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

Good morning and afternoon, ladies and gentlemen, and welcome to the Advantage Energy Limited Q1 2025 Results Conference Call. [Operator Instructions] This call is being recorded on Friday, May 2, 2025. I would now like to turn the conference call over to Mr. Brian Bagnell, Vice President. Please go ahead.

Thank you, Kelsey, and welcome, everybody, to Advantage's conference call to discuss first quarter 2025 results. Before we get started, I'd like to refer you to our advisories on forward-looking statements that are 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. We've also posted an updated corporate presentation. I'm here with Mike Belenkie, President and CEO of Advantage; and 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 Mike has finished speaking, we'll pass it back to the operator for questions and go to the webcast. As usual, we'd like to ask that if you have any detailed modeling questions that you follow up with us individually after the call. So with that, I'll turn it over to Mike Belenkie. Mike, please go ahead.

Thank you, Brian, and thanks to everyone for joining us today. As you can see from our financial and operating results, we had a really strong quarter at Advantage. Here's the rundown of how it went. Financially and operationally, we did better than planned. Our adjusted funds flow hit $121 million (sic) [ $121.1 million ], that's $0.73 a share, thanks to the strong performance of our newest assets and the relentless pursuit of cost reductions. We spent $94 million (sic) [ $94.2 million ] during the quarter, which is expected to be our busiest quarter this year. And we still managed to reduce net debt by $22 million (sic)[ $22.3 million], bringing us to that $603 million (sic) [$603.3 million ] net debt. This is ahead of schedule to achieve our $450 million debt target by year-end. Operationally, we continue to execute really well. We achieved a production record of 83,773 boe per day, which is up 27% from Q1 last year. Liquids production was up 106% to 13,273 barrels per day. Both our Montney assets and our Charlie Lake assets continue to deliver better results than budget. We drilled 10 (sic) [ 10.1 ] net wells this quarter in Wembley, Valhalla, Progress and Gordondale with none of them brought on production pretty recently. Our latest tranche of four operated Charlie Lake wells hasn't quite surpassed 30 days of production history after cleanup, but performance remains well ahead of expectations. Operating costs dropped to $4.76 a barrel, down 8% from Q4 2024 because our team has done a great job of integrating our new assets smoothly into our dominant infrastructure network. Q1 was strong, both on production and op costs compared to our guidance range, but we're keeping our annual guidance steady. A few reasons for that. NGTL pipeline maintenance is expected to intensify this summer, and we don't plan any more production growth for the remainder of the year. And our op costs will be impacted later this year by some new midstream gas processing deals that we inherited, pushing us back into our guidance range. So we do expect our costs to settle out in the lower half of that range. On the marketing front, we've hedged 43% of our natural gas and 43% of our oil for the rest of 2025. That helps keep our cash flow steadier no matter what the market throws at us and provides increased confidence in hitting our debt target. We're not sitting around counting on LNG Canada to come onstream in June. Gas prices in Q3 are very difficult to predict with the date of that important event not yet locked down. Looking ahead, our focus is straightforward, grow cash flow per share without risk in our balance sheet. Not surprisingly, we've calibrated a drilling program with a maximize cumulative cash flow. Given the amount of volatility in the markets right now, we will make adjustments to our program regularly to ensure that each discretionary investment is the best use of that capital based on real-time data. With the heaviest capital spend now behind us for the year, we're expecting to see free cash flow ramp up through the year, accelerating debt repayment and systematically stepping up share buybacks. As we approach our debt target during the second half, we will set a new conservative debt target range and lean harder into the buybacks. It's about doing the right thing with every dollar at the right time. At today's prices, we're expecting over $500 million in free cash flow during our 3-year plan, while growing production at the same time by 5% to 10% per year. That's only possible because of our high-quality Montney assets and a team that executes at the highest level. Premium Montney assets are getting scarce so our previously announced special committee of independent directors will be watching carefully for opportunities that make sense for Advantage and our shareholders. We're in a good spot to benefit from Canada's constantly changing energy landscape with our low-carbon natural gas and a 62% stake in Entropy Inc. Our strategy is simple, allocate capital smartly, invest in projects with strong returns, grow cash flow and shrink our share count. That's how we build compounding value for you. To our employees, our Board and our shareholders, thank you for your continuing support and trust. We remain committed to delivering strong performance and optimizing value for all of our shareholders. With that, I'll pass it back to Brian. We'll start taking questions.

