Perpetual Energy Inc. (PMT) Earnings Call Transcript & Summary

Yes, I would appreciate that, [ Jordan ], if you could make that motion.

I move that the firm of KPMG LLP, Chartered Accountants be appointed auditors of the corporation until the next annual meeting or until their successors are appointed.

I second the motion.

Thank you, [ Jordan ] and Mark. We will now provide for a short pause for registered shareholders and duly appointed proxy holders to vote on these specific matters to be considered at the meeting. [Voting]

Now that everyone has had the opportunity to vote, I now declare the polls closed for the meeting. We have received the vote reports and have been informed by the scrutineer that the vote report shows that the ordinary resolution electing each of the nominated directors and our auditors has been duly carried. We will be reporting the vote results in a press release and SEDAR filing as soon as reasonably practical following the meeting. At this point, we have now completed the business portion of the meeting, and as there is no further business to come before the meeting, I, with the approval of this meeting, declare this meeting will be concluded. With the formal business of the meeting concluded, I've prepared a short presentation reviewing Perpetual's 2019 results and future operations, opportunities and plans. I'd like to take you through that now. So thanks for making time today to attend our Annual General Meeting. A special thank you to our team who are also committed to bringing their best for our stakeholders and shareholders, and this is so very much appreciated. I'd also like to thank the many service providers that help us in so many ways. I'm personally very grateful for all of you and for your continued support of us. These are challenging times, COVID-19, the drastic drop in oil demand as the world shelters in place and as a consequence, the oil price collapse. That all began to really take shape when Russia and Saudi Arabia added on with their oil price war on March 9. These last few months have been difficult and uncertain times for us at Perpetual and few certainly have -- and also, certainly lots of other companies as well. But today, I want to share with you some of the exciting things that we have worked to accomplish over the past year with a view to the better times that are undoubtedly ahead. So I'd like to draw your attention to the forward-looking statements advisory. There will certainly be some of these throughout the presentation. So what does your company look like today? Well, we have recently completed -- or, I guess, over the last few years, we've completed our transition to really a diversified resource-focused asset base. Our assets are entirely in Alberta. In West Central, we have -- we continue to have exposure to liquids-rich gas in the Edson area, where we have been successfully developing the Wilrich with horizontal multistage frack wells for multiple years. In Eastern Alberta, we've complemented our Mannville heavy oil area, where pools are maturing and secondary recovery through waterflood is well established and proven, with a new emerging heavy-oil play in the Clearwater formation that has been unlocked by new multilateral horizontal drilling technology. We're quite excited about this play. And we also have our bitumen resource ideas in Northeast Alberta. In the first quarter, we produced just under 7,500 BOEs a day. And with the transition announced at East Edson -- or transaction announced at East Edson on April 1 that I'll tell you more about, we are now set to grow off a new base of around 4,600 BOEs a day. And our asset mix is about 65% gas, 35% oil. I'd like to go through a few quick highlights on some of our more recent business developments. As I alluded to, we're excited about the new Clearwater play. Our exploration and development has successfully derisked an attractive development area at Ukalta, and we have secured a sizable acreage position and drilling inventory prospective for the Clearwater zone. At East Edson, we just sold a 50% working interest for consideration that included $35 million of cash and, importantly, a carried interest in the next 8 wells, which is expected to restore our production levels there, lower our unit operating costs and prove up some strong capital efficiencies that will be beneficial for our future drilling inventory. At the same time, the deal enhances our liquidity and allows us to better optimize our value. This transaction, along with the sale of our investment in Tourmaline Oil shares, that is the legacy from our sale of West Edson a few years back, has reduced our debt close to $43 million since year-end 2019. But as borrowing capacity has come down in step with lower commodity prices, our balance sheet and liquidity remain tight, and we have more work to do there. We have made progress on resolving the Sequoia litigation that was launched against us in August of 2018 and relates back to the sale of our shallow gas assets in October of 2016. Although we found it disappointing and challenging to have our integrity questioned through this vicious litigation, we do remain confident that the courts will ultimately deny to trust these claims, but the timing is not our own. And lastly, I want to highlight that we have responded with action to the incredible upset of the global supply-demand balance brought on by COVID-19 pandemic, which has destroyed economic activity and created extreme volatility uncertainty in commodity and capital markets. First and foremost, our people are safe and healthy. Office employees began working from home in mid-March and continue to do so until Calgary enters phase 2 of our reopening plan sometime in early June. In the field, operating protocols were put in place and are being followed, and we have experienced no issues. At the end of March, we quit producing our heavy oil to sales, shutting in over 1,700 barrels per day of production, and that was to minimize operating losses and to preserve the value of our reserves. We're continuing to fill