International Petroleum Corporation (IPCO) Earnings Call Transcript & Summary

Welcome to IPC's 2026 Second Quarter Results Update Presentation. I'm William Lundin, the President and CEO, and joined today by Christophe Nerguararian, our CFO; as well as Rebecca Gordon, our SVP of Corporate Planning and Investor Relations. I'll begin with the highlights and provide an operational update, then hand it to Christophe to walk through the financial section. After the presentation, we can take questions, which the audience can submit through conference call or via the Internet online. Getting right into the second quarter highlights for IPC. Our average production for the second quarter was right in line with guidance at 42,200 barrels of oil equivalent per day, and our full year 2026 production guidance is maintained at 44,000 to 47,000 BOEs per day. Second quarter operating costs came in line with expectation at USD 19.10 per BOE. And the OpEx per BOE forecast for the full year is maintained as per the original CMD guidance at USD 18 to USD 20 per BOE. And of course, the major announcement in the quarter for the company was achieving first oil at Blackrod. It's the largest organic growth project IPC has undertaken since formation in 2017 and to execute ahead of schedule and on budget is a huge achievement that we're very, very pleased about. Similar to production and OpEx per BOE guidance, we're maintaining our CapEx guidance at USD 163 million for 2026, noting the majority of the capital has been spent in the first half of USD 120 million or around 3/4 of that capital budget. Q2 capital spend was $49 million. Operating cash flow for Q2 was robust at USD 67 million, noting oil prices were higher in the second quarter relative to the first quarter, averaging around $100 barrel Brent. About 40% of our oil production exposure was hedged at a WTI price between low and mid-60s and for the Brent side between the mid- to high 60s for Brent. So despite those hedges in place, still a robust Brent in cash flow. Our full year OCF is forecast at USD 230 million to USD 330 million, assuming $70 to $90 per barrel Brent for the remainder of 2026. And free cash flow for Q2 was a positive $4 million, noting this is the first quarter of positive free cash flow since 2023 as we transition from a higher spending period during the Blackrod build-out to startup. Full year free cash flow is expected to be between USD 10 million to USD 110 million between $70 to $90 barrel Brent for the rest of the year. Net debt as at the end of Q2 stands at $509 million, about a $4 million reduction relative to the prior quarter, thanks to the positive free cash flow delivery in Q2. We have greater than $150 million of undrawn credit availability under our Canadian bank syndicate. And as of July 1, 2026, our oil production is fully exposed to WTI and Brent oil prices with the prior benchmark oil hedges rolling off, as I mentioned previously. There are some Canadian heavy oil differential transport and quality-related hedges for the remainder of '26 and some into '27 that are in place as well as some natural gas hedges that are also in place for 2026, all of which are in the money currently. And our seventh annual sustainability report was issued alongside our Q2 results. So as can be seen on the production plot, we've seen continuous flat production performance through the first 6 months of the year with average rates of around 42,600 barrels of oil equivalent per day. Stable performance across the portfolio year-to-date, and we're looking forward to the imminent production growth going into the second half and beyond. As mentioned, we're well positioned to deliver on our annual production guidance for 2026 of 44,000 to 47,000 barrels of oil equivalent per day. The guidance bands in the production forecast shows a progressive production ramp-up in the second half of the year, and that trend will continue into 2027. The increased forecast is predominantly due to the Blackrod start-up and partially supported by intra-year production investment additions at existing producing assets, which will yield more of an impact at the end of this year and going into 2027. I'll touch on more specific activity detail in the following slides. Q2 is the inflection point from a production standpoint and higher production quarterly averages will shine through going forward as we transition from inventorying period at Blackrod to consistent sales mode in Q4. We'll also see a material uplift in cash flow generation. Our current production mix is split 70% towards oil and 30% towards natural gas, which is important to highlight, and as per my previous comment, with larger proportion of oil-weighted production coming imminently, our future production mix is going to be higher proportionately weighted towards oil versus natural gas lending to increased cash flow. Operating guidance is maintained at USD 18 to USD 20 per BOE with Q2 costs settling in at $19.10. As previously reported, we had some production enhancement activity that is going to be expensed, most of which will fall into Q3, which is expected to be a slightly higher OpEx per BOE quarter before dropping in the subsequent quarters. Christophe will expand on this evolution in his section of the presentation. So operating cash flow for the first half settled in at USD 134 million with an average Brent price of $92 and the WTI price of $82 and WCS of $68. It has been a volatile period on the pricing front so far year-to-date. The cash flow and