line from $9 50 to 800 cap do you want to comment on why we did that.
Or do you want to comment on that.
Yes sure.
Good morning, everyone.
So last month, we extended our credit facility to October 2025 from October 2023.
We chose to reduce the credit limit from $950 million to $800 million as we don't see a need for the high credit facility going forward, giving our forecasted growth.
Free funds flow forecasted debt reduction.
So the reduced credit limit benefits paid out through lower credit facility renewal fees and lower standby charges on that undrawn balance.
The renewal renewal also allowed us to improve our credit price grid.
Our prior credit facility was signed when our debt to EBITDA was much higher at $2 four eight.
At the end of September we were down to one six.
Which allowed us to negotiate that lowered pricing grid and thats going to help us.
With our offset that increase in bank of Canada.
Rate increases.
Great.
Thanks dose.
Last question here that came in was just one.
Our extended reach horizontal program, we've talked at length over the last few years about how we've pushed longer and longer laterals.
Maybe.
You could maybe make some comments on just that program.
How it's evolving do we have a bunch more technology to play with are we reaching the limits of the length of lateral.
How is that.
Driven enhanced returns for the wells yes.
We are continuing to see good success applying extended reach horizontals.
Ross many areas in many different species and of course.
The efficiency gains we see amortizing the.
Sort of fixed cost portion of the wells across more laterals is really helping too.
To drive better economic returns and it's helping to combat some of the inflation inflationary pressure we see also.
So predominantly apply this to the well rich, but obviously planted elsewhere.
As you alluded to Darren.
Recently drilled some some done vegan wells in the within the sort of fashion longer wells and those are generating some really good results.
Also apply this to some filler channels, where we're seeing some really good results and where we haven't really developed channels before so the benefit of this is obviously the economic gains that we get but it's also the inventory of that comes from it.
As far as sort of like where we're pushing this too I think.
Given the system, we're using ball drop we are kind of coming up against some limitations with it but.
We've also seen those limitations continually push out and out into the future here, where do you go back a couple of years we were.
Seeing limitations and sort of like the mid 30 stages and now we're able to put 750. So as time goes on here, we're continuing to drive wealth longer and apply the.
The new technology as they come available.
So yes this.
This has been a pretty critical for us as far as developing.
A lot of our plays and it's really critical for us as far as the new stuff, we're doing in white horse as well, which is really great. So.
We will continue to.
Push as hard as mechanical as far as we can and to try and maximize the economic benefit we get from it so.
Okay good stuff.
It doesn't look like there's any additional questions Justin So maybe we'll wrap it up from here.
We're excited obviously with.
What we've got on the lineup here for the rest of Q4 to get us to the end of the year.
Of course, it doesn't stop there.
We usually do shut down for a little bit of a Christmas break with the drilling rigs and give the guys a few days off.
Mostly from a safety perspective than anything but.
Yes.
Everybody has been working hard our rigs have been running pretty steady all year long. So it's good to give the guys a little bit of a break and then we'll get back at it in the new year.
We've got a lot to do next year, it's going to be an exciting year and then by the end of the year, we should be selling gas to a brand new power station right excellent. So we're excited to see that too.
I think we're set up really well.
We're going to we're going to be reporting obviously, along the way as we go.
J P will be the one reporting.
To you every quarter so.
Please listen in.
And we will be back to the.
Reserves I guess in February and then the Q4 results shortly after that.
So thanks for thanks for listening into the call. This morning.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly.
You can dial one one.
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Yes.
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Okay.
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Good day, and thank you for standing by and welcome to pesos Q3, 2022 financial results Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Darren Gee, Chief Executive Officer.
<unk>.
You kind of cut out there little bit Jonathan hopefully, we're still with you.
Good morning, ladies and gentlemen.
Thanks for tuning in to <unk> third quarter 2022 results conference call.
Justin can I, just confirm that were coming in loud and clear.
Yes, sorry did you not hear my introduction I apologize.
Not a problem and you just cut out at the end I just wanted to make sure we didnt lose the lines of your life. We're all good.
