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

Hello and welcome to the Perpetual Energy conference call and webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Sue Riddell Rose. Please go ahead.

Thank you, Kevin. Good morning, everyone, and thanks so much for taking time to dial in on our webcast this morning. We're really excited to share with you the news about the transactions that we announced last Friday morning regarding Rubellite Energy. Today, in the room with me, I have Ryan Shay, our CFO and VP Finance; and Mark Schweitzer, our retiring CFO and VP Finance; Jeff -- and also Jeff Green, our VP, Corporate and Engineering Services. And we'll be doing a live question-and-answer session after the formal webcast here. I'd like to draw your attention to the forward-looking statements. There will be plenty of those today. And so please take the time to read the advisory, if you could. Okay. Well, we're really excited to tell you more about Rubellite Energy and how that positions Perpetual going forward. So Rubellite is a new exciting Clearwater pure-play growth company that we created last Thursday, announced on Friday morning. It's a subset of our assets in -- all within the Clearwater formation in Northeastern Alberta. We've got about 100 sections of lands that we've moved into the Rubellite entity. It's going to have a very robust organic growth plan. We expect to grow from 350 to -- barrels a day to 2,000 barrels a day in 2022 and beyond. The transactions actually involve funding that actually put it in very good stead to invest in the development plan that quickly unlocks free funds flow at the current strip pricing. The entity's capitalization structure will be very conservative. We'll have cash on the balance sheet initially. And we'll have a prudent approach to our hedging strategy so that we can ensure that we can get the development growth that we anticipate and that engine moving quickly. Rubellite is going to be efficiently managed by Perpetual under a management services agreement. I'll tell you a little bit more about that. And I think it's creating a real opportunity to accelerate our investment, expand our exploration in the play, pursue other acquisitions, and ultimately, return value to our shareholders. And I guess on the ESG front, the great thing about starting a new company is it's all new assets, and we can use all the newest technology on those new assets. And I think that this will be a role model for ESG excellence in the future as well. It also leaves Perpetual in an excellent shape. We're positioned -- repositioned well to realize the inherent values of the diverse asset base that we have. Our balance sheet has stabilized. At the close of these transactions, we'll have reduced our debt by 45%. We'll have less than 25% drawn on our bank line. We'll have eliminated the vast majority of our second lien debt, reduced our interest costs related to that. We'll dramatically have improved our liquidity, which allows us to invest in drilling programs at Edson and at Mannville and other value-enhancing opportunities that we have. And we'll have good asset coverage with desirable monetizable assets as we progress through our business plan. So in terms of the assets, our 2 main base assets will remain Mannville, where we're generating substantial free funds flow right now at the current Western Canadian Select prices for oil. We're also working on a battery consolidation project. And our investment there is ongoing, and those reduce operating costs and build a more sustainable cost structure. Edson is an asset that we still have very significant value-creating opportunities. It has had a stable production history. As we've grown through reinvestment recently with our joint venture partner, Tourmaline, we're now moving into a position where we're generating free funds flow. And the half-cycle economics are very attractive at Edson as well. Perpetual also has our spectrum of higher-impact new venture opportunities that we've continued to pursue, our bitumen project in the Panny area specifically. We've got some helium assets, some tight oil and gas exploration activities are ongoing, and we've also ventured into some clean hydrocarbon new ventures. We have the opportunity to significantly enhance our corporate netbacks with the Rubellite transactions. We should see interest and G&A cost savings, about $6 million to $7 million a year, which actually pays for about half of the Edson capital program going forward. And the timing is good as we've been experiencing a rally in both commodity prices, oil and gas, and we're happy that our assets will continue to be exposed to that. So really, we're creating a new, exciting Clearwater pure-play growth company while we're positioning Perpetual to better realize the inherent value of our assets. So a little bit of history. The last 18 months or so, we've been really playing defense. It's -- the macro environment has been challenging. Back in 2020, we have the OPEC price war and the COVID-19 pandemic. And that certainly led to a dramatic reduction in commodity prices and revenue. Our liquidity has been relatively limited. As prices dropped, we saw a decline in our cash flows. We also had imminent debt maturities that have really hampered our ability to adequately capitalize the assets as we've been coming through the recovery. Our strategic priority has been, for several years now, to improve our balance sheet, stabilize it, improve our liquidity, reduce our debt. Last year, in April, we actually sold 50% of our East Edson transaction. That allowed us to restore our production and with our partner grow the production back, and that is on the back of very strong capital efficiencies. And we certainly increased