Paramount Resources Ltd. (POU) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Paramount Resources Limited Annual Meeting 2021. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

Thank you for joining us today. My name is Raj Ravichandran of Computershare Trust Company of Canada. Before we begin, we would like to provide a quick overview of the Lumi Virtual Meeting platform. You should now see the agenda on your screen. At the top of the agenda page is a legend showing 3 different icons you may click on to access different parts of the platform. [Operator Instructions] To view the presentation following the meeting, click the icon shaped like a document. If your screen shows only an image, presentation or the questions page, and you wish to return to the agenda, click the i icon. The voting icon will only be displayed once the polls are open. Thank you. And I will now turn it over to the Chairman of the meeting, Mr. James Riddell.

Okay. Good morning. I'd like to welcome everyone to Paramount's 2021 Annual General Meeting of Shareholders. My name is Jim Riddell. I'm the President, Chief Executive Officer and Chairman of Paramount. I will be chairing today's meeting. We will first hold the formal part of the meeting, and I will then give a presentation and update you about the company's operations. I now call the meeting to order. I would ask Mark Franko, our Corporate Secretary, to act as Secretary at the meeting; and Kyle Gould of Computershare to act as Scrutineer. A notice of meeting and information circular dated March 19 was sent to all shareholders in advance of the meeting. I direct that the notice of meeting be attached to the minutes of this meeting. I have been advised by the scrutineer that a quorum of shareholders is present. I direct that the scrutineer's report on quorum be attached to the minutes of the meeting. Due notice having been given and a quorum being present, I declare this meeting to be regularly called and properly constituted for the transaction of business. We have received all proxy voting results for today's resolutions in advance of the meeting. Anyone in attendance today who has not yet voted by proxy and is not signed in as a guest will have an opportunity to vote online at any time during the meeting. At the time of the meeting, we will announce -- at the end of the meeting, we will announce the preliminary results of the voting.

Shareholders and duly appointed proxies will now see a screen change to show the various items of business for today's meeting. You will have from now until the conclusion of the meeting to cast your votes on each of these items. Over to you, Mr. Chairman.

As the first item of business, I place before the meeting Paramount's 2020 audited financial statements. A copy of the financial statements has been mailed to the registered shareholders and all beneficial shareholders who have requested one. No vote is required on this matter. The next item of business is the election of directors. In accordance with Paramount's articles, the directors have fixed the number of directors to be elected at this meeting at 8. May I have the nominations?

Mr. Chairman, my name is Paul Kinvig, and I am a duly appointed proxy holder. I nominate for Director, the 8 persons listed in the information circular, being: James Riddell; James Bell; Wilfred Gobert; Dirk Jungé; Kim Lynch Procter; Robert MacDonald; Keith MacLeod; and Susan Riddell Rose.

Thank you. I can confirm that no other nominations were received in accordance with the advanced notice requirements of the company's bylaws. Are there any questions on this motion? Please vote on this item now or at any time prior to the end of the meeting. The next item of business is the appointment of the auditor. May I have a motion to reappoint Ernst & Young as auditor?

Mr. Chairman, my name is Spencer Sinclair, and I am a duly appointed proxy holder. I move that Ernst & Young LLP be appointed as the auditor of Paramount to hold office until the close of the next annual meeting of shareholders.

I second the motion.

Are there any questions on this motion? Please vote on this item now or at any time prior to the end of the meeting. The next item of business is the approval of unallocated options under the company's stock option plan. The required approval for this item is a simple majority of the votes cast. May I have a motion to approve the unallocated options under the option plan?

I move that the resolutions approving the unallocated options as set out in the information circular be approved.

I second the motion.

Are there any questions on this motion? Please vote on this item now or at any time prior to the end of the meeting. The final item of business is the approval of amendments to the company's bylaws concerning the holding of shareholder meetings by electronic means. The required approval for this item is a simple majority of the votes cast. May I have a motion to approve the amendments to the bylaws?

I move that the resolutions approving the amendments to the bylaws as set out in the information circular be approved.

I second the motion.

Are there any questions on this motion? Please vote on this item now. [Voting] We have now received motions on all items. We will close the poll shortly. Please complete any final voting. [Voting]

Polls are now closed.

We will now pause briefly while the scrutineer prepares a preliminary report of the voting results. I have now received the preliminary report of voting results from the scrutineer and confirm -- can confirm that all motions have been approved by the required majorities. I declare the individuals nominated as Directors to be elected. And all other motions to have been carried. We will press release and SEDAR file the final voting results later today. Is there any other business to discuss at today's meeting? Seeing none, I will now entertain a motion to end the meeting. But before I do, I just wanted to make a quick comment on one of our directors who's retired this year, John Gorman. He retired just short of 20 years of service, and I did want to thank him on behalf of all Paramount shareholders for his very valuable service that he provided to the company for the last 20 years and wish him the best in his retirement.