Super well, thanks, everybody for listening in.
Before we do get started today I would like to remind everybody that all statements made by the company. During this call today are subject to the forward looking disclaimer and advisory set forth in the company's news release issued yesterday.
In the room today, we've got the entire Peyto management team.
Our president and Chief operating Officer J P. The Sharps is here to answer your questions as is Kathy Turgeon, our Chief Financial Officer, Scott Scott Robinson, our VP of business development here, Dave Thomas Our VP exploration is here Todd Burdick, our VP of production and Lee Curran, our VP drilling and completion are both here and answer your questions on operations.
Derek Zimbra, our VP of land or IV frame, our VP of engineering or here in our new VP of finance David Carlson is here. So everybody is in the room ready and set to go for your questions.
Before I get started with my comments about our results, though I do want to recognize the efforts of both our office and field personnel. This past quarter, we had a very active quarter drilling and completions pipelining activity. We have some land deals. Some acquisitions. So we were busy firing on all cylinders, even our marketing guys were hopping. This.
Last quarter with all the volatility in commodity prices.
<unk> opportunities that existed.
And of course, our exceptional field staff kept everything running smoothly. So a big thank you to all of those for that effort.
Particularly now incentives 20 below in Alberta, and we all rely on natural gas to keep the lights on and heat our homes and survive the winter.
So on behalf of all El Burton. Thank you all for giving us that security.
And I suppose speaking of security in the freedoms, we all enjoy I would also like to thank all those that have fought so valiantly to give us that freedom Tomorrow is remembrance day, which is the official data remember, but we are thankful everyday for their sacrifice.
So please remember that with us.
Onto the quarter as we mentioned in the release, we drilled in most of our core areas and into many different formations in the quarter.
It's important because as.
As we diversify both.
Geographically and in geology, we eliminate a lot of the contingencies between wells and we tend to reduce the risk in our overall drilling program.
It really allows us to pick the very best of each area in each area and each zone.
And those results are starting obviously to show now we drilled some great <unk> wells in our Cecilia area, which is a new play for us and we drilled it in several different zones and brasow that proved up even more of the future inventory down there.
Our average well in the quarter was almost 5000 meters measured depth, which is the longest we've had on average and that's amazing over 600 meters of horizontal lateral on average.
And of course that average was up because a large percentage of wells in browser or were in brazeau and the formations are very deeper there. So we have to drill a little bit deeper to get them.
Our average well cost was also a bit more expensive because of those deeper wells, but there are some big wells down in browser to make up for it. So there is a reason where we're going deeper.
We also saw our costs on a per stage and per meter horizontal lateral were up.
Partly due to service cost inflation and partly due to increased frac intensity.
So because of the increase in more expensive wells that we've chosen to drill in <unk> and because we've built a disproportionate amount of facilities and large diameter pipeline. This year, we've had an increase to our capital budget for this year.
But that's okay. Riley assures me that the rates of return we're generating on all these wells and Brasow are fantastic.
And some of these new place we are proving up and all of this infrastructure, we're investing in will serve us well for many years to come.
We also closed a very strategic property acquisitions brands during the quarter with some very exciting drilling inventory audit.
We've already drilled two big wells on those new lands and they were brought on just this week I believe so.
That's nice that we can jump on those opportunities right away. These new lands plug in quite nicely to our existing land base and we will use a lot of its inventory to fill up the Aurora gas plant that we purchased earlier this year.
There's a good slide in our corporate presentation that illustrates where all these lands and facilities are and how well they fit in so please check that out.
On the financial side of things commodity prices, particularly gas prices were while during the quarter or at least acre was the daily Eco high in the quarter was I think over $6 50, Giga Joule and the low was negative 19.
So extreme volatility, which is exactly why we've chosen not to have any exposure to the ACO market.
The Nymex was much more stable it had a daily low of $5 65 in the daily high of 985.
And the average was I think 7% higher than the previous quarter. So a lot more stable there.
Although we have almost no exposure to <unk>, we did have some previous hedges to contend with which is why our realized prices still lagging the spot market will all be glad to put those behind US which is also why we expect such a nice jump in funds flow for next year, Despite a lower strip price.
