Advantage Energy Ltd. (AAV) Earnings Call Transcript & Summary

The motion before the meeting may be addressed during the meeting. All other questions will only be addressed during the question period at the end of the meeting. Following the formal portion of the meeting, Mr. Andy Mah, our Chief Executive Officer; will present an overview of Advantage's operations results; and Mr. Mike Belenkie, our President and Chief Operating Officer, will present an update on Advantage's fully owned subsidiary on Entropy, Inc. The meeting will now come to order. With your approval, I shall ask Jay Reid to act as Secretary of the meeting. And Patricia Selby, a representative of TSX Trust Company to act as scrutineer. I have received confirmation from TSX Trust Company as to the mailing of the notice of the Annual General and Special Meeting of Shareholders, the information circular, proxy statement, instrument of products in notice and access notification and 2020 annual report to shareholders in compliance with the applicable securities requirements. I direct that the confirmation, together with copies of the documents mailed to the shareholders, being kept by the secretary with the minutes of this meeting. If there are no objection, the reading of the notice of the meeting will be dispensed with. Pursuant to the bylaws of the corporation, business may be transacted at this meeting if there are persons present not being less than 2 in number and holding or representing not less than 25% of the shares entitled to be voted at the meeting. I have the scrutineer's report, which shows that there is a quorum of shareholders present at the meeting. I now declare that the meeting is regularly called and properly constituted for the transaction of business. We will conduct each vote by way of vote cast on the TSX Trust platform and those submitted by proxy. I will now take a moment to ask that polls be opened to registered holders and duly appointed proxy holders. The polls are now open. Please note that while the TSX Trust platform permits voting by registered holders and duly appointed proxy holders. You should not use this feature to vote if you have already submitted a proxy as it will automatically cause your prior vote to be revoked. [Operator Instructions] You will be able to see on the screen, all motions being brought forth at this meeting, including our motion to terminate them, which will be enacted after the announcement of the boarding results of the matters considered at this meeting. [Operator Instructions] The polls will remain open during the period that all the motions and matter -- motions per matters to be considered at the meeting are made and seconded. Once all of the motions for matters to be considered at the meeting have been made and seconded, we will give registered shareholders and duly appointed proxy holders, one additional minute to finish voting and then polls will be closed. Particulars of the votes cast on all matters may be obtained from the secretary after the meeting. I direct that the scrutineers report on all matters, be annexed to the minutes of this meeting as scheduled. The first item of business is the placement before shareholders on the financial statements of Advantage for the fiscal year ended December 31, 2020. A copy of Advantage's annual report, which includes the financial statements has been mailed to each registered shareholder with a copy also updated on the TSX Trust virtual page. The next item of business is to fix the number of directors [Audio Gap]

I second the motion.

As previously noted, voting on this resolution will be conducted on the TSX Trust virtual platform. We will report the results of the voting once all of the motions for matters to be considered at the meeting have been made and seconded. The next item of business is the election of 8 directors of Advantage. In accordance with Advantage's [ matters ] bylaw, the only individuals entitled to be nominated as directors at this meeting are the persons named as nominees in Advantage's information circular for this meeting. Therefore, I will now entertain the motion nominating such individuals for election as directors of Advantage.

I nominate Jill T. Angevine; Steven E. Balog; Deirdre M. Choate; Donald M. Clague; Paul G. Haggis, Norman W. MacDonald; Andy J. Mah; Ronald A. McIntosh as Directors of Advantage Oil & Gas limited to hold office until the next annual election of directors where until their successors are elected or appointed subject to the provisions of the Business Corporations Act of Alberta and the Bylaws Advantage Oil & Gas limited.

I second the nominations.

As previously noted, voting on this resolution will be conducted on the TSX Trust virtual platform. We'll report the results of the voting once all of the motions for matters to be considered at the meeting have been made and seconded. I would like to take this opportunity to acknowledge that. Mr. Grant Fagerheim chose not to stand for the elections. It has been a pleasure working with Grant last 7 years, and we greatly appreciate all those contributions and insights on Board. The next item of business is an ordinary resolution approving certain amendments to Advantage's restricted and performance award incentive plan.

I move that the ordinary resolution set forth on Page 18 of the Advantage's information circular dated March 26, 2021, approving certain amendments to Advantage's restricted and performance award incentive plan be approved.

I second the motion.

