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

I second the motion.

As previously noted, voting on this resolution will be conducted on the Computershare 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. May I have a motion that the formal portion of the meeting be terminated following the announcement of the voting results on the matters considered at this meeting?

I make that motion.

I second the motion.

As previously noted, voting on this resolution will be conducted on the Computershare 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? I am advised that there are no questions. We will provide registered shareholders and duly appointed proxy holders approximately 30 more seconds to complete the electronic ballots. [Voting]

The polls are now closed. I would ask that the Scrutineer compile 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 requisite number of votes required. Therefore, I declare all of the resolutions carried. I direct the results of the poll will be included with the minutes of this meeting, and the results of the voting on directors will be announced in a press release in accordance with the policies of the Toronto Stock Exchange. In adherence to the approved termination motion, I declare this meeting terminated. With the formal portion of the annual meeting complete, and there being no further questions, I will now turn the meeting over to Mr. Mike Belenkie, Advantage's President and Chief Executive Officer, who will now present an overview of Advantage's operations and results. Mike?

Thank you, Steve. I'll walk through our publicly available slide deck, which is also available on our web page. It should take about 15 or so minutes after which point we'll be able to take questions if there are any. I'll start with the introduction to our corporate highlights. For those of you that are shareholders, you'll know much of this. The company is a midsized gas producer, with high-quality assets, low net debt and strong ownership of facilities, along with a carbon capture and storage development subsidiary called Entropy Inc. Our guidance is to grow at about 10% per year over the next 3 years by spending between $250 million and $300 million, with spending in the year 2023 to be approximately $250 million to $280 million. Current production guidance is between 59,000 and 62,500 BOEs per day. Our corporate strategy is less than straightforward, as most of you know, because the company has a strong balance sheet, has strong assets and existing infrastructure allows us to operate in an efficient way. Our strategy is focused on profitability. First and foremost, to deliver free cash and growth to maximize shareholder returns. The current state of the business is strong in all aspects of these approaches. And the intent is to continue to grow and shrink our share count in order to compound the value of that growth. The 1-year guidance again is $250 million to $280 million, of which 16 wells -- which buys us 16 wells of Glacier and 9 wells in our liquids-rich assets, Valhalla and Wembley as well as approximately $40 million of infrastructure investment that allows us to grow our total processing capacity. With all those inputs, our net debt is expected to remain between $170 million and $230 million, and any free cash be directed to our ongoing share buybacks. The added benefits of our ownership in high-quality assets bring us to a very low operating cost structure. We do have a strong and growing processing revenue stream as well as capital efficiencies that, dependent on what we're chasing with our primary drilling targets, tend to be top quartile in the peer group. Slide 5 is an overview of our 3-year plan, and we show right down to area by area and use of that capital, how we intend to spend our capital in the next 3 years. Each of the 3 years, spend is between $250 million to $300 million, and that delivers about -- well over a 10% compound annual growth rate in production. We show the production on the right side of the ranges that comes there. You'll note that there are allowances for capacity expansions in each of those 3 years. The current year, capacity expansion has been around $40 million, 2024 being around closer to $50 million and 2025 being back towards $40 million. Those expansions allow for capacity growth or for production growth in the following year. And should there be a change to a capital program, it would typically come out of capacity expansions first. And that gives us a lot of flexibility to either accelerate or restrict our capital and the associated growth of that when commodity markets change. So elasticity for a company like ours is baked in. And of course, the output, which we -- sorry, most is adjusted funds flow per share growth. Because in the energy space, especially in the mid-cap size, we believe almost all peers trade at about the same multiple of funds flow, Advantage is focused on growing funds flow per share as the most direct way to control our value proposition. With the current plan and with the current and stated forward strips for commodity pricing, our current plan will deliver approximately 20% compound annual growth and AFF per share. If you look closely, the lighter color of orange in the next 2 years shows the direct impacts of the planned share buyback under the existing free cash flow assumptions. So what that free cash flow does is we do our share buyback is it doesn't just increase the current AFF per share but has a compounding impact as our production rose, and that allows us to go from a 10% production per share growth to a 20% AFF per share growth, compounding with our strip pricing. And of course, we think about budgeting carefully and conservatively. We have a -- in the slide on the right or in the graph on the right, that shows that at about $2 per mmbtu Henry Hub price, we can cover our capital spending without increasing debt or any outside capital. So it's a fully funded program at $2 per mmbtu annualized. And of course, anything above that price is free cash flow buybacks. Slide 7 shows an overview of the 4 assets, all within 1 map sheet. The gaps between those 4 assets are approximately 3 miles each. So in most cases, many companies would see this as being one asset base. We've made them separately because each asset has a unique set of characteristics. But overall, they share