As those hedges roll off.
Of the things, we do control we did a good job our cash cost before royalties were right in line with the previous quarter at 87 cents.
A bit higher transportation costs offset by a bit lower interest cost.
We are forecasting our interest costs will continue to fall as our debt falls and that's despite the rising interest rate environment.
We signed up a new bank deal in Q3 that comes with it lower staffing fees. So that will help offset the rising bank of Canada rates.
The future strip for both oil and Alberta power has both of them falling into the near future. So I guess that's helpful for our operating costs as both oil price and diesel.
Alberta power pool prices drive a lot of our operating costs.
As we continue to fill up our gas plants and increased utilizations, though we should see some improvement in the op costs on a per unit basis.
But the reality is we use a lot of diesel to run the.
The trucks and heavy equipment in the field, including drilling rigs and Frac pump person.
Everybody driving around to.
To develop all of this natural gas and Thats driven by oil price, so higher oil prices do drive higher cost for us.
We've been watching closely the evolution of natural gas powered equipment like drilling rigs and Frac pump <unk> and CMG, our LNG powered semi trucks, we're eager obviously to adopt those to use the fuel that we produce.
When they are ready, but as of yet the economics just arent there.
<unk> been following that closely so feel free to ask some questions about that if you'd like.
Overall, our financial performance in the quarter was good but as I mentioned it will be so much better when our hedges roll off and we don't have a $92 million hedge loss in the quarter as it was though we achieved 71% operating margin and a 30% profit margin.
And those are going to help to drive record cash flows and earnings for this year.
And despite the extra 26 million capital outlay for the acquisition in the quarter, we still reduced our debt in the quarter.
That's eight straight quarters, we've reduced our debt and we plan to keep knocking it down.
Until the amount that we really have exposed to any higher interest rates is significantly reduced.
Remember, though we have around $420 million of.
That that is has fixed interest rates on it that's about 45% of our debt right now and those fixed interest rates or right around the 4% so.
That portion has no risk of rising rates associated with it.
We also announced our plans for 2023 yesterday and Thats exciting we've got.
Great lineup of drilling plans.
But we're going to schedule it to try and take advantage of a less busy summer season. So that we're not competing with all the winter guides in the winter only drilling that happens in the province.
We'll be following up on our successes this year and greater Sundance and greater Brasow as always and also building out a brand new core area. That's in between those two it's called Whitehorse, We announced some details about that in yesterday's press release as well.
And there is also a good slide in our presentation that shows where that is.
So we're excited to get on to those plans.
And then of course lastly, we announced a return to a much higher dividend for 2023, and I am sure many of our longstanding shareholders or happy to finally see that.
Of course that doesn't mean revert any plans to continue to strengthen our balance sheet just means our free cash flow position for next year is expected to be even stronger than this year. So we can finally start to flow some of those outsized earnings that we've been generating.
To our shareholders are the profits that we've been generating all this capital we've been investing.
And of course, we fully recognize some of the extreme commodity price volatility that we've had over the past few years, which is why we need to have the security of pricing going into the decision to increase the dividend.
We now have over 50% of our gas sales for next year already sold and with that hedge protection. We know we can fully fund our capital program and dividend.
Even if the spot price drops well below $3 in <unk>.
Since we're only exposed really to Nymex prices thats the price we're watching.
Spot prices right now, though for next year and the futures curve for next year has been cycling right around that $5 50, so substantially more.
And Thats why we are quite confident in the funding that we have going into next year.
But we will continue with our hedging practice of locking in future prices as we move forward in time to ensure that we all have that funding going forward.
Anyway that's.
That's a lot of talking for me I'm sure investors in those listing and have lots of questions. So just maybe I'll stop and we can turn it over to questions from those listening in thank.
Thank you as a reminder to ask a question Youll need to press star one on your telephone please standby, while we compile the Q&A roster.
And again that is star one one if you would like to ask a question.
And one moment our first question.
And our first question comes from Chris Thomas from Ci BC. Your line is now open.
