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

Good morning, ladies and gentlemen, and welcome to the Advantage Energy Limited Q3 2024 Results Conference Call. [Operator Instructions] This call is being recorded on Friday, October 25, 2024. I would now like to turn the conference over to Mr. Brian Bagnell, Vice President, Commodities and Capital Markets. Please go ahead.

Thank you, Cindy, and welcome, everybody, to Advantage's conference call to discuss our third quarter 2024 results. Before we get started, I'd like to refer you to our advisories on forward-looking statements contained in the news release as well as advisories contained in Advantage's MD&A and annual information form, both of 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 our financial and operational highlights. Once Craig and Mike have finished speaking, we'll pass it back to the operator for questions. As usual, we'd ask that if you have any detailed modeling questions that you follow up with us individually after the call. Mike, please go ahead.

Thanks, Brian. I'm pleased to report our third quarter results, including record production, strong liquids performance and lower operating costs. I'll start with some highlights. Third quarter production averaged 34,400 BOEs per day, an increase of 12% over the prior quarter and 16% over the third quarter of 2023. This was a corporate record despite having curtailed approximately 5,000 BOEs per day of dry gas during the quarter in response to unusually low AECO prices and a significantly reduced drilling program for the year. Liquids production achieved a record of 12,800 barrels per day, an increase of 80% over the prior quarter. Liquids represented 71% of our sales revenue, which highlights the diversification benefits of our recent acquisition while gas prices have been volatile. Thanks to our disciplined capital allocation and continued strong well performance, we were able to reduce our 2024 capital spending guidance to between $245 million and $275 million. That's a reduction of $35 million compared to our budget at the time of the acquisition only a few months ago. We'll continue to manage our capital program in fourth quarter with a strict focus on returns and will only bring new wells online when the returns are supported by the forward strip. With lower capital and higher revenues from liquids, our capital spending and adjusted funds flow were balanced during the quarter, each at $55 million. Net debt remained flat at $622 million. Turning now to an update on the performance of the acquired assets. We're very pleased to be able to report positive early results on integrating the assets and capitalizing on synergies. Operating costs and G&A are materially lower than budgeted and production declines have been shallower than expected. Cash flows have benefited from added production including reactivated high H2S wells that were unable to flow without access to our substantial gas processing assets. Third quarter operating costs were $5.55 per BOE, which is well below our expectation of $6 per BOE. And there is room for them to fall further. This is a great result when considering our production curtailments for the quarter. Our first 2 Charlie Lake well pad first 2 -- excuse me, our first Charlie Lake 2-well pad has been drilled and will be completed in the coming months. We expect it to be on stream in mid-December. Seven net wells are planned before the end of 2024 in the Charlie Lake, targeting development locations with strong economics. Construction continues on our 75 million cubic foot per day Progress 4-21 gas plant, which we expect to be on stream in the second quarter of 2025. This facility will unlock significant synergies from the new assets resulting in lower operating costs and stronger operating netbacks. Combined with surplus capacity that came with the acquisition, Advantage has adequate gas processing capacity now to execute on our growth targets for the next 3 years while reducing infrastructure spending in 2026 and 2027 by about $100 million. Switching now to operational discipline. Glacier is amongst the lowest cost natural gas assets in North America. However, daily gas prices at key regional hubs like AECO and Empress recently fell to as low as $0.05 per GJ at times during September and early October. As such, we chose to curtail production by as much as 130 million cubic feet per day on certain days to maximize free cash flow and reduce depletion. These curtailments by Advantage and a small number of our peers, combined with increasing seasonal demand, have so far supported a sharp recovery in Western Canadian cash prices in the last few weeks, which did allow us to restore production to capacity quickly. We see our ability to quickly turn large volumes of production on and off while pricing is volatile as a competitive advantage. We also recognized though that volatility may continue into the early winter. We expect market conditions for natural gas to improve in 2025 and beyond as a result of growing exports and increasing Western Canadian natural gas demand. Looking forward, Advantage's long-term focus is on maximizing the AFF per share growth, while maintaining a strong balance sheet. As a result of the acquisition, Advantage now expects to exceed our per share growth targets. So our strategy has temporarily shifted towards maximizing pace of delevering with a focus on achieving our net debt target of $450 million. As a part of this process, we are evaluating various options to accelerate delevering, including small noncore asset sales. We anticipate providing investors with an update earlier this winter. While Advantage is focused on reaching our net debt target quickly, we may consider opportunistic share buybacks if our share price becomes temporarily disconnected from fundamentals. We plan to host a virtual Investor Day on December 10, 2024, to discuss our 2025 budget and our refreshed 3-year plan. Though the plan is not yet set, it will continue to focus on steady, efficient growth, highly efficient capital deployment and a strong predictable focus on total shareholder returns. With that, I'd like to thank our long-term investors and Board of Directors for their continued support, and I'll hand it back to the operator to open the lines for questions.

Cindy, we will pass it to you to address any Q&A. Thank you.

[Operator Instructions] We have 1 question on the queue from Amir Arif from ATB Capital.

Mike, a couple of quick questions for you. First, just in terms of the breakeven prices to think about for gas, can you give us a sense of what gas price you do think about shutting-in volumes? And then also what gas price you do think about either completing DUCs or willing to go ahead and do -- put new capital into Glacier wells?

Thanks, Amir, for the question. Yes, I appreciate that. Our Senior VP, who is in charge of all things operational, has a list with his team of the individual operating costs, this is variable operating costs at each one of our wells. And based on the price of the day, we'll go down the list that is essentially a higher cost molecule than the price of that day. And so on any given day, the prices may raise, the increase -- may increase the amount that shut-in or decrease it. So there's no single number. But I think that the way to think about it should be, we do tend to reduce -- we see reductions start to grow when we fall below $0.80 and at $0.50, it becomes quite material. Certainly at $0.05 or $0.20, we're going to be pinned at the top end of that range where anything that's disposed to AECO or Empress pricing will be shut in at low price.

Makes sense. And then in terms of completing DUCs, like bringing some of the capital back in, is there a certain gas price you're looking for on that side?

Yes. Thank you. So that's second part. In terms of that, that's -- each well is looked at with a cumulative free cash flow metric as we think about when to bring the wells on. What we're driving towards is maximum pace of delivering using free cash flow. So on a regular basis, we'll recalibrate well economics to establish the optimal time to turn a well on that might be shut in or has been completed but not yet tied in. So really, it's about calculating simply for highest cumulative free cash flow. And that can vary quite a bit, Amir.