the same sort of quality and provide a lot of flexibility in how we deploy our capital with Glacier being lean -- the leanest of the assets, although there are liquids-rich targets within Glacier, Wembley oil and Valhalla and Progress between being a combination of oil and liquids-rich gas. Slide 8 is an overview of our operating cost and total cost structure versus peers. You'll note that we fall on the very -- on the left side, very close to the bottom. We also include our transportation expense, even though transportation expenses as a general rule is actually when you have long-haul pipe, you tend to get higher netbacks associated with that. So it's not the normal expense model that you might consider. OP cost and royalty expenses, all again, top decile roughly within our peer group. That's because we have almost entirely 100% working interest, very little well count on a relative basis, our own infrastructure and very efficient operations. And those designs have been built and executed for the last -- realistically, the last 15 years, plus or minus, with Glacier the asset itself being in operation for about a dozen years in its current state. So that's baked into our DNA and baked into the DNA of the actual assets and facilities. When we talk about the drilling that we're doing, we're lucky to have a huge amount of inventory for a company our size. The -- that good fortune comes from both the aerial extent of the assets, but also the thickness of the resource package. For much of our resource base, we have 300 meters to stick of Montney section, which allows us to have multiple tiers of development. And across the whole area, we're developing multiple zones as well as multiple benches within the Montney. When you look at the targets that are most active right now, it allows us to avoid any notion as being sweet spot drilling. We don't expect to run out of our Tier 1 asset drilling for approximately 20 years. Zooming into Glacier as an asset, there are lots of sticks on the map showing the amount of drilling done to date. We do -- we figure we're probably at about the fourth inning of Glacier in terms of the maturity of the asset. We have had incredible gains at Glacier where the wells we're drilling now are actually producing approximately triple what they used to produce as recently as 4 years ago, thanks to a combination of different approaches from the entire group of the technical team, from geology geophysics, drilling completions and even production engineering, along with making sure that our pipe and plants are ready for that increase in production that happens so rapidly. We compare ourselves to our peers, you can see that we are certainly drilling our wells versus peers and pound for pound, this asset is very difficult to compete with. We also show a lot of detail on these pages because the range of outcomes on what we do is now very low, which means it's very predictable. As a result, we tend to disclose as granular as monthly production forecasts and certainly, our cash flow and capital forecast for this area -- for this asset. Zipping across our map sheet to the Wembley asset, this is a newer asset, which I'd say we're in our second inning. You'll see that we've actually had 2 seasons. If you look on the bottom right, where it shows all the well results that we've delivered in 2 separate campaigns. To date, we've had great outcomes. We're still making up some of that productivity that one of our peers has been able to deliver just to our west but we're actually beating several of our peers in the area at Wembley. We think of Wembley as being a world-class oily Montney asset. And we intend to grow this asset by about double this year, at which point will start to taper or start to plateau around 10,000 BOEs per day. This is a very active area for us this year in no small part because it's oil-rich where we've seen -- we have seen the gas pricing has been weakening after a rapid growth in those parts of the states. So we have a heavy deployment of our capital in Wembley this year, where we expect oil prices to be more resilient. Same thing with every other asset, we tend to show a great deal of disclosure and accuracy and granularity on all the data here. But suffice it to say, this is a crown jewel of an asset. Then we move over to Valhalla and Progress, which are our 2 least mature assets with Valhalla being slightly more mature than Progress. Both these assets are limited only by the fact that their infrastructure has been full for quite some time. So at Valhalla, we've drilled best wells that the company has ever drilled and at Progress we've drilled the best oil wells that we have ever delivered as a company. But because they're behind the facilities, because we're focused on AFF or cash flow per share growth drilling wells, spending capital into existing facilities tends to have a higher rate of return. And therefore, we focused our efforts at Wembley and, of course, Glacier. These 2 assets will form much of our future in the mid- to long term, and we intend to build a gas plant or converter, our compressor station to a gas plant on these assets in about 2 years' time, maybe 1.5 years time, assuming that the market continues to remain encouraging. Slide 13 is an overview of genericized type well economics. You can see that at low prices, all these assets, all the zones that we tend to think of as our primary targets are still quite economic with 50%-plus rates of return. As you climb, you start to see some of those results that we were able to deliver during the year 2022. In some cases, in 2022, flip into the next slide, we are able to see the wells payout in as little as 3 months. In a few cases, we have wells that paid out 300%. That's 3x payouts within 6 months. So quite an unusual time when you can drill wells where you can receive a full payout prior to actually getting the bills from the drilling company. That's not something that we expect to return in the near future, but certainly a testament to the quality of assets and the efficiency that we've drilled these assets up. And again, this is all of the last 2 drilling seasons that we've had. Every well, it shows up as early as 2020. So 3 years ago now. We show capital per well, the gross operating netback of each well and then the payout of each wells along the way. We can do this because, first