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

Good morning, ladies and gentlemen, and welcome to the Advantage Energy Limited Second Quarter 2024 Results Conference Call. [Operator Instructions] This call is being recorded on Friday, July 26, 2024. I would now like to turn the conference over to Brian Bagnell, Vice President of Commodities and Capital Markets. Please go ahead.

Thank you, Constantin, and welcome, everybody, to Advantage's conference call to discuss our second quarter 2024 results. Before we get started, I'd like to refer you to the advisories on forward-looking statements contained in the news release as well as the advisories contained in Advantage's MD&A and annual information form, which are available on SEDAR and on our website. I'm here with Mike Belenkie, President and CEO of Advantage; Craig Blackwood, our CFO; as well as other members of our executive team. We'll start by speaking to some of the financial and operational highlights. Once Mike and Craig have finished speaking, we'll pass it back to the operator for questions. And as usual, we'd ask if you have any detailed modeling questions, that you follow up with us individually after the call. Mike, please go ahead.

Thanks, Brian, and thanks, everyone, for joining us for this conference call on our second quarter 2024 results. This is the first quarter since our asset acquisition, which we closed on June 24 this year. So this report includes a 7-day step period from the new assets. Let's start with the financial and operating results. Production for the quarter was 66,401 BOEs per day, slightly higher than the first quarter of 2024, but 28% higher than the second quarter of '23, during which time, the Glacier gas plant had a plant turnaround. Production from liquids was 7,141 barrels per day and an 11% increase versus the first quarter, and a 12% increase versus the second quarter of 2023. Although liquids represent just 11% of our production this quarter, they contributed 53% of our quarterly revenue. As we've seen, gas prices have been quite weak across North America during the quarter, which has impacted our revenue. However, this has been significantly offset by higher production and stronger liquids pricing. Adjusted funds flow for advantage, not including our Entropy subsidiary but including transaction costs, was $44 million or $0.27 per share. Without transaction costs, though, adjusted funds flow was $47.2 million, or $0.29 per share. Capital spending for the quarter, excluding the acquisition of Entropy was low for the quarter at just $39.7 million with 3 wells drilled and completed monthly. On the balance sheet, balance end at the quarter with net debt of $619 million after funding the acquisition. We sit with over $150 million available on our credit facility. Our debt level translates to approximately 1.7x debt to trailing cash flow when consolidating cash flows from the acquired assets during the last 12 months. With 2024 production expected to average between 70,000 and 73,000 BOEs per day and 16% liquids for the remainder of 2024, we are significantly exceeding our annual per share growth targets. Therefore, our strategy has temporarily shifted towards maximizing free cash flow and maximizing the pace of delivery. A few weeks ago, we also reduced 2024 capital spending guidance by $20 million to between $260 million and $290 million by cutting gas-weighted wells from the program that were expected to drive gas production even higher while gas markets remain oversupplied and prices are suppressed. As a reminder, our original budget for Advantage, which we issued in December of 2023, was for the same range, $260 million to $290 million. Thanks mostly to continued Glacier well outperformance. We've been able to deliver roughly the same level of production growth on our base assets, plus we've added 8 net [ drilled ] wells on the acquired assets for the same total capital as our original budget. Since the acquisition, we've increased our hedging position to reduce exposure and price volatility. Approximately 28% of our natural gas production is hedged through the end of '24 as well as 26% for calendar '25 and 10% for calendar '26. Approximately 65% of our oil and condensate production in the second half of '24 is now hedged as well as 45% in the first half of '25, and 15% in the second half of '25. I'll talk a little bit about the acquisition. It's only been a month since we closed the Charlie Lake acquisition. However, we are already encouraged by the results these assets are bringing to the Advantage portfolio. Production from the acquired assets is exceeding expectations with current production of about 15,000 BOEs per day due to some excellent wells results, including 4 of 18 Valhalla well that delivered over 1,100 barrels per day of oil in the first 30 days of production. Our team has identified our initial drilling program on the acquired assets with drilling expected to begin in September. Find to drill 8 net Charlie Lake development wells this year selected based on max internal rate of return. We are executing on synergies to reduce costs and improve efficiencies on the assets. The largest synergy relates to deferral of the second phase of the Progress gas plants, which was originally planned to begin construction in 2026. However, thanks to the acquisition, that expansion has been deferred definitely, which frees up approximately $100 million for the 2026 and 2027 programs. That expansion no longer required, thanks to the new processing capacity that we acquired through the transaction. On the other end of the synergy spectrum, we're also already seeing operating costs on the assets trending lower by more than $1 per BOE versus our forecast already with further reductions expected by the second quarter of 2025, once Phase 1 of the Progress gas plant is online. For more information on the synergies, we have lots of details in our investor slide deck, feel free to refer to that. As some of you have likely noticed from our latest investor presentation, we are evaluating various options for accelerating towards our net debt target, and that includes consideration of noncore, nonproducing asset dispositions. We are in the very early stages of this process and we'll provide more information later this year. On Entropy, during the quarter, we were pleased to see the Canadian CCUS investment tax credit finally received royal assent after about 3 years, which is great news for us as we are eligible to be one of the first recipients. We're currently preparing applications for our operating carbon capture projects for Glacier to realize the ITC for expenses we incurred on CCS back to January 1, 2022. Any ITCs we receive will lower our net capital for Advantage at least in this round of ITCs, hopefully prior to the end of the year. At Glacier Phase 2, at the beginning of the quarter, we are pleased to announce FID for Glacier Phase II, our second and largest post-combustion CCS project to date with an onstream date expected in the second quarter of 2026. Total CO2 capture capacity will be approximately 160,000 tonnes per annum from 9 gas-fired engines plus 1 gas-fired power generation turbine. This is in addition to the existing Phase 1 capacity of 32,000 tonnes per annum. Total cost of Glacier Phase 2 CCS, including capture equipment, compression, transportation and storage wells is $127 million resulting in a capital efficiency of $800 per ton per annum or $600 per tonne per annum for capture only, excluding compression transportation and storage. All capital costs are incurred and financed directly by Entropy at no cost to Advantage. All capital expenditures are also expected to be eligible for the federal investment tax credits of up to 50% plus the Alberta Carbon Capture Incentive Program of 12%. Revenue from the project is contractually underpinned 75% by a 15-year carbon credit offtake agreement with Canada growth fund and 25% by a 15-year power purchase agreement with Advantage. In conjunction with the Glacier Phase 2 CCS project, Entropy will repower Advantage's Glacier gas plant by installing the 15-megawatt gas-fired turbine and selling power to Advantage via competitively priced -- Power Purchase Agreement, PPA while also capturing approximately 90% of the CO2 emissions from the turbine. This modular power plant is estimated to cost $47 million, providing power and heat for the plant and for Entropy CCS equipment. With the more efficient turbine power source, Advantage's existing power generators will be shut in, eliminating prior CO2 emissions and methane emissions. This project is expected to be the world's first CCS project on gas-fired baseload power. We expect this to be an important aspect of Entropy's business in the future. A few weeks ago, we also announced partnership with Methanex , where Entropy entered into an agreement to invest in a pre-FEED study for CCUS deployment and Methanex's Medicine Hat, Alberta facility. We're tremendously excited about this collaboration that will leverage Entropy's proprietary modular post-combustion CCS technology and Methanex's manufacturing expertise to utilize a portion of the captured CO2 to produce additional methanol. Entropy plan to construct and own the capture equipment adjacent to Methanex's facility and Methanex will supply the utilities build the times to its facility and operate the capture equipment once commissioned. Total emissions captured targets approximately 400 tonnes of CO2 per day and involves an investment of approximately $100 million, the largest portion of which will come from Entropy. Methanex plans to use the captured CO2 as feedstock to produce approximately 50,000 tonnes per annum of additional methanol with the remaining CO2 permanently sequestered safely underground possibly by Entropy. The Methanex partnership highlights for us the versatility of our CCS technology and a strong growing market for CCS and Alberta. More to come on Entropy. So the outlook for Advantage. The Advantage's long-term focus on cash flow per share growth remains unchanged. Our short-term focus on delevering will be executed with conviction via disciplined capital allocation and potential asset sales. Most importantly, we're very pleased that we have been able to acquire a high-quality asset base with deep strategic synergies, resulting in cash flow per share growth that is above and beyond what we can possibly deliver within our organic development framework, and we're able to do this all at an accretive price. So with that, I'd like to thank our Board of Directors and our long-term shareholders for their continued support. And Brian, I'll throw it back to you.

