Peyto Exploration & Development Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 9, 2023

There are 7 speakers on the call.

Operator

Thank you for standing by, and welcome to Peyto's Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. I would now like to hand the call over to President and CEO, JP Lachance. Please go ahead.

Speaker 1

Thanks, Latif. Good morning, folks, and thanks for joining Peyto's Q3 results conference call. I'd like to remind everybody that all statements made by the With me today in the room, we have Kathy Turgeon, our Chief Financial Officer Bradley Frame, our VP of Engineering Tavis Carlson, our VP of Finance Todd Burdick, our VP of Production Derek Sember, our VP of Land and Business Development and Lee Kern, our VP of Drilling and Completions. Before we discuss the quarter, on behalf of the management team, I'd like to acknowledge and thank Peyto team as we always do for their efforts over the past quarter, including our people in the field for their commitment to Paydol. And I mean that sincerely as a lot of people are working extra hard these days to integrate We recently acquired Repsol Assets.

Speaker 1

And it was a very busy quarter at Tayo, not so much On our capital program, which was relatively quiet as we continued with our careful approach to spending, given commodity prices were still down significantly as compared to last summer, I think AECOMUXY 7a price averaged only $2.26 a gigajoule and NYMEX was around $2.58 an MMBtu for the quarter. But our systematic hedging and our diversification portfolio helped us maintain cash flow, while our capital program kept us flat on production over Q2. Cash costs of $1.05 per Mcfe excluding royalties were up slightly from Q2, but when you factor out the $0.05 per Mcfe, we paid for Some partial financing fees incurred from the acquisition. They were actually slightly lower, collecting typical lower summer operating costs, but also that we've Obviously, we've been very busy doing some exciting things over the other than the drilling program we Over this last quarter, like another tuck in deal. And I call the Repsol deal that because it really fits with our strategy to acquire assets Immediately adjacent to our own operations that come with lots of upside and operating facilities.

Speaker 1

So on October 17, we closed the Repsol acquisition. And when you consider the bids went in shortly after our last call in August, that was pretty fast. But because of closing Q4, there's no production or revenue contribution from this deal in our Q3 results aside from that initial financing costs. Clearly, we're really excited about the opportunities here. We see Over 800 high quality drilling locations right now, but I expect once we get drilling, we'll spot even more like we usually do.

Speaker 1

For us, it's like going into a time warp since many of the great opportunities we pursued in the past on our own lands are right next door Right next door to these are now available again on the Repsol assets. The difference is at this time we get to use our latest drilling techniques We've been refining over the years like our extended reach horizontals and increases in stimulation intensity. So that means the well should be that much better. And as I said in the Monty report just published, the real work begins now and we've already begun drilling. Lee has 2 rigs running on the Repsol lands and we expect to drill 7 more wells by the end of the year, 7 wells in total by the end of the year.

Speaker 1

That coupled with our 2 rigs will help drive exit production to somewhere between 126,000 BOEs a day depending on hookup timing. And while much of our staff is busy integrating data with systems into Peyto, our operations team is also busy working up field optimization projects, which I'll get Todd to The field synergies with the Peyto's Greater Sundance area are fantastic. I would encourage you to look at the slides in our corporate presentation and you can see the overlay of the plants and the gathering systems because that picture says it all. We all control and operate 1.5 Bcf a day or 1.4 net Bcf a day of processing capacity in the Deep Basin. We also released our preliminary budget for 2024, which targets between 450,000,000 And that plan has a combination of activity on both the newly acquired Repsol assets and our own plateau legacy lands, where we plan to drill around or between total of 75 to 80 net horizontals.

Speaker 1

On top of that, we expect to spend about $10,000,000 on closure activities to stay ahead of our abandonment and reclamation obligations. We believe our plan to grow over the next 2 years is well timed with the In the meantime, we expect gas prices to remain volatile, so we've protected our revenues with a robust hedging program, 68% of our Forecasted gas volumes are fixed for 20 24 and 56% for 2025 at prices around $4 an Mcf, which is quite a bit higher than the strip for 2024. We calculate that not only can we support the dividend and the capital program that we've got contemplated in our plans, but also pay down debt such that we should be under one times debt to EBITDA, trailing EBITDA sometime in 2025 under the current strip. But beyond our hedges, our remaining exposure for the winter, for this winter and into 2024 is Some premium gas markets like Don, Malinan, California and U. S.

