Peyto Exploration & Development Corp. Q1 2023 Earnings Call

Speaker 1: It wasn't just two years ago in the winter where we had the Ventura really pay off and we had left that exposed. I think we made $25 million over a weekend. So it's safe to say that as we look forward here, we are going to leave some of these more volatile markets.

Speaker 1: exposes those. We hedged those volumes two years ago. At that time, that was a superior price to what we could get at ACO at the time. So that was why we did it. Again, what you said is important. It's about securing revenues and we can't predict a price.

Speaker 1: So a lost opportunity, a lost opportunity, a value year, but again, it's the security of the RAM unit is important.

Speaker 2: We'll open up to questions from from the phone operare. Certainly, Ladies and gentlemen, And if you'd like to ask a live bodyud your question at this time, Please press star 1- one on your telephone.

Speaker 2: One moment for our first question. And our first question comes from the line of Chris Thompson from CIBC World Market. Your question, please.

Speaker 3: Yeah, good morning everyone. Thanks for taking my question. This one's just regarding the $100 million note that you have come and do. Just wondering, you know, at this point, if you have any plans for that or what are some of the scenarios that they could play out that we should be thinking about.

Speaker 1: Sure, okay, I made a ask Kathy to address that one that you're referring to the note that comes up in October of this year. That's $100 million and people are 3.7% interest rate. Go ahead, Kathy. So we are, it is flexible on the hats. It's a bit too early to talk to the note holder.

Speaker 4: the 50 no-holder, but we have strong relationships with that no-holder, it's one no-holder. And so we may rule that note over if we can get reasonable terms. Otherwise we do have the ability and capacity on our bank credit facility to just pay it down. So it's really going to be-

Speaker 4: now is probably about 6, 6.5%.

Speaker 1: Okay, and that's you know 4% on the long-term notes of which we are probably 400 million, a little over 400 million of the long-term. Fixed notes is 4% and a couple of them are involved, right? Yeah, the revolver along.

Speaker 3: I'm going to have to ask you to have right now. Okay. I'll underline interest rates 5%. Okay, great. And then on my next one, just with respect to dividends, sustainability, a lot of investors have been asking the question, how should we be thinking about...

Speaker 1: the way you look at your dividend, stress testing it down to certain commodity prices, what are your thoughts around that? Yeah, I think that's just we have a mention earlier, the reason why I did two, the reason we do the hedging program is to help secure those revenues so that we can be comfortable with the level of dividend we set. When we look back, November when we set...

Speaker 1: You know, the capital program that we're drilling, you want to make sure that the decisions we're making to flying capital is giving us a return. So we're cognizant of the fact of where the prices are. And we continue to hedge the future. I think that's the thing to remind everybody of your hedges.

Speaker 1: Don't roll off. We were continuing to hedge what's our hedge level now for our hedge level now for small sales floor is already up to a few percent of gas. A few percent of gas. So, you know, we are securing those revenues because prices are in contango and we can take that off the table so it gives us confidence to continue to sustain the dividend.

Speaker 5: So Dynasty.

Speaker 3: One other question from me, just with respect to inflation. I noticed in your note, you talked a bit about drilling costs per meter coming down a bit, completion costs per meter up a little bit. In terms of line of sight, to a bit of relaxation and inflationary pressures going forward, I think we've seen a bit of...

Speaker 1: year. We'd like to see them coming out but I don't think that in the short term is realistic. We'll see what happens with activity levels here come post-breakout. If that changes...

Speaker 1: I think on the operating cost side we've seen some inflation that it was a bit of a lag to seeing those costs go up.

Speaker 1: drilling and completion side we saw costs quickly earlier on and then operating costing to lag a little bit and some more inflation here this quarter. But our our our our our look for inflation is it's it's I don't we don't see we don't we're not planning to have it to see it.

Speaker 2: Thank you very much. I'll hand it back. Thank you. One moment for our next question.

