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

Thank you for joining us today. Please note that today's meeting is being recorded. [Operator Instructions] I will now turn it over to the Chairman of the meeting, Mr. James Riddell.

Okay. Welcome, everyone, to Paramount's 2022 Annual General Meeting of Shareholders. My name is Jim Riddell. I'm the President, Chief Executive Officer and Chairman of Paramount, and I'll be chairing today's meeting. We'll first hold the formal part of the meeting, and then we will take the opportunity to give a presentation to update you on Paramount's operations. I'll now call the meeting to order. I'd ask Mark Franko, our Corporate Secretary, to act as Secretary of the meeting; and Kyle Gould of Computershare to act as Scrutineer. A Notice of Meeting and Information Circular dated March 17, was sent to all shareholders in advance of the meeting. I direct that the Notice of Meeting be attached to the minutes of the meeting. I have been advised by the scrutineer that a quorum of shareholders is present. I direct that the scrutineers' report on quorum be attached to the minutes of the meeting. Do notice having been given and a quorum being present, I declare the 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. At the end of the meeting, we will announce the preliminary results of the voting. As the first item of business, I place before the meeting, Paramount's 2021 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 been fixed, 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'm 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 Junge, Kim Lynch Proctor, Robert MacDonald, Keith MacLeod, and Susan Riddell Rose.

Thank you. I can confirm that no other nominations were received. Are there any questions on this motion? Seeing no questions, please vote on this item now. The next item of business is the appointment of the auditor. Now, 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? Seeing none, please vote on this item now. We have now received motions on all items. We will close the polls shortly. Please complete any final voting. We have closed the polls and we will pause briefly while the scrutineer prepares a preliminary report of voting results. I've now received a preliminary report of voting results from the scrutineer and I can confirm that all motions have been approved by the required majorities. I declare the individuals nominated as Directors to be elected and Ernst & Young LLP to have been appointed auditor. 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'll now entertain a motion to end the meeting.

I move that this meeting be concluded.

I second the motion.

Any objections? Seen none, then I declare the meeting ended. That concludes the formal portion of the agenda. I think that was -- we've been fast in the past, but I think that might be a true record. So now it's my privilege to be able to give you an update on your company. I would ask that you -- so I'll be able to show you slides that you'll be able to see on the screen and speak to them. I do ask that you keep in mind our future-oriented information disclosure, advisory as it applies to everything that I would have to say today. Okay. So yes, so you should see in front of you the first slide, which is our corporate overview. So I'll just touch on a few things. So again, Paramount Resources founded in 1976 as a private company, IPOed in 1978. We have grown now to an updated market capitalization of CAD 4.5 billion. We have 141.6 million shares outstanding. Net debt, as you saw in our press release this morning is CAD 360 million. So an enterprise value of just under CAD 4.9 billion. One of the significant assets that's allowed us to take a longer-term view and make -- maybe some less conventional choices in our path here is a significant insider ownership of 46%, which we think is definitely an asset and leaves all shareholders directly aligned with the insider ownership that's managing the company. Just to give you a quick snapshot of where we're at in Q1. So we did, again, disclose our Q1 information earlier this morning in a press release. Q1 2022 production was 82,137 Boes a day, 45% liquids. We generated adjusted funds from operations of CAD 238 million, had free cash flow of CAD 103 million, and we're able to pay down our debt by over CAD 100 million through a combination of the free cash flow. We did sell some non-core securities of -- or I guess, some of our public securities for CAD 51 million. We did make a small property acquisition for CAD 24 million in the first quarter and again, resulting net debt at the quarter end of CAD 360 million. So making good progress on our -- achieving our stated target of net debt of CAD 300 million, which you'll see has moved up in time now. We did also bump our dividend from CAD 0.08 to CAD 0.10 per share per month. And then the other updates are small changes to our guidance for 2022 and our preliminary guidance for 2023. So in 2022, our production guidance, 91,000 Boe to 95,000 Boes per day and 46% liquids. The CapEx has been bumped CAD 20 million higher at the midpoint to start to accelerate some more activity in our core asset at Karr. And then, our free cash flow estimate has been increased to CAD 710 million, principally