Speaker 1

Midwest. And of course, we also have our Supply contract to the Cascade Power Plant for 60,000 DJs a day, which has been delayed slightly, but should be up and running in Q1 of 2024, And we're all connected and ready to go there when they are. We also released our annual sustainability report as part of the Q3 release and you can find that on our website. We continue to hold the view that our focus on operational excellence naturally keeps our costs down, but also serves to emit Less methane, use less water, use smaller surface footprints and keeps facility utilization as high as possible. This report covers the year ending in 2022.

Speaker 1

So it doesn't include the newly acquired Repsol assets. And of course, next year, we'll reevaluate the targets based on these combined assets. Before I close My opening remarks here, I'd like to congratulate Riley on his promotion to COO and Tavis to his promotion to CFO that will take place early next year. I know you guys are excited as I am to begin the next chapter at Peyto. And thank you, Kathy, for 20 years of dedication to Peyto, We should move forward to retirement in 2024.

Speaker 1

But before we go to the phone, Latif, I think I'll let Todd, maybe expand upon a little bit. If you could Todd, you could expand on these operations optimization projects as they relate to the Repsol synergies that we've been Maybe you can provide a little more color as what your team has planned for the rest of this year and into 2024. So Todd, I'll ask you to maybe stand upon that first before we turn it over Sure.

Speaker 2

So I guess maybe to expand a little bit on your Recognition of the Peyto people, I would say that we're pretty happy to see the Repsol All people that we former reps and all people that we brought in really working hard along with our Peyto people to Identify some synergies and optimization opportunities, they've really stepped up since they came in and They look like really great additions. So we're pretty happy on that. I'm sure that's probably other groups are seeing that too, I hope. As far as what we've got planned for The remainder of this year, we've got some kind of quick wins, if you want to call it that. We've got immediate plans for 3 projects In the Greater Sundance area, 2 should be completed here in November, 1 in December.

Speaker 2

2 of them involve some pipeline tie ins that will redirect roughly 20,000,000 cubic feet a day of well gas into lower line pressure and higher liquid recovery plants. And then a third involves a compressor sales pipeline redirection that ends up Removing the need for about a $2,500,000 pipeline that we were previously envisioning building. So we have that savings and then that all that gas that moves into that system will end up being at A lower line pressure, so that will help. And we're doing it for minimal cost, a few $100,000 and Very little regulatory applications required.

Speaker 3

And then as

Speaker 2

far as going into 2024, We're going to focus on really adding infrastructure, I guess, And connecting infrastructure so that we're able to connect Repsol plants into Peyto infrastructure so that we've got swing capability so that we can move Gas around from plant to plant in outages and then it will continue to look for lower line pressure opportunities and that sort of stuff. So we've sort of got about 5 projects that we're envisioning right now. Several of them will be Up in the northern area, sort of Wild River, Wild Hay, Cecilia, and that will connect those three plants together And then further south connecting the Edson gas plant, the Med Lodge gas plant into the Old Man, Swanson and no sale facility. So we're excited about that and expect to have a lot of this stuff done Probably in the first half of twenty twenty four, and then we'll continue working on some of the little bit more nuanced things as we move through The first half of the year and we'll probably be able to do we're expecting costs pretty minimal costs even for some of those larger header modification

Speaker 1

Okay. I imagine there's a lot of questions. So Latif, let's open up the phone lines there. Perhaps we

Speaker 4

can see what we have for questions.

Operator

Our first question comes from the line of Jeremy McCray of Raymond James.

Speaker 3

Hi, guys. It's been a month since the closing here now and I'm curious if you're getting Any kind of update just in terms of some of the synergies that we could have expected? Are you getting maybe I'm just trying to think of like better potential for more access into the California market, better rig contracts, better anything just with some of the Synergies and contracts that you guys may have had with Repsol. And then second question, a lot of M and A going on here in the sector here right now. Are you guys done with these tuck in acquisitions or is there more still to come here?

