Peyto Exploration & Development Q1 2024 Earnings Call Transcript

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May 15, 2024

Key Takeaways

  • In Q1 2024, Peyto generated $205 million in funds from operations and $100 million in earnings, supported by a $93 million hedging gain, funded $114 million of capex, paid $64 million in dividends, and reduced net debt by $23 million.
  • Drilling on Repsol‐acquired lands delivered 15 wells averaging 2,200 m laterals with a 30% productivity uplift versus legacy assets and an F&D cost of ~$0.95/Mcfe, affirming the acquisition’s quality.
  • Peyto aims for a 10% reduction in unit operating costs by year‐end, including ceasing third‐party ethane extraction to save $0.02/Mcfe in op‐costs while planning to recover the ~2,000 bbl/d production loss through year‐end drilling.
  • The Cascade power plant gas contract for ~52 MMcf/d over 15 years is operationally ready, with commissioning filings indicating a July 2024 start and pipeline connectivity already pressurized.
  • Looking ahead, Peyto is positioned to benefit from 12 Bcf/d of new LNG export capacity and growing AI data‐center demand later this decade, underpinned by its low‐cost structure and disciplined hedging policy.
AI Generated. May Contain Errors.
Earnings Conference Call
Peyto Exploration & Development Q1 2024
00:00 / 00:00

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Operator

Good day, everyone, and thank you for standing by. Welcome to Peyto's First Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To participate, you will need to press star one one on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star one one again. Please be advised that today's conference is being recorded. Now, I would like to hand the conference over to the President and Chief Executive Officer, J.P. Lachance. Please proceed.

JP Lachance
President and CEO at Peyto

Thanks, Carmen. Good morning, folks, and thanks for joining Peyto's first quarter conference call. I'd like to remind everybody that all statements made by the company during this call are subject to the same forward-looking disclaimer and advisory set forth in the company's news release issued yesterday. Present with me in the room today to answer your questions, we have Riley Frame, our VP of Engineering and Chief Operating Officer; Tavis Carlson, our VP of Finance and CFO; Lee Curran, our VP of Drilling and Completions; Todd Burdick, our VP of Production; and Derick Czember, our VP of Land and Business Development. Firstly, we'd like to thank the Peyto team, both in the office and in the field, for their contributions to a strong quarter. Q1 was a good quarter for Peyto, despite low gas prices.

JP Lachance
President and CEO at Peyto

We generated CAD 205 million of funds from operations and CAD 100 million of earnings, which in part has to do with our industry-leading cash costs, but also thanks to our to a ninety-three million dollar hedging gain from our systematic hedging program that we put in place over the last two and a half years. This allowed us to not only fund our capital program of CAD 114 million, but pay our shareholders CAD 64 million in dividends, and also left us enough to pay down some debt, about CAD 23 million of net debt over the quarter. We continue to be excited by the drilling results on the newly acquired Repsol lands.

JP Lachance
President and CEO at Peyto

We had 15 wells on stream to the end of the quarter, with enough history to show us a sustained 30% increase of average well productivity as compared to the performance of recent wells, recent years on Peyto's legacy assets. This continues to affirm that the assets we bought last year have the quality we thought they did. We completed some very long lateral wells in the first quarter across all species. Longest quarterly program in our history, in fact, at an average, average length of about 2,200 meters, and we continue to see the benefits of doing this to optimize resource recovery.

JP Lachance
President and CEO at Peyto

In Q1, we also drilled 2 2,400-meter lateral Dunvegan wells that we subsequently brought on in April, that demonstrate good deliverability, coupled with higher liquid content in our Spirit River wells, about 20-30 billion barrels per million. It has us excited enough to dedicate a rig to the play for the rest of the year. We have over 100 wells booked across our land base, and we expect to drill about 10-12 wells total in 2024. You can find a little more information about this play in our, in the April monthly report and in our corporate presentation slide deck. Peyto's focus on unit operating costs remain a priority, so much so that we set a target of at least a 10% reduction from Q1 levels by the end of the year.

