Greenfire Resources Q1 2024 Earnings Call Transcript

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May 16, 2024

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to the Green Fire Resources First Quarter 2024 Results Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I will now turn the meeting over to Robert Lobeck, Vice President of Corporate Development and Capital Markets.

Operator

Please go ahead, Robert.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for joining us for Greenfire's Q1 2024 earnings conference call. Please note that Greenfire's financial statements and MD and A and press release are available on our corporate website with the associated documents filed on EDGAR and SEDAR Plus. Our corporate presentation has also been updated and is available on our website. As we begin our discussion of these results and details, I will remind everyone that this conference call contains forward looking statements, references non GAAP and other financial measures.

Speaker 1

And as such, listeners are encouraged to review the associated risks outlined on our most recent MD and A. All dollar amounts discussed today refer to Canadian dollars unless otherwise stated. All capital expenditures and production amounts discussed today are on a working interest basis, net to the company, unless otherwise stated. References to the Hanging Stone facilities refer to the expansion asset and demo asset collectively. Today's call is hosted by members of the Greenfire team, including Robert Logan, President and Chief Executive Officer Tony Kraljuk, Chief Financial Officer and myself, Robert Loback, Vice President, Corporate Development and Capital Markets.

Speaker 1

Following the team's prepared remarks, we will be conducting a Q and A with our management team on the call and will open the line to questions from participants. I will now turn it over to our President and Chief Executive Officer, Robert Logan. Robert, please go ahead.

Speaker 2

Thank you, Robert, and good morning to everyone joining us on this call. Given we have shared full details of our financial and operating results in the Q1 2024 press release and MD and A, this morning's call will be focused on providing additional context around Greenfire's current activities and our outlook for the future. Before we get started, I wanted to provide a brief update on the wildfire situation on May 11. The company is actively monitoring the situation to ensure the protection and safety of our people and assets as the situation continues to evolve. Our thoughts and appreciation go out to the firefighters and other brave responders who are battling the fires.

Speaker 2

Operationally, we are very pleased with Greenfire's continued performance through the Q1 of 2024, during which we navigated some challenges associated with extreme cold weather, regulatory delays at demo and 5 third party downhole sensor failures at expansion. Nonetheless, we had a responsible, safe and successful start to the year with consolidated bitumen production averaging 19,667 barrels per day in Q1, 13% or 2,300 barrels per day higher than Q4 of 2023. These results reflect strong production performance from the refill drilling program that began in August of 2023 and surface facility optimizations at the expansion set partially offset by unplanned impacts from the 5 previously disclosed downhole temperature sensor failures. I'm also proud of how our team responded quickly and efficiently to changing circumstances during the quarter. Following continued delays with the regulatory approval required to restart the disposal of the demo asset, Greenfire elected to reallocate the drilling rig from the demo asset to the expansion asset to advance redevelopment drilling activities.

Speaker 2

Once this drilling program concludes in Q3, we plan to mobilize the drilling rig back to the demo asset to continue to drill additional extended reach refill wells. The expansion drilling program is highly economic and is expected to have a significant positive impact on Green Fire's production growth in 2024. Production performance is anticipated to be further enhanced by continued increases in reservoir pressure at the expansion asset owing to sustained high rates of NCG co injection. In addition, we have now replaced failed downhole temperature sensors in 3 of the 5 refill wells and expect to see increases in average productivity from the affected refill wells that align with the current productivity of the remaining 5 refill wells that have had functional temperature sensors. Despite the challenges with the faulty third party downhole temperature sensors, we believe the initial positive results from our refill drilling program and the ongoing facility optimizations clearly demonstrate high quality and potential productivity of Greenfire's Tier 1 SAGD assets.