Speaker 1

Okay. So hi, Jeremy. Thanks for Your question, in the first, I think Todd alluded to some of the projects that we got working on as far as optimizations go. We did get a little bit of diversification with the acquisition into a little bit more California into the California market with the marketing side. As far as synergies around drilling and etcetera, really we haven't changed our program.

Speaker 1

All we do is redirect it More on the Repsol assets. So we still have 4 rigs, Brian. So that hasn't really materialized any changes to sort of synergy or larger Synergies related to contracts like that. With respect to what was the second part of your question?

Speaker 3

Just a lot of M and A going on in the second half year right now. Just your comments on that and how do you guys fit in with all this M and A that you are you guys done? Are you still looking at things still opportunistic?

Speaker 1

Yes, we haven't changed our approach. In fact, I'd argue that what we just did isn't any different than what we've been doing all the way along. We call these tuck ins because they have Synergies, they're right next to our own assets. We understand them really well. And so we'll continue to do that.

Speaker 1

For us, it's The strategy really hasn't changed. We'll look at opportunities as they come around and we'll jump on them if we think they make sense to us and we can make Typically, they're going to come with facilities and they're going to come with a lot of opportunities so that we can continue our strategy of owning and controlling. We think that's really important and we'll continue to look at any kind of opportunities like that. I think the Repsol opportunities So the Repsol acquisition provides us with additional opportunities as we move out, our footprint gets bigger and we see more opportunities On other kinds of tuck ins that we'll pursue as we go along here. But besides that, I mean, really we have we're also not we're looking at land sales, we're looking at other ways To add to our land base, maybe you want to comment on that, Derek?

Speaker 4

Yes, sure. We're definitely active still on the land sale front, continue to target In the quarter, we did pick up 10 secondtions of prospective lands for an average of 211 an acre and that put us to a total of 26 secondtions year to date for an average of 178 And Ankur, So we're active on the

Speaker 1

land front too, which is good.

Speaker 4

Yes. So with the additional footprint of the Repsol lands, Many new Crown land sales in the future will now fit our profile given the closer proximity to our pro form a land base. So We'll look to capitalize on those opportunities once they arrive.

Speaker 1

Okay. Thanks, guys. Thanks, Ray. Thanks, Jeremy.

Operator

Thank

Speaker 1

you.

Operator

Our next question comes from the line of Chris Thompson of CIBC.

Speaker 5

Yeah, Good morning, guys. Thanks for taking my question. Just firstly, on some of that infrastructure work that you're doing, you mentioned redirecting $20,000,000 a day With these projects coming up here at the end of this year, does that actually increase utilization on a specific plant? Does it Does it decrease utilization on another? How should we be thinking about that?

Speaker 5

I noticed you specifically called out utilization in the press release there.

Speaker 1

Yes, I think I'll get Todd to sort of expand a little further on that. I think in general, we're looking at this from the perspective of we got to get drilling here and start growing production in those areas and that will really be the key driver for OpEx reduction because obviously fixed costs They have been underdeveloped in the areas and so the fact that these plants have not been their production has Falling, the fixed costs are spread out, so those fixed costs. And so that utilization is down relative to where We'd like to see it. So obviously, we're going to get drilling here. But in the short term, Todd's got these projects planned to move production around and to optimize it.

Speaker 1

And part of that is We're lowering line pressures to help increase throughput as well, right? So utilization rates are going to move around as we do that, obviously, right?

Speaker 2

I think on specifically on the 20,000,000 cubic feet a day of gas that I mentioned, That is moving some gas that's up in the Cecilia area. That Cecilia plant has been So our plan is to there's a connection right there, Repsol pipe going right past the Cato pipe and we're going to move some gas up Further north into the Wild River plant?

Speaker 1

So that's why utilization is already 100% as it were, but now We're going to help lower pressures and increase utilization.

Speaker 2

Exactly. And we have it will move a little bit of gas maybe out of the Wild hay plant, but it will relieve the infrastructure that we were directing to move that gas around. Yes, definitely will help online pressure and positively affect a lot of other wells in that area.