Speaker 2: from the line of Gerald Mackay from Self-Employed. Your question, please.

Speaker 6: Hi JP, thanks for all the hard work this quarter. In the monthly letter, as well as in all the disclosure, you will see that the

Speaker 6: Hi JP, thanks for all the hard work this quarter. You know, in the monthly letter, as well as in all the disclosure, the

Speaker 6: topic of the influence of commodity prices, hedges, inflation and costs, I think has been well aired and thank you very very much for that. The area that I find a little bit harder to understand is

Speaker 6: There was a target year-end production level of 110,000 barrels a day.

Speaker 6: and $500 million has been spent in the last year, and yet we've been down every month.

Speaker 6: since the beginning of the year.

Speaker 6: Spending continues and we're actually not at 110, we're at 102. And that is a year that we're actually below the year ago level as per what I saw in the last letter.

Speaker 6: And I'm a little less clear, I'm very clear on the diversification program, the cost, the escalations, all of these things.

Speaker 6: I'm very unclear on

Speaker 6: capital expenditures and the issue with production. I do understand that decline rates were a bit higher is the way it seemed last time this was aired.

Speaker 6: But it does seem that...

Speaker 6: But it does seem that there is a problem here that is...

Speaker 6: deeper. So my first question is, are you gradually discovering a deeper problem? Or maybe the easiest way is to just...

Speaker 6: talk about what targets you would be comfortable with on production for

Speaker 6: the second, third and fourth quarter or whatever you want in terms of looking forward.

Speaker 6: 425 if you succeed in being at the low end, 425 million. And production is lower than it was a year ago.

Speaker 1: That's my question. Where are we going and what has happened? Thanks, Gerry. We talked a bit about this in the last call, but I'll just elaborate some more on some of the things. I think inflation is a big part of this. We're just not drilling as much.

Speaker 1: to really grow production in the short term. Certainly, 3Rigs isn't going to do that. We are going to be somewhat flattish to down slightly over the next little while. I suspect it's the back half of the year that we'll wrap up and continue and then grow.

Speaker 1: Inflation is a big part of this cost structure and we don't have enough activity. We don't feel that it's a good time to be getting aggressive on that, keep considering where prices are at. I think it's prudent for us to be cautious on how much we're spending. The activity levels just aren't there for us to be able to substantially move the needle. If we look back at our trailing twelve months.

Speaker 1: I didn't put it in the release, but a trailing 12-month capital efficiency was probably about $14,000. When we look at the last three quarters, we look backwards at what we spent and what we gained in production. That's when I removed some of the bigger items, like for example, the

Speaker 1: We are still targeting a cap efficiency metric by the end of year of around 12,000 per flowing – somewhere in that range. So we're still – we look at our projects. Look what we have going forward. We still expect to achieve that. That means we will be growing production on the back half if we add that fourth rig. We'll be growing back up again. And that's the plan, Jerry. Thank you.

Speaker 2: Thank you. Thank you. Once again, if you have a question at this time, please press star 1 1. And our next question is a follow-up from the line of Chris Thompson from CIBC. Your question, please.

Speaker 3: Just talking on that same topic from Jerry there, with respect to the extended reach horizontals that you're drilling, are you seeing an uptick in productivity per

Speaker 3: lateral meter accessed or are we going to expect sort of the same per meter productivity but just seeing the the overall well cost per meter drop? So like I guess what I'm asking is do the extended reach horizontals drive an improvement in capital efficiencies over time? How are you thinking about that?

Speaker 1: One of the things with the extended reach horizontal is obviously we are tapping into more resource when we extend out. We are going to see reserves. Certainly, reserves of productivity may not be quite as robust and that is a factor. We are putting more dollars into the ground that we are seeing.

Speaker 1: I would say on the extended reach, we're not necessarily seeing a per meter increase on the upfront productivity. If anything, well bore limitations, friction and other stuff like that actually can choke that initial productivity from these wells.