Hey, good morning, everyone and thanks for taking my questions.
First one for you how are you thinking about natural gas egress capacity out of the basin. That's fair the maintenance disruptions that we saw this past summer and then to <unk>.
Follow on to that can you maybe walk us through the mechanics of how pay those gas molecules floater market.
Sure.
<unk> sure yes. Good question, Chris Yeah. So as you know we're very diversified.
Got a lot of our gas pointed at different markets and we've done that in different ways.
One of the ways one of the one of the locations, we're pointing to as Emerson. So we have physical transportation that covers us to get to Emerson.
And with that we also have the <unk> piece is the piece that gets across the border from the <unk> into the mainline. So we had those physical transportation contacts.
Lightest for pretty much as long as we like the Emerson deal as a renewable contract. So we're allowed to do that every year.
And then we have more than enough Empress to cover that piece of the transportation and then some and that gives us some flexibility so that we can sell either at <unk>.
<unk> <unk> at across the border into Empress so.
For relatively cheap insurance, but the rest of our of our diversification. As you know is is more around basis deals or what we like to call. It synthetic transportation. So that's to these other locations like.
Henry hub.
No in venture Dawn and those are all.
Set up with marketing arrangements that get us to price at those locations and those markets, but how we get there is embedded in marketing or basis deals. So we really only have to physically deliver tier two into.
Into the NGL system here in Alberta, and so that that allows us to maybe not take on those long term transportation arrangements in that case.
And by doing that we just have to make sure we have enough physical transportation here in Alberta, and we have about 15 or 20% excess firm in the NGL system right.
Right now and so that allows us for the future growth of the company as we see going forward.
Next year near the end of next year when we.
Start delivering to the Cascade power plant will have an additional $60 minimal an additional 50 million a day of capacity that we won't have that we'll have available as FTR service.
We bring that gas directly to from our Swanson plant directly down to the Cascade power plants. So from a from a transportation perspective.
We've got more than we need and ability to grow into that and and the nice part about this to us.
We're basically are diversified away from April so we won't be subject to the summer price swings that we see and as Darren mentioned earlier, how prices go negative in the summertime.
Chris I would add that.
<unk>.
NGL just released it maintenance scheduled for next summer.
Maybe surprised everybody at the amount of impact.
That's going to happen to the system.
And really their mechanism for dealing with us on the system when they're trying to do that maintenance obviously is too.
As to copy.
Access to storage and Thats, where the price gets very volatile.
Thankfully, we've got coverage for all of our volume and then some actually to be able to get out of the province, and not be exposed to that that price volatility, particularly in the summertime.
We signed up as J P mentioned several years ago for a whole bunch of them for service delivery service off of Nova onto the mainline that gets us.
All of our gas in Nantong.
So we've got lots of coverage lots of protection against the impact of things like that maintenance schedule.
And the volatility upgrades.
Okay just to clarify on the.
The comment on having coverage for your volumes.
So that's <unk>.
10% to 20% of FTR in excess of.
Your gas production according to 2023 guidance.
Correct, so that the FTR to get onto Nova receipt service to be able to deliver onto net adds.
And then of course once you're on Nov that then you are exposed to the acre price how do you get away from that then you've got to have the diversification either the basis deals or the firm service delivery service off the Nova system to get outside of the ACO market and so we have both pieces.
In excess actually.
Okay.
My next question for you what percentage of your 2023 capital spending will be directed towards facilities and pipelines.
To answer yes.
I bought the same as we did this year we have a few.
This is GP, we have a few major projects, we still plan for next year, we have the Cascade.
Pipeline I, just mentioned that we have to build down too.
To cast to the power plant down and that's both how far is it roughly equal.
21 kilometers so a fairly large large diameter line down to 21 kilometers and then we have the planet the plant. Although we are saving some costs in the plant light reusing some equipment, we still have a fair bit of cost to spend there. So it's roughly going to be around that same range, Chris in that 50% to 20% range, probably closer to the 20% range in our budget 20 years out there.
Okay.
Okay.
And then where do you see cash taxes.