of all, our range of outcomes has been so tight and so strong. And secondly, because we have very strong data management systems that make full disclosure easy for us. And again, thinking back to our accomplishments from last year, Slide 15 shows that within Alberta, Advantage drilled 8 of the top 10 Montney wells of the year, and 11 of the top 20 wells of the year. So incredible outcomes. And that's not -- definitely including some of the wells that were drilled around the end of the year, which have all outperformed every single well drilled in Alberta in the Montney last year. So more of those wells to come, we probably see but a dozen of those coming on here in the first quarter as data becomes available. Since the geopolitical instability we've seen in the last year, along with some ramping in other plays and other parts of North America, we've had a lot of questions about how our inventory compares to others, and in particular, the quality of our inventory. So we put together 3 pretty clear slides here to make sure that these things are available for all to check. The long story but -- the long story short, our inventory is that Advantage has about 50 years of inventory, of which we currently consider to be Tier 1, 20 years' worth of inventory, And for a well to be considered Tier 1, it must be both within a couple of miles of existing production, existing Tier 1 production, and it has to be the same high rock quality that we expect to see on the geological level. So these are not simply 4 wells per section multiplied against the number of sections. This is actually detailed geological scoping with nearby well productivity, proving the level of tiering that we've used. And of course, as you can see from the pie chart, there's no concentration of this inventory in one area. These inventory wells are sited across the entire asset base. And that's why we have this sort of 50-plus year inventory in front of us. And that, of course, plays into our growth strategy. With all that inventory as much as 10 or 20 years in the future, what we can do for shareholders most is to make sure that, that inventory gets monetized in some way forward. Slide 17 is an example of bringing inventory -- sorry, what we would call untiered or Tier 2 inventory into the Tier 1. The left graph is from about 3 years ago, the map is from about 3 years ago. The right map is from last year. As we drill new wells into areas that were not well established, we have the ability to display and demonstrate the Tier 1 nature of that rock and the productivity. You can see in areas of the Northeast, we had well -- a new well -- or old well 1.4 mmcf per day, IP 30 well, a new well came on at 9.5. Same thing on the lower example, 1.8 million a day became 15.4 million a day. Of course, the rock around those results gets promoted from untiered into Tier 1 inventory. And that's just one example of the one zone. And of course, we have 5 target zones of Glacier alone. So as we drill more -- it's not common for people to start to drill through their Tier 1 inventory and watch their Tier 1 number shrink. For us, as we drill more Tier 1 inventory, our numbers have been growing, and that's because of that previous slide showing how we promote areas from being under defined into Tier 1. One last one quick note here to talk about infrastructure. One of the things that makes Advantage Advantage is the Glacier gas plant in the bottom right corner in the photo. That asset is really an $800 million infrastructure asset when you factor in the plant plus the pipes. On top of that, we have compressors and oil batteries at Valhalla, Progress and Wembley. Keep in mind that our market cap is currently $1.2 billion. So that kind of -- those investments in infrastructure have created a structural cost advantage and the structural control that allows to do what we do. If we were to have used the midstreamer to build those facilities, we'd have sort of off balance sheet financing for that asset and a much higher structural cost, which looks a lot like debt. So by avoiding midstreamers for the lion's share of our infrastructure, we keep control and we keep our costs low. Of course, it gives us a strategic advantage by dominant area. On the gas marketing side, we do have a strong diversification book. Part of our strategy of growing by about 10% per year and underpinned by the goal of growing our export pipeline by about 10% per year. We don't believe that AECO is a good market. We think that it's actually managed in a way that somewhat is functional. It's been that way for more than half a decade. It's tough to see that improving, at least to improve in a sustainable way, just based on the fact that it's as complex as it is. So in order to mitigate that risk, that concentration to AECO has been reduced significantly. We now expect to have roughly 8% exposed to AECO this summer. And we vary that based on our outlook for pricing in the markets. But in the meantime, while we're avoiding AECO, we're typically getting exposure to places like Dawn, Chicago, Ventura, and in some cases, Hub via financial hedges. We will continue through the year here with modest hedging to reduce volatility in the sort of face of very volatile gas prices. But broadly speaking, for bearish, we hedge a little more. For bullish, we hedge a little less. And that brings us to really where we set Entropy. We've had lots of focus on sustainability through the life of the company, and we have been around for more than 20 years. But really the product of the 20 years of responsible development and sustainability, became what Entropy is now, and that is really a focus on applying our expertise and skills in low-cost, safe operations and efficient operations. And take you to one step further and investing in carbon capture storage. So as we think about Entropy, Entropy's business is like an inversion of the traditional resource business, where we capture the emissions from the burning of energy, and we put them back in the ground where they came from. So it's a nice way to close the loop, and it's a natural hedge to this business as it relates to exposure to carbon policy. How do we do this? Well, we have a pure-play focus on it. It's very complicated and it's difficult to do in spare time. So we have a pure-play focus. We developed the team, assembled a team of expertise that