as a result of increased forward futures indications for commodity prices. In 2023, our guidance has been increased a little more materially by up to 105,000 Boes to 110,000 Boes per day, 47% liquids. The CapEx has increased from CAD 475 million to CAD 525 million to now being CAD 540 million to CAD 580 million for 2023 and the free cash flow at the midpoint is estimated to be CAD 820 million, which is a substantial increase from our prior estimate. The other thing I'd like to point out on the slide is just the focus areas, and I'm sure as you all know, it's the Grande Prairie assets at Karr and Wapiti as well as our Kaybob and Willesden Green, principally Duvernay and Montney assets. So I'd like to point to the 2 graphs where you can really see the story of what we've been working to achieve, and that's really replacing any of our declines throughout the company's historical asset base and seeing declines of lower netback Boes that are produced at Kaybob and Central and replacing those with much higher netback production in Grande Prairie. So you can see that 2020 through 2023 growth in the Grande Prairie area from 30,000 Boes to 70,000 Boes per day, or I guess, almost 80,000 Boes per day. And then the -- for the most part, declining production in Kaybob and Central, although it does start to reverse itself as we start to add higher netback production in Kaybob and Central and in our Duvernay developments as we start to turn our attention to those. So the next slide, the main item I want to point to in this slide is the basically, a reconciliation of what we see the free cash flow forecast to be in 2022 and 2023. So you can see on the right-hand panel, the left chart showing 2022 adjusted funds flow, CapEx and ARO and G&G being the capital that we're going to spend to replace our declines as well as provide 13% growth in 2022 totaling just under CAD 600 million all in, including ARO and G&G. And then about CAD 150 million remaining to achieve our debt repayment target in full year 2022, our dividend, and that still leaves currently approximately CAD 400 million of unallocated free cash flow that can be delivered back to shareholders in further shareholder returns in the form of additional dividends, whether they be a further increase in the base dividend or special dividends, share repurchases through our NCIB program or further increases in capital appreciation of the company and the underlying shares through accelerated growth or further accelerated growth or additional property acquisitions. In 2023, having achieved our debt repayment target already, you can see the unallocated free cash flow that remains after our dividends is closer to CAD 650 million in total. So quite exciting times for Paramount for sure to be in that position and we look forward to continuing to generate those returns and provide that shareholder return. Our reserves, we had a very strong reserve reporting at year-end 2021. Our F&D was exceptional with PDP F&D at CAD 6.22 per Boe and 2P F&D at CAD 2.12 and focusing in on the asset where we have been allocating the majority of our capital, the PDP F&D at Grande Prairie was CAD 653 and on a 2P basis was just under CAD 0.60 per Boe. The recycle ratio, you can imagine with those F&Ds and current netbacks, 4.3x on a PDP basis, 12.6x on a 2P basis. And if you look at just our core asset at Grand Prairie, 5.1x for PDP and over 50x for -- on a 2P basis. So exceptional results, and that speaks to the success we've had in reducing our costs as well as optimizing what we get for those costs in the form of production and reserves and the wells that we drill. On the right-hand panel on that slide, we have updated our full 5-year outlook, and we're very pleased with seeing an acceleration with a small amount of accelerated capital predominantly seeing that in the end of 2022 and '23 to principally accelerate our Karr development. We're now seeing a compounded annual growth rate of 7% and cumulative free cash flow of over CAD 4 billion, up from CAD 3.4 billion the last time we reported. Okay. This slide is -- I've come to like this slide a lot. This really does speak to Paramount's strategy all on one slide. So the idea here has been to capture assets and then allocate our capital to develop those assets based on the highest rate of return first and leaving the lower rate of return opportunities to be -- to follow after and to capture these and then continually optimize the development on those assets. And so you can see our Karr asset and our Wapiti asset ranking as the highest rate of return opportunities. So obviously, we're doing those first in Karr exceptional in that -- we're hard pressed to find another asset in all of our travels across North America that rivals the kind of returns that we see in our Karr asset. And then these later life, the assets to follow, we are applying our technical resources at, I believe, are second to none to continue to improve the cost to execute on those assets as well as the result. And so the dotted circle that shows a larger circle and a higher rate of return as we learn how to drive those costs down and get better and better wells. So the -- as time goes by and we focus more on -- and it may become the near-term opportunity, we expect to see those