Coming in for 2022, and then 'twenty three.
I think we're budgeting right now a little bit of taxes, just here in the fourth quarter to end the year.
Small payment and then next year, we're going to start making.
Orderly progress payments on our tax bill as we move throughout the year.
We're obviously still converting pools that we've accumulated through our capital.
Historically as we go along and then.
The capital program next year also adds to that base.
But.
We just don't have enough obviously to shelter all of them.
All of the income that would be taxable in the year. So we will pay some taxes.
I think we were looking at an average of somewhere.
Around 12% of cash flow.
Okay.
Okay and then.
Final question and I think you may have mostly answered this but in terms of how you think about dividend sustainability.
And your capital program I think I heard you say down to $3 <unk> in the Btu Nymex in 2023.
Yes, even less in fact so.
So we run a bunch of sensitivities on commodity price, obviously, we want to make sure that.
We can fund all of the all that we want to accomplish.
And that reduction is one of the things we do want to accomplish so we want to make sure that we've got the.
The free cash flow for that.
Evidently obviously to fund the capital program.
Now.
Because if we did see a large drop in the commodity price.
Likely we would see a follow on drop in service costs.
And so the expectation is our capital program would cost us quite as much because we can see everything backing out <unk>.
Activity levels, if commodity prices dropped tend to drop off and so did the cost structure out in the industry.
Over the past year, we've experienced kind of the reverse right. We've seen rapidly rising commodity prices and we've seen service costs going up along with them. So.
I would fully expect to reverse to happen but.
That's not what the future strip is showing us obviously, it's months a big much bigger than that but we've seen so much extreme volatility.
We need to be prudent and make sure that we've.
We can handle all of it at whatever we get thrown in.
And we feel very confident that we can.
Okay. Thanks for taking my questions I'll hand, it back.
You bet Thanks, Chris.
And thank you and again if you have a question that is star one one again, if you'd like to ask a question that is star 111 moment, while we compile the Q&A roster.
And I am showing no further questions I would now like to turn the call back over to Darren Gee for closing remarks.
Actually Justin.
We'll take a quick moment here, we had a couple of questions.
Come in over the wire understood.
So I did want to address a couple of things.
One was with respect to the acquisition and so Dave maybe I could hit you up.
Just to comment a little bit on this acquisition.
<unk>, we did in Q3.
As we noted we bought some land and a little bit of production.
Can you maybe talk a little bit more about the evolution of.
This acquisition.
What opportunities, we really see the long term.
Yes.
Sure Darren.
Yes.
As mentioned in the press release, we spent $26 million to purchase 49, gross or 42 sections of land in the Brazos area.
I think the three main takeaways regarding the deal.
First is that.
<unk> had really good upside.
Its top tier upside in several of the key zones, we target we've mapped.
<unk> 40 upside locations, so far with 18 of these being non acute and most of the remainder being will Richard Valera with US a few guardians.
<unk> in particular as we saw epithelia in that ex acquisition last year they have the capability.
Quite high impact wells.
On this new <unk> acquisition, we've already drilled and completed and tied in the first two.
<unk> and they become close to filling up this bear.
$30 million of processing capacity.
Aurora gas plant.
And we're currently drilling a pair of horizontals and after that we'll move to drill five additional professionally licensed to <unk>.
So.
The acquisition will.
A significant role in the 2023 Capex program.
The second takeaway is that the new acquisition really nicely complement the corporate one we did earlier in the year. In that example is sort of already talked about it.
<unk> gas plant it came with a lot of excess spare capacity from Australia acquisition.
Yeah.
The.
The land base will fill is up nicely.
Third takeaway sort of linked to that.
So obvious until you look at a map of the.
Our land and the pipelines in the area.
The new lands really filling a significant gap between our chambers in Brazzaville gas plants.
Now we have a continuous swath of almost 100% Peyto land and stretch and spent 30 miles.
And the new pipelines that come with this deal along with the pipelines that came with the earlier acquisition plus three gas plants, perhaps of Cambridge, and Aurora combined to give us quite a dominating infrastructure position here.