Speaker 5

Got it. Okay. And then from an infrastructure spending standpoint next year, You mentioned the big turnaround at the Edson plant. So just wondering if you can expand a bit on what the estimated costs are for that and other

Speaker 1

I won't get into specific projects because those will move around on us, Chris. But generally speaking, our Facility budget is close to 15% to 18% of our annual budgets and that isn't any different than in the past. Maybe I guess Last year was lower than that. But so there's a few projects that we've got on the go this year that related to that, the gas plant. The gas plant Gas and Gas Plant turnaround is actually spaced over a couple of different months.

Speaker 1

So it's spread out. It will be around the infrastructure costs, facility costs will be in that 15% to 18% of our capital budget range.

Speaker 5

Okay. And then next question from me, how should we be thinking about your royalty rate next year and then Cash taxes as well and we've talked about operating costs in the past, but just wondering if there's been any change to your outlook on OpEx as well?

Speaker 1

Sure. Maybe I'll get Thanos to answer the royalty question here first and we'll talk I'll follow-up some other ones.

Speaker 4

Yes, Chris, I think our royalty rate is going to be consistent with where Peyto has been over the last year. Like obviously, if AECO Does that tick up a bit? We could see a little bit higher,

Speaker 1

but somewhere around that 8%

Speaker 4

to 10% would be a good place to be modeling right now. In terms of cash actions, we're modeling around 12% to 14% next year. It's going to be a bit higher than where we are at in 2023. The Repsol acquisition is a partnership, so it doesn't come with many tax pools. The resource pools and non capital losses will flow up to the partners in Healy.

Speaker 4

So really we're only inheriting A little bit of UCC pools and some resource pools that we would

Speaker 1

have generated from June 1 Chris, you also asked about operating costs. Operating costs, I mentioned earlier that utilization of their plants is down and we Like to think we have significant improvements that we can make on operating costs, step off costs will be higher, but we've already we're already going to See some changes to that. In fact, as far as our people synergies, how we feel. And so Costs are going to go up for sure, but we still think that we have lots of opportunities to go down our direction over The coming year 2024, that's what we focused on doing. If you look to our corporate presentation, I have a sort of a total cash cost Slide here that gives you some direction around what we see in our total cash cost excluding royalties and tax in the core presentation to help you with

Speaker 5

All right. Thanks, JP. Maybe just last question from me, Just with your preliminary budget and guidance out, could you maybe help us a bit on the shape of the capital profile next year and the shape of your production profile next year?

Speaker 1

Yes, sure. So capital the capital program is probably relatively Balance throughout the year, it would be a little bit higher in the back end and because we have different and a lot of that has to do with the timing of facility projects that don't Production typically will be back end loaded. For us, we have a couple of things there. We came out of the year, We have a little bit higher declines at the front end and so we're relatively flattish in the first half of the year and we grow at the back half which is Fairly typical of Peyto's profile. And part of that is to do with the fact that we have a breakup period.

Speaker 1

We're modeling right now that we aren't going to be Running all 4 rigs to break up, that could change. So that capital profile could change as well if we decide that it's a good time to go and make sense, the market is there. We can get to lower costs, which we typically done, but not always. So right now, we're modeling more or less a flat front end

Speaker 5

Okay. I think you mentioned exiting 2024 between 135,000 and 140,000 BOEs a day. So I mean if we just connect the exit this year guidance to the exit next year guidance in the straight line, we kind of get to about 100 and 32,000 a day as an average next year, is that the right way to be thinking about it?

Speaker 1

Yes. Again, I would say, come out of the year, stay flat in the first half Thank you. Thanks for your call, Chris.

Operator

Thank you. I would now like to turn the conference back to JP Lachance for closing remarks. Actually, sorry, we do have a question. I'm sorry. We have a question, please stand by, from the line of Travis Wood of MBS.

Speaker 6

Hey, guys. Good morning. Two questions. First, Just kind of carrying on from Jeremy's question around M and A. Anything that you see within the portfolio kind of pro form a now that you've Been operating it for a month that you could carve out as quotation non core, including potentially some facilities with that?