As previously noted, voting on this resolution will be conducted on the TSX Trust virtual platform. We will report the results of the voting once all of the motions for matters to be considered at the meeting have been made and seconded. The next item of business is an ordinary resolution, approving all unallocated incentive awards under Advantage's restricted and performance award incentive plan.

I move that ordinary resolution set forth on Page 19 of Advantage's information circular dated March 26, 2021, approving all unallocated incentive awards under Advantage's restricted and performance award incentive plan be approved.

I second the motion.

As previously noted, voting on this resolution will be conducted on the TSX Trust virtual platform. We will report the results of the voting once all of the motions for matters to be considered at the meeting have been made and seconded. The next item of business is an ordinary resolution reapproving Advantage's amended and restated shareholder rights plan agreement.

I move ordinary resolution set forth on Page 24 of Advantage's information circular dated March 26, 2021, reapproving Advantage's amended and restated shareholder rights plan agreement be approved.

I second the motion.

As previously noted, voting on this resolution will be conducted on the TSX Trust virtual platform. We will report the results of the voting once all of the motions for matters to be considered at the meeting have been made and seconded. The next item of business is a special resolution to amend the articles of the corporation to change the name of the Corporation to Advantage Energy Limited.

I move that this special resolution set forth on Pages 24 and 25 of Advantage's information curricular dated March 26, 2021, to amend the articles of the corporation pursuant to Section 173-18 of the Business Corporations Act of Alberta, to change the name of the Corporation to Advantage, Energy Ltd. be approved.

I second the motion.

As previously noted, voting on this resolution will be conducted on the TSX Trust virtual platform. We will report the results of the voting, once all of the motions to the matters to be considered at the meeting have been made and seconded. I will now entertain a motion for the appointment of the auditors of Advantage.

I move the firm of PricewaterhouseCoopers LLP, Chartered Professional Accountants, be appointed auditors to Advantage Oil & Gas Limited until the next annual meeting or until their successors are appointed and that the remuneration as such be fixed by the Board of Directors.

I second the motion.

As previously noted, voting on this resolution will be conducted on the TSX Trust virtual platform. We will report the results of the voting once all of the motions for matters to be considered at the meeting have been made and seconded. The final item of business is to arrange for the termination of the formal portion of the meeting following the announcement of the voting results on matters considered at this meeting. May I have a motion that the formal portion of the meeting be terminated following the announcement of the voting results on the matters to be considered after the meeting.

I make that motion.

I second the motion.

As previously noted, voting on this resolution will be conducted on the TSX Trust virtual platform. We will report the results of the voting once all of the motions for matters to be considered at the meeting have been made and seconded. Are there any questions on any of the motions from any registered shareholders or duly appointed proxy holders? We will provide registered shareholders and duly appointed proxy holders approximately 1 more minute to complete any electronic ballots. [Voting]

Thank you. The polls are now closed. I would ask that the Scrutineer can file the report regarding the results of voting on all business matters. I have been advised by the Scrutineer that all resolutions have been approved by more than the required majority. Therefore, I declare all of the resolutions carried. I direct the results of the poll to be included with the minutes of this meeting, and the results of the voting will be announced in a press release in accordance with the policies of TSX. In adherence to the approved termination motion, I declare this meeting terminated. Now with the formal portion of the annual meeting complete, I will turn the meeting over to Mr. Andy Mah, Advantage's Chief Executive Officer.