JP Lachance
President and CEO at Peyto

We've already begun to make meaningful changes in this regard, beyond connecting gathering systems and plants together in the field. The decision to no longer recover ethane via a third-party deep cut plant fits to a T with our own and control strategy. Paying someone else to extract low-value ethane from the gas phase doesn't make sense, especially when we can redirect a portion of that raw gas stream to our Edson Gas Plant, which helps to dilute its higher fixed costs. We estimate that we will see about a CAD 0.02 per Mcfe reduction on overall operating costs going forward without any material loss in revenue.

JP Lachance
President and CEO at Peyto

We do lose about 2,000 barrels a day of low-value production from the base, but, you know, in the short term, but we expect more to make that up, make up that loss by the year-end with the quality of the drilling program that we're executing. And this is a good example that we, you know, we're running a business here to make money, not lower-value BOEs. We're still running four rigs right now, but we have them situated on three well pads for the most part, through a break-up, to minimize moves, and we'll be prudent on spending capital and bringing on production in the current low price environment. That means we might wait on completions to keep costs down and production adds will be delayed accordingly.

JP Lachance
President and CEO at Peyto

We have varying levers we can pull to reduce capital, should low prices prevail past the summer. I know many are wondering about the status of the Cascade Power plant and when we're gonna start selling gas to them under our contract. As a reminder, that contract is for 60,000 GJ a day, or about 52 million cubic feet a day, over the next 15 years, and it will start once they are fully operational. We have pressured up our pipeline that connects the gas roughly to their plant, and we're ready to go. Based on publicly available data, both plants have been generating some power and are making commissioning progress, so that's a good sign. The latest filing with the Alberta Utilities Commission for startup is in July of 2024.

JP Lachance
President and CEO at Peyto

When we look past summer 2024 and into 2025, we're excited about the LNG egress build-out, which is coming over the next few years. By the end of the decade, Canada and the US should be exporting at least another 12 Bcf a day. Besides that, there's significant demand potential that could be born out of the evolution of AI, with increased power requirements for data centers... We all know that natural gas is safe, secure, clean, and affordable, but most importantly, it is a reliable supply of energy for the future. In the meantime, while all that comes to fruition, Peyto is well protected with our low-cost structure, our disciplined hedging policy, and our quality drilling inventory to thrive in 2024.

JP Lachance
President and CEO at Peyto

This gives us confidence to execute a measured capital program, sustained dividend payments to shareholders, and still allow us to manage the balance sheet with repayments of debt over the course of the year. Okay, I'll keep this short, but just a reminder, our AGM is next week on Wednesday, May 22 at 3 P.M. in the building in our Calgary office on the Plus 15 level in the conference center. We hope to see you there. If you can't make it, we'll be posting a recording of it on our website afterwards, but please vote your shares. If you need help with that, you can see our press release for instructions. Okay, again, I'd like to keep this short, so maybe I'll go to the phones. Carmen, if there's any questions there?

JP Lachance
President and CEO at Peyto

If not, I can go to some questions we have, that came in overnight. Carmen, any questions?

Operator

Thank you. I don't see any questions at this time, but as a reminder, if you do have a question, simply press star one one to get in the queue. I see one question from the phone. How do you want to proceed?

JP Lachance
President and CEO at Peyto

Go ahead, and we'll...

Operator

All right. Thank you. One moment while I bring it to the stage. From Chris Thompson with CIBC. Please proceed.

Chris Thompson
Director at CIBC Capital Markets

Hey, good morning, everyone. Thanks for taking my question this morning. First question for you, just on the transportation costs. In your release, you mentioned, you've seen an increase in tolls on NGTL and increase in costs related to transportation with your Q1 results. Just wondering how we should think about that trending for the rest of the year.

JP Lachance
President and CEO at Peyto

Hey, Chris, it's Tavis Carlson here. Yeah, we came out at CAD 0.30 per MCFE in the quarter, and I think you could use that going forward for the rest of the year. I think 2023, we were CAD 0.27, so we're, we're up about CAD 0.03 year-over-year here. But thirty cents is a good number to, to estimate for the rest of the year.

