Cavvy Energy Ltd. (CVVY) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Welcome to the Pieridae Energy Q2 2020 Financial Results Conference Call. [Operator Instructions] I would now like to turn the meeting over to Mr. James Millar, Director, External Relations. Please go ahead, Mr. Millar.

Thanks, Christine. Good morning, everyone. I'd like to welcome you to Pieridae Energy's Q2 2020 Financial Results Conference Call. With me today are Chief Executive Officer, Alfred Sorensen; Chief Financial Officer, Rob Dargewitcz; and Chief Operating Officer, Tim de Freitas. Alfred and Rob will begin today with some opening comments on our financial results and certain other company developments. Please note that a slide presentation will accompany their remarks. Following their prepared remarks, we will turn the call over to the conference coordinator for your questions. [Operator Instructions] Before Alfred begins, I'd like to remind you that our remarks today will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the reports filed by Pieridae with Canadian securities regulators on sedar.com. With that, I'll turn the call over to Alfred. Alfred?

Thanks, James, and good morning to everyone, and thank you for taking the time to listen to what we have to say today. Just a quick overview of Pieridae. We are Canada's only fully independent integrated LNG company. Our Goldboro project is a 2-train multibillion dollar project with a fully -- from a good project without -- throughout the entire permitting process. We are also one of the largest Foothills producers in North America, and we control and operate enough gas to supply the first train of our LNG terminal. Pieridae issued its Q2 2020 results at premarket this morning, and we recorded solid financial results given the COVID period. Substantial quarterly increases compared to Q2 2019 in revenue, up approximately 412%, net operating income up over 1,000%, and adjusted fund flows from operations up almost 300%. Production increased 185% from roughly 15,000 barrels a day in Q2 2019 to about 44,000 in Q2 2020. I'll now let -- move on to our operations, and Rob will take care of the financial operations. As you all know, KBR left Pieridae's project earlier last summer. We have reached an agreement with them that will allow us to move forward with the planning for the LNG project. We will transition all the work that KBR has done on the open book estimate to a replacement EPCC provider before the end of the month. We received quite a few bids for -- to replace KBR. Those bids are due on Friday. And we expect that we will have a new EPCC provider in place by the end of the month. The primary concern, I would say most people have had is can we continue to get to lump sum turnkey contract in this environment. And the good news there is of the 6 companies that are interested in bidding, we expect at least 4 will provide us with that type of a contract, which will allow for the continued financing of the LNG project. The second big issue of the quarter certainly is where we sit with the AER license transfer from Shell. Pieridae and Shell continue to work together to resolve the issues, the denial of the transfer from the regulator of the Southern Alberta assets to Pieridae. We do not anticipate that this will occur before the end of the year, but we also do not anticipate that they'll affect any of our financial position or future cash flows because of the decision. Pieridae continues to operate all the assets and it's business as usual. COVID has obviously played a significant impact on all of our companies. In Pieridae, specifically, we have been -- we have made safety in the physical and mental health of our employees, a primary priority. We have been very fortunate over the last few months with good management at our facilities, and by closing our office in Calgary, we have not had a single incident of COVID. All our assets have performed very close to 100% reliability during this period, and we have not experienced any significant loss of productivity over that period of time. The priority was to return our -- to work here in Calgary office as soon as we could, and we did that on June 29. And we continue to monitor the health of our employees and to ensure that we continue to have an environment that is safe and allows people to not fear coming to work. Our Board and myself continue to observe a reduction in salary to recognize that the situation remains difficult. We did cut all other employees' salaries as well, and we have a commitment to reduce our G&A by 10% during this period of time, and we continue to meet that obligation. When we look at what Pieridae is different than everyone else, the LNG project definitely is a significant difference between ourselves and any other midsized production company. And we do believe that, that is the one item that makes us a different looking company than most producers are used to seeing. We are a low-cost gas supply to this facility when we look at the resource space in comparison to worldwide production going into LNG terminals. We'll have a low cost of capital to build the LNG terminal with the assistance of the German government. And we have convenience and successful access to international markets. And that is one opportunity that we'll never lose given that the Nova Scotia is one of the closest places to Europe, which is our primary market. And most importantly, we maintained a very good and strong relationship with our community that we're going to build in, the labor markets that we are going to access to build it, and most importantly, our relationship