I move that this meeting be concluded.

I second the motion.

Any objections? No? Then I declare the meeting ended.

And that concludes the formal part of Paramount's Shareholder Meeting. Now Mr. James Riddell, Chairman, President and CEO of Paramount Resource Limited, is going to give us a corporate presentation. To access the presentation, click on the document icon right of the messaging icon on top of the agenda screen. There you should find our corporate presentation file, click to open it. In order to full screen, click the broadcast band. And in order to toggle between slides, use the scroll bar or use the scroller on your devices. Thank you for your attention.

Okay. So thank you. And yes, it's my privilege to be able to give you an update on your company. So as you heard, you'll need to advance the slides, and I'll do my best to guide you on which slide that I'm speaking to so that we can try and keep up with the same slide for my comments. So starting on Slide 2, if you could click to that. I do just want to point out our forward-looking information advisory so that you can understand them and note that they apply to all the comments that I have to make today. Slide 3. So again, Paramount, as you know, was founded in 1976, went public in 1978, has a market cap of $1.6 billion. Net debt at the end of the quarter was $760 million for a total enterprise value of just over $2.3 billion. We have a very aligned management and shareholder position with an insider ownership of just over 46%. We did update our guidance for our forward-looking operations in our latest release. We did increase our -- for 2021, our production guidance from 77,000 to 80,000 BOEs per day for full year 2021, up to 80,000 to 82,000 BOEs per day, and that's inclusive of additional disposition of our Birch property that represented about 2,000 BOEs a day for the second half of 2021. We've also modestly increased our CapEx guidance. So our CapEx guidance prior was $230 million to $260 million, and we were finding that we were tracking to something that was approximately $30 million further below that previously provided guidance. We've increased our CapEx by accelerating a property in Wapiti, which I'll describe later here, but that incremental $60 million only realized a net $30 million increase approximately in the forward-looking guidance for the year to $265 million to $285 million. We were tracking to something that looked closer to $200 million of free cash flow, which is up again from our prior guidance for free cash flow and net of the incremental $60 million of accelerated capital. We're now predicting forward free cash flow of $140 million for the year. And net debt is projected to be less than 1.5x our cash flow at the end of the year. We have reached forward and provided some preliminary guidance to help you understand where we're going out into the future. And so we've provided 2022 preliminary guidance of 84,000 to 88,000 BOEs a day and CapEx guidance of $325 million to $385 million. And free cash flow guidance for 2022 of an additional $185 million, which, if that was applied to -- all applied to outstanding debt would see our debt to cash flow or debt to adjusted funds flow drop to less than 1x multiple. A couple of other things on Slide 3. On the map on the bottom left, you can see where our properties are principally focusing on Wapiti and Karr and our Kaybob assets. But the charts that are inset are really telling the story. So you can see that we have very much been focusing on growing our production in our Grand Prairie area. You can see it's growing up to over 60,000 BOEs a day in 2022 as we move up to a full plateau rate for both Karr and Wapiti. That's growing the -- essentially growing the higher netback, $28 to $30 per BOE currently netback production, and then you can see the Kaybob and central assets which represent the lower netback production of $12 to $13 of BOE declining. And then overall, the total incremental production at Grande Prairie is more than offsetting that Kaybob and central production. In the middle chart, we just wanted to show how virtually all of the capital being allocated is being allocated into our Grand Prairie, Karr-Wapiti core area. We did also want to show that there's about 65% of that 2021 capital being allocated to sustaining capital to replace the declines, and then 35% being allocated to growth. And then forward-looking to 2022, you can see we're allocating about -- we're estimating about $250 million of capital to maintain our existing production at that over 80,000 BOE per day rate. And just under 20% is being allocated to further growth in 2022. And then the bottom right, just graphically depicting that growth in production from full year last year of $68,000 to this year, again that 80,000 to 82,000. And then 2022 forward-looking to 84,000 to 88,000 BOEs per day. Flipping forward to Slide 4. So the right-hand chart is showing essentially the various cash flow forecasts that we would see with increasing oil price from $40 to $70. And importantly, we're -- I guess, really want to stress the large amount of hedging we put in place this year, really -- I guess provide certainty to a minimum of $60 million of cash flow even being generated at a $40 per barrel average price for 2021, up to $175 million of free cash flow. And again, we're estimating $140 million now. That free cash flow is being allocated to debt reduction first and foremost, followed by additional growth, shareholder returns through dividends and share buybacks and then potentially acquisitions. The left-hand side, just showing that approximate $140 million of free cash flow after our CapEx, ARO, inclusive of $157 million of proceeds from dispositions, $80 million of which was completed in Q1. And then the $77 million sale that we've done for Birch would see us realizing net debt, inclusive of the free cash flow of less than $600 million or less than 1.5x adjusted funds flow by year-end 2021. So if I could ask you to flip to Slide 5. This is really trying to show what we have built in our Karr-Wapiti core asset area or that Grande Prairie core asset area. We're delivering -- in the forward 2022 preliminary guidance, we would be delivering 18% free cash flow growth. 