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

Good day, ladies and gentlemen, and welcome to the Pieridae Energy Q3 2023 Financial Results Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the meeting over to Mr. Dallas McConnell, Vice President, Corporate Finance. Please go ahead, Mr. McConnell.

Thanks, Gigi, and good morning, everyone. I would like to welcome you to Pieridae Energy's Third Quarter 2023 Conference Call. With me today are President and Chief Executive Officer, Darcy Reding; Chief Financial Officer, Adam Gray; and Chief Commercial Officer, Paul Kunkel. Darcy and Adam will begin today with a review of our operating and financial results and certain other company developments. Following the prepared remarks, we will turn the call over to the conference coordinator for your questions. Before Darcy begins, I would 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 the Canadian securities regulators on sedarplus.ca. With that, I will now turn the call over to our President and CEO, Darcy Reding, who will provide more detail on our performance last quarter, along with recent corporate developments.

Thank you, Dallas. Good morning, and thank you for joining us as we recap our third quarter results. The company continued moving forward with its strategy to sharpen focus on its upstream business and midstream development opportunities while completing the pivot away from the Goldboro East Coast LNG export project. We have commenced a process with the intent to sell the Goldboro subsidiary, which consists of 267 acres of undeveloped coastal industrial land in Nova Scotia that was originally purchased by Pieridae to accommodate a proposed onshore LNG export terminal. In addition, the Goldboro subsidiary also holds various active licenses and permits that we believe may have strategic value to a potential buyer of the asset with interest in developing the site for industrial purposes. Although still early days, we are confident in the probability of closing a successful sale transaction in the first half of 2024. The third quarter also saw the kickoff of the previously scheduled and announced Waterton gas plant maintenance turnaround. This was the first major maintenance turnaround at the facility since 2017. The turnaround commenced as scheduled with production to the gas plant ramping down beginning on August 12. The turnaround was originally scheduled to be completed with gas production restart in mid-September. However, upon inspection of the waste heat boiler, a critical heat exchanger in the facility's sulfur recovery process, significant degradation and corrosion of the internal tubes was observed. Although the tube condition did not pose a health, safety or environmental risk, it did create a material risk to the long-term operational reliability of the vessel. And a prudent decision was made to proactively replace all of the roughly 1,300 heat exchanger tubes contained within the vessel. The expanded scope of the outage to accommodate this additional work resulted in a significant increase to the time the Waterton plant remained offline, past the end of the third quarter, with first gas restarted to the gas plant inlet on October 29. Despite having more than 200 workers on site in a 24-hour period at times during the turnaround, the project was completed without lost time incidents or any significant injuries. During this maintenance turnaround outage, several gathering system de-bottlenecking and reconfiguration projects were completed in the field. These projects helped optimize native well flow to the plant by reducing wellhead pressures. Furthermore, this optimization will also reduce fuel gas, power and methanol consumption while increasing our ability to handle additional straddle volumes through our deep-cut facility from the TC Energy Southern lateral sales pipeline. With the Waterton gas plant restart, we expect about 10% flush volume from native wells for up to 2 months, while the optimization work mentioned will help moderate our already shallow underlying 8% natural decline on native well production. And last but not least, I would like to take the opportunity to thank Pieridae's former Chief Executive Officer, Alfred Sorensen, for his vision and leadership to Pieridae over the past decade. I wish him all the best in his retirement, and I thank Pieridae's Board of Directors for their strong support in my transition from President and Chief Operating Officer to my new role as President and Chief Executive Officer, which was effective September 1. In briefly reviewing our third quarter operating results, production for the quarter was approximately 30,250 BOE per day comprised of 86% natural gas. Of note, the extended outage of the Waterton gas plant through the end of Q3, coupled with the impacts of various wildfires in our Northern Alberta and Northeast British Columbia areas, negatively impacted our quarterly production by nearly 6,600 BOEs per day. Our fourth quarter will reflect some recovery of these impacts. Although as previously mentioned, the Waterton gas plant remained shut in through most of October and our Ekwan producing property in Northeast BC sustained some forest fire damage. This area is limited to helicopter access outside of the winter months, and assessments of required well site repairs prior to resuming full production are ongoing. Operating costs for the quarter were $55.5 million or just under $20 per BOE with the unit operating costs also negatively impacted by the previously mentioned production impacts given the high fixed cost component of our operating expenses. Capital spending for the quarter was just over $16 million. About 70% of our quarterly capital was directed to the Waterton plant turnaround with lesser amounts directed towards other sustaining and maintenance capital and optimization projects. Lastly, I'd like to draw your attention to the operating expense graph in the lower left of this slide. While we continue to focus relentlessly on cost containment and cost reduction on an absolute dollar basis, as depicted by the flat trend of the solid green bars, it is evident that the significant outages incurred in both Q3 and Q1 of this year put pressure on our per BOE cost performance, as shown by the light green line. In contrast to the light green line, the red line reflects our adjusted operating costs. As we have communicated in prior quarterly and management discussion information, we deduct the benefit of third-party processing revenue and sulfur sales revenue from our operating costs to drive these adjusted operating costs as we believe it is reasonable to reflect the benefits of our major infrastructure ownership in our adjusted operating cost to better represent the true net cost of running our business. In the third quarter, the adjusted operating cost as depicted by the red line on this chart were $17 per BOE, a nearly $3 per BOE improvement on our reported operating cost of $19.92 for the quarter. As we finalize our budget for 2024, we will be continuing with our strategy to drive operating costs out of our business, and we look forward to communicating the results of this ongoing strategy in the coming months. At this time, I'd like to turn things over to Pieridae's Chief Financial Officer, Adam Gray, for some discussion on Q3 financial results, along with a summary of our hedge position and the guidance update.