with the First Nations of Nova Scotia. We have continued to provide ourselves with the majority of the achievements that we need to have our LNG make its FID decision. We are, as I mentioned earlier, we have all our environmental import, export and construction permits in place. We have received recently the reconfirmation of our eligibility for the $4.5 billion loan guarantee from the federal government of Germany. We have recently, with government of Germany -- sorry, with [ Uniper's ] approval, have extended the 20-year agreement with our export contract. And we have a majority of the gas supply for our LNG terminal has now been fully scoped on the first train. And we continue, as I said, to work our benefits agreement with the Mi'kmaq First Nation. And our labor agreement with the 15 trades of Mainland Nova Scotia Trade Association remains in force. Our commitment to ESG remains strong. We are in the process of developing and issuing our first sustainability report by the end of this year. Our key objectives are to minimize emissions intensity and to reduce our water usage at all our plants. From a socials perspective, I mentioned we have our agreement with the Mi'kmaq First Nation, and we are continuing to develop relations with the Stoney Nakoda and nations to the west of Calgary. In the past first quarter, we had actually 18 to 20 plants inspections. We have closed out more than 90% of them, and we are not on the enforcement ladder. We continue to operate these assets reliably and within the regulations of the government. From an accident perspective, our goal is to have a TRIF of under one. And today, we've only had one accident that gives us a 0.18 TRIF for the first and second quarters. We believe our accident record is indicative of how important safety is to our employees. I would like to talk a little bit about now our relationship with the Mi'kmaq First Nation because I think it is an important part of making sure the LNG terminal receives its FID decision. Over the last several months, we have worked together with the Mi'kmaq, governments of Nova Scotia, Alberta and the federal government to ensure that our project is a major part of the reconciliation between the First Nations of Canada and ourselves. And we have been working very closely with Chief Terry Paul, who is the Grand Chief of the First Nation -- of the Membertou First Nation. And he regards this project is an important element of the reconciliation of his people with the people of Canada. And it's very -- we're very proud to be the fact that we have made very great progress with them. They attend a lot of meetings with us as we talk to the government about how important this project is to Canada, that we stand sold with the Membertou to ensure that this project meets its FID decision next year. Just to update a little bit where we sit with the Goldboro LNG project. As I said, we extended our agreement with Uniper back in June. We have replaced KBR, or will replace KBR, before the end of the month. The settlement documents were signed last weekend, and we are in a place to move forward on the open book estimate. We do, at this time, we have asked all of the 4 to 6 people who may bid that we stay within the boundary of the June 30, 2021, FID decision. And so we do not believe at this time that a change of contractor will affect our FID decision next year. We are continuing to work on 6 priority areas that are outside the scope of the EPC contractor. Those items primarily are the site road work, the water pipeline construction, the water treatment plant, the terracing of the site and the building of the award for Jetty. Between those items, they make up roughly about 20% of the overall construction cost and as we were hoping that, that work will begin before the end of the year. On our LNG drilling program, which is a big part of our entire project in order to bring gas into the first train, we continue to do significant amount of work on that project, and we are of the belief that we have sufficient reserves in place now to -- or reserves in place now, to reach the 800 million a day for over 20 years. We have a deep drilling inventory of over 500 locations identified, and we expect that to continue to grow as we continue to work on our drilling program for the remainder of this year. Our goal is to ensure that our drilling volume will allow our facility to come on to stream. It's a 56-month construction facility -- of the facility. So I'll just say it one more time, that the volume of drilling that we need to do over the 5-year period should allow us to fill the LNG terminal for the 20-year program. A big part of our LNG project, as I mentioned, the government of Germany recently agreed to continue the $4.5 billion loan application. It is -- a big part of what's happening in Germany is the conversion of natural gas from coal to natural gas. Recently, Fortum purchased majority interest in Uniper. Fortum is a Finnish-based company, a renewable-based company that recently made an announcement that they see natural gas as the natural transition from coal in the German energy marketplace. So this is the primary reason that Uniper continues to have significant interest in ensuring this project happens. It's important that we get this project on the go before the end of the year. And it's important for the government of Germany that the conversion from natural gas -- from coal to natural gas begins. And that is the primary reason why those 2 parties remain interested in our project. I'll now pass things over to Rob, and he will go through our first quarter results.