Speaker 2

Prior to moving the drilling rig over to the expansion asset, Greenfire drilled 3 extended reach refill wells at the demo asset, each having lateral lengths of approximately 2,300 meters or 700 meters longer than the refills we recently drilled at the expansion asset. In addition, the company drilled the 2nd disposal well at the demo asset for additional operational flexibility, which is also awaiting regulatory approval to commence operations. With the Trans Mountain expansion project operational as of May, Western Canadian heavy oil producers are positioned to benefit from approximately 600,000 barrels per day of incremental export capacity, which is anticipated to result in a structural tightening of WCS differentials over time. We are seeing summer differentials in the $11 to $12 per barrel range. While Green Fire does not have any volumes contracted on TMX, the company's production is 100% weighted to benchmarks linked to Canadian heavy oil pricing, providing material exposure to improvements in the WCS differential to further support the company's free adjusted cash flow generation potential.

Speaker 2

We are pleased to reiterate our 2024 outlook, including consolidated average production of 22,000 barrels per day to 25,000 barrels per day, assuming a fully funded capital expenditure range of between $70,000,000 $90,000,000 which is anticipated to result in meaningful free cash flow generation over the balance of 2024, assuming continued strong commodity pricing. This cash flow generation potential supports our ability to continue to prioritize repaying debt and evaluate implementing return of capital strategy for our shareholders over time. I will now hand the call over to Robert Bloback, our Vice President of Corporate Development and Capital Markets.

Speaker 1

Thank you, Robert. Greenfire continues to execute its WTI focused commodity hedging strategy to support the company's ability to fund its capital program in the current volatile commodity environment. The company's hedging program for 2024 features 11,500 barrels per day of fixed WTI price swaps at a price of approximately US71 dollars a barrel, which enables the company to fund its capital program from internal cash flows down to WTI prices as low as $35 a barrel U. S, assuming a $15 per barrel U. S.

Speaker 1

WCS differential. For Q1 2025, the company added 8,600 barrels per day of WTI costless collars with a floor of about US58 dollars and a ceiling of approximately US84 dollars per barrel. Our conference call timing announcement issued earlier this week included a notice that Greenfire has resolved the compliance requirement issued by the New York Stock Exchange in February of 2024. The NYSE previously indicated that the company needed to comply with one of their continued listing standards, which required all listed companies to have a minimum of 400 public stockholders on a continuous basis. Greenfire now exceeds that threshold following our TSX listing and the expiration of our 6 month lockup period related to the De SPAC transaction.

Speaker 1

I will now hand the call over to Tony Kraljuk, our Chief Financial Officer, to discuss highlights from Greenfire's financial performance.

Speaker 3

Thank you, Robert, and good morning, everyone. With higher consolidated basement production and tighter WTI to WCS differential, Greenfire recorded strong realizations for Richmond in the Q1 of 2024 compared to the same period in 2023. As such, we generated adjusted EBITDA of $39,300,000 in the quarter, including $8,800,000 of realized losses on commodity risk management contracts with an adjusted funds flow of $27,600,000 Green Fire invested $31,900,000 in our capital program on property, plant and equipment in the quarter, of which $21,900,000 was allocated to drilling Breso wells at both the Denmo asset and expansion asset and approximately $10,000,000 was directed to various facility projects. The company had available liquidity of approximately $140,200,000 at quarterend with $90,200,000 of cash, cash equivalents and $50,000,000 of available credit from the company's senior reserve based credit facilities. The outstanding principal amount on the 20 28 notes is US300 million dollars or approximately US407 million dollars assuming a US to Canadian dollar change rate at the end of Q1 2024 period.

Speaker 3

As Robert mentioned previously, we remain committed to debt reduction and securing enhanced financial flexibility with Green Fire planning to use 70% of excess cash flow to semi annually redeem our 20 28 mills until total indebtedness is less than US150 $1,000,000 Our first excess cash sweep under our senior secured notes is scheduled around August 2024 this year. Relative to our SAGP peers, Greenfire is favorably positioned with $1,800,000,000 of corporate tax pools, sizable unrecovered royalty balances, resulting in lower prepay of royalty rates as expansion assets and no gross overriding royalty obligations at the Haines Mill facilities. Collectively, these advantages support strong adjusted free cash flow generation, particularly due to periods of high commodity prices. Yesterday afternoon, Green Fire posted our 1st AGM as a publicly traded company, and we're pleased to report that our resolution surpassed in favor, including our director nominees. We appreciate all shareholders' time to vote to their process.