6% production per share growth and on a debt adjusted basis per share growth of 14%. We expect over the next 5 years to grow production in the greater Grand Prairie area to 66,000 to 70,000 BOEs a day. And maintain it at, at least, that level. In order to maintain that, we expect to be reinvesting $220 million to $290 million over those per year over that period. And generating asset level free cash flow of over -- of approximately $1.9 billion. You can see that as production grows, the amount of free cash flow per year is growing modestly. Looking forward to Slide 6. This is trying to communicate our strategy that we have been following, and that's essentially to allocate our cash flow that we do have to the most -- the highest returning, largest opportunities that we have available to allocate capital to. So the center chart, you can see it is rate of return on the x-axis and then the time in which that we're allocating the capital to it on the y-axis. So you can see that we are allocating. And then the size of the bubble is the size of the opportunity, which is represented by the number of locations that we have times the NPV per location, just to give you an idea of the size of the opportunity. So you can see that we're absolutely allocating our capital to Karr-Wapiti, which are currently the highest rate of return, largest opportunities that we have for the company. And then through time, we're trying to increase the understanding and value of the -- what we call the next [ one ] assets. So these different Duvernay opportunities that we have in Kaybob, in Smoky, Kaybob North, Kaybob South, also the Willesden Green, Duvernay and other Montney opportunities, including our Montney oil opportunity and what used to be and our Ante Creek opportunity. And the idea is to capture the opportunity inexpensively, spend modest amounts of capital to understand the play and its profitability and then solely move it through an appraisal and development stage until we're harvesting. And you can see that -- where each of those assets falls, and you can see Karr-Wapiti moving into that developed and harvest phase where we're generating significant amounts of free cash flow that I spoke to already. Moving forward to Slide 7. So this is our -- definitely our flagship asset Karr. We've been working towards reaching a plateau production of over 40,000 BOEs a day, and I'm very happy to announce that we have, in fact, achieved that level and expect now to maintain it in that over 40,000 BOE day level for the next 20 years. We have drilled and completed and brought on stream 55 wells to date. This year alone, which will be the final year of growing up to that plateau level, we will be drilling 20 wells, completing 19 and bringing 19 wells on stream. Essentially, to maintain that over 40,000 BOE a day level per year, we have to drill 12 to 16 wells, which represents $84 million to $112 million, so approximately $100 million a year in CapEx to offset declines that we see annually. And we expect to generate asset level free cash flow per year net of that capital of $260 million to $290 million per year. We do see currently an undeveloped location count of 235 wells, which should handily maintain that production level for almost 20 years going forward. And then you can see on the chart the different activities and when -- which quarter that they occur, and you can see that production growing from that 33,000 BOE per day level on average in Q1 to that over 40,000 BOE per day level and maintaining it into 2022. Slide 8. If you could click forward to that. So specifically, we did some highlights. We did bring on probably our most profitable pad ever drilled to date in Karr. We brought on a 6-well pad at 3-10, 2 months ahead of schedule, under budget. The average 30-day IP rate per well has averaged over 2,000 BOEs a day and over 1,000 barrels a day of condensate and NGLs. The all-in drill complete equipment tie-in costs averaged $6.8 million, 12% lower than our 2020 average costs at Karr. We also brought on an additional 3-well pad at our 4-28. It's only been on stream for a couple of weeks. So I don't have additional production info for that. But I can tell you that [ head ] as with new information that we've discovered with this pad. It has moved the overpressured window for the Karr Montney further to the east of our lands, which now leaves our entire Karr land base in the overpressured portion, which is expected to be a defining factor for success in the development of the remaining Karr asset. Also on this page, this is showing the type curve data that we use for planning purposes in Karr. You can see they represent some very, very strong wells. The IP365, 1,100 BOEs a day. The EUR for these wells is 1.1 million BOEs, the capital efficiency is $6,700 per BOE a day for an -- for type wells that have as high a liquids content as they do is spectacular. Slide 9. This has really been the story for our GP assets [ in ] Karr. The progress we've made on capital efficiencies has been outstanding in the last year to 1.5 years. The DCET costs have now -- and the last 2 pads have now averaged $6.8 million per well. This represents a further 12% reduction on average 2020 and is 45% lower than our average DCET cost in 2019. You see the drilling days on the