And that should really help us.
To give us an edge as we continue to look for continued opportunities to grow here.
So all in all this.
A big win I think for us and thanks to all the people who participated in and making this happen.
Okay great.
First thing I see.
<unk> is there a question.
Yes, yes, Sir one moment.
Our next question.
And our next question comes from Michael Biehl from Davenport. Your line is now open alright. Thank you.
In regards to the distribution increase.
A lot of E&P companies have a base plus variable.
Maybe not as many in Canada. The U S. So as a shareholder should we think about this new rate being a base that we hope to.
Not reduce for.
A long time or is this sort of looking a year forward.
And in essence.
A variable dividend.
Okay.
Yes, it's a good question.
Mike.
We work in a volatile commodity industry. So sometimes I have to laugh when people talk about base dividend and oil and gas just because.
We've seen the commodity price actually go to zero, so nobody's dividend as a base dividend when you have no commodity price, but it everybody ends up cutting those.
But the reality is we have good visibility into our business.
We operate 99% of our production all of our capital that we invest every year is in our home control.
We have.
Very good handle on how our business is expected to perform so.
And quite frankly, how our capital program.
It to perform.
The one variable being the commodity price.
That's partly why we do as much hedging as we do to try and take that commodity prices.
Variable out of the equation as much as we can and so what our board.
Decides on the dividend level, it's with all of that information in mind.
Obviously, we don't want to be.
Reducing our dividend.
We expect fully that as we go out into time.
All of the activities that we have planned and with the future strip, we're going to be able to continue to increase it over time.
But.
That obviously is subject to the future.
As we hedge and continue to move along locking down those commodity prices and taking some of that risk off the table, we get higher and higher confidence in what we're able to deliver.
We have a few levers obviously that where we're playing with with all of this cash flow that we're generating we've got a capital program. We've got that we want to take down and we've got our dividend.
And we're cognizant of the profits that the business is throwing off.
The ability that we have to reward our investors.
With those profit.
So.
It's a sort of a long answer winded answer.
I think we don't have to be us.
I don't know.
Noncommittal with the dividend I guess, that's maybe not the right word to say using both our base and variable piece, because we have a lot of volatility that we can't attribute.
We have I guess higher confidence in the business and so we've never really considered a.
A variable component of dividend we've just.
<unk> done our best to be able to set the dividend at what we believe to be an achievable level.
You didn't.
Buying in stock and we're not saying, that's the right or wrong thing to do but.
Looking at the long term present value reserves year drilling inventory.
You didn't mention that as being one way to return capital.
What's the thought on that.
Yeah, we don't we haven't ever done.
Exercise or share buyback.
Our thought is as youre paying us to drill wells.
And to <unk>.
<unk> profit off of that investment.
And that profit we can return back to you in the form of a dividend and you can then buy the stock.
Arguably.
Probably a terrible stock picker.
Probably not the person to consult as to when to buy stock and sell stocks.
But hopefully we're pretty darn good at drilling wells and making money at that.
And really Thats, what you are paying us to do so that's what we focus on.
The last question as it relates to year drill inventory roughly how many years do you say, our drill and I know a lot of variables go into it.
How many years' worth of drill inventory do we have especially in light of these recent purchases.
Just a range or a round number.
Yes, we highlight that in our presentation as well I think we're carrying about <unk>.
<unk> hundred locations or probably will be more by the time, we rack. It all up at the end of this year on our reserve books, that's really limited just to.
A handful of years out into the future. We're scheduling those wells. We believe we've got much more inventory beyond that at least double that amount.
So that puts it up over 2000, maybe 2500 locations on the lands we have today.
We are drilling less than 100 wells a year. So that's that's a lot of years of drilling inventory into the future.
That said, we don't just sit back and harvest that opportunity. We are constantly looking for new stuff to do as well that is even better than what we currently have so if we can continue to every year.
AD.
And increase the quality of the inventory that we have with new ideas and new locations.
Then we're never going to catch up to all of that inventory I know over our history.
Sort of an example in a look back we've typically added two locations drilling inventory locations for every location we've drilled.
