Advantage Energy Q3 2024 Earnings Report

Advantage Energy EPS Results

• Actual EPS: -C$0.04
• Consensus EPS: C$0.03
• Beat/Miss: Missed by -C$0.07
• One Year Ago EPS: N/A

Advantage Energy Revenue Results

• Actual Revenue: $144.86 million
• Expected Revenue: $161.10 million
• Beat/Miss: Missed by -$16.24 million
• YoY Revenue Growth: N/A

Advantage Energy Announcement Details

• Quarter: Q3 2024
• Date: 10/24/2024
• Time: N/A
• Conference Call Date: Friday, October 25, 2024
• Conference Call Time: 10:00AM ET

Advantage Energy (TSE:AAV) Ltd supplies clean, affordable, reliable, and sustainable Canadian energy to power the needs of Canada and the world. It is focused on the development and delineation of its Montney natural gas and liquids resource at Glacier, Wembley/Pipestone, Valhalla, and Progress, Alberta.

Advantage Energy Q3 2024 Earnings Call Transcript

Key Takeaways

• Advantage delivered record production of 74,400 BOE/d in Q3, up 12% QoQ and 16% YoY, with liquids output hitting a record 12,800 bbl/d and representing 71% of sales revenue.
• The company reduced its 2024 capital spending guidance to $245–275 million, a $35 million reduction since the recent acquisition, while maintaining disciplined capital allocation.
• Capex and adjusted funds flow were balanced at $55 million in the quarter, leaving net debt flat at $222 million.
• Early integration of acquired assets has driven synergies, resulting in operating costs of $5.55/BOE (below the $6/BOE budget) and shallower production declines than expected.
• Advantage’s curtailment strategy—shutting in higher-cost gas when AECO prices fell below ~$0.50/GJ—has protected free cash flow, and the company now prioritizes deleveraging to a $450 million net debt target via non-core asset sales and potential opportunistic share buybacks.

Presentation

[Operator]

Good morning, ladies and gentlemen, and welcome to the Advantage Energy Ltd Q3 2024 Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, October 25, 2024. I would now like to turn the conference over to Mr. Brian Bagnell, Vice President, Commodities and Capital Markets. Please go ahead.

[Brian Bagnell, VP of Commodities and Capital Markets at Advantage Energy Ltd.]

Thank you, Cindy, and welcome everybody to Advantage's conference call to discuss our third quarter 2024 results. Before we get started, I'd like to refer you to our advisories on forward-looking statements contained in the news release, as well as advisories contained in Advantage's MD&A and annual information form, both of which are available on SEDAR and on our website. I'm here with Mike Belenkie, President and CEO of Advantage, Craig Blackwood, our CFO, as well as other members of our executive team. We'll start by speaking to some of our financial and operational highlights. Once Craig and Mike have finished speaking, we'll pass it back to the operator for questions. As usual, we'd ask that if you have any detailed modeling questions, that you follow up with us individually after the call. Mike, please go ahead.

[Mike Belenkie, President and CEO at Advantage Energy Ltd.]

Thanks, Brian. I'm pleased to report our third quarter results, including record production, strong liquids performance, and lower operating costs. I'll start with some highlights. Third quarter production averaged 74,400 BOEs per day, an increase of 12% over the prior quarter and 16% over the third quarter of 2023. This was a corporate record, despite having curtailed approximately 5,000 BOEs per day of dry gas during the quarter in response to unusually low AECO prices and a significantly reduced drilling program for the year. Liquids production achieved a record of 12,800 barrels per day, an increase of 80% over the prior quarter. Liquids represented 71% of our sales revenue, which highlights the diversification benefits of our recent acquisition, while gas prices have been volatile.

[Mike Belenkie, President and CEO at Advantage Energy Ltd.]

Thanks to our disciplined capital allocation and continued strong well performance, we were able to reduce our 2024 capital spending guidance to between CAD 245 million and CAD 275 million. That's a reduction of CAD 35 million compared to our budget at the time of the acquisition only a few months ago. We'll continue to manage our capital program in fourth quarter with a strict focus on returns, and we'll only bring new wells online when the returns are supported by the forward strip. With lower capital and higher revenues from liquids, our capital spending and adjusted funds flow were balanced during the quarter, each at CAD 55 million. Net debt remained flat at CAD 622 million. Turning now to an update on the performance of the acquired assets.

[Mike Belenkie, President and CEO at Advantage Energy Ltd.]