Thank you, Kelsey. I think we'll start with questions from the webcast here and then pass it back to you for any questions on the phone lines. Our first question here is, will we get updates from the special committee during 2025? And will a formalized process be entered into this year?

Okay. Yes. Thank you, Brian. Yes, we've been receiving a lot of questions on this lately. As most of you are aware, high-quality Montney assets like ours are becoming increasingly scarce. And it's our most important responsibility to shareholders to try and maximize corporate value. But in the big picture as a publicly traded company, we're always considering strategic options, and we do hold Board strategy session at least once a year. In fact, rarely does a year go by without some important opportunity to evaluate. If our special committee were to become aware of an opportunity to do more for shareholders via formalized process or otherwise, it will be decided at that point whether it should be publicly announced. So since nothing is currently underway, it's pretty difficult for me to predict what that might look like. So in the meantime, this is the way it looks with a high-quality publicly traded company.

Thanks, Mike. Second question here on the webcast. Are you still working on other dispositions? And if so, can you elaborate on the magnitude and the timing?

Sure. Yes. I think this is probably a less important question, but we still hear quite frequently. Just like any strategic discussion, we're always looking to optimize our portfolio of assets but it's better to not really set expectations for any of these types of deals since most of these types of deals are modest in size and have to be timed to match other priorities. And maybe more importantly, doing deals like these smaller asset rationalization deals, these are market driven. So we won't set any expectations. We're always going to keep watching for opportunities to bring in better value, whether that's through a small sell-down of infra or other asset rationalization. Okay.

Great. Kelsey, I think that's it on the webcast at the moment. We'll pass it back to you for any phone Q&A.

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

Congrats on a great quarter. One quick question for you, just two different parts. On your $450 million net debt target, just given the move in the commodities, the leverage ratio obviously looks different at $450 million than it did 6 months ago. Just curious how comfortable you are with the $450 million as your near-term target. And when you do reach that level, what percentage of your free cash flow are you thinking of putting towards a structural [ bottom line ] program?

Arif, this is Craig Blackwood here. Yes, we're very comfortable on the $450 million. With regards to the commodity, that's a little bit of a perception thing. Our numbers are actually better than when we put out our budget originally. And we keep updating our forecast like every couple of weeks given the amount of hedging and everything else. We've been really just bounced around that $450 million, even through all the noise of tariffs and the movement of commodities and coming off of oil prices, we've been extremely consistent. We are actually getting more comfortable all the time in our debt target. So we feel that we're completely on track to attain that by year-end.

Okay. Sounds good. When you do get there, Craig, is there certain percentage of free cash flow you are thinking of allocating towards buybacks?

Yes. We're not going to be kind of mathematical on that. Clearly, a very significant amount of our free cash flow will go to buybacks. But you have to look at multiples and valuation and other things at that point in time. But I think it would be fair for people to see us execute exactly the same way that we've done over the last three years. And really focusing our free cash flow in buybacks, but we aren't going to be methodical if necessarily in terms of saying this is what the percentage will be. We do plan to lay out -- when we start getting there at the end of the year, we will lay out what our debt target, what our ranges will be going forward. So you'll see that near the end of the year. Would you like to elaborate on that a bit, Mike?

Yes. I think if you look to our past behavior as a predictor of the future, when we are within our debt target range, of course, I did mention we'll be setting a new debt target range as we approach our $450 million. When we're in that range -- in the past, typically, we've been using about 100% of our cash flow for the share buyback. So getting within that range is #1. And then at that point, the conviction level gets quite high. Okay?

Ladies and gentlemen, this does conclude your conference call for today. We thank you very much for participating and ask that you please disconnect. Have a great day.