Speaker 3

At this point, I'll turn it back to the operator to open up the line for questions.

Operator

Thank Our first question is from Michael Bone with Sona. Please go ahead.

Speaker 4

Hi. I wondered if you could kind of bridge your production guidance from where you are today.

Speaker 5

If you

Speaker 4

start with the disposal well, clearly, that is disadvantageous to output a demo. When do you expect to get those permits or that authorization cleared? How should we think about the ramp up of the wells drilled at expansion? When will the remaining sensors be installed and complete? On a monthly basis, should we start to see production increasing subject to the fires, obviously, from here on in?

Speaker 2

Hi, Michael. Robert Logan here. Yeah, it's been frustrating with the continued regulatory delays on disposal well, particularly since we already have one disposal well that's been operating at the expansion for years without issue. I will say that the industry as a whole has seen a bit of a slowdown in regulatory approvals. And I think the government's noticed that and taken steps to try to expedite that.

Speaker 2

I'm not sure if you saw the news, but the Chairman of the Board and about half the directors at the AR have been changed out now. So I think that we're going to be seeing our approvals imminently here. There's no reason why we wouldn't get the approval here and we're highly confident that it's going to happen very soon. We saw an immediate 1,000 barrel per day reduction when that disposal well went off. So there's 1,000 barrels a day right there.

Speaker 2

That brings us from just call it to 20,000 barrels a day to 21,000 barrels per day. As the refills at demo ramp up, you're going to be seeing production from all of those. So that's all coming on. At the expansion, you saw that the first five refills averaged 1500 barrels a day each, gross numbers 1200 barrels a day net to Green Fire with a or 11.15 with a 75% to us. There's 5 more where we had the temperature sensors that failed.

Speaker 2

It's just a manufacturing issue. These sensors are used throughout the industry, including at all of the existing wells. In fact, I actually installed some of the sensors at the site back in 2,000 and 2,2003 and they're still working. So once you get through the manufacturing issue and they're highly ratable and they get a good long life out of them. So the way to think about how we operate the wells is similar to how you're driving down highway.

Speaker 2

If you're driving down and your windscreen is starting to fog up, similar to how as our downhole temperature sensors start to fail. For a while, you can still drive at your normal speed, but as more and more of these sensors fail, it's like your windscreen fogging up. So you have to drive slower and slower or you could get a wreck. So the math doesn't mean that all 5 are going to turn on at 1500 barrels per day because we have a combination of those that are just slowed down or turned off. But it'll be quite significant on the increase because, well, 5 wells down, that's not a small part of our production.

Speaker 2

Michael, does So

Speaker 4

when should the other well, I guess when should the other fire temperature sensors be completed? When is the work to be completed? And I guess the other question that I asked was, will we start to see production increase on a meaningful basis prior to the end of the second quarter?

Speaker 2

So 3 of the 5 have now been finished. The third one just recently. We've got 2 more to do. I would have said absolutely, you would see a meaningful production increase before the end of the quarter. The fire potential is what gives me pause where I can't put my hand on my heart because it's out of our control.

Speaker 2

So let's hope for some wet weather here.

Speaker 4

So what do you think your run rate will I mean assuming everything was working, what do you think is your current run rate pro form a run rate production?

Speaker 2

That's where our guidance is. I mean, we would be well within our guidance of 22,000 to 25,000 barrels per day.

Speaker 4

Okay. And then the other point I just wanted to check, the hedging loss that you took in the quarter that was booked prior to EBITDA, yes, obviously.

Speaker 2

Tony, do you want to weigh in on that?

Speaker 3

Yes. We calculate our EBITDA and we do show the EBITDA before and after the hedging loss, Michael. So if you look in that detail of our breakdown, we had it before. So the $39,000,000 included the $8,300,000 loss as we said in the script. But we have a breakdown on that financial statements.