corresponding prices were higher than our original CMD guidance, as shown on the right-hand side of the slide. So we're pleased to see higher cash flow generation coming through. Looking forward for the full year OCF, we expect to generate between $230 million and $330 million between $70 and $90 Brent, assuming a differential of $5 from Brent to WTI and $14 from WTI to WCS. The proportion of operating cash flow is heavily tilted towards Q4 compared to Q3 for the second half, as can be shown with the lighter shading on the bar chart in the middle of the slide. This is largely due to the prior mentioned additional activity taking place in Q3 and the inventory and treatment at Blackrod. The torque to higher prices is significant, and we are fully exposed to Brent and WTI prices going forward since the Brent and WTI hedges concluded at the end of June. Our CapEx program, inclusive of decommissioning spend is maintained at $163 million, noting we did increase the capital budget at Q1 relative to Capital Markets Day, large in part due to the sanctioning of short-cycle investments in France and the Suffield area assets in light of the higher commodity pricing environment that we saw as the year progressed relative to starting 2026. We do retain flexibility to adjust our program for the second half given our operatorship status at all the assets in our portfolio. Free cash flow is projected to be $10 million to $110 million, between $70 and $90 Brent for the remainder of 2026. returning to a free cash flow positive position is really fantastic to see and the waterfall of free cash flow will significantly grow in the years ahead. So since inception, IPC has repurchased 77 million shares at an average price of SEK 79 per share or CAD 11 per share, translating into around $1 billion of value creation compared to our current share price. We have the ability to repurchase up to 6.5 million shares through our normal course issuer bid program, which represents 10% of the free float. And our current share count today is less than 113 million shares, notably lower than the original share count in 2017. So driving up production value reserves and resource longevity per share is really a key ingredient to maximizing shareholder value. As previously reported to the market, Blackrod Phase 1 is officially producing oil, achieving this milestone at the end of May, ahead of the original schedule guidance. Costs came in line with the budget at USD 855 million growth capital, and we currently have 5 well pairs online with several other well pairs to be converted upon necessary conformance conditions being met. We held a Blackrod site visit at the beginning of July with our Board and the pride and sheer competency of the top-tier talent at site is really off the charts and the state-of-the-art facility is off to a fantastic start as we get into operational start-up and ramp-up mode. So this is really a unique feat in the industry to deliver a multiyear growth project on budget and ahead of schedule with no material safety incidents, really hats off the entire team involved for executing this transformational greenfield project responsibly. Blackrod, it's a long-life asset that is officially unlocked as the Phase 1 CPF is now on stream. Plateau production for Phase 1 is 30,000 barrels of oil per day, and we have 311 million 2P reserves assigned to the Phase 1 project, which represents around USD 1.4 billion in net present value using a 10% discount rate based on the conservative year-end '25 reserve auditor price deck, along with the 1/1/2026 breakeven of $47 WTI. We have regulatory approval of this asset to go to 80,000 barrels of oil per day and the combined 2C plus 2P volumes represent 1.45 billion barrels of recoverable resource, which is shown on the graph on the bottom, there's been a substantial increase to the total recoverable barrels compared to that of the early volumes in 2010. So the depositional environment of this asset really lends to a scalable and repeatable upside, and we continue to work behind the scenes to mature future phase expansions, which are yet to be recognized in the underlying net asset value or future cash flow projections. Moving on to Onion Lake Thermal. OLT has delivered stable production through the first 6 months of the year. This is our Saskatchewan thermal operation. We did shoot some 4D seismic earlier this year. That data is under review and preparations are ongoing for the next sustaining capital activity. The Suffield area assets consists of our Suffield Block acquisition that we acquired from Cenovus in early 2018 as well as the Brooks package that we purchased from Core 4 in 2023. And this package overall continues to deliver stable, low decline, reliable production. And we're super excited to be drilling again here within the basal quartz formation, production multi-leg lateral wells are planned to be drilled. And first half production from our Brent-linked assets was around 500,000 barrels of oil per day. Drilling is underway in France with 4-well sidetrack campaign. Initial results from the first well are very encouraging thus far, and we look forward to future reporting on the progress of this campaign. Malaysia dated Brent premium realizations have been very material, as Christophe will share in his section of the presentation. And workover activity is ongoing in Bertam, which will boost production rates from current levels looking ahead into Q4. Now I'll hand it over to Christophe to expand on the financial highlights.