Speaker 1

Yes, there's obviously, we're going to continue to look at these assets in a way that we've always been focused. And so but Really what we purchased here is quite focused, right? So none of the I would suggest that the Revsol assets themselves are Something like that we would consider carving out necessarily and it fits really, really nicely with that's why we bought it. But there may be some minor properties that came along with this that we would look to I've asked for sure, and we'll continue to look at that depending on what opportunities are out there and how we want to Sort of direct our capital program, but nothing specific.

Speaker 6

Okay. Thank you for that. And then unrelated, A lot of comments around maintenance and kind of optimizing infrastructure and directing volumes kind of Zigzagging across the portfolio, anything from an optimization standpoint as we think about liquids CAPTURE, is there anything within that optimization outside of costs? Is there anything on the revenue side where we Could expect higher NGL ratios on the back end?

Speaker 1

I think Todd mentioned there that with respect to redirecting some of our gas to higher efficiency, higher liquid recovery plants, Certainly, it's part of that and that's part of the work. It's about making money. It's not just about production, right? So obviously, higher liquid recoveries where they make sense, so they got to make sense, Right. If the deep cut doesn't make sense, we turn it down.

Speaker 1

We turn it off like we always have it at the old end and same would go with anything on the Repsol lands. We would handle at the same pace. So we'll always be looking for highest netback we can get. If that means changing our processes or moving production around to do that, we're going to be doing that. So And I think this gives us even more opportunity now that we have this interconnection.

Speaker 1

As Todd mentioned, we're going to interconnect all these plants together Give us maximum flexibility to be able to do those kinds of things, but nothing specific to tell you right now, Travis. We're Still in the throes of all this, right?

Speaker 6

Okay, fair enough. And then just specifically for Edson and the maintenance Is that is it related to just kind of not enough capital Spend from Repsol over the years or is there something specific that you want to target before you start to change throughput there?

Speaker 1

Yes. First of all, actually, I would say the capital spending done by Revsol in the past has actually been To maintain the Eds and Clark Gas Plant has been great. I mean, that's what they have spent their money on. So The condition of that facility is in great shape. It's just coming up to its turnaround.

Speaker 1

I don't know if we talk Can expand upon that, the money we're spending there is more on preventative maintenance as part of an ongoing program as opposed to fixing it off this quarter.

Speaker 2

Yes. This is their 10 year turnaround. So they've got a It's obviously a very big facility, so there's a lot of vessel entries that have to happen, a lot of PFE changes, that sort of stuff. And then Along with that, some R and R work to replace Stuff that's maybe coming to end of life, which is just typical. You do have some 10 year and 5 year schedule.

Speaker 2

So it's Just timed out that we picked up the assets right in time of a very large 10 year turnaround.

Speaker 6

Okay. That's fantastic color. Thanks very much. I'll turn it back.

Operator

Thank you. And I show no questions. Mr. Lachance, the floor is yours for remarks, sir.

Speaker 1

Okay, thanks. Well, thank you all for tuning in. We're excited about going forward here and we need some time to digest And similarly, as it were, the assets and going forward, we're quite excited about the

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Key Takeaways

  • Despite commodity prices averaging only $2.26/GJ AECO and $2.58/MMBtu NYMEX in Q3, Peyto’s systematic hedging and diversified portfolio preserved cash flow and held production flat versus Q2, with cash costs of $1.05/Mcfe ex-royalties (slightly lower when adjusted for financing fees).
  • Peyto closed the Repsol asset acquisition on October 17, adding over 800 high-quality drilling locations contiguous to its Greater Sundance area and drilling nine wells by year-end to lift exit production toward 126,000 BOE/day.
  • The preliminary 2024 program targets a $450 million budget to drill 75–80 net horizontals across legacy and Repsol lands, plus $10 million for abandonment, aiming for flattish first-half volumes and growth to 135,000–140,000 BOE/day by year-end.
  • A robust hedging program fixes 68% of 2024 and 56% of 2025 gas volumes at roughly $4/Mcf—well above current strips—supporting the dividend, the capital plan, and a path to sub-1× debt/EBITDA by 2025.
  • Operational synergies with the acquired Repsol team include three quick-win projects to redirect about 20 MMcf/day into lower-pressure, higher-liquid-recovery plants and a pipeline reroute saving $2.5 million in facility costs.
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Earnings Conference Call
Peyto Exploration & Development Q3 2023
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