Speaker 4

And then obviously from sort of the top down, WTI was higher in April and remains reasonable. You've talked about the WTI WCS spread. There's no reason well, I mean, I know we're still in the second quarter, but if things stay where they are, there's no reason to think that the actual overlying economics shouldn't improve for you guys going through Q2 versus Q1 with the exception of output? Exactly. Fine.

Speaker 4

Thank you very much.

Speaker 2

Appreciate the call or the questions, Michael.

Operator

The next question is from Christopher Lembo with Brigade Capital. Please go ahead.

Speaker 4

Hey, guys. I know the company can't do share buybacks until later this year. But has management been buying shares? And if so, could you share details on the Quantum or just more detail in general and maybe your view on the public equity valuation today? Thanks.

Speaker 2

Tony, is that for you or for me to answer?

Speaker 3

I'll ask the first part, Rob. It's probably best to ask the second part about management buying. So you're correct until we get to our first catch, but we cannot look at shareholder returns. And it is something we're actually discussing as with our Board right now what our plan is going forward as we look to deleverage the debt in a longer term basis. We do see ourselves significantly undervalued to our peers.

Speaker 3

If you look at our corporate presentation, we can show EV to flowing barrel comparison to our top 2 peers in the Athabasca region. And we're at a 60 ish percent discount to our peers on that foreign barometric basis. So that's what we believe. Our shares are significantly better valued, especially as we look to ramp up production at the remainder of the year. Probably pass it over to you, you can talk a bit about those lines and buying shares.

Speaker 2

I agree. I believe we're significantly undervalued. That's why I bought CAD1 1,000,000 worth of shares.

Speaker 3

Great. Thank you.

Operator

The next question is from Jason Wangler with Imperial Capital. Please go ahead.

Speaker 5

Good morning. I wanted to just ask on the capital spending side. I think you spent a little over $30,000,000 in the Q1. Just kind of how you see kind of the breakdown the next few quarters to your budget as well as kind of what's the breakdown of that $30,000,000 in terms of drilling versus facilities and infrastructure?

Speaker 2

For sure, Jason. So on the call, Tony actually gave the breakdown, dollars 31,900,000 on that capital program. Dollars 21,900,000 was allocated to drilling the refills wells and dollars 10,000,000 was on the facility projects. If you look at that breakdown, that includes a significant amount of long lead items. Obviously, with a year long drilling program and facilities, You had to buy some significant long lead equipment and a lot of that was bought in Q1.

Speaker 2

A couple of other things that contribute to higher Q1 costs versus other months. When we do what's called a winter drilling program, so a delineation program to look for where the best places to put our sustaining wells. You can only do that in the wintertime because the ground is frozen. So we actually brought in a second rig to help us with that. And then additionally, during the wintertime, it's a much higher burn rate than what you have during the non wintertime.

Speaker 2

Obviously, when it gets to minus 40 and minus 50, we need to spend a lot of money on keeping things warm, especially on the drilling rig. So you bring in boilers and hot oilers. We go through a lot more diesel fuel. So and if you look at other companies there, you'll see usually a higher Q1 than what you do on your Q2 and Q3 numbers. So we expect Q2 and Q3 to be down from there and still within our $70,000,000 to $90,000,000 capital target for the year.

Speaker 5

Okay, great. I appreciate it. Thank you.

Operator

The next question is from Nicholas Akerian, a Private Investor. Please go ahead.

Speaker 6

Hi, guys. Congrats on the quarter. My question is on the demo wells that you guys have drilled. How are you it's an older reservoir than the expansion asset. And how should you think about the productivity on a per foot basis relative to the productivity of the expansion asset wells?

Speaker 6

Is it comparable? Is it a little bit lighter? Like how should you be thinking about that to forecast the production that will come out of it?

Speaker 2

Hey, Nick. Robert Logan here. You hit the nail on the head in terms of it's an older reservoir. It's also a thinner reservoir than what the expansion is. The expansion is 25 to 30 meters thick, whereas the demo was 20 to 25 meters thick.