Thank you very much, Will. Good morning to everyone. So it was a solid quarter operationally. So hands off to all of the teams locally with the production right in line with guidance in excess of 42,000 barrels of oil equivalent per day. We saw some very strong oil prices during the quarter with an average dated Brent price in excess of $100 per barrel. And so with operating costs in line with guidance at $19 per barrel of oil equivalent. IPC generated strong operating cash flow and EBITDA at USD 67 million and USD 64 million, respectively. I think what's really worth noting here is that almost for the first time in almost 3 years, the operating cash flow fully covers the CapEx. That was true in the second quarter, and that is true year-to-date. And so that's really the turning point we've been talking about for a while with Blackrod first oil achieved at the end of May during the quarter. We've not really turned the corner yet, but almost at least we see a strong reduction in the Blackrod CapEx and still a very strong operating cash flow. So we are really going to move back into positive free cash flow territory. That was the case in this second quarter with a ramp-up at Blackrod in the third quarter. It may or may not be again the case, but we would hope to have another free cash flow positive or right in line with the second quarter. The real change will occur in the fourth quarter with a much stronger production from Blackrod, translating into what we believe will be a much stronger free cash flow towards the end of the year. So the net debt at the end of the quarter was reasonably flat, just around USD 510 million. Looking at the realized prices, of course, with the war in Iran, the oil, which was not flowing freely through the Strait of Hormuz, we saw very high oil prices in April and May, specifically during the second quarter. So with dated Brent price of USD 104 per barrel on average during the quarter and WTI, WCS at $92 and $78, respectively, those are a very, very high level, which we didn't fully benefit from because around 40% of our production was hedged before the war started early March in Iran. That being said, maybe just another comment that's interesting is that Will talked about it, but we were lifting cargoes roughly every 2 months in Malaysia. And the premium we get there is always an interesting indication about how tight physical markets are. And clearly, the June cargo, which was priced in April during the quarter, saw a very, very strong, very high premium, which showed how tight markets was. And again, for our next cargo in the third quarter, we've already agreed on a very high premium as well. So that's a sign that the physical market remains very tight. Looking at the gas prices, not much change, frankly. And sadly, the Canadian gas prices remain at a discount to the U.S. market. It's not fully or very well physically connected with the U.S. market, which enjoys higher gas prices. So during the quarter, we realized a price of CAD 1.75 per Mcf. So it's traditional that there's an element of weakness for gas prices during the summer. But unfortunately, it stays well below U.S. gas prices. Looking at the operating cash flows and EBITDA for the first 6 months in 2026 and compare those to 2025, reasonably stable here. The production was a bit higher last year. Oil price is a bit lower last year as well. So it's roughly in line with around USD 130 million of operating cash flow during the first 6 months, both last year and this year and around $125 million, both last year and this year. So I think as we touched upon before, with a bit more one-off OpEx with more activity in terms of workovers in Malaysia, in Canada as well, we're expecting maybe the operating cash flow to be in line or lower in Q3, but much higher with the Blackrod contribution during the fourth quarter. And indeed, you can see on the OpEx per barrel. So we are maintaining our guidance, but you see that clearly with some of the activity, which we sanctioned at the end of Q1 and which is really being carried out in this third quarter, you can see a bump in OpEx -- in the operating cost per barrel in that third quarter that is well anticipated and hopefully well communicated to you and the market. But on average, we're expecting to be in the second part of that $18 to $20 range, but stay within it. Again, I think it's important to anticipate and note that in the fourth quarter, as