Constantin will take any questions, if there are any, thank you.

[Operator Instructions] Your first question comes from the line of Amir Arif from ATB Capital.

I appreciate the color on the acquired assets in terms of operating costs already down $1 BOE. Could you possibly just layout qualitatively at least in terms of activities you're doing to help further reduce the operating costs or at least even on the capital efficiency side in terms of what you're doing differently than the previous operator to help bring those down further?

Yes. I'll take this question myself. It's Mike here. First -- the first thing that we were able to do is capitalized on manpower synergies, which is essentially we have a great presence for highly skilled operators in the area. We brought on all the people that we believe we needed to continue to operate the assets but in aggregate, less people are required to operate because it's all 1 footprint, so less hours and trucks, less driving time and so on, that cuts out a significant aspect of the operator hours, which is a significant cost in these operations. That's the first and most immediate thing that happens. There's a lot of other stuff that's also quick to happen coming down the pipe. We don't have to wait until the Progress gas plant comes on before we see all of our synergies but that's the biggest thing of all, which comes in the second quarter of '25, where we can take natural gas as currently being processed in third-party facilities for as much as, in some cases, close to $2 per Mcf and turn that into owned, operated, very low variable operating cost plants that we own. So that will be the single biggest step and the easiest one in coming, I guess, 12 months. And in the interim, there's a lot of processes and procedures that Advantage uses, including safety, including efficient operations, chemical issues, power management, that in the area where it will apply and just simply improve day-to-day. Prior company, [indiscernible] was a growth resource development and exploration company, we're now operating cash flow generation company. So those processes flow through quite quickly.

I appreciate that. And then just in terms of well capital efficiency, any differences on that front?

[indiscernible] to deal.