Kiwetinohk Energy Q3 2024 Earnings Report

Kiwetinohk Energy EPS Results

• Actual EPS: C$0.73
• Consensus EPS: C$0.42
• Beat/Miss: Beat by +C$0.31
• One Year Ago EPS: N/A

Kiwetinohk Energy Revenue Results

• Actual Revenue: $116.71 million
• Expected Revenue: $117.00 million
• Beat/Miss: Missed by -$290.00 thousand
• YoY Revenue Growth: N/A

Kiwetinohk Energy Announcement Details

• Quarter: Q3 2024
• Date: 11/6/2024
• Time: N/A
• Conference Call Date: Thursday, November 7, 2024
• Conference Call Time: 10:00AM ET

Kiwetinohk Energy (TSE:KEC) Corp develops and produces natural gas and related products and is in the process of developing renewable, natural gas-fired power, carbon capture and hydrogen clean energy projects.

Kiwetinohk Energy Q3 2024 Earnings Call Transcript

Key Takeaways

• The upstream division delivered strong Q3 performance, leveraging high-pressure, high liquid gas ratio Duvernay assets with top‐performing wells and a first Simonette Montney well producing over 7 MMcf/d gas plus 400 bpd condensate, exceeding expectations.
• Operated facilities and hedging drove a Q3 operating netback of $28.98/BOE (adjusted to $30.89/BOE), with operating costs down 22% YoY to $7.19/BOE thanks to owned infrastructure.
• Secured 120 MMcf/d Alliance pipeline capacity extended to 2032, enabling sale of over 90% of gas production at Chicago prices approximately 200% above the AECO benchmark.
• Accelerated its capital program by adding a second rig and advancing nine new wells into Q1 2025, positioning the company to generate free cash flow and commence debt repayment early next year.
• The Power division remains cautious amid regulatory uncertainty, pursuing sale or financing options and advancing the Homestead transmission line through final AUC approval stages.

Presentation

[Operator]

Good morning. My name's Angeline, and I will be your conference operator today. I would like to welcome everyone to Kiwetinohk 2024 third quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then the number two. Thank you. Mr. Carlson, you may begin your conference.

[Pat Carlson, CEO at Kiwetinohk Energy]

Thank you, Angeline, and good morning, everyone. Welcome to the Kiwetinohk Energy Investor Call for the third quarter of 2024, and thank you for joining us for this update. I am Pat Carlson, Kiwetinohk CEO, and to start, I will ask Janet Annesley, our Chief Sustainability Officer, to do an Indigenous land recognition. Please go ahead, Janet.

[Janet Annesley, Chief Sustainability Officer at Kiwetinohk Energy]

Thank you, Pat. Kiwetinohk's conference call today is coming to you from Calgary, which is located on the traditional territories of the people of Treaty 7, which includes the Blackfoot Confederacy, comprised of the Siksika, the Piikani, and the Kainai First Nations, the Tsuut'ina First Nation, and the Stoney Nakota, including the Chiniki, Bearspaw, and Goodstoney First Nations. Calgary is also home to the Otipemisiwak, which is also known as the Métis Nation of Alberta, districts five and six. Kiwetinohk has operations across Alberta, Treaty 6, Treaty 7, and Treaty 8, and we recognize the diversity of First Nations and Métis people in all these places that we call home. Back to you, Pat.

[Pat Carlson, CEO at Kiwetinohk Energy]

Thank you, Janet. Joining me today, in addition to Janet, are Jakub Brogowski, Chief Financial Officer, Mike Backus, Chief Operating Officer Upstream, Fareen Sunderji, President Power Division, Mike Hantsch, Senior Vice President Midstream and Market Development, Lisa Wong, Senior Vice President Business Systems, and Kevin Nielsen, VP, Corporate Controller and Investor Relations. We'd like to use the first part of the call to provide you with a summation of our third quarter release from yesterday evening. The telephone line will then be opened up to allow participants to ask questions. Before going through the results, I'll remind everyone that the conference call includes forward-looking information and non-GAAP financial measures with the associated risks and disclaimers detailed in our news release and management discussion and analysis. The news release, financial statements, and MD&A, and all of the company's official disclosures are all available on our website and SEDAR+.

[Pat Carlson, CEO at Kiwetinohk Energy]

I'm extremely pleased with the team's performance in the third quarter of 2024. In our Upstream division, we executed on a significant development program, which has provided us with continued confidence in the quality of our assets, including key differentiating factors that we continue to use to our advantage. Among these differentiators are: our Duvernay asset is high-pressure, high-liquid gas ratio and delivers some of the top-performing wells in the Duvernay, and Kiwetinohk has drilling inventory to continue development and grow production into the future. Beyond our Duvernay position, we recently brought on production the first Montney well in the Simonet area drilled by Kiwetinohk. Its results encourage our team to continue to delineate and demonstrate the productivity of an underdeveloped Simonet Montney resource. These results will be elaborated on by Mike Backus later in the call. Pardon me. We've been able to maintain strong netbacks for two main reasons.