includes subsurface for storage, includes process engineering, includes the engineering procurement construction management. includes operations management as well as the commercial and data management systems that are required to make this type of complex project possible and possible at today's carbon presence. On top of that, to address the pressing challenges, ownership of the best technology gives us a huge structural advantage. And lastly, this is a capital-intensive business. We have access to capital, thanks to the investment we received from Brookfield. This was announced a year and a quarter ago, where Brookfield agreed to invest $300 million into Entropy in exchange for what will eventually become approximately half the company. So as we spend money on carbon capture projects within Entropy, Brookfield funds those costs of 100%. All the work we do within Entropy is at no capital cost to the Entropy. This is a different business. It has solid returns. It's certainly not an appropriate use of Advantage's, high cost of capital, cash flow be redeployed. A bit more explanation on the way the business works because this is an inversion of the traditional resource business, we take the resource as tailpipe of the industrial emitter. So for us, carbon dioxide is the resource. This is for Entropy. We process that resource from being low-concentration CO2 in mixed gases, and we purify it, which is necessary in order to inject it into the rock, into subsurface in the storage zones where it's permanently stored safely. And then in order to get revenue from this process, really, it requires carbon offsets because you're creating the derivative of carbon offsets, which we sell to monetize. The sale of those derivatives or those carbon offsets is our revenue stream, okay? So the business itself is essentially the opposite direction of the oil and gas business where you're taking this exhaust, you bring it back where it came from and getting paid for that. On a technical level, we started with what is known to be the only currently viable industrial solution for scrubbing carbon dioxide out of the mixed gases, which is aiming for processing. And we were able to secure what we believe to be the most advanced aiming technology in the world based empirically on the data from the University of Regina, who developed this technology over the last decade. When we acquired this technology, we had great hopes in the last 9 months since we've been running this technology at the Glacier gas plant, it's delivered on those high hopes. But the energy intensity now delivered of about 2.4 gigajoule per ton of carbon capture, which is perhaps 40% better than off-the-shelf generic engineering would deliver. In addition to that, though, again, this is about managing a very complicated, very new industry. We had to develop a calculation and data management platform to manage all the data, to manage all the energy flows as well as all the costs and variables in operating the systems. EntropyIQ was announced a couple of months ago as the first sort of data management platform that's available for managing and reporting CCS projects, and this will be available to anyone, whether they're working with carbon capture or not. A quick real-life photo of the first phase of carbon capture storage at the Glacier plant. It's important to note that gas-fired CCS, while everyone knew it's possible and certain elements have been done in pilot stage or a pilot level in the past, the Glacier first phase CCS project is the first gas-fired project in the world. It's running well. Teams did a great job, and the learnings from phase 1 have allowed us to stretch our lead over other what might be competing technologies at some point. We show a little bit of background on how this makes money. Basically, we invest in the carbon capture project. We do receive in Canada an investment tax credit. And after that, we received carbon offsets for every ton generated, by selling those offsets that was expected to be a 10% discount versus face value, we receive our cash flow. And the economics of these projects will be variable, but illustratively, they have the potential to be 20% to 30% rate of return. And of course, what's happening right now in Canada is the evolution of carbon policy. Unfortunately, it's been slow to become really refined, but we have some degree of faith that in the coming year or so the markets would be better established such that very large investments can be made in Canadian carbon capture. Meanwhile, no worries for that, we're putting our resources to work in the United States with several projects underway. A quick shout to the fact that carbon capture storage can't be done without the asset storage piece. We do apply Advantage's long and strong history of subsurface expertise. In fact, that led us to being awarded 2 separate global scale storage hubs. Number one, Grande Prairie Net Zero Gateway in partnership with Keyera and NorthRiver, which is going to be capable of storing 3.3 megatons per annum. And the second one, the Bow Valley Hub in partnership with IPL in the pipeline. That one will be capable of storing about 5 megatons per annum. Both those projects are global scale and create an opportunity to gather and store more carbon, but also the ability for us to work on products that we currently are developing to capture for as well. In addition to that, we have 2 local storage projects, Glacier and Leismer, which is on old winning policy to develop. So more to come on Entropy in the coming quarters. The long goal for Entropy is to reach IPO at which point Advantage will be able to offer our common equity for sale through a secondary. And through that sale process, that capital would return to Advantage shareholders via strategy of the day, potentially will show up in actual dividends. So the goal here of course is to turn Entropy and Glacier -- well, we've created Entropy into a cash return for Advantage shareholders. So with that, that really is the end of my overview of the business of Advantage and Entropy. If there are no questions, which they don't appear to be, I would throw this back to Steve -- to Mr. Balog ro conclude the meeting.

Thank you, Mike. This concludes the informal portion of the meeting.

Thank you. This will conclude the meeting. You may now disconnect, and have a pleasant day.