tank storage at Mannville, and we'll optimize physical sales as opportunities present themselves. And of course, as a follow-on to that, we've suspended all heavy oil-focused capital investment right now. And as you know, we are carried at East Edson for the next 18 months in our drilling. We've severely cut our operating costs, and our team has cut work hours by 20% across the board. We do qualify for the short-term federal wage subsidy, and we're keeping on top of other government actions that are targeting to keep people working by helping to bring down government-related costs and improve liquidity. And we're carefully watching the market as we always do and have seen positive movement in the gas markets that were depressed before the pandemic. So this presentation is laid out to share our progress in the context of our 5 strategic priorities: growing the value and impact of our Clearwater play, maximizing the value of our base assets at Mannville and East Edson, improving our balance sheet and managing risk, resolving the Sequoia litigation and advancing some of the new technology-driven diversified new ventures that we've identified as opportunities. It's most definitely a time that requires heavy navigation through choppy waters, but we're also acutely aware that these uncertain times can serve as tremendous opportunities, and we're looking for those. So we'll start with sharing how we have advanced our position in the Clearwater play. We're very pleased with the inventory we've built, how we have jumped up the innovation curve with this new open-hole multilateral drilling technology and also pleased with the performance of our exploratory and delineation wells. We view the Clearwater play fairway as covering a vast area in Northeast Alberta. Our prime delineated development area is in Ukalta, where we have 27 net sections of land, reserves booked on the back of our 2019 and Q1 2020 drilling program, and we have a view to about 74 additional locations in that area as well with varying degrees of risk that will get resolved over time. Through crown sales, acquisitions, farm-in commitments and options, we have secured a total of 83 net sections on the play, spanning multiple prospect areas, each of which could provide material developments once derisked and support significant heavy oil production growth. This is the play that we really look as defining -- helping us to define our near-term future. Taking a deeper dive into Ukalta. This is the area we have done our drilling in to date, with our first 2 exploratory wells drilled in 2019, followed up by 4 more in Q1 of 2020. The wells have been drilled with 6-leg open-hole multi laterals averaging around 1,400 meters per leg. At year-end 2019, on the back of the exploratory wells, we booked just 5 undeveloped locations in our McDaniel report. In the Q1 program, we switched over from a KCL water-based mud system to an oil-based design, and our execution results improved dramatically, as did our preliminary production performance when we were able to minimize the formation damage. The lower Clearwater zone is the primary development zone at Ukalta, and we have identified 25 unbooked locations today that rank as equal to the Tier 1 locations we drilled in Q1. 2 of our Q1 drills were PUD conversions, 2 were step-outs, and we expect to significantly increase our reserve bookings here at year-end 2020. First 2 wells at Ukalta stabilized at initial rates of about 80 barrels a day with about 40% water cut. And we believe the high water cut production is partially a phenomenon of the KCL mud design. We learned from these first 2 drills, and we're able to improve our design and optimize our trajectories in the Q1 program. And after recovering all of our load oil, the 2020 wells have shown positive preliminary results, closer to that 150 barrel per day range after they've ramped up. And importantly, water cuts are significantly lower at less than 10%. If this performance holds up over the longer term, we would expect new reserve bookings will also reflect a more favorable type curve. So this slide actually highlights the economics of the Clearwater based on that year-end 2019 type curve. And even at that, the all-in economics were very strong at prices that we experienced in Q1 before the oil price collapse. The 6-leg laterals cost us about $1.4 million all in, and we forecast ultimately -- ultimate recovery of about 110,000 barrels per well. So at $55 WTI, these were forecast to pay out in about a year. Today, very few oil prospects are investable at the current strip pricing. But we forecast a return on investment of about 30% and payout of less than 2 years at that $45 barrel WTI level. Or really, it's WCS that matters to us, Western Canadian Select prices, and levels of around $38 per barrel would be quite attractive economics. Strong performance of the Clearwater has been the foundation of our heavy oil production growth over the past 7 months. First quarter average heavy oil in Eastern Alberta grew 17% year-over-year, but our Q1 Clearwater drills were only on for several weeks and we're ramping up. By the time we shut in production later in March, in response to the oil price collapse, Ukalta Clearwater production was around 730 barrels per day, and our de facto Q1 exit rate was close to 1,725 barrels today -- barrels per day. We have pegged our restart price for production at Ukalta at CAD 22 per barrel, Western Canadian Select. And as the differentials have now tightened today into that $2 to $4 range in late May and for June, we're now working to secure these stronger prices and considering a partial restart for later next week. So you see our Clearwater play is a nice operational complement to our base heavy oil assets at Mannville, but we've maintained our strategy for commodity diversification with our liquids-rich exposure at East Edson as well, and these base assets have all performed well. So going first to Mannville, a legacy shallow gas property for us. We now have 6 heavy oil pools, all under waterflood and produced an average 