left chart have dropped in almost by half. Time is money. And on the completion side, our completion costs have also dropped close to half with the average completion per well now dropping to $3.8 million. And I would stress that we have not reduced the frac intensity or the -- or ultimately, the expectation that we would have from these wells in order to achieve these costs. We've done it through -- predominantly through efficiencies and how we actually execute these completions. Slide 10. So we have tracked every single well that we've drilled in Karr to try and depict how profitable these wells are. So you can see the graph. What it represents is -- the solid blues is the amount of cash that we have actually generated per well. The remaining gray bar is the remaining PV10 reserves that were estimated by our independent engineering firm at the end of the year. And then obviously, sum of those 2 is the total. And then the gold dots are the average recycle of capital to value. And then the red just shows the average well, cost per well. And you can see essentially, we're just trying to depict the cash-on-cash return. And you can see we're achieving 3x the value that is invested per well, and that has slowly increased through time. And I would venture to guess if we were to update this for today that every single one of these wells now would fall above the actual costs that have been incurred to date with significant value remaining in all of those wells. Slide 11, now moving on to Wapiti. So this is, obviously, just to the northwest of our Karr asset. Similar geological environment and very similar play type. We commenced development in 2018. We've now brought on 29 wells through the end of 2020. This year's activity is to complete and tie-in our 6-4 pad, which we have just started moving in equipment for a couple of days ago. And then also now start to develop down to the south to our new 9-22 pad, which includes a significant investment in major pipeline trunk line system for moving down into the South for production of the Wapiti asset. You can see, we have also got a significant location inventory of 204 wells remaining in Wapiti, which also represents something in the order of 20 years of forward inventory to maintain production at over 30,000 BOEs a day of plateau rate that we see in the future. You can see the chart on the bottom right, just depicting that growth of production up to a 2022 estimated average rate of 18,000 to 21,000 BOEs a day. Slide 12, similar type of information. I will maybe just summarize this slide to say that the Type curve is modestly lower. And I think the key difference between Karr and Wapiti is, Wapiti is an even higher liquids ratio Type well with -- if Karr is 60-40 gas to oil and NGLs, Wapiti is the opposite with probably closer to 2/3 of its value being generated out of condensate and NGLS. I went through the plan going forward for 2021 to tie in the 6-4 pad and then also build down and tie in our 9-22 pad as well as an existing well drilled over 5 years ago by Apache before our acquisition at 10-22. Moving forward to Slide 13. Very similar. I'll just say very similar progress is being made. We now have a $7.9 million Type curve, and I fully expect us to achieve similar cost efficiencies as we're seeing in Karr and see that type cost come down even further. On Slide 14, this is just showing all 29 wells -- 28 wells, sorry, that we have brought on stream to date and same kind of exact cash that we've realized to date as well as the remaining value that we expect to generate out of these as of December 31 of last year. Slide 15. So these are getting into some of the forward value, next ones, as we call them. So our Duvernay asset, Paramount does control a very large material position in the Kaybob Duvernay. We have -- on the map, you can see our asset relative to other significant owners. This is essentially the entire sweet spot of the Kaybob Montney with other owners being Chevron, Shell having recently sold its asset to Crescent Point Energy. The green is PetroChina, which is part of the prior Encana-PetroChina joint venture and then Murphy to the North as well as Exxon to the south. There has been significant new transactions in the last few months of over $1.2 billion in 2 transactions with Crescent Point buying the Shell asset as well as Distinction Energy buying the Encana asset or Ovintiv asset. The other key thing is that overlaying this entire area and key to our development is Paramount has very significant existing legacy infrastructure position with roads, pipelines, compressor stations, gas plants and oil batteries that are key to kick starting the development of the assets as we move into our development stage in the Duvernay in the next few years. Slide 16 is showing those key Kaybob Duvernay assets that we have, the Kaybob, Smoky Duvernay, the Kaybob North Duvernay, which is a very significant land position. What I'll say about all -- and then the Kaybob South Duvernay. What I'd maybe say about all of these is that they have been very well delineated by offset operators surrounding, as you can see, all the well locations that have been drilled to date surrounding us. And we have the undeveloped positions that are -- that remain in the core of these areas. Slide 17, some more of the next ones. These ones, they all do have activity that are being undertaken in 2021. So at Kaybob North, we are piloting our first foray into an enhanced oil recovery pilot in the Montney Oil pool. So we have drilled over 100 wells into the pool, and we are looking forward to positive results from the pilot for enhanced well recovery, which could lead to realizing significant value with minimal investment if we were to be able to deploy that on a full field basis. At