Blackrod production is going to further ramp up, you can see the natural decline in OpEx per barrel. And so irrespectively of what you can see here in the third and fourth quarter, I think it's important for us to reiterate that the mid- to long-term operating cost per barrel remain very positive and should be below what we see here once Blackrod is ramping up to its full potential at 30,000 barrels a day in the course of next year, towards the end of next year. Strong netback, obviously, driven by the strong operational and the solid oil prices. You can see here both in the second quarter and for the first 6 months, relatively stable. with an operating cash flow netback in excess of $17 per barrel of oil equivalent and an EBITDA at around $16.5 per barrel of oil equivalent. Looking at the net debt really at the cash flow, and I like and I want to emphasize again that for the first time in a while, you can see here the operating cash flow of USD 134 million for the first 6 months, which is covering more than all of our development CapEx and abandonment costs. So we are moving into this phase where finally we are going to generate free cash flow. So it's not fully the case yet for the first 6 months, but we're getting there. You can see that's where the operating cash flow fully covers our CapEx and cash G&A. And we believe that very soon, we'll be covering as well all of our cash financial items and working capital to put us in a solid free cash flow position. Please note that we had a USD 6 million sale of assets in the first 6 months. Those were lands, which we never really intended to drill. It's an acreage, which we had been -- collected along the prior years, and we're able to sell them to some Canadian companies. In terms of financial items, well, the situation on the balance sheet and the capital structure is very stable with our bonds and revolving credit facility. So you can see that we have net interest expenses of around USD 10 million per quarter, stable again quarter-to-quarter, and we're expecting stable again in -- going into the third quarter. And G&A is stable as well at around USD 4.2 million, USD 4.3 million per quarter or just above $1 per barrel of oil equivalent. So strong financial results with almost USD 360 million of revenues, a cash margin of $135 million, gross profit of $75 million and a net result of $23 million for the first 6 months. The balance sheet, not much to mention here. The investment, of course, goes into increasing the value of our oil and gas property assets on the asset side of the balance sheet, and we're continuing to depreciate those assets as we are producing them. We have very little cash now, and we're usually maintaining around $10 million on the balance sheet. And otherwise, we draw or repay under our revolving credit facility as we need. The capital structure, I mentioned, is very stable. We have our 5-year bonds with a coupon of 7.5% maturing in 2030. So USD 450 million of bonds. On top of that, as an adjustment, if you wish, depending on whether we need it or not quarter-to-quarter, we have access to an equivalent revolving credit facility from our Canadian banks of USD 250 million and only CAD 100 million were drawn at the end of the quarter. We have reduced our outstanding letters of credit now that the Blackrod project is finally on stream. So we have roughly CAD 12 million of letters of credit just to support access to pipelines and some export facilities. And we had a very small amount under our French loan, which was fully repaid in the month of May. So we didn't fully benefit from the high oil prices only 60% roughly. We benefited from during that second quarter because we had 40% of WTI and Brent exposure hedged. That is no longer the case, excuse me, going forward. We have no benchmark hedging going forward. What we have though for the next 18 months is we've hedged some differential. So we have typically for this year, the differential, the WTI, WCS differential hedged at minus $12.5 which is roughly $2 in the money. And depending on the months, you have the detail on this table, we've also hedged a part of the transportation cost between Hardisty Canada and Houston in the United States. And all of these hedges are in the money, and we can see around $6 million of positive mark-to-market on our balance sheet. So that concludes my final section, and I will hand over to Will for the overall conclusion.