[Pat Carlson, CEO at Kiwetinohk Energy]

First, we own and operate our own facilities within our Simonet asset, which allows us to keep our operating costs low. And second, we hold 120 million cubic feet per day of pipeline capacity on the Alliance Pipeline, which recently facilitated the sale of over 90% of our natural gas production in Chicago at a premium to Alberta prices. This Alliance capacity was recently extended by seven years, allowing us continued access until 2032. In our Upstream division, we expanded our fourth quarter plans to include a second drilling rig to accelerate three wells previously planned for the second half of 2025. Incremental capital is expected to result in a higher ratio of net debt to adjusted funds flow from operations in the short term as we exit the year.

[Pat Carlson, CEO at Kiwetinohk Energy]

However, with nine wells anticipated to come upstream between now and the end of the first quarter of 2025, we expect to be in a position to begin delivering free cash flow and begin to repay debt early in 2025. Advancing this investment in wells provides us with flexibility to determine optimal growth levels depending on the commodity price environment. Work on our 2025 budget is well underway, and we anticipate releasing guidance in the fourth quarter. In our Power division, we continue to remain cautious and disciplined given the uncertain regulatory environment. We continue to seek sale or financing opportunities for our power portfolio in whole or in part. I'm looking forward to providing markets with our 2025 budget later in the year and updating our full year 2024 achievements in the new year. I would like to thank our shareholders and board for their continued support.

[Pat Carlson, CEO at Kiwetinohk Energy]

I'll now ask Jakub Brogowski to provide more information from the CFO's perspective. Jakub?

[Jakub Brogowski, CFO at Kiwetinohk Energy]

Thanks, Pat, and good morning, everybody. During the third quarter, our focus remained on development of our upstream assets, with 98% of our capital investment directed towards our profitable high-net-back Duvernay and Montney production. The quality of our upstream assets continues to be proven as we develop our extensive inventory, and there are a few key points I wanted to draw your attention to in this quarter. Our liquids-rich production, owned infrastructure, and U.S. egress capacity continue to consistently deliver peer-leading operating netbacks with a Q3 netback of CAD 28.98 per BOE. Our hedging activities and strong overall hedge book further added to our netbacks, bringing our adjusted operating netback to CAD 30.89 a BOE. We have consistently shown our ability to maintain strong adjusted netbacks over a long period, with quarterly netbacks averaging CAD 32.50 per BOE since the start of 2023.

[Jakub Brogowski, CFO at Kiwetinohk Energy]

As Pat noted, our owned and operated facilities continue to drive low operating costs, achieving CAD 7.19 per BOE in the third quarter, and we remain on track to achieve the low end of our operating cost guidance. Current levels also represent a 22% reduction from the third quarter of last year. I also wanted to touch on our recently extended Alliance capacity and the value that it has provided us this year. In the third quarter, we saw significant downward pricing pressure on the Alberta AECO benchmark gas price. Our Alliance access has allowed us to realize higher gas pricing based on the Chicago market, with benchmark monthly average pricing approximately 200% higher in Chicago when compared to AECO in the third quarter.

[Jakub Brogowski, CFO at Kiwetinohk Energy]

On the capital side of the equation, Kiwetinohk's assets and our contracting structures provide us the flexibility to respond to a changing pricing environment, and we have the ability to quickly increase or decrease our capital program to maintain a strong balance sheet. This year, we have chosen to reinvest our cash flows into growth, with 85% of the approximately CAD 237 million we have invested in the first nine months of the year covered through our cash flows. Our credit facility has supported the remaining capital expenditures, and as of the end of the quarter, we continue to have strong availability with our credit facility of approximately CAD 230 million. During the third quarter, we announced the further acceleration of our capital program, increasing our capital guidance by CAD 10 million for the year.

[Jakub Brogowski, CFO at Kiwetinohk Energy]

We expect significant new production coming on stream, starting before the end of this year and into the first quarter of 2025, which will allow us to pay down balances on our credit facility. This head start will also provide us with flexibility to respond to the pricing environment in 2025 when determining optimal growth levels. We are planning to announce our budget for 2025 later in the year, as Pat mentioned. We also ended the quarter with just under CAD 900 million of tax pools. These valuable offsets to income will help us to defer our tax for the coming years as we continue to profitably grow production. I wanted to conclude by reiterating our excitement over the quality of our asset and underlying value within our shares.