Great. Thank you, Alfred. Good morning, everyone. And hopefully, you and your families are continuing to stay safe and healthy. I'd like to just go through the quarterly results and then some of our other pieces around benchmarking, and I'll give you an update on financing for the LNG project. So one of the keys for the quarter really were, in response to an extremely challenging macroeconomic quarter, Pieridae responded strongly by monetizing certain hedge positions, limiting nonessential capital and operating expenditures, and taking active steps to reduce administrative costs while continuing to support safe and reliable asset operations. So if you've seen our financials that were released today, you see some of our peers, we have not had any impairments thus far this year. We have a solid hedge book that insulates us from the downside. And then the other big piece for us is we have a loan agreement where we're not at the mercy of the banker's rightsizing credit facilities. So we don't have any of those issues that some of our peers are experiencing. If you look at the slide on summary of quarterly results, you can see, as we discussed when we acquired the assets from Shell last year, the revenue now is consistently in that $60 million, $70 million range. So we had another solid quarter. You can see from our financials there that the turnaround with the working capital, the net operating income and the adjusted funds flow from operation are consistent in that $19 million to $20 million range for NOI and working capital continues to be positive. When you think about our earnings, think about anything we spend on LNG, the LNG project. We don't capitalize until we get to FID. So it's important to note that that's really a grind on earnings because that is going to become very accretive spend when we get to FID. But for the time being, it's all expensed. So that's where -- when you do those onetime adjustments, that's something to consider. The other pieces I'd like to highlight just as I'm on this slide for the quarter is we did graduate to the Toronto Stock Exchange on June 3. So we are very excited with that. That's something we've been planning. And again, we feel that gives us more access to liquidity and a better platform for trading. The other piece we disclosed in our second quarter highlights, subsequent to the second quarter, was we announced a facility with Export Development Canada. What's important there is that allows us to free up some cash collateral for existing security obligations. And really, it's not so much the dollar value that we'd like to highlight. It's the relationship with the government now that we do feel quite honored and proud that we have a relationship with the government of Canada now through that small facility and continue to work with them. If I flip over to the next slide. So if I talk about petroleum and natural gas reserves, really what I want to highlight there is just the production is consistently in our guidance range. So our guidance range is 40,000 to 45,000 BOEs a day. And you can see we're right in that range, and we continue to climb. One of the things I'd also like to point out is the third-party processing revenues. So you can see for the 6 months ended June 30, we're about $13 million, $14 million there. So if you annualize that, you're in the $25 million to $30 million range. And on that note, I just want to take the opportunity to maybe talk a little bit about our share price performance because I see today, it's moved a little, but we're still in that $0.33 to $0.35 range. If you look at Pieridae with -- on certain different metrics, if you think about our PDP, our proved developed category, 85% of our reserve is PDP, proved developed producing. So that's one of the highest amongst our peers. And if you looked at our net asset value on that basis, we should be around $2.50. And I always think about PDP really as your blowdown case. So if you didn't drill anymore, we already have that production. So that puts you in the $2.50 range. If you look at the Painted Pony comp that's recently happened with CNRL at 9,000 of BOE, that puts Pieridae in about the dollar range. The other way to come at it is if you look at the sum of the parts and you look at our midstream, and I highlighted this third-party processing revenue, midstreamers with contracted revenues like this are about 10 to 12x cash flow. So that would put our midstream value at about $300 million. And then there's clearly also reserve value, although you'd be paying higher fees if you had to pay all third-party fees. If you just assume the reserve value maybe gets cut in half from what is in the reserve valuator's report, that puts you back to the 3 -- $500 million to $600 million range on a valuation. So on a NAV basis, that would get you back to the $2.50 range. So I just want to highlight again that the stock is severely undervalued. There's no upside for any of the LNG, and it's trading far below what the -- what a blowdown scenario would be. The other thing I wanted to highlight as we go through this is just benchmarking. So we are always watching our peers. And what we look at is we look at different peers that are in the basin, and you have to take into consideration that it's much more costly for a sour gas producer than it is for a sweet gas producer. So for example, we have an $11.50 to $13 range for our OpEx per BOE, that doesn't include any of the sulfur