Thank you very much, Mr. McIntosh, and welcome to all that's joined us today. As Ron indicated earlier, I will be providing some summary highlights of Advantage. And Mike Belenkie will follow through with comments on Entropy. First thing I'd like to do is thank our Board of Directors for their support and also our shareholders for their strength in believing in this company and the great things that we have done in the last several years and look forward to even better results as we look ahead. I'd also like to thank upfront -- or upfront thank our staff, both in Calgary and in the field for their dedication and extra efforts as we've gone through, as all of us would realize a really tough period here in 2020. And it continues through, but our people have excelled, and I commend them for their contributions to the company. So to begin with, as you see, there'll be slides on -- you should be able to see, and we'll move those ahead as I speak. On the first slide, what I'd like to just touch on is the fact that in terms of our corporate strategy and direction, one of the key things that's laid out here is you can look at the boxes across the top is our strong foundations. And that speaks to our assets, our financial and operating expertise and discipline as well as our people, like I mentioned. We've continued to enhance and strengthen that, especially in the last 2 years. And the company is in better shape than ever in terms of meeting the challenges as we look ahead. In terms of generating free cash and moderate growth, that is what we're targeting to do in 2021 and ahead. And you can see that we're already moving our net debt-to-AFF down towards 1. And as we see this year unfold, we certainly will continue to improve our debt position. We intend to keep production growth between 5% and 10% and focus our investments into our top-tier economic plays and wells, which will serve us well. In addition, we created Entropy, as most of you have saw or seen in the recent announcements. This is integrated with our carbon capture and sequestration expertise that we've done for well over a decade at our Glacier gas plant. This not only helps our industry and our company. But it will also be able to, but we will also be able to expand that technology to other sectors and reduce emissions to provide cleaner energy and products for all Canadians and for those abroad. So we're very proud of our ability to synthesize that into our ability or into our operations and into our planned strategies ahead. Moving forward, we see ourselves enhancing resilience and also strength as we continue to grow our liquids. And we'll also look at scaling and enhancing resilience of the company through acquisitions. When we look at this slide, I'll talk a bit about our assets here. Glacier is our foundational asset that we started with in 2008 in the Montney, and we've developed that into a very strong cash-generating asset. Through the drilling and the development and building of our gas plant, which is -- can process 400 million cubic feet per day that asset continues to provide the foundational cash flow for us to reinvest in opportunities both at Glacier and in our other assets. Over the last few years, we did focus more on our liquid's assets in Progress and Wembley and also Valhalla. These assets are spectacular in terms of what results that we'd be able to attain. We were able to optimize drilling and completions in those areas in the last few years, put in some initial infrastructure, and those are ready or at the ready to be developed further. At this time, though, because of our constructive view of natural gas prices, we continue to invest back into our Glacier natural gas asset and the economics there are excelling in terms of the cost comparisons and results that we've seen. So moving into the next slide, you can see the results and the efficiency and performance improvements that we've continued to drive here. And most notably, in the last couple of years, we've been able to, as we invested back in the Glacier, improve our well productivity by well over 87% and reduced our well cost by more than 10%. So those impacts are allowing us to see economics that are resulting in rate of returns well over 100% at current gas prices. And even in our liquid's areas, at current oil prices, we can see returns of approximately 70%. But as I explained, our best investments today are spilled into the natural gas side in the picture. So this is a very interesting slide in terms of the fact that even a property like Glacier, where we've drilled over 200 wells, we're still able to improve it substantially. Next slide. On this slide, we continue to reinforce our low-cost structure and as you look at other Montney players in this fairway, we continue to be one of the lowest-cost producers out there, if not the lowest -- one of those costs in North America. As we look ahead in some of our future plans, we expect to maintain that, and we expect that to help certainly deliver more and more free cash flow as the years go by. Next. In terms of our marketing, diversification and hedging solutions, we've also taken an approach, a portfolio approach where we began marketing into several different areas. We have AECO, Emerson, Empress, Dawn, and the U.S. Midwest's, where we market our sales. And in that, we hedged our production this year, you can see that in the middle of the charts, as shown, we're hedged around 40%, 45% for most of the year, a little lower in the fourth quarter and as we look forward, we're watching pricing here, which we believe will continue to be in a very strong -- in that very strong price range for us to continue to add more hedges as we come up on the end of summer and early fall. So we believe the '22 price strips as currently are too low. We think that the constructive fundamentals will support that, and we believe that pricing will respond to that. In terms of crude oil and liquids, which make up a smaller proportion of our revenue streams, we've also done some hedging there to allow us to protect some of that volatility on the liquid side. On the right-hand side in the pie charts, that shows you our percentage of sales into each of these different end markets. And as you can see in '21, we're approximately 45% exposed to AECO, Emerson. And that grows over time. And one of our strategies was to allow us to not get locked in -- sorry, not get locked into hubs for too long but allow us the opportunity to move gas into different arenas and opportunities as they come forward. So that continues with our theme of flexibility. Next slide. Our 2021 capital investment program really reinforces our longer-term strategy. And as outlined on this slide, we intend to spend between $115 million and $135 million of capital. We recently reduced our capital, and we've increased our production and our guidance for 2020 on the heels of very strong wells that we drilled through the fourth quarter of 2020 and also what we are seeing in the first quarter of '21, which where we had spectacular results. We expect these investments here to provide us with strong capital efficiencies, driving net debt-to-AFF down towards 1, as I mentioned earlier, but we also are driving close to 10% production growth with $30 million of growth capital. So very strong results as a result of continuing efficiency improvements in our operations. And the last slide on Advantage, I just wanted to highlight here that if you dig a little deeper into the 2021 capital program, what we can see here on this slide is that moving from the left to the right, if you look at the sustaining capital that we require to keep production flat in this company, it's $75 million. What's astounding is the fact that we can do that at $1.37 AECO pricing. To drive our 10% production growth, we could fund that at $1.63 in order to -- in addition to funding not just the growth but future initiatives, which will help us position us in the liquids and gas assets for '22 and beyond, another $20 million, which overall would say just under $2, we could fund this entire program. So when you translate that back to free cash, you can see that the numbers roll back around 70 as an average based on current prices, and it could be higher than that if we see stronger constructive gas developments occurred through the half -- last part of this year. So with that, I'm going to turn it over to Mike Belenkie to talk about Entropy.