Speaker 2

So immediately, you're not going to get as productive per meter length in the horizontal. The second part of that is the demo has been producing for 25 years now. The expansion is at 7. So some of your recovery factors you see at the demo are higher than what you see at the expansion. And as a result, your productivity will be a little bit less because your chambers are more mature, they've come down a little bit more, there's less of a pay column there.

Speaker 2

Now the thing that we can do to counter that is to just drill more well length. With expansion, we were drilling 1600 meter long wells, mile long wells. And now at demo, we're almost 50% longer than that. We've been able to push the edges of what the industry has seen. And we're very happy that not only did we drill it, but the harder thing to do, the much harder thing to do in the oil sands is to get your liner to bottom all the way.

Speaker 2

And we got our liner to bottom all the way on all of our wells. So we're in warm up process. Having a disposal well would help us warm up a little bit faster because then we can push harder on there. But I think we're going to be quite happy with what we see on our demo wells.

Speaker 6

Got you. And then the other two questions I have are more capital allocation related. 1 is just post debt pay down as that process goes on. How do you guys think about your hedging?

Speaker 3

Under our bond inventory, we have a 12 month rolling hedge requirement. And that's in place until the bonds is under a US150 $1,000,000 phase. So that will continue until we hit that point. And then once we go beyond that point, we'll then look at hedging as part of our risk management going forward. Depending on where the market is, we'll make that decision at that time.

Speaker 6

Got you. And then on the capital return side, how do you guys think about the different options? So whether it's a base dividend and variable dividend, special dividends, an NCIB or an SIB, how do you think in ways that especially with the liquidity, the low liquidity in the stock?

Speaker 3

Great question. It's one of our active debates right now we're having. Clearly, our immediate focus is to delever. And that's where a slightly higher percent of our cash is being allocated to for now. And as we get beyond that, see that the leverage get manageable, we'll look at all the options we mentioned.

Speaker 3

And to your point, it's a great debate here, right? When we look at our share price, as we talked about, we do believe it's significant or valued. So we do see a benefit of participating in an NCIB program, some of that effect and looking to buy back shares. But we recognize liquidity is where it's at. And one of our thoughts is as we buy shares and create that share support, we could see the share price rise.

Speaker 3

And with that, you could see other shares come to market and see more liquidity. So that could be an option. But at this point, we continue to monitor. And when we make a final decision, we'll provide that update in the market in due course.

Speaker 6

Okay, great. Thanks guys for taking my questions.

Speaker 3

Thank you.

Operator

This concludes the question and answer session. I'd like to turn the conference back over to Robert Loback for any closing remarks.

Speaker 1

Thank you, operator. On behalf of Greenfire, we appreciate you joining us today on our Q1 2024 earnings conference call and encourage you to reach out to the team should you have any additional questions or wish to engage. Have a great day.

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Key Takeaways

  • Production averaged 19,667 bbl/d in Q1, up 13% QoQ, driven by refill drilling and facility optimizations despite extreme cold, regulatory delays at the demo asset and five downhole sensor failures.
  • Regulatory delays for demo asset disposal prompted reallocation of the drilling rig to the expansion asset, which is expected to deliver significant production growth in 2024 before returning to demo in Q3.
  • Greenfire’s hedging program covers 11,500 bbl/d of WTI swaps at US$71 and 8,600 bbl/d of 2025 costless collars (US$58 floor/US$84 ceiling), enabling capex funding down to US$35 WTI.
  • The company reiterates 2024 guidance of 22,000–25,000 bbl/d of production with C$70–90 million in capex, anticipating meaningful free cash flow to support debt repayment and future capital returns.
  • At quarter end, liquidity was C$140 million (C$90 million cash, C$50 million credit) and Greenfire plans to use 70% of excess cash flow to semiannually redeem its US$300 million 2028 notes until total debt is under US$150 million.
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Earnings Conference Call
Greenfire Resources Q1 2024
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