995 barrels per day of oil in the first quarter. With over 190 million barrels in place and only 3% produced to date, the focus over the past several years has been on waterflood implementation and optimization. We do have several ideas here to employ the multilateral drilling technology that we have proven up at Ukalta and unlocked the Clearwater, but at these price levels, no drilling is planned for the current year. Successful waterflood response. We have flattened base declines in all our pools with area oil decline rates now less than about 10%. These 2 pools actually show slight inclines as the pools are being re-pressured. And this is also the case for the 3 pools that comprise our largest Upper Mannville B pool as it's designated. The relatively flat production performance has been manifesting positive technical revisions in our reserve bookings annually. While we have no plans to invest capital here while prices are in this extreme low, we have close to 38 drilling opportunities identified with attractive returns when prices stabilize and recover. Turning now to our natural gas-focused base assets in West Central Alberta at East Edson. We've been developing the Wilrich formation using horizontal drills and multistage frack technology for a number of years now in the Greater Edson region. The large contiguous land base has an infrastructure network throughout, with pipelines connecting 2 plants, including the more modern West Wolf plant, providing gross area capacity of 7,800 -- or 78 million cubic feet per day. At year-end 2019, McDaniel had recognized 66 gross Wilrich development locations in an 8-year development plan, and we have a prospect inventory identifying locations to complement that plan beyond that. In addition to the Wilrich, there are multiple secondary targets for horizontal development in the future, including the Notikewin and Fahler and the Gething where we have some offset horizontal production that we've been monitoring. As I mentioned earlier, on April 1, we announced that we had closed the sale of a 50% working interest with a follow-on development capital carry at East Edson. The $35 million of cash consideration has been used to reduce our bank debt. Two wells are contractually required to be spud in July, after spring breakup, with the timing of the remainder of the 8-well drilling program at the purchaser's discretion. Although the optimal plan is to fill the West Wolf plant for exit 2020 in time for more constructive winter pricing and then hold production flat from there. We also expect to benefit from modest design changes incorporating industry learnings since our 2-year drilling hiatus began in early 2018. And we expect to verify close to a 25% reduction in all-in development costs per well, closer to that $3.85 million per well level. The East Edson transaction is another example of partially crystallizing value in order to advance our other strategic priorities, similar to our sale of the West Edson property a few years back. As operating costs are largely fixed, independent of sales volumes, the 8-well drilling commitment will bring sales volumes back up toward the capacity of our infrastructure, and that is expected to restore the top-quartile cost per BOE to less than $3 per BOE as we've achieved historically. This low operating cost is one of the significant benefits of this asset, makes it competitive in even low price environment. With a fair amount of drilling history on this property, the type curves are well defined and reliable. In fact, we have had multiple years of positive technical revisions, driven by strong base well performance. Current strip pricing provides a compelling investment thesis, especially when we factor in the forecast 25% capital reduction. So as I mentioned earlier, we have some work to do on our balance sheet, and the next section really focuses on that. So to start with capital spending. As I mentioned earlier, we're spending very little for the remainder of the year. That's the current plan. We spent $5.2 million in the first quarter, all on the Clearwater play, and have no plans to drill in Eastern Alberta until prices recover and stabilize. At East Edson, all our capital spending will be carried by the purchaser as per the terms of the transaction. With limited spending in 2019 at East Edson and now the working interest sale and heavy oil shut-ins in Eastern Alberta, the second quarter of 2020 will be our low point of production for the year. Production is forecast to build from these lows as new drills come on stream in East Edson in late Q3 and heavy oil production has restarted if Western Canadian Select pricing gets sustainably above that CAD 22 per barrel level. Our natural gas market diversification strategy that we put in place back in 2017, which synthetically shifted our market from -- for 40,000 MMBtus per day to 5 NYMEX-based markets, has been extremely important for us over the last few years. It's brought in close to $33 million of additional revenue since we put it in place a couple of years ago. That market, though, changed drastically for this strategy in the third quarter of 2019, primarily driven by changes in the maintenance protocols on TC Energy's pipeline system, and this premium actually reversed for 2020. We were able to capture and preserve some of this value in advance of this fully settling in, and we closed out the contract for most of 2020 and brought that value forward into 2019, representing about $2.7 million of cash flow in our Q3 2019 results. Western Canada gas prices have strengthened significantly more relative to NYMEX. And now storage, which was at very low levels, is filling quickly. We expect the contract to, again, return back to providing a premium on our sales in November of 2020 and for 2021 as reflected in the forward market. Since natural gas markets have become very tied to the oil market with associated natural gas as a significant contributor to supply with tight -- through the tight oil plays, particularly in the U.S. but also in Canada, this oil price