Chris Thompson
Director at CIBC Capital Markets

Got it. Okay. Thank you. And then my next question, just, in terms of free cash flow for the balance of the year, you know, I'm wondering if you can help us sort of triangulate where you see your free cash flow profile, going in, in the balance of 2024.

JP Lachance
President and CEO at Peyto

Well, we don't typically guide specifics on that, but, you know, generally speaking, we'll, you know, with prices a little bit lower here in the next two quarters, we'll see that come down. Obviously, cash flow will come down in general. And so that, you know, might mean we accumulate a small amount of debt over those terms. But Q4, we have stronger prices and of course, on the strip, but also on our hedge book, which is in the press release, and so we'll see a meaningful paydown of debt over the year. So what free cash flow that we generate, obviously, goes towards adding any free cash flow we have and, of course, sustaining the dividend as well throughout that period is no problem.

Chris Thompson
Director at CIBC Capital Markets

Okay. Thank you. And then, on the production profile, just, the loss of, 2000, I guess, that would be 2000 barrels a day of ethane production from your base. But then you mentioned you're gonna make up for it by year-end. So, I understand your exit rate is unchanged, but should we think about, you know, if we were modeling, a certain number before this change, would we see our full year average come down 2000 barrels a day, or how should we think about really just modeling this out?

JP Lachance
President and CEO at Peyto

I'd say in the first, like, second quarter, third quarter, maybe it continues for that period of time, you'll see a, you know, reduction of whatever you had in your model by about 2,000 barrels a day of production. You shouldn't see a change in your revenue. In fact, you should see cash flow go up because we are gonna reduce operating costs by, like I said earlier, CAD 0.02. So you should model something slightly less on the, obviously, 2,000 barrels a day less on the short term. But, you know, depending on the timing of all the production adds we have, which would be Q3, Q4, mainly, and corresponding with higher prices, will more than make up for that 2,000 barrels a day.

JP Lachance
President and CEO at Peyto

It'll be, you know, caught up in, say, Q3, Q4, in that range, somewhere in there.

Chris Thompson
Director at CIBC Capital Markets

Great. Thanks. I'll hand it back.

JP Lachance
President and CEO at Peyto

Okay, thanks for your questions, Chris.

Operator

Thank you. You may continue. I don't see any questions at this time.

JP Lachance
President and CEO at Peyto

Okay, thanks. I'm gonna take a couple of questions that came in over the wire there last night. Maybe this one's probably for Riley about this. We talked about the 30% improvement on our well results. You know, we're very happy with and it's what we expected, or maybe it's even a little better than we expected. Can you maybe elaborate some more around, you know, maybe what are the costs associated with these wells? And, you know, how are we predicting our F&D and those sort of things, a little more color maybe around that program.

Riley Millar Frame
VP of Engineering and COO at Peyto

Yes. Thanks, JP Yeah, so obviously the performance of the wells on the Repsol lands have been excellent, as you mentioned, 30% over last year's program on average, which is great. From a cost perspective, everything's coming in line with what we would expect. You know, average cost for the quarter, about CAD 4.8 million D&C. The Repsol costs were actually just a little bit below that, at CAD 4.7 million per well, even though we're actually drilling those wells slightly longer, roughly 15%. So, you know, based on the data we have right now, to forecast these wells, we're predicting an F&D around CAD 0.95, which is really good. Actually is right in line with what we're seeing from our bookings, from our reserve process this year.

Riley Millar Frame
VP of Engineering and COO at Peyto

... So yeah, that's all really positive, and I would actually expect that that F&D number here will drop even a little bit further throughout the course of the year as we feather in more punching out acumen locations. You know, as we move through the second half year, we've been able to digest a bunch of the seismic that we picked up late last year, and there's a suite of really high-quality audit locations that we'll be drilling in the second half. So I expect those numbers to improve through the second half of the year as well, so.