we produce in the BOEs. So there's a bit of a hit there for a sour gas producer. That also doesn't include third-party processing fees. So if you netted that off, our $1 per BOE, you'd quickly get to a range for us of about $10 a BOE when you take that consideration. So that's something to consider when you're looking at us, screening us against peers. The other piece I'd like to cover quickly is the G&A. When you look at our administration costs, we are starting to drift around to the $1 a barrel for G&A, which is really close to our peers when you back out onetime cost and any expenses that relate to the LNG. So again, we think we screened quite favorably, but it's very important to understand how to put it apples-to-apples. If I move over to the next slide, you can see the substantive growth in NOI, combined with our forecast for when we get to the LNG facility. And I'll talk about that, the LNG facility, in a moment. I'll skip over Slide 19, just another continuation of the trajectory we talked about. If I talk about our hedging program, you can see in our financial statements on Page 14, we're fairly well-insulated through the end of the year. And if you think about where is strip pricing for next year, if you look at the strip today, it's about $2.60 at GJ. And if you think about this quarter, we averaged -- realized price was about $1.85. Our sensitivity is for every $0.10 in gas, we have another $8 million of gas revenues. So at $0.70 higher on an annualized basis, you're about $50 million to $60 million more revenues for Pieridae. And that is -- you can clearly see in North America, the turnaround and the gas price. So we're very excited by those prospects. We will continue to hedge though, and we'll always be in that kind of 40% to 60% range. We did monetize the condensate hedge this quarter. And really, that was just -- that wasn't incremental NOI. That was to bring forward some NOI for some deferred maintenance that we had to defer due to COVID. Now that we're back and we're back to running almost full tilt again, some of those things, we want to do over the summer months. If I turn my attention to the Goldboro financing. So as Alfred alluded to, the cornerstone of our financing is going to be that AAA guarantee or insurance cover from the UFK. So just as a reminder, the German government does not put funding in. What they do is they assess the project on its commercial viability just like all the lenders will. So it's our job with our advisers to go find the bankers and the debt capital markets providers that can participate in this, and then the German government would put on the guarantee. There's always a 10% at-risk element as part of that UFK guarantee. Think of it as an insurance deductible. And so, what we've been doing lately is really strategizing around, you have to have your bankers in on the at-risk piece as well. That may also involve discussions with other ECAs, specifically EDC, but we are working that and we're working to structure where our key goal is to get as close to 20-year money as we can. We want to match the underlying offtake agreement. And if you think about how a project finance works a little bit, if you think about full tolling agreements like the Gulf Coast has, you're about 1.5x on a debt service coverage ratio is what you need to strive to. If you only have price risk in your offtake agreement, which is what we have, it's a take-or-pay with it -- tied to indices, you'd need to be about -- 1.75x debt service coverage ratio. If you had price and volume risk, you're well over the 2x. So we understand what investors are looking for. We understand what the coverages are. And we are constantly looking at our structure and building in things like liquidity reserves, maintenance reserves, et cetera. The other thing I'd like to highlight is when we look at the economics, we are still double digits on an unlevered IRR basis, and we like to look at the risk-free long bond rate that -- what's the alternative, right? The alternative is a risk-free long bond rate. So we always consider that if we have a 10% spread, then we are still economic. And the other thing to keep in mind is as a lot of projects have been canceled, the supply-demand economics are really changing when we would come online in 2025, 2026. There's forecasted to be quite a large supply shortfall. So you can see some of the projections on price gets you back to the $7, $8 range by the time we get out there. So things are going well. We're progressing discussions on that. And finally, if I cover our 2020 guidance, everything is unchanged from prior quarters, except for our capital spend. And the reason why our capital spend is down from the previous of $28 million as we've deferred our turnaround to Jumping Pound. And really, it's just in accordance with COVID-19 and requirements from the Alberta Health and the regulator that we can't have large groups congregating together. So we've decided to defer that. We'll do some minor spends on things we have to do this year, but really, that's the reason. And again, we're still forecasting $40 million to $60 million on a hedge basis and in that $11.50 to $13 range. But again, I would remind you, when you look at those numbers, think about the third-party processing revenues, you really would deduct that off OpEx. So that number, on an apples-to-apples, are probably closer to the $10 range. I'll turn it back to Alfred and James.