Ante Creek, we have made a discovery in Ante Creek, and we did follow that up with an additional completion this year to maintain our land position, and this does look like it will be a significant asset in the future. And then at Willesden Green, we are drilling -- we are currently drilling a 2-well pad to further understand and delineate the Duvernay position. We have over 100 sections or close to 100 sections of land in the Willesden Green Duvernay and look forward to moving into the development phase of that in the -- within our 5-year plan. Slide 18 now. So Paramount did -- was proud to be able to file and produce its first ESG report. On the environmental front, we have made great progress in reducing our Scope 1 and Scope 2 emissions, reducing them by 45% in absolute terms and 40% on an emissions intensity basis in 2019 versus 2017. The other thing I'd maybe highlight is that we have kicked off working towards a -- we're working with a partner that we've made an initial investment in years ago through our subsidiary called Paxton. One of our partially owned subsidiaries called Paxton Energy, which has an ownership in Clean Energy Systems. So we have started to work together with Clean Energy Systems to develop a 0 emissions power solution that could also include CO2 sequestration as well as enhanced oil recovery opportunities. On the social side, we are proud to say that we work in a very positive -- have a very positive relationship and work very constructively with all of the stakeholders in all of the areas in which we work. And then on the governance front, I would suffice to say that I think that we maintain and always have the highest governance standards for a public company that we can -- that we understand to exist. So moving forward to Slide 17. I just -- we do have $1 billion covenant based revolving credit facility. We had $680 million drawn at the end of March. And we do also have $35 million of senior unsecured convertible debentures that we issued in January of this year in our capital structure. And then we also have a very diversified natural gas marketing portfolio, where we market about 34% annually of our annual production into the AECO market. We have firm service into the Dawn Eastern Canadian market, represents 19% of our production. And then 7% of our production down into California to the Malin Hub, where we have firm service -- where we hold firm service to get to that hub. And then we also have exposure to Chicago and Ventura markets. And then we also have 28% of our AECO production or remaining production in fixed-price physical contracts where we have [ forward ] sold that. Slide 20. These are just some of the other longer-term value that we have within the company that I wanted to remind you of. So we do have investments in other public companies generally operating in the upstream E&P space valued at March 31 at $110 million. We have investments in other private companies, also generally operating in the upstream space of approximately $20 million. We have our descent entitlement payment from -- related to our investment in Strath that we have on the books for approximately $90 million in our latest financial statements. We also have ownership, 100% ownership of our Fox Drilling subsidiary, where it holds 7 large triple-sized rigs, 4 of which are state-of-the-art walking fit-for-purpose drilling rigs that we use in our operations. We have significant forward -- future resource opportunities in Northeast B.C. in the Liard Basin as well as the Horn River Basin. These represent trillions of cubic feet of potential resource development that are fairly well understood. That are significant assets, particularly in light of future potential LNG development off the West Coast of Canada. We also have our 100% owned MGM Energy subsidiary, which -- when it was independently evaluated, held resource estimates of close to a TCF of gas in the Central Mackenzie as well as the Mackenzie Delta, areas in the Northwest territories. And then we also have our 100% owned subsidiary, Cavalier Energy, which holds 1.35 million acres prospective for heavy oil development and thermal development of oil in Northeast Alberta. The most significant asset of which would be our [ pool ] asset, which we have eyes for. full field development being in the order of 100,000 barrels a day of thermal oil development. So moving forward to Slide 21. Just to summarize. So again, 40 years of responsible energy development. We have a very large portfolio of Montney and Duverney, obviously focusing on our Wapiti-Karr assets initially as -- and then we have a very significant deep inventory of future development properties or the next ones after that. We have made great strides in increasing the rates of return and value of those assets through significant focus on cost control, and I guess, best practices and best-in-class technical development of our assets in increasing the value for Paramount shareholders. We are forecasting now generating meaningful free cash flow. Again, I'll remind you of the $1.9 billion I spoke to in the next 5 years just from our key Grand Prairie assets at Karr and Wapiti. We have a very strong liquidity position and a very strong balance sheet, projecting year-end net debt to cash flow -- adjusted cash flow of less than 1.5x. And very aligned management and Board with you, the shareholders. So with that, I think we have the opportunity to answer any questions that may have come in.

No questions have come in at this point.

Okay. Well, hearing none, thank you very much for the opportunity to give you an update of your company, and I appreciate your listening in.

That concludes the meeting. You may now disconnect.

Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.