Speaker 1: far we drill. The economic benefit of drilling these wells longer is definitely coming through. I think you can see it in the dollars we spend as far as the efficiency as far as that goes. Part of the reason that our per meter numbers and our per continent per horizontal meter numbers.

Speaker 7: or for stimulated horizontal are where they are because we are combating rising prices with...

Speaker 7: be more efficient with the dollars as we drill longer. Overall, I think the economic benefit of them is definitely paying off for us for sure.

Speaker 3: Then how about on the.

Speaker 3: this concept of parent-child interference or maybe not even that specific, maybe just thinking tier 1 versus tier 2 inventory.

Speaker 3: operators in the US have been kind of messaging that move into lower tier inventory. What are you seeing for Payto from an inventory quality perspective?

Speaker 7: Yeah, we've kind of like we've almost combatted the sort of step down in reservoir quality by going along. You know, if you look back at that, you know, what we were drilling, you know, 2015, 2017 and you compare that from a reservoir quality perspective.

Speaker 7: to what we're getting today. The reservoir quality is poor today for sure, but we've actually been able to offset that by going along, which is why everybody is going that route.

Speaker 7: today, you know, the reservoir quality is ordered a for sure, but we've actually been able to offset that by going one, which is why everybody is going that route, right? So yeah, it's...

Speaker 7: From an economics perspective, the ERH stuff is a way of turning tier two into tier one is kind of the way we look at it, right?

Speaker 3: Right, okay, yeah, so yeah, it sounds like reservoir quality, kind of the top tier stuff has been consumed to some extent. And so just.

Speaker 3: trying to upscale the tier two stuff with technology. In terms of your inventory of remaining, how would you break down sort of what you have left in terms of...

Speaker 1: tier one opportunities, tier two, tier three? Sorry, do you want to go? Yeah, I think the way to look at it Chris, and we'd ask that question three, four years ago, it would be a different answer than it is today because obviously with technology changes in this extended reach horizontal design, for example, we move things from tier two to tier one, so we don't look at our inventories the same way.

Speaker 1: We look at this from the perspective of what we have in front of us and what we want to drill every year. We just continue to high-grade. We don't bucket our opportunities. Any geologist is going to drill his best wells first. That's always the way it goes. The engineer's job is to make sure to move those things up.

Speaker 1: off the chain as it were into the tier one category with some help with respect to the design of the wellbores or the completion.

Speaker 1: chain, as it were, into the Tier 1 category with some help with respect to the design of the wellbores or the completion techniques.

Speaker 3: Okay. All right. Well, thank you for the follow-up. I'll hand it back to you again. Okay. Thanks.

Speaker 2: Thank you once again. As a reminder, if you have a question, please press star 11. One moment for our next question.

Speaker 6: And our next question is a follow-up from Gerald Mckay. Your question, please. Yeah. The last question, the answer to the last question was excellent, but it does kind of —

Speaker 6: slide into this follow-up. The first part of the follow-up would be a top-down question, which is

Speaker 6: To what degree has the balance of the industry both in Canada and the US

Speaker 6: And you know, this is something that you may have the answer right now, or I would look forward to it in your letter or some way in the future, but to what degree has

Speaker 6: the industry experienced the costs. And I'm interested in that from a competitive viewpoint, how are we doing versus everybody else on this inflation front, but also almost more importantly.

Speaker 6: If industry CapEx levels are similar or up a bit, but this inflation is actually...

Speaker 6: having that real effect on activity, it would theoretically bode well for future prices. So that's the first part.

Speaker 6: The second part on a bottoms up basis is given the new, you know, we were at 10,000 per barrel of economics and now we're at 14 settling back down to 12. What's the incremental...

Speaker 6: capex that implies to hold production flat. Anyway, over to you and if you answered the first question so well it it did kind of lend itself to these follow-ups.

Speaker 1: Yeah, okay. So, Jerry, I think to start with the second question first, we think that around somewhere between $375 and $400 million keeps us flat to answer that question and that would be up from – I think it's up – it's basically inflation to the large part that's driven most of that efficiency cost, right?