Thank you, Darcy. Welcome and congratulations on your appointment to CEO. You certainly have mine and the rest of the management team's confidence in your ability to complete Pieridae's strategic pivot. To follow up on Darcy's comments, the major theme of our Q3 results was certainly the impact of our Waterton Turnaround. We've been planning this capital project for some time and accounted for downtime during the quarter. However, that full tube replacement in the waste heat boiler was not expected and added considerably to the length of the project. Additionally, while the turnaround impacted our volumes as reported by Darcy, it had a proportionately greater impact on our operating income. Production in Waterton is the most liquid-rich of our operating areas. And in a normal quarter, Waterton will represent about 25% of production but over 40% of our operating income and cash flow. Our corporate natural gas production this quarter was 86% natural gas with liquids and condensate making up the remaining 14%. But at Waterton, liquids and condensate comprise 29% of total production. Additionally, we operate a straddle operation at Waterton, which processes up to 1,800 e3m3 per day off TC Energy's sales gas line, stripping additional liquids. Not having Waterton available to us for half a quarter was impactful. The silver lining of these large capital maintenance projects is that well-executed planned maintenance conducted during favorable weather conditions reduces the risk of unplanned outages, which can occur at very unfavorable times of the year and cause great strain on our operations. Most financial metrics in Q3 were impacted by the turnaround, including our normal than -- our lower-than-normal net operating income of $11.7 million, cash flow from operations of $7.6 million, and net loss incorporating both interest expense and depletion of just over $16 million. Turning to highlights. Our liquidity remains strong under our revised debt structure. We have over $33 million of available liquidity heading into a stronger pricing environment this winter. We were able to conduct the turnaround without drawing on our USD 10 million delayed draw component of the senior secured loan, which leaves that available to us should we require it in the future. Additionally, operating costs and fuel gasoline usage at our other 2 gas processing facilities continue to respond to our assertive efforts to reduce our cost environment, as Darcy mentioned. Fuel gas savings are particularly beneficial to us as we see those results over time, both in higher sales volumes and lower carbon taxes. Finally, we've begun to see some early signs of success building our midstream business at our Caroline gas processing facility. During the quarter, we added approximately 300 e3m3 per day of new third-party gas volumes, representing over $2.5 million in new annualized revenues. We continue our efforts to market Caroline as an ideal gas processing partner for a number of our peers with large deep-basin development plans right in our backyard. I'll reiterate that absolute debt reduction remains my #1 priority. Although challenging in a quarter which includes a major capital turnaround, I will continue to prioritize debt reduction until we are comfortably under 1x on a debt-to-EBITDA multiple. As you will have seen in our quarterly news release, as Darcy has spoken about and as we've been communicating for well over a year, part of our de-leveraging efforts include streamlining and focusing our asset base on our core operating areas in Central and Southern Alberta. We are working to monetize a number of non-core assets, both within our E&P portfolio as well as legacy business units, and we will transact if and when valuations are sufficiently supportive. Okay. Turning now to our guidance and hedge position. Our substantial hedge portfolio, put in place with prices that support ongoing de-leveraging goals, have continued to be supportive in the quarter with a net hedge gain of $5.4 million on sales commodities and another $9.9 million on power hedging, together adding over $0.10 per share of cash flow in Q3 alone. The WTI collar we put in place was out of the money during the quarter as oil had a couple of pretty strong run-ups in the summer and fall. But the natural gas swaps were in the money and are expected to be in the money for the majority of 2024. Our hedge position represents about 55% to 60% of our total production forecast moving forward, which is substantial enough to provide a great deal of cash flow stability while also leaving upside opportunity if and when gas prices begin to recover. Subsequent to the end of the quarter, we also layered in a small foreign exchange hedge in the form of a delayed premium put, which protects currency risk downside for the majority of our mandatory USD-denominated debt service costs over the next 12 months, while leaving any upside on a strengthening CAD dollar to us. Finally, I'll reiterate our previously announced guidance, which we've left unchanged. We're very pleased with efforts to keep production and cash flow guidance within our ranges while experiencing a longer-than-expected Waterton Turnaround. Q4 will unfortunately be impacted by this Waterton Turnaround as the facility did not come back online until the end of October. But as Darcy mentioned, we're very pleased with its performance since coming back and hope to make up some lost time with flush production we're experiencing in the Waterton field. Our 2024 budgeting process is nearly complete, and we'll be issuing 2024 guidance to the market in the first half of December. Thank you very much. And at this time, I'll turn the presentation back over to Dallas McConnell to wrap things up and take any questions folks might have.

Thank you, Adam and Darcy. The conference coordinator will now manage the question-and-answer portion of the call. Darcy, Adam and Paul will answer any questions you have.

[Operator Instructions] At this time, I see no telephone questions.

We also have no questions on the webcast. So with that, I think we'll wrap it up. Thanks to everyone who participated today. We very much appreciate your interest in Pieridae. If you have further questions, you can call us at 403-261-5900 or e-mail us at [email protected]. Thanks again, and we look forward to speaking with you soon.

Thank you. The conference call has now ended. Please disconnect your lines at this time. We thank you for your participation.