We're very pleased to be able to report positive early results on integrating the assets and capitalizing on synergies. Operating costs and G&A are materially lower than budgeted, and production declines have been shallower than expected. Cash flows have benefited from added production, including reactivated high H2S wells that were unable to flow without access to our substantial gas processing assets. Third quarter operating costs were CAD 5.55 per BOE, which is well below our expectation of CAD 6 per BOE, and there is room for them to fall further. This is a great result when considering our production curtailments for the quarter. Our first Charlie Lake 2-well pad has been drilled and will be completed in the coming months. We expect it to be on stream in mid-December.

[Mike Belenkie, President and CEO at Advantage Energy Ltd.]

Seven net wells are planned before the end of 2024 in the Charlie Lake, targeting development locations with strong economics. Construction continues on our 75 million cu ft per day Progress 4-21 gas plant, which we expect to be on stream in the second quarter of 2025. This facility will unlock significant synergies from the new assets, resulting in lower operating costs and stronger operating netbacks. Combined with surplus capacity that came with the acquisition, Advantage has adequate gas processing capacity now to execute on our growth targets for the next three years, while reducing infrastructure spending in 2026 and 2027 by about CAD 100 million. Switching now to operational discipline. Glacier is among the lowest cost natural gas assets in North America.

[Mike Belenkie, President and CEO at Advantage Energy Ltd.]

However, daily gas prices at key regional hubs like AECO and Empress recently fell to as low as CAD 0.05 per GJ at times during September and early October. As such, we chose to curtail production by as much as 130 million cu ft per day on certain days to maximize free cash flow and reduce depletion. These curtailments by Advantage and a small number of our peers, combined with increasing seasonal demand, have so far supported a sharp recovery in Western Canadian cash prices in the last few weeks, which did allow us to restore production to capacity quickly. We see our ability to quickly turn large volumes of production on and off while pricing is volatile as a competitive advantage.

[Mike Belenkie, President and CEO at Advantage Energy Ltd.]

We also recognize, though, that volatility may continue into the early winter, but we expect market conditions for natural gas to improve in 2025 and beyond as a result of growing exports and increasing Western Canadian natural gas demand. Looking forward, Advantage's long-term focus is on maximizing the AFF per share growth while maintaining a strong balance sheet. As a result of the acquisition, Advantage now expects to exceed our per share growth targets, so our strategy has temporarily shifted towards maximizing the pace of delevering, with a focus on achieving our net debt target of CAD 450 million. As a part of this process, we are evaluating various options to accelerate delevering, including small non-core asset sales. We anticipate providing investors with an update early this winter.

[Mike Belenkie, President and CEO at Advantage Energy Ltd.]

While Advantage is focused on reaching our net debt target quickly, we may consider opportunistic share buybacks if our share price becomes temporarily disconnected from fundamentals. We plan to host a virtual Investor Day on December 10th, 2024, to discuss our 2025 budget and our refreshed three-year plan. Though the plan is not yet set, it will continue to focus on steady, efficient growth, highly efficient capital deployment, and a strong, predictable focus on total shareholder returns. With that, I'd like to thank our long-term investors and board of directors for their continued support, and I'll hand it back to the operator to open the lines for questions.

[Brian Bagnell, VP of Commodities and Capital Markets at Advantage Energy Ltd.]

Cindy, we'll pass it to you to address any Q&A. Thank you.

[Operator]

Thank you, ladies and gentlemen. We will now begin the question-and-answer session. Should you have a question, please press the star followed by the number one on your touch tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you're using speakerphone, please lift the handset before pressing any keys. You have one question on the queue from Amir Arif from ATB Capital. You may now ask your question.

[Amir Arif, Managing Director at ATB Capital]

Hey, thanks. Mike, a couple of quick questions for you. First, just in terms of the break-even prices to think about for gas, can you give us a sense of what gas price you do think about shutting in volumes? And then also, what gas price you do think about either completing DUCs or willing to go ahead and do put new capital into Glacier wells?

[Mike Belenkie, President and CEO at Advantage Energy Ltd.]

Yeah. Thanks, Amir, for the question. Yeah, appreciate that. Our CVP, who's in charge of all things operational, has a list with his team of the individual operating costs, this is variable operating costs, of each one of our wells, and based on the price of the day, we go down the list anything that is essentially a higher cost molecule than the price of that day. And so on any given day, the prices may rise, be increased. It may increase the amount that's shut in or decrease it. So there's no single number. But I think that the way to think about it should be, we do tend to reduce. We see reductions start to grow when we fall below CAD 0.80, and at CAD 0.50 becomes quite material.

[Mike Belenkie, President and CEO at Advantage Energy Ltd.]

Certainly at CAD 0.05 or CAD 0.20, we're gonna be pinned at the top end of that range, where anything that's exposed to AECO or Empress pricing will be shut in at that low price.