Speaker 1: 20-30% easily, right? Probably 30% more realistically. Your first question was just, I'm sorry I lost it. I thought there was...

Speaker 6: industry-wide inflation and action activity. Yeah, we've seen, I mean, two things here. One is that everybody's seen the same cost increase.

Speaker 1: that we are. Everybody's trying to fight them the same way we are with being more efficient with what they do. You have to remember we start at a spot that's lower than the rest of the industry. These increases to us, we've been squeezing out every bit of cost structure we can all the time. When prices go up, they go up and we see it all. We don't have the lowest prices in the world.

Speaker 1: We've done pretty well on a lot of these sprints, I think, managing our costs.

Speaker 1: We were fairly well insulated relative to industry last year. We used a lot of timing on our fee processes, business contracts.

Speaker 1: protected us relative to some of those operators that picked up incremental activity late in 22 and early in 23. We were locked in on a lot of our services so that did insulate us relative to our peers.

Speaker 8: it looks like the battle for personnel has subsided a little bit in the industry. That was a big factor in some of these inflationary pressures, it seemed like.

Speaker 8: Everybody was commanding a top dollar rate just to provide personnel, hopefully qualified personnel, but it seems like that.

Speaker 8: that issue has subsided a bit.

Speaker 8: Everything we do is tied to fuel price, oil price, commodity related.

Speaker 8: where it goes forward. Oil prices, some of those services we expect to come off, we haven't seen huge reprieve yet. But as JP mentioned, we did start at a lower point on a scale relative to 30.

Speaker 8: our data indicates we started a lower point on the scale relative to our peers. So some of the percentage increases maybe you know look a little

Speaker 8: worse than our peers, but we're still that he still keeps us in a advantageous position favorable to the rest of the industry. We really have a...

Speaker 8: The equipment we use, the processes we use are very much simplified. If you can drive downtown in a Civic versus an F-350, that's kind of...

Speaker 8: We try and keep it simple for that purpose. A lot of industry is pushed towards a lot of automation, a lot of higher tech stuff, but it comes with a big cost and those services have to command a higher price to capitalise that investment.

Speaker 8: I don't know how else to answer that. Going forward, we do expect steel is a big part of our cost.

Speaker 8: and the increases in our tubular goods have been dramatic. Two and a half, you know, from lows, two and a half fold of pricing we saw from our all-time lows and I think we're going to see some retraction in that.

Speaker 6: Right in the silver in the silver landing cat a silver lining category

Speaker 6: landing category, if

Speaker 6: We're kind of

Speaker 6: peaked out at where we were and we're down at 102 and we're holding for the rest of the year and I know you didn't say that was the objective. You said that at three rigs that's how it would work out.

Speaker 6: Would it be reasonable to assume that the absent inflation that the CapEx level would moderate because the decline level would also be moderating given that this isn't an expansionary program anymore? And that's the end of my follow-up.

Speaker 1: As you know, tight gas, the first year decline is the highest. The less the size of the program we drill, the lower the declines in the following years. We've already seen that. 3-4 years ago we were up. to revelation on tomorrow at 26C central where we place our annual update.

Speaker 1: In 2017, I think I looked at the numbers here, we had a 37% decline. We had built a lot of production over that time and now we're somewhere closer to 29-30%. That's because we slow down and that's your assessment.

Speaker 1: moderate the growth, we're going to see an even lower cost to add because our declines will be lower. It all depends on where inflation goes from here, right?

Speaker 1: rate, the growth we're going to see an even lower cost to add because our declines will be lower. It all depends on where inflation goes from here.

Speaker 2: Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to JP for any further remarks. Okay, well thanks a lot folks and we'll see you next quarter. Actually, again, a reminder, our general meeting is next week on Wednesday here in Calgary. Thanks.

Speaker 2: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day. Good day.