[Jakub Brogowski, CFO at Kiwetinohk Energy]

We saw multiple acquisition transactions during the third quarter, demonstrating value being paid for assets with growth potential and ample inventory, both of which Kiwetinohk possesses. Most recently, a Duvernay position in the immediate proximity to our asset was part of a U.S. $6.5 billion acquisition. We are excited by the significantly increasing interest in the Duvernay play and valuation metrics achieved in these market transactions as they continue to demonstrate our significant value potential. Thank you for your time today, and I'll now turn it over to Mike to expand on our Upstream results.

[Mike Backus, COO of Upstream at Kiwetinohk Energy]

Great. Thanks, Jakub, and good morning, everyone. I'm pleased to provide you with an update on the Upstream operations for the third quarter. We're safely executing our busiest program to date during the second half of this year. The development program's on track, and we're excited to see our production volumes continue to ramp up, particularly in the fourth quarter and into early next year. Our production in Q3 averaged near 26,000 BOEs per day, which was consistent with the second quarter. This was a very busy quarter with new wells coming on stream later in the quarter, as outlined in the press release. It was offset by both some planned and unplanned downtime, which led to production levels that were steady. We remain confident in our annual production guidance, which was increased in the first half of the year from our original budget.

[Mike Backus, COO of Upstream at Kiwetinohk Energy]

I specifically wanted to point out our much-anticipated Montney well at the 12-7 Pad. Here, we drilled one Montney and one Duvernay well, and this pad came on stream at the end of the quarter. After an initial cleanup period, the Montney well continued to ramp up and is seeing current rates in excess of seven million cubic feet per day of gas and gas liquids, in addition to approximately 400 barrels a day of condensate. This is above our expectations, with condensate near the plan, but gas rates well ahead of our expectations. With only about 12% of our Simonet Montney inventory in our current reserve book, we have a lot of value to unlock here. Our operating expenses came in strong again for the quarter and continue to trend to the low end of our guidance range, which is already lowered in Q2.

[Mike Backus, COO of Upstream at Kiwetinohk Energy]

This is being driven by our growing production base, high-quality owned and operated assets, and the team's focus on operational excellence and cost efficiencies. I'm expecting a busy and strong exit to the year. Here's a rundown of our current activity in the fourth quarter and into early next year. We're currently completing the two-well Duvernay and one Montney well at our 8-23 pad that should be on stream later this month. The completion crew is actually moving over to the 9-11 pad as we speak, where we currently have three Duvernay wells ready to complete with production budgeted early in the new year. We're also currently drilling two Duvernay and another one Montney well at our 14-29 pad, which will be completed in early 2025.

[Mike Backus, COO of Upstream at Kiwetinohk Energy]

As Pat mentioned earlier, and in our press release, we will also commence drilling an additional three wells at the 12-7 Pad in December, which was the capital acceleration decision we mentioned on our second quarter conference call and confirmed in our press release. We are in the process of finalizing our plans for next year but are expecting to remain active and continue to develop our asset and move us toward our target of 40,000 BOEs per day. Our goal remains to stay safe, delineate, and protect our high-quality resource, demonstrate the top-tier deliverability of our Duvernay, unlock the value potential across our Simonet Montney, fill our owned and operated infrastructure, and provide more growth over the next couple of years, which has already more than doubled since we acquired the assets. Thanks for your time today, and I hope everyone has a great holiday season coming up.

[Mike Backus, COO of Upstream at Kiwetinohk Energy]

I'll turn it back to Pat now.

[Pat Carlson, CEO at Kiwetinohk Energy]

Thank you, Mike. This concludes our first quarter conference call. I'll now pass control of the call back to Angeline for any questions. Thank you for joining us for this update. Angeline?

[Operator]

Thank you. Thank you, Pat. 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. And if you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for the first question. Your first question comes from Amir Arif from ATB Capital Markets. Please go ahead.

[Amir Arif, MD and Lead Analyst of E&P Research at ATB Capital Markets]

Hi, good morning, guys. Just an initial question just on that Montney well. Can you just remind us how that rate compares to your Placid Montney, and then I know you completed it in a lower part of the Montney up there or within the bench, and then are the next two Montney wells also going to be targeting that same area, or are you planning on seeing if there's room for two wells in the same bench?

[Pat Carlson, CEO at Kiwetinohk Energy]

Good morning, Amir, and thank you for the question. I'll ask Mike Backus to answer that for you.

[Mike Backus, COO of Upstream at Kiwetinohk Energy]

Sure. Amir, I would say that I think the first part of it was relative to Placid. Seeing similar kind of results on the condensate side, but probably higher gas rates. I think we probably produce in the three- to four-million-a-day range across most of our Montney and in Placid, and we're seeing obviously rates that are well in excess of that, so pretty encouraged by the gas drive of those wells, and then you talked about the next two wells coming up. We kind of have two main horizons in our Simonet Montney. I won't get into the numbering sequence of them, but we've got some wells in both of those targets. The one we drilled in the lower, the next two wells, one will be an additional lower, and then we'll probably drill one a little bit in the upper zone as well.