rates of returns improve and the overall size of the prize expand. Paramount throughout its history, looking at the center panel has been focused on a strategy of early capture of resource opportunity or play proving up that play through delineation or exploration -- testing it through exploration or -- and that exploration can be geological, it can be using technology to unlock a resource. And then I guess early-stage capture appraisal and then development and harvest of that asset. And I believe we're somewhat unique in having chosen a path of developing our assets out to a longer plateau rate for a longer period of time. And I believe that should drive a value multiple, at least of that free cash flow generated from each development to be a higher multiple than someone that's accelerating that plateau production to be a higher number for a shorter period of time. The furthest right panel is a new piece that we've added, which hopefully captures what we've been trying to do, which is capture these development opportunities or plays, build them up to this plateau rate and then produce them for that extended period of time of 15 to 20 years or more. And to -- so basically a stair-stepping of each development, executing and then building a free cash flow edge and then moving on to the next one and the next one and that cumulative free cash flow in total growing with each new area being executed on. You can see the development potential that we have within our inventory sees us growing to almost 150,000 Boes per day, just with what's in our near-term identified development project inventory on the graph there. So a few things just on each asset, I'll just try to touch on the highlights that I see in each of these areas. So Karr, we've had fantastic success achieving our plateau rate of 40,000 Boes a day last year. And definitely been able through optimization of the drill results to reduce the amount of wells and capital that we need to sustain that 40,000 Boes a day. And so we've been -- we've met with exceptional success and the cost structure to achieve those wells, as you've seen over the last couple of years have been dramatically reduced. And we -- this has -- had always been the plan. I can tell you that we never dreamed that we'd be able to drill even bigger wells for as much of a discount to the cost. So this asset has turned out to be even better than we had ever dreamed, I guess, is the message. The update here is that we have now -- we've been working on how to debottleneck the facility capacity so that we can increase our total plateau rate from that 40,000 Boes per day to now something that's 50,000 Boes to 54,000 Boes a day in what we see as what we've been able to achieve. So we expect to be able to see that rate in 2024. And you can see even in 2023, we'll be in the high 40s, now just accelerating the wells, it takes to fill that realized capacity. And then the type curve, I guess, it's all about the type curve, the -- maybe the thing I'll point out here is that we have been able to achieve a well cost as low as CAD 6.3 million per well seen late last year what was happening in the industry with increased activity. We did build in some inflation to see our DCET is now CAD 7.1 million for a Karr well type well. And we're doing our best to try and still beat that CAD 7.1 million drill complete equipment tie-in cost. The type crews themselves are exceptional. I have to point them out still, they're CAD 7.1 million wells, the IP 365 days. So the first year, an average over 1,300 Boes a day total EUR of 1.74 million Boes so that these do provide exceptional results. I know of no other company looking at -- so this is a listing of every well that we've drilled in Karr and I don't know of any other company that puts us in their corporate presentation to reconcile every single well they've drilled and measure its success. So you can see, as you go across the bottom, those are wells 1 through 74 on the X-axis, that's dollars. And then you can see, as we've gone through time, the red lines with the red labels, we've been able to decrease the cost to drill these wells from CAD 13.3 million down to CAD 6.3 million per well all in. Then the bars represent the amount of dollars we've actually cash flowed back or remains to be produced. And you can see the -- when the blue is above the red line, the wells have already paid out. And you can see there's some exceptional results that we've been able to achieve with even the last pad that came on in Q4, might even have been Q1 -- Q4 of last year already having paid out. Then the yellow dots, those are the total value, so the sum of what we've already received plus the remaining divided by the cost, and you can see the -- I guess, the recycle ratio of CAD 1 spent on the amount of cash flow that it generates now being a 7.2x multiple. So at Wapiti, the -- this has been an exciting evolution. I can tell you that last year, as we built the infrastructure to be able to start to move to the south and develop our southern part of the Wapiti block. We are very excited about the prospects that we expected to see after spending a considerable amount of time looking at the subsurface, geotechnical data and believing that we were going to see better results. And in