And when Youre, adding at twice the rate that youre harvesting it youre never going to catch up to that all of that inventory.
So as long as we can continue to do that we're doing our job.
Always got some really good quality stuff to be developing.
Okay. Thank you very much.
You bet. Thanks for your question.
And thank you and I'm showing no further questions I would now like to turn the call back over to Darren Gee for further remarks.
Thanks, Jonathan.
We had one other question that came in overnight.
And this isn't something we necessarily highlighted in the press release, but it was in the financials.
M DNA and that is with respect to this new credit facility.
And the question was that we lowered our.
Our bank line from $9 50 to 800 cap do you want to comment on why we did that.
Or do you want to comment on that.
Yes sure.
Good morning, everyone.
So last month, we extended our credit facility to October 2025 from October 2023.
We chose to reduce the credit limit from $950 million to $800 million as we don't see a need for the high credit facility going forward, giving our forecasted growth.
Free funds flow and forecasted debt reduction.
So the reduced credit benefits paid out through lower credit facility renewal fees and lower standby charges on that Undrawn balance.
The renewal also allowed us to improve our credit price grid. So are our prior credit facility was signed when our debt to EBITDA was much higher at $2 48.
At the end of September we were down to one six.
Which allowed us to negotiate that lowered pricing grid and thats going to help us.
With offset that increasing bank of Canada.
Rate increases.
Great.
Thanks dose.
Last question here that came in was just one.
Our extended reach horizontal program, we've talked at length over the last few years about how we've pushed longer and longer laterals.
Maybe.
Either you could maybe make some comments on that program.
How it's evolving do we have a bunch more technology to play with are we reaching the limits of the length of lateral.
How is that drill.
Driven enhanced returns for the wells, yes. So.
We are continuing to see good success applying extended reach horizontals.
Ross many areas in many different species of course.
The efficiency gains, we see amortizing the that.
Sort of fixed cost portion of the wells across more laterals is really helping too.
To drive better economic returns and it's helping to combat some of the inflation inflationary pressure we see also.
So we predominantly apply this to the well rich, but obviously planted elsewhere.
As you alluded to Darren.
Recently drilled some some done vegan wells in the within this sort of fashion longer wells and those are generating some really good results with <unk>.
Also apply this to some filler channels, where we're seeing some really good results and where we haven't really develop these channels before so the benefit of this is obviously the economic gains that we get but it's also the inventory that comes from it.
As far as sort of like where we're pushing this too I think.
Given the system, we're using ball drop we are kind of coming up against some limitations with it but.
We've also seen those limitations continually push out and out into the future here, where if you go back a couple of years we were.
Seeing limitations and sort of like the May 30 stages and now we're able to put together. The 50. So as time goes on here, we're continuing to drive wealth longer and apply the.
The new technology as they come available.
So yes, I mean, this has been pretty critical for us as far as developing.
A lot of our place in it is really critical for us as far as the new stuff, we're doing in Whitehorse as well, which is really great. So.
We will continue to.
Push as hard as mechanical as far as we can and to try and maximize the economic benefit we get from it so.
Okay good stuff.
It doesn't look like there's any additional questions Justin So maybe we'll wrap it up from here.
We're excited obviously with.
What we've got on the lineup here for the rest of Q4 to get us to the end of the year.
Of course, it doesn't stop there.
We usually do shut down for a little bit of a Christmas break with the drilling rigs and give the guys a few days off.
Mostly from a safety perspective than anything but.
Everybody has been working hard our rigs had been running pretty steady all year long. So it's good to give the guys a little bit of a break and then we'll get back at it in the new year.
We've got a lot to do next year, it's going to be an exciting year and then by the end of the year, we should be selling gas to a brand new power station right. So we're excited to see that too.
I think we're set up really well.
<unk>.
We're going to be reporting obviously, along the way as we go.
J P will be the one reporting.
To you every quarter so.
Please listen in.
And we will be back to you with the reserves I guess in February and then the Q4 results shortly after that.
So thanks for thanks for listening into the call. This morning.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.