collapse could be a very positive thing for natural gas futures, and we're starting to see that in the forward market. Associated gas shut-ins are expected to be occurring, and certainly, declines are expected to kick in with limited drilling on these tight oil plays. The forward market is still a little bit below the price for a big pickup in gas-focused drilling. And even as prices improve, growth from this gas-focused drilling will be slow to materialize given the sector-wide liquidity crunch. So we're starting to see some green shoots for a natural gas price recovery that would be very welcome to bolster our funds flow. Our balance sheet has improved since year-end, with the absolute debt down 21% to $94 million as we opened Q2. We have work ahead of us to manage some upcoming maturities. The bank borrowing base was reset at the close of the East Edson sale, reducing our line to $20 million. That's scheduled for redetermination in July, and the bank facility is due in November of 2020. We continue to work to extend this, which requires dealing with the repayment or extension of our $45 million term loan that's set to mature in March of 2021, and work is underway to accomplish those things. Certainly, the overhang related to the Sequoia litigation has made this incrementally challenging, but we'll continue to work through that. So now going to the Sequoia litigation. This claim came unexpectedly in August 2018 and relates back to our sale of shallow gas properties in October 2016. We have made progress, though, this year. We were successful in dismissing all but one claim against us with the decision that we received in the first quarter. And although the written decision had many favorable elements on the Section 96 BIA claim, the court decided a trial was required. Both sides have appealed the decision, and we have also taken positive elements from the decision and put a new summary dismissal application forward that's scheduled to be heard in June. An appeal process is also proceeding with applications before the court, also scheduled for June, and the actual appeal is scheduled in December of 2020. With positive results, this claim could be resolved this year, and we're working hard to achieve this. And finally, last strategic priority we'll touch on today. We are also continuing to work some of our new venture ideas. As you've heard many times in the past, we have our bitumen resource at Panny, and we've been investing time to advance. In addition to the Panny property, we've been investing time to advance some clean tech ideas for our operations and ideas that drive growth in the natural gas economy, for example, the gas-fired power generation that we've sort of stepped our -- dipped our toe into at Mannville that enhances our gas price. These are things that interest us, and we have been investing time and energy understanding where we can add value in these regards. At Panny, we have a large bitumen resource in place dwarfing our reserves base from our conventional assets. The bitumen resource almost flows cold, and we've piloted low energy intensity extraction technologies that have shown some promise. We carried out a pilot a few years back on a technology we called LEAD, Low-pressure Electro-thermally Assisted Drive, and learned a great deal about the electric heating technology and the reservoir. We continue to advance our ideas and hope to move to a second-stage pilot in the next few years. This, of course, though, has been set back by commodity prices. So wrapping it all up, we continue to see a lot of value in our asset base for the short and the long term. At year-end 2019, our reserve base now was $3.27 per BOE -- or per share, using our sum of the parts analysis. If we roll that forward to current pricing effective April 1, where our consultants have actually reduced price decks to reflect the current market, we still see a significant amount of value and including our prospect inventory, calculate a reserve -- or a net asset value of about $2 a share. To wrap up, we've built a high-quality asset base. We've accomplished the diversified resource style transformation that we set out to do about 5 years back. We're very pleased with the base assets that we have in Edson, Mannville. The emerging Clearwater play is exciting. And certainly, we have other prospects for adding value through technology-driven solutions for our bitumen resource and then other heavy oil and natural gas resource plays. We've shown a track record of operational performance as a team. In the strategies that we've chosen, we've led operational performance with top-quartile operating cost structures such as at East Edson and low capital -- or positive capital efficiencies in both of our areas. And that's really thanks to our creative and entrepreneurial team. Our balance sheet continues to be challenged. We've got debt maturities approaching, but we'll work to resolve these. And certainly, the liquidity challenges need to be solved to move forward, and part of that is working hard to resolve the Sequoia litigation overhang. So all in all, we think we have a compelling opportunity for value creation and particularly to the oil and gas price recovery that we think inevitable -- is inevitable and always results from low commodity prices. Basically, the best solution for low commodity prices is low commodity prices, and that, in our view, is how the circles work. So we'll continue -- or the cycles work. We'll continue to persevere to navigate this uncertainty and look for the opportunities that will be created and available for value creation in the future. So with that, I'd like to take any shareholder questions and comments that can be entered today on the web portal. Okay. Seeing no active questions, I'd just like to thank you for your interest in Perpetual today and for attending our Annual Shareholders Meeting, and we wish everyone and their families well, especially through this challenging global pandemic. Thanks very much.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect. Have a great day.