fact, we have absolutely received or seen better results. The latest add we highlighted in our press release this morning with IP30 is a 1,500 Boes a day, comprised of 4 million a day and over 800 barrels a day of condensate. And that's followed up with -- we were expecting -- we just finished completing the next pad, 8 to 22 and expect to have that pad on by the beginning of June here, so quite exciting. We see the 2023 production growth to 26,000 Boes to 29,000 Boes a day, 58% liquids being in our sites, very close to that forecast production target of 30,000 Boes a day in late 2023. This is the type curve data for the Wapiti wells and there's 2 things I'd like to point out here. So at Wapiti, we've been able to further reduce the well cost by implementing monobore. So we tested those on our 9 to 22 pad. We just completed the 8 to 22 pad, which included all 8 wells being drilled with the monobore, which reduces the time and cost to run an intermediate string for casing and allows you to drill faster and cheaper still. So we think those -- that technology allows us to reduce the well cost by in the order of CAD 300,000 or CAD 400,000. And then the other thing I'd say is that the most recent pad, so when you're looking at the play data on the top right-hand panel, the most recent pad looks like -- so that's an average of all the pads, all the type curve bins that we use in throughout the whole asset base and tell you the latest 8 to 22, 9 to 22 expect to be considerably higher than that average. And then the last on Wapiti here is just the same well-by-well analysis of how we've done and basically what kind of return we're generating for the dollars we're spending at Wapiti and you can see that -- as we've gone through the 40 wells, we've improved the results. You can see the total value of each well that we've drilled is considerably higher than the first ones, and that's through applying learning how to drill these wells a little better and how to produce them a little better. You can see the recycle still 5x, so not quite as good as a Karr, but still exceptional. I touched on cost. I do want to talk a little bit about inflation. So we are definitely seeing with the increase in commodity prices and increased activity in the industry, we are seeing higher costs. We're doing our best to control those costs through the continued learning from our prior operations and applying those to just better and better execution. So we are driving the days to drill down. You can see in the last few years, we've essentially cut the days to drill in half. And if you consider it's roughly CAD 75,000 a day to -- for every day that we're on a hole. When you take 10 days off, you're taking CAD 750,000 per well of cost out. We've also been working hard on our completion costs to mostly through frac efficiencies in increasing constantly the amount of time we spend pumping out the total time of frac spread spends on the pad site, which translates into savings. And you can see we've close to reduced our completion costs by half over the last 3 or 4 years. And then the right end is trying to put into words and a graph the places we're seeing inflation and what we're doing to try and -- or how we're seeing ourselves offsetting those increases. So we're definitely seeing the biggest cost increases in steel, nuts on tubulars and casing to -- that are very difficult and essentially out of our control. We are seeing increased fuel costs, and I'm not complaining about that. That's -- I'm going to be the last person that's going to complain about high gas prices, but they are -- they do increase the cost of the well by increased sand costs so all of those are consumables. And then labor and vendor costs are all seeing serious inflation pressure. And to offset that, we've been working on better motors and bit designs and well designs, including things like the monobore technology at Wapiti, completion efficiencies, and that can include the frac efficiency as well as things like stage spacing and cluster spacing to continue to improve the design, the actual results as well as the cost. So moving on to the Duvernay; the Duvernay is a very big part of Paramount's future. We have significant acreage position in the Kaybob and Willesden Green areas. We think as we apply more and more of our learnings from the Montney and historical Duvernay operations to our future operations, we see a lot of opportunity to materially reduce the well costs and also increase the deliverables. And that's mostly showing up in longer lateral lengths. In particular, I'll point to our recent operations down in Willesden Green last year. We drilled Paramount's longest well to-date at over 7,000 meters with a 4,000 meter lateral. And I can tell you, we have -- we sticked out all our Kaybob North development to be 4,200-meter laterals. And so we're looking forward to the better relationship between cost and well result because of a longer well. But also we think that's a very big opportunity to reduce the costs in those longer laterals, particularly in Duvernay. So specifically, the activity that we're doing this year, we just finished drilling our first pad in a number of years in the Duvernay. We just finished a 4-well pad at Smoky. We're currently upgrading