Thank you, Christophe. In summary, a solid second quarter for the company and a compelling outlook going forward. Q2 production of 42,200 barrels of oil equivalent per day, OpEx of $19.10 per BOE in the quarter and the original Capital Markets Day production and OpEx guidance is maintained. Capital spend in Q2 was USD 49 million and the full year 2026 outlook is maintained at $163 million. Operational cash flow was USD 67 million for Q2 and USD 230 million to USD 330 million is expected for the full year. We have in excess of $150 million of undrawn liquidity headroom. Our sustainability report was issued alongside our Q2 results, which I encourage the audience to read. It highlights the responsible business practice undertaken in 2025. And this voluntary report is progressively aligned with the latest standards such as IFRS 2. So with that, I'll hand it to the operator to open the floor for questions and as well questions can be submitted online.

[Operator Instructions] Our first question is from Teodor Nilsen from SB.

Congrats on Blackrod first oil. My first question on production guidance. As you mentioned, you achieved the Blackrod first oil slightly before expectations, slightly before guidance, but you do not increase production guidance, although first oil was achieved earlier than expected. Why is that? And second question that is on hedging. Christophe, you highlighted that you don't have too much hedging at least on the oil side going forward. Is that mainly explained by lower CapEx going forward, so lower commitments? Or do you have any particular market view that drives that hedging strategy? My last question that is on share repurchases. I think we discussed this also last quarter, but now most of the Blackrod CapEx is behind us, should we expect you to do some more on repurchases than you have done over the past couple of quarters? Or yes, any thoughts on that would be useful.

Yes. Thanks for the questions, Teodor. I'll answer the first question, the third question, and I'll hand the hedging question to Christophe to answer that one. So you're right, we're really pleased about Blackrod first oil being achieved ahead of guidance. And I think the type of asset that we're talking about and first oil being achieved, there are going to need to be 40 well pairs online to deliver 30,000 barrels of oil per day. So we did have -- our initial set of well pairs came on ahead of expectation, which is very positive. But at this point in time, we feel like it's still prudent to maintain the full year guidance. And as we progress further into the year, we feel like we're pretty well positioned to deliver at least within the midpoint and potentially in excess of that. So we're maintaining the guidance as things stand at this point in time. But in the field, it's looking very positive at this point at the Blackrod asset. And on the share repurchase side, regarding the flexibility, that's right. As I mentioned in the presentation, we have the flexibility to repurchase around 6.5 million shares. We haven't done that yet as we remain steadfast on executing Blackrod, which, of course, as you point out, is now on stream. We are pleased to see a marginal net debt reduction in this quarter, and we are monitoring macro, micro conditions as things stand and keeping a close eye on our liquidity, and we remain opportunistic to begin participating in that program. On the hedging front, Christophe?

Yes. No, thanks for a very good question, obviously. And I think we are generally bullish long term. The short term is much more difficult to take a view on and changes almost on a daily basis depending on the statements coming from the White House in the U.S. Now that being said also, we shouldn't be confused with the very short-term daily volatility and the long-term oil prices where we can hedge. There is a very significant -- the curve is relatively steep and backward dated. And so we obviously cannot hedge at the current spot rates. But we are monitoring that. Now the flip side is we've always communicated that when the bulk of the CapEx is behind us or we don't have any specific debt maturities, we will take a lighter approach on benchmark hedging. So we'd rather focus on hedging and securing good transportation costs for crude to the U.S. Gulf Coast or the absolute WTI/WCS differential. And I think we'll be a bit more cautious on hedging dated Brent or WTI prices. It's not excluded, but we're going to take a much more prudent approach there.

Okay. Makes sense. And actually, if I may have even one more question that is on, could you just please remind me what's the latest you have communicated on time line for sanctioning of Blackrod Phase 2?

Yes. Phase 2 and future phase expansions still lie within our contingent resources. So there hasn't been any prescriptive disclosure in terms of when the next expansion project takes place, but it is a lot of work that's happening behind the scenes on looking into multiple expansion opportunities there. And as those plans mature, we will provide an update accordingly to the market at that point in time.

[Operator Instructions] It appears there are currently no further questions over the phone. With this, I'd like to hand the call back over to our host for any webcast questions.

Okay. Thank you, operator. We have a few questions from the Internet here. So just kicking off with a question regarding the portfolio, Will, perhaps you can comment. With Blackrod now upstream, is now the time to rationalize your portfolio and divest your international assets?

The asset base that we have has demonstrated high cash flow generative ability and the foundation of existing assets has really supported us to put us in a place to be able to unlock the likes of Blackrod Phase 1. There's still lot of life out of the portfolio beyond Blackrod with the existing producing assets. We do think of ourselves as ruthless capital allocators, and we're interested in maximizing value. There's no imminent processes at this point in time to note.