JP Lachance
President and CEO at Peyto

Good, that's encouraging. Thanks for that color. Todd, I also have some questions around our preparedness for, you know, wildfire season. We saw some smoke roll in over the weekend in Calgary. As a reminder, it's that time. We're hearing about evacuations already in some areas. Maybe you could elaborate on what we learned last year and maybe and then, what we've done or how we will mitigate any impacts from that. It's one of the common questions I'm getting these days, so yeah.

Todd Burdick
VP of Production at Peyto

Yeah, sure. So as far as key learnings last year, you know, we did learn, excuse me, that our gas plants, we can operate them remotely for short periods of time. We can't obviously do that with the Edson Gas Plant. It's a fairly large facility and a little more complex to operate, but we can run them for a short period of time. Cut off of access is pretty key issue, where, you know, obviously, if we can't get into a certain area due to an evacuation or something like that, then you've got water tanks that are filling on, sort of thing. So again, you can run for a short period of time, but we can remotely shut wells in, which helps.

Todd Burdick
VP of Production at Peyto

So we try and keep things going as long as we can, and we did that in certain situations last year. Liquids trucking egress is a main concern that affects many of our plants. Right now, about 68% of our liquids move on pipes to sales. As long as those facilities that are on the other end of those keep moving, then we can move a large volume of fluid, but a lot is moved out on trucks. So that's, you know, some a little bit of risk that we see. As far as mitigation, obviously, we talk about it quite a bit. We've got a lot of plants linked together, especially in the Sundance area and as well down in Greater Brazeau.

Todd Burdick
VP of Production at Peyto

As we've been talking about since the acquisition, we've worked to connect the Repsol plants in the Greater Sundance area as well. So that gives flexibility to move production around if needed, you know, if a fire should approach a particular part of that Greater Sundance or Greater Brazeau area. We, you know, we've cleared areas around plants where maybe trees were a little bit close, closer than what we felt comfortable with. We looked at all of the Repsol, former Repsol plants, and there was no issues there. Obviously, I mentioned the liquids pipelines.

Todd Burdick
VP of Production at Peyto

When fires start to get near the area, then we start looking at things like pulling tank levels down at plants and LPG levels and that sort of stuff, just to be able to run a little bit longer. And then obviously, we installed cameras last year, so we've got cameras at all of the plants, so that we've got 360-degree views just to see and make sure that fires aren't getting too close so we can get people out, if need be, quickly. And then we can... Even our propane refrigeration plants, we can always warm up, make less liquid, put it in the gas phase so that we can stretch out that time while tanks are filling.

Todd Burdick
VP of Production at Peyto

So, you know, I guess the final thing would be, we learned last year that good communication with fire liaisons is really important. At times, we were talking to them a couple of times a day. They were really good at sending information to us. That allowed us to feel confident that we are protecting our people, and we're not gonna get anybody caught where they shouldn't be. So, obviously, that would be something; fires come close, we'd be reaching out to those people right away, both fire liaisons with industry and with the Alberta government. So we feel pretty good that, should something come our way, we learned a lot last year and made a few changes of what we've done. And I think, hopefully, we don't have to go there, but if we do, we're ready.

Todd Burdick
VP of Production at Peyto

Best we can be.

JP Lachance
President and CEO at Peyto

Thank you for that. I think it's important for folks to understand that owning and controlling our facilities is a real advantage for us to be able to take, you know, to be able to do these kinds of things, right? To be able to make the changes we need to, to online situations like this. Okay, I don't have any more questions. If there are no questions on the call... Are there any more questions on the call?

Operator

All right. To our tele audience, as a reminder, that is star one one, if you do have a question. One moment. I don't see any further questions. I'll turn it back to J.P. Lachance for final comments.

JP Lachance
President and CEO at Peyto

Okay. Well, thanks for tuning in, folks. I hope to see you at the AGM next week, but if not, we'll talk again the next quarter. Thanks for tuning in.

Operator

Thank you, everyone. You may now disconnect.

Analysts
    • Chris Thompson
      Director at CIBC Capital Markets
    • JP Lachance
      President and CEO at Peyto
    • Riley Millar Frame
      VP of Engineering and COO at Peyto
    • Todd Burdick
      VP of Production at Peyto
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