the plant in order to be able to handle the incremental production that, that pad will bring and expect -- so that plant increase will be from 6.5 million to 12 million cubic feet a day and allow us to increase their amount of condensate that we handle and will also reduce -- we're going to eliminate the trucking and have that production all piped over to our existing operations at Kaybob North to the East. So that pad is expected to start fracking in late May and expect to have that on stream in early in the third quarter. Kaybob North, we've just moved rig on to start drilling our first pad there in quite a long time. And again, this is where we're looking at longer laterals, 4,200 meters. And we've laid out all these locations. We've laid them out at a slightly wider spacing between wells. So there's less parent-child interference between the wells. So we expect to get bigger wells and then again, try and drive the cost down. We're targeting a plateau production rate of over 20,000 Boes a day when we're all developed there at Kaybob North. We do have a number of other assets in the Kaybob area. I'll just point to very quickly, considerable amount of land as you move further south into what we call Kaybob South, and they are lower condensate gas ratios, but still fairly substantial condensate rates. Kaybob North, Montney Oil, so any of the historical Trilogy shareholders would recognize this pool. So we still have a significant opportunity with the remaining locations at Kaybob North. In the Montney as well as we have initiated a pilot waterflood to see whether or not repressuring that reservoir can have a substantial impact on recoveries there and some fairly inexpensive additional reserves to be found by doing that. Ante Creek, we do think is a substantial asset. We continue to drill the minimum in order to maintain our acreage position and learn from that asset. And again, that falls in one of the later developments. Willesden Green, this is very exciting for us. So a couple of things here. I mentioned the wells that we had drilled last summer, brought on-stream in July. They've already paid out in early 2022, and they continue to produce -- so those 2 wells of one 3,000, one 4,000 meter lateral. They continue to produce -- we see the IP rates there, but they continue to produce at a couple of million a day and over 300 barrels a day of condensate. We did make a highly complementary acquisition of offsetting lands in the Willesden Green area in the last -- well, I guess, we've closed it in just before release here. And so CAD 40 million, we've added 1,300 Boes a day of production at just under 50% liquids and the other 50% gas. And we've added 90,000 acres of undeveloped land, which over doubles our existing 55,000 acres of undeveloped land that we held already. So that will add to increase even further the 20,000 Boe a day development plateau that we envisioned for Willesden Green. On ESG, many of you will have taken the opportunity to read our annual reporting on this. I can tell you that maybe I'll summarize to say that Paramount continues to work on constantly trying to reduce our impact on the environment as we operate, try to use, I guess, release less Scope 1 and Scope 2 emissions, which we've made good progress on in recent years. Try and have a smaller and smaller impact on the surface or have less and less disturbance on the surface by having bigger pads and less of them in order to drill all of our wells from one site and have less total disturbance and trying to use less water constantly in our operations. And then when we do -- in the operations that we do undertake, we're trying to use more energy efficient or I guess emissions-efficient forms of using more natural gas instead of diesel to run our frac spreads and drilling rigs and things like that and then also trying to reduce our fugitive emissions using instrument air instead of fuel gas to run our different instruments on our well sites and at our plants. On the social side, we try and be the best corporate partner that we can in all of the communities that we operate in. And I can tell you on the governance side, we believe we represent the shareholders in the best possible way in everything that we do. One of the larger opportunities that we've been working on that we have kept -- that we put in to show an example of one of the bigger opportunities that we pursued is trying to use a oxy-combustion technology to essentially create a low emission power generation for the power that we do use in our operations as well as additional power that we can sell into the grid. And then by using pure oxygen and combusting it with our natural gas, we can end up with a much easier product that we -- when you combust pure oxygen with hydrocarbon because you're not using air and you don't have all of the impurities within the air like principal nitrogen. You get just CO2 and water that comes out the other side and both of those can be easily separated. And then the CO2 can be sequestered for that elimination of emissions, and we can use the water in our ongoing development operations. So we're quite excited about that. It is in its early form, but we think it's a very good idea on how to move forward and what the industry needs to do to move