Thank you, Mr. Mah. I'll walk through about 10 slides here to talk about Entropy. Entropy of course is our brand-new subsidiary focused on carbon capture and storage. So the next slide, this is the introduction. Entropy are leaders in carbon capturing storage. We have proven carbon capture storage technology, and this is innovative post-combustion carbon capture that we're talking about that has been designed on the backs of a variety of skill sets that come from our pre combustion carbon capture, which we've been doing at the Glacier plant for the last dozen years. It's an energy-efficient integration of multiple technologies, and it's built on decades of experience both in geology and in processing and reservoir engineering. The result of all that work is a massive reduction in total [ cell ] costs, which is all that is really required in the end to make carbon capture a commercial project. This has been made possible by Advantage knowledge and expertise, along with world-class technical partnerships without as power consulting, our engineering company, back in this hub and part of it is actually a large part of the zone as well as a partnership with the Clean Energy Technology Research Institute, University of Regina. One of the most advanced carbon capture institutes in the world. It's been developing this technology for the last 30 years. Carbon capture has talked about a lot, but rarely actually executed at Entropy, we're in the process of executing our first post-combustion carbon capture project right now. We've ordered the equipment, construction will begin in the third quarter, and we should be capturing first carbon late in the first quarter of next year. The first phase will cost $27 million. It's fully funded by Advantage and an external contributor. And it will capture 46,000 tonnes, capturing offset 46,000 tonnes per year of carbon dioxide, which delivers net operating income of $2.9 million per year. Important to Advantage is that, at this point, roughly 20% or 25% of our gas will be net 0 gas sourced. So this is something we'll begin to market as blue natural gas, and we believe will bring a premium in the market. Phase 2 will be developed following Phase 1 and funded not using Advantage capital, but instead using Entropy capital. Part of the carbon capture storage challenge boils down to cost. Carbon capture is actually a technology that's quite old, different iterations. But the challenge has always been making an economic proposition to finance, build and run, both because the capital costs and the operating costs are very high using old technologies. What Advantage and Entropy have done together with our partners ABC and CETRI has driven the cost down for post-combustion carbon capturing storage to about $400 per tonne per year on a capital basis and a $15 per tonne operating cost. We try to standardize these metrics because in the world of carbon capture, there are many ways to look at it, this is the most transparent version that we've come up with so far. It's clean and obvious and we hope that other projects are clear with the disclosure, and we've tried to show a couple of comparisons here for what other people have accomplished in the past as we are in the process of accomplishing right now. Turn on the left of this page, Slide 13, shows a green line, which is the -- it's a trend line showing our cost structure with different sized projects. Since Entropy has been announced, we've been engaged to look at numerous different third-party projects. And as such, we've developed this cost curve to represent what we believe future projects will cost at different sizes. The most important part of this chart, of course, is that the cost curve is following by more than 50% to come down to our level. And almost every size of project falls at below the cost of what we know we can receive right now from tax incentives and the Canadian carbon market. That's how this becomes a commercial project. On the right side of this slide, it shows the distribution of all the emitting facilities in Canada. And really, what it shows is there's more than 1,500 of any facilities. And our project size falls right in the middle of the most frequent sizes on left and the largest sizes on the right. So the point of this slide, of course, is that we can do it economically. It's extremely scalable for different sizes from both sizes to very large projects. And it's economic enough to scale up over and over again, which is the business plan. Going back to the Glacier project on the left side. With Phase 1 and Phase 2 together, we've shown a variety of net operating income streams at different price decks. The red line on this chart shows the declared carbon pricing in Canada by the Trudeau government and shows the incredible upwards trajectory of net operating income from simple investments these 1 and 2 Glacier. Assuming this happens, the economics of carbon capture for Entropy projects are extremely positive. Looking to the right side, you see different jurisdictions