[Amir Arif, Managing Director at ATB Capital]

Makes sense.

[Mike Belenkie, President and CEO at Advantage Energy Ltd.]

Okay.

[Amir Arif, Managing Director at ATB Capital]

And then in terms of completing DUCs, like bringing some of the capital back in, is there a certain gas price you're looking for on that side?

[Mike Belenkie, President and CEO at Advantage Energy Ltd.]

Yeah, thank you. So that second part, in terms of that, that's each well is looked at with a cumulative free cash flow metric as we think about when to bring the wells on. What we're driving towards is maximum pace of delevering using free cash flow. So, on a regular basis, we'll recalibrate well economics to establish the optimal time to turn the, turn a well on that might be shut in or has been completed but not yet tied in. So, really, it's about calculating, simply for highest cumulative free cash flow. And that can vary quite a bit, Amir. Yeah.

[Amir Arif, Managing Director at ATB Capital]

Okay. Yeah, no, fair enough. And then just a second question. On the comment of willingness to buy back some stock opportunistically if the stock price is dislocated from fundamentals, can you give us a sense of would that come from cash flow, or would that only come if you have some non-core asset sales? And just some more color around that comment relative to the CAD 450 million longer term net debt target.

[Mike Belenkie, President and CEO at Advantage Energy Ltd.]

Yeah. Again, that's this is. It's important to note that we mention this to just be very clear that our primary goal, now that we've exceeded our growth targets, our primary goal is to delever. But that's not to say that it's the best use of capital at all times. There may be times, if our share price is volatile, where a better use of capital is to pick up some shares opportunistically. So again, it's not necessary. You asked if it's coming from cash flow or from sales. It all goes into the same pool. It all comes really in the end, it goes through our balance sheet.

[Mike Belenkie, President and CEO at Advantage Energy Ltd.]

And so positive news on pricing, positive news on asset sales, or simply low price will all influence our willingness to go and pick up some more shares along the way. But really, not a primary focus, just an opportunity for us to fine-tune. Okay?

[Amir Arif, Managing Director at ATB Capital]

Got it. Appreciate the color. Thanks.

[Mike Belenkie, President and CEO at Advantage Energy Ltd.]

Okay, thank you.

[Operator]

Next question from Jamie Kubik, from CIBC. Please ask your question.

[Jamie Kubik, Director of Equity Research at CIBC]

Yeah, thanks for taking my question. I'm just curious on the non-core asset sales that you highlight in your press release. Can you talk a little bit more about what you consider to be non-core in your portfolio? And if you have any targeted total disposition values in mind or things to that effect? Thanks.

[Mike Belenkie, President and CEO at Advantage Energy Ltd.]

Sure. Thanks, Jamie. Yeah, so what we consider to be non-core are things that are not on the main Alberta map sheet. So, that includes both the block at [audio distortion], which is 37 sections of high quality Montney rights, 53 sections at Conroy, high quality Montney rights, which are non-producing, so there's no cash flow from those. So, we consider those both non-core in terms of geographically, and they're non-producing, so it doesn't impact our cash flow. Within the Alberta assets, there are still some non-core items in there, things that we don't expect to drill in the near future, things that are not cash flowing or things that are worth more in the hands of our partners. In some cases, these are low working interest lands that would be better owned by partners.

[Mike Belenkie, President and CEO at Advantage Energy Ltd.]

Qualifying the target value of this sort of multifaceted sales process that we would look at is very difficult, very wide range, so probably not worth being too crystal clear on. But we don't expect this to be picking up, you know, if our debt target is, let's call it CAD 150 million lower than we currently are at, we think this would take a partial bite of that, but not likely to be complete. Okay, hopefully that answers that quickly for you, Jamie.

[Jamie Kubik, Director of Equity Research at CIBC]

Yeah, that's perfect color. Thank you. That's all for me.

[Mike Belenkie, President and CEO at Advantage Energy Ltd.]

Okay.

[Operator]

Again, should you have a question, please press the star one on your touch-tone phone. Okay, there are no further questions at this time. I would like to turn the call back over to Mr. Bagnell. Please continue.

[Brian Bagnell, VP of Commodities and Capital Markets at Advantage Energy Ltd.]

Thank you very much, everybody, for joining, and happy to catch up with you individually later. That'll end the call today. Thank you.

[Mike Belenkie, President and CEO at Advantage Energy Ltd.]

Thanks, everybody.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Participants

Executives

• Mike Belenkie, President and CEO
• Brian Bagnell, VP of Commodities and Capital Markets

Analysts

• Amir Arif, Managing Director at ATB Capital
• Jamie Kubik, Director of Equity Research at CIBC