forward to push towards lower and lower emissions. It does have the last benefit of generating carbon credits when you do -- by which do have value, and they have an increasing value in Canada as price of carbon goes up from CAD 50 to a proposed CAD 170 a ton through time. On our credit facility, I'd just like to update you in our first quarter results, a report that we issued this morning. We did disclose that we've been able to increase our credit facility to CAD 1 billion, and that includes a CAD 250 million accordion feature that could be activated under certain circumstances. And we were able to also push out the expiry of that credit facility. So it's now a 4-year facility that expires in May of 2026. And then I do like to point out some of the other items within Paramount's operations and value that may not -- so we do have public and private investments in other E&P, principally E&P entities that total CAD 480 million at March 31. Those instruments are worth even more today. And again, that's after having crystallized CAD 51 million of value by selling some of those securities in the first quarter. We do continue to have Fox Drilling, which is an asset and an ongoing asset, not only in the value of the company itself, but also in the synergies that we see by having the same team executing on our drilling operations month-after-month and year-after-year. So we really do see that as an operational asset as well as a financial asset. And then a few other longer-term resource opportunities. So these are -- this is again on strategy. This has been Paramount's strategy for 40 years, and that's to capture large resources or new play ideas and unlock them by testing them through exploration drilling or applying new technology to them. And we see that alive and well in all of these other assets that we hold, whether it's the Horn River Basin and the Liard Basin. Those are massive in-place gas resources that we see as future assets that will be very valuable and particularly in the context of increasing development of LNG off the West Coast of Canada and a growing gas market within Canada. Our Cavalier asset, we have captured 1.3 million acres of land, principally for either Clearwater exploration, Bluesky conventional exploration or thermal development in the lower Cretaceous and principally the McMurray or the Grand Rapids. The biggest one that we point to is the potential development that we have delineated at [ Hull ], which we still envision as 100,000 by thermal development. More recently, we've seen a lot of new activity moving towards or offsetting our lands in the Clearwater and in the Bluesky. We're applying some of the new technology, which involves drilling multi-leg laterals. So significantly lower drilling costs with much higher exposed lateral length available to the reservoir producing very high or very fast payout wells in that formation and seeing that technology now being applied into the Bluesky. And then for the longer term, again, MGM, we -- when we did independently review those, evaluate those resources that have been discovered those close to a Tcf of producible resource that had been identified with the discoveries to-date there. And there'll be a time it's definitely been pushed out with shale and resource plays being developed in the southern part of the continent. But in time, that will be a valuable resource as well. So to summarize, we think that Paramount had a very -- an exceptional 40-plus year history of responsibly developing resources and being a good partner in all of the -- with all of our stakeholders, whether they are the communities that we operate in, the residents in the areas that we operate in or our shareholders or our employees. We have an extensive portfolio of liquids-rich assets in the Montney and the Duvernay. We're very excited. We think we've captured very large positions in 2 of the best resource developments in all in North America. We've had exceptional returns by allocating our capital to the best opportunities first and working to improve the returns on those that we hold for the future. We've got a meaningful cash flow generation in future years. Now you can see over CAD 4 billion in the next 5 years. So to put that into context, that's essentially enough free cash flow to acquire the entire company -- company's enterprise value over that same period of time. We have a substantial amount of tax pools that we've been able to capture that will shelter that income. That will be a very strong competitive advantage that we expect to hold over the next few years. We're in a position that I can say has never been better and very excited. And I think all the employees at Paramount are very excited with what we have to look forward to for all of the shareholders. So with that, I'm happy to see if there's any questions. Despite my best urging, I can never get questions out of the AGM. So I'll take that as vote of confidence that we're happy, and I wish you all continued success as Paramount shareholders and hope you're excited -- as excited as I am and the rest of the staff and leadership team, Board of Directors of Paramount is on the future of your company. Thanks very much.

This concludes the meeting. You may now disconnect, and have a pleasant day.