Okay. Thanks for that, Rob. And I'll just quickly wrap up with where we see as our advantage right now. And I think the key things for our project: we continue to be important aspects to us getting this project across the finished line; we continue to have and we'll be improving our management team with additional hiring of a new Vice President of LNG, who is going to manage the construction project; we continue to take advantage of the fact that we acquired assets at a low cost that have long-term capability to build the LNG terminal over time. When we look at our decline rate, it's something we didn't talk very much about, our decline right is under 10%, and these assets match very well with the nature of the LNG project. Our fully integrated strategy is an important way of how we manage risk, both in the field and at the flange. And the continued support of both Uniper, the government of Germany and the Mi'kmaq First Nation are 3 important reasons why we believe that our LNG project, in an environment where many projects have been canceled, continues to be an important part of the reasons why we see that we are going to make it to the finish line. I think the one other thing we haven't spoken very much about is we continue to develop our relationship with the government of Canada. That relationship is important, that we want this project to be seen as a national project that will help Canada come out of the COVID crisis. And with that, I wish to thank all of our staff who have done a fabulous job of keeping our business going and that we'll now throw it to James, and we'll open it up for questions.

Thanks, Alfred. The conference coordinator will now manage the Q&A portion of the call, as Alfred said. Alfred, Rob and our Chief Operating Officer, Tim de Freitas, will answer your questions. Operator?

[Operator Instructions] Your first question comes from the line of Darrell Bishop from Haywood Securities.

Just 2 quick questions on my front. The first one around that relationship with the Canadian government. Obviously, sort of a lot more skin put in the game by the German government here. You have a small facility through the EDC to [ Starz ]. But is there a bigger commitment being discussed for the projects between you guys and the Canadian government? As well as a question -- second question then comes around hedging for next year. As Rob, you pointed out, strip has come up quite a bit here. Do you guys see yourself locking in pricing here over the next little bit?

I'll take the first one. We certainly are interested in having the government of Canada show its commitment to our project. As aware, Canada invested about $275 million in LNG Canada earlier this year, maybe it was even late last year. That we believe that our project is worthy of its support. And certainly, the government is in a position right now to look at large-scale infrastructure projects to re-kick -- kickstart the economy. Before, we used to call it shovel-ready, that was -- now what's the term call now?

Shovel-worthy.