around the world. And of course, current pricing, Canada is on the lower end of all these other countries and the prices that they demand right now. Right up to the top range of California low-carbon fuel standard, $250 per ton currently trading at, and that's in Canadian dollars. So not only is this technology suitable in Canada at floating markets. It's particularly suitable in the United States at the 45Q tax credit cents rate, which is a fixed guaranteed rate by the federal government. And of course, in other jurisdictions that are moving out to increase the cost of carbon. So scaling and replicating our technology in those jurisdictions is also a part of the business plan. Slide 15 shows a very simple rendering of major equipment required to accomplish carbon capture in a modular sense. This is the Entropy modular carbon capture solution. And one of the large -- one of the most important pieces of design is that almost everything that's manufactured for our design can be done so in a controlled environment and fabrication shop and delivered on-site and assembled very simply in a predictable way. So the cost overruns are much more unlikely than the mega projects with carbon capture been installed otherwise. We can do this design from a small project is 8,000 tonnes per year. And there is no upper limits on scalability. The next slide shows a reference to our new generation of carbon capture solvents. In our partnership with the Clean Energy Technology Research Institute at the University of Regina, we have access to and secured ownership of a brand-new class of solvents that reduces energy input and reduces equipment requirements in order to capture carbon. This is an important part of our ability to drive down the cost of carbon capture because we've secured this solvent and secured the research through CETRI, we have a unique ability to deliver this reduction in carbon capture costs versus typical engineering companies who are required sticking with normal technology that's off the shelf, ready off-the-shelf chemicals. A cartoon of the process, many people ask how it works. What reverse entropy carbon capture really is, is bolt up equipment to the exhaust stream of an industrial emitter. We have a number of proprietary technologies that we preprocess the gas with, a proprietary solvent to actually scrub the carbon dioxide know the exhausts and proprietary processing of those gases prior to being injected, in our case, Glacier 3,000 meters underneath the surface of the earth, primarily in safety store and reservoirs that Advantage and Entropy have decades of experience in disposing into. So a very simple representation of a very, very complex process, which is the product of decades of experience. An important part of reducing emissions, is being more efficient with our energy. And one piece of technology that Entropy has developed significant experience with our partners is heat capture. And an important part of any project, whether you're capturing carbon or not, is our ability to deploy, heat capture into industrial emitters. And then on the storage side. Many people ask about where the carbon dioxide goes after you scrubbed it. The eventual home is for us going to be almost exclusively geologic storage. They have the ability to do this in EOR situations, but broadly speaking, because we're looking at scalability and being able to scale up the number of tonnes that we actually install these things, we are planning to rely heavily on geological storage in sealing off for supply permeability. Again, a very complex skill set with Advantage and Entropy having decades of experience, monitoring and including the regulatory environment. As with any team, Slide 20 shows the importance of the partners and leadership. We think that the team that we've assembled at Entropy has potential to continue to lead the industry well into the future, assuming we capitalize it appropriately and seize the opportunities in front of us right now. This brings us back to a couple of Advantage slides. Advantage is already one of the lowest emissions energy producers -- oil and gas energy producers in the basin. On a net basis in 2018 and 2019, we were just over 0 tonnes per boe, thanks to carbon offsets we've been receiving for our pre-combustion carbon capture scheme. When you relate that to the amount of emissions, it tends to be for energy, per boe, that's the full life cycle emission of [ 3 buckets ]. And about Community. Advantage has a long history of to treat the Community, not just through employment, but also through part-time jobs, services, operating activities, and contributing to social and environmental causes. So with that, I'll wrap up our portion of the corporate presentations. And I'll hand the floor back to I guess, Ron.

Okay. Thank you, Mike, and Andy, that was very informative. I think that all our shareholders would appreciate the material that you've provided today. We will take a moment or 2 to see if there's any further questions or if there are any questions?