[Mike Backus, COO of Upstream at Kiwetinohk Energy]

So we'll continue to delineate both of those benches across our land base.

[Amir Arif, MD and Lead Analyst of E&P Research at ATB Capital Markets]

Okay. Sounds good. And then just on, I know there wasn't much update on the power segment, and there isn't a lot of capital going into the business, but just curious, Pat, if you could just provide us an update on the status of Homestead if you can, or just the power segment in general.

[Pat Carlson, CEO at Kiwetinohk Energy]

Sure. Thank you, Amir. I'll ask Fareen Sunderji to answer that.

[Fareen Sunderji, President of Power Division at Kiwetinohk Energy]

Amir, do you mind repeating your question?

[Amir Arif, MD and Lead Analyst of E&P Research at ATB Capital Markets]

I was just wondering if you are able to provide us an update on where Homestead project sits in terms of the status. I know you've been looking at some alternatives, and then just for the power projects in general, just given the minimum capital going in, just curious what the status is in terms of I know some projects are supposed to reach FID by the year end or a couple of years.

[Fareen Sunderji, President of Power Division at Kiwetinohk Energy]

Yeah, absolutely, Amir. As you know, the regulatory environment and some of the policies still linger, and we're catching up with respect to that. But we are pleased to share that the transmission line for the Homestead project, which was what we've communicated previously as a real regulatory hurdle, has advanced significantly, and we're in the final stages of the AUC approval process. Things are progressing on Homestead, but with policies still in question, particularly the restructuring of the energy-only market, capital discipline is what we're applying to the projects right now and moving them cautiously.

[Amir Arif, MD and Lead Analyst of E&P Research at ATB Capital Markets]

Okay. Appreciate that, caller. Thanks.

[Operator]

Thank you. The next question comes from Josef Schachter from Schachter Energy Research. Please go ahead.

[Josef Schachter, Founder and President at Schachter Energy Research]

Good morning, everyone. I've got a bit of a sore throat, so I hope you can hear me. Just wondering first about the op costs. You've done very, very well with the Simonet 719 BOE down from 917. How much more room is there to go as you ramp up production into that facility? How much more space is there, and what could that do to that op cost number?

[Pat Carlson, CEO at Kiwetinohk Energy]

Thank you for the question, Josef, and good morning. I share your throat issue, so sorry about that too. I'll ask Mike Backus to answer the question.

[Mike Backus, COO of Upstream at Kiwetinohk Energy]

Yeah, thanks, Josef. Yeah, our asset is split between Simonet and Placid. Placid carries a higher operating cost, so the $7.19 you're seeing is a blend of that. So the Simonet asset itself is much closer to like a $5-$6 OpEx environment, and that has a little bit of room to decline because we do have spare capacity in our asset. So with the absolute cost go up there, but on a per BOE basis, I would expect there to be a little bit more room to lower those to probably bring our average cost down to $7 or potentially even below $7 a BOE.

[Josef Schachter, Founder and President at Schachter Energy Research]

Okay, great. Next question is just from listening in on the calls in the service sector. The drillers seem to have held up pricing, but the frackers were a little weaker. How do you see input costs for drilling and completion? And given we're all hopeful that second half of 2025 when LNG Canada is coming on, would you want to start locking in the crews that you like for both rigs, drilling rigs, and fracking in concern that things tighten up once that facility comes on?

[Pat Carlson, CEO at Kiwetinohk Energy]

Yeah, I'll ask Mike to answer that question as well, Josef.

[Mike Backus, COO of Upstream at Kiwetinohk Energy]

Yeah, really good question, Josef. Yeah, I think our philosophy is very aligned with your question in terms of how we act. We've seen relatively steady drilling and completion rates, I would say, from last year and into this year. You're right, there's been probably a little bit of excess supply on the completion side, so there's maybe a potential for there to be a little bit of relief into 2025, but we're not really planning for much of an increase or decrease on the DNC side in terms of locking in providers. We've enjoyed some very long-term relationships with both our drilling and completions providers and definitely subscribe to that same philosophy. So I see us continuing to have long relationships and try to have a steady program with both of those providers. So that's our plan.

Participants

Executives

• Mike Backus, COO of Upstream
• Pat Carlson, CEO
• Fareen Sunderji, President of Power Division
• Janet Annesley, Chief Sustainability Officer
• Jakub Brogowski, CFO

Analysts

• Amir Arif, MD and Lead Analyst of E&P Research at ATB Capital Markets
• Josef Schachter, Founder and President at Schachter Energy Research