Shovel-worthy is the new word versus just shovel-ready. And so, we think we're shovel-worthy as well and the fact that we kind of meet some of the key requirements of the government, we have certainly a climate change agenda with the ability of the German government to switch its coal use to natural gas. That we also have that same opportunity with the waste heat being produced by the LNG terminal to use that waste heat to generate electricity to replace coal-driven electricity in Nova Scotia as we -- kind of the climate change thing. And obviously, I've mentioned several times our relationship with the Mi'kmaq First Nation. And it's that hitting those touch points, and the third one being able to start construction immediately, that we can put boots on the ground within several weeks of funding it, the decision, that we believe we have a very good case. And we hope that we'll have some announcement on that before the end of the year. Do you want to take that...

Sure. Great. Good question, Darrell. So if I turn your attention to Page 14 of the financial statements, you can see what we've got locked in so far. So in terms of hedging, we are fairly well-hedged through the end of the year, but if you note November, December, we're about 50% hedged. So we still have quite a bit weaker place. We will definitely always be hedging kind of in that 40% to 60% range. You can see, though, for next year, we don't have a whole bunch locked in yet. So we still have a lot of room to participate on the upside. And really, with Pieridae's balance sheet, we always want to insulate to the downside, but we are mindful that we want to be locking in when the time is right. But we do have a lot of room for next year with our hedging because we only have a couple of contracts placed for January to March 2021 at the current time, with less than half of our gas. So we will hedge and we're being mindful of the run-up in pricing.

So maybe just a follow-up on that. The big issue, I think that everybody has is certain credit and liquidity are very big issues. And we are limited on credit, and that is one of the reasons why the export Canada credit facility is helpful for us because it relieves us of cash so that we can boast credit if we have to in order to hedge. But the marketplace itself, given where we've come through and where we are today, liquidity on the natural gas side is very limited. And we obviously compete with everybody else to try and lock in. So -- but we are -- with those 2 conditions in mind. We also -- we do see an absolute need that we need to hedge mainly because of our credit facility.

[Operator Instructions] Your next question comes from the line of Jack Harsh from [ FT Washington Investment Advisors ].

My first question is regarding TransCanada and some chatter that we've heard that they might be interested in moving up the LNG value chain. And clearly, a successful FID of Goldboro would be very beneficial to them. And I was wondering if you've had any discussions with TransCanada about a possible equity position in Pieridae as well as any required cash commitment to get the ball rolling on work on the mainline? And then my second question, I heard you mention briefly, but I just wanted to verify that the EPCC, when that's selected, you're not anticipating any timing variations for the FID on Goldboro.

Okay. I'll take the second one first because that's an easier question to answer. Yes, as part of the settlement with KBR, we will receive all of the intellectual capital that has been -- intellectual property that was paid for by ourselves already. And as we've kind of gone through the due diligence phase with the replacement to EPC providers, the number one criteria that we have put on them for choosing a new EPC provider is the fact that we will not -- we do not want to move the FID date of next year. So we don't receive the bids until tomorrow. So I can't guarantee that, that's going to be what's in those bids. But it is the #1 criteria. The second being the cost structure to take the time to get up to speed on the project. Those are kind of one and number two. And we have made it very clear, and I would say, given the discussions we've had, that [indiscernible] more than one party has said to us that they can make that June 30, 2021, FID date. So we are very confident that, that will happen, but we will need to see what the tenders look like tomorrow. And the second question, if you know who that we should be talking to at TransCanada, we'll gladly take their TC Energy. We'll take their name and phone but as of now, we have not had those types of conversations with TransCanada or TC Energy. And we are still focused on more of a contractual relationship. And that's part of our overall discussions we're having with the government of Canada is how to move that pipeline. Construction work forward is a big part of that -- those discussions. But no, we have not had any equity interest from TC Energy.

[Operator Instructions] And there are no further questions at this time. I'll turn the call back over to Mr. James Millar.

Thanks very much, Christine, and thanks to all of you for participating today. We obviously very much appreciate your interest in Pieridae Energy. To that extent, you have further questions, you can contact us at (403) 261-5900, and we would be happy to respond. Thanks again, everyone, and we look forward to speaking to you very soon. Operator?

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.