the value of the retained assets through that transaction. Our bank debt was reduced by $43 million last year with that transaction and then the sale of some of our -- the Tourmaline shares that we have on our balance sheet as well. So we managed to stay -- to move forward through the price crash in late Q1 of last year. But certainly, our debt maturities required refinancing and -- in order to reestablish our liquidity. And we started that process really through last year with the -- first, starting with our senior notes. The third lien senior notes were refinanced in January. We extended our maturity of those notes to 2025 and established an option to pay in kind. So that gave us a lot of flexibility. But we still have the second lien term loan, which was maturing on March 14, 2021, and that needed to be refinanced. And of course, backed up on that, we had the first lien revolver. And there was really nothing to do on that until we actually had the second lien reworked. So all of these second lien refinancings -- or all of these financings needed to be put in place for us to move forward. And certainly, that was challenging in the macro environment of 2020. But at the same time, tough macro environments create opportunities to add value. And if you can find ways to capture them, then that's really the trick. And so we worked at not just playing defense, but also mounting an offense. And that was really focused on expanding our Clearwater opportunity. We had drilled some wells in Q4 of 2019, Q1 of 2020 at Ukalta. We learned a lot about the oil-based mud and what it could do for the heavier oil in that play, and that tends to be what the oil quality is down in the south end of the Clearwater play trend. Other competitors were also active in the play, including right at Ukalta, but also in that Jarvie Figure Lake area. And we took their learnings and have built upon those. So we were able to actually materially increase our Clearwater acreage and our inventory through that downturn at quite attractive prices. So the trick was really to figure out how to capitalize those. And our 6-month refinancing process really evaluated all the avenues available to Perpetual to do just that. We learned a lot of things, I think, through that process. Really, equity wasn't available to Perpetual. It would have been exceptionally dilutive and given our market cap and the perceived risks of our equity, the cost of our debt capital to refinance the second loan was going to be exceptionally expensive. But there was a universal appreciation for the assets that we had in our portfolio, not just the Clearwater assets but all of the assets. And there was a desire to gain exposure to those assets. So really, we turned our head to plan A and we determined that a pure-play Clearwater entity would be able to attract that external equity capital that we needed in the capital structure. And with the improving Western Canadian Select oil prices, the economics of the Clearwater made a very material capital program highly attractive. So we put all of that together and we determined that the Rubellite transactions, which we announced last week, which is really an effective rights offering that allows our shareholders to have exposure to the Clearwater play and then also Perpetual to have ongoing exposure to the play through our 5-year option. We decided that that was the fairest approach to Perpetual and the stakeholders to recapitalize the balance sheet and allow us to invest in the many opportunities that we had. So just a quick look at the macro environment, and this is really -- has really been key to, I think, moving forward with the Rubellite transactions. We've been in a multiyear downturn, I think, for both oil and natural gas. At times, Alberta and Western Canada have actually been disproportionately punished in that downturn. But as we're moving through the -- as we've been moving through the last 6 months or so, I think a lot of the significant supply-demand adjustments to the global macro for both oil and natural gas have started to take shape. So on the oil front, you can see on the chart here, this is WCS calendar pricing. The prompt month is WTI, and that's shown as well. But you can see the downturn really affected all of the front months -- or all of the front years actually of the forward gas market. So we saw an extreme drop in March of 2021. We actually shut in production to preserve its value over that time. And there was a good rebound, though, by July. We had production back on, and prices had stabilized through sort of the second part of last year as OPEC came to terms with how they were going to deal with the global market going forward. Of course, this was all -- the demand issue was really compounded with the COVID-19 crisis or pandemic that we all faced around the world. But you can also see in January of 2021 how all 4 of the years that are shown on the chart here started to see a little bit of a rally, and the prompt month has brought up everything. And we've really seen almost 3x recovery off the very bottom in prices going forward. And the curve is very backwardated, so the strongest months are certainly in the front. But it's been improving all through the forward market as we've seen the supply-demand balance is starting to kick in. On the gas side, a slightly different dynamic, less impacted by the COVID-19 pandemic, but equally challenging, I think, in 2020. But I think there's been a sort of underlying change in the supply-demand dynamics. And North America -- or gas actually has gone from a North American market really to a global market over the last 2 to 3 years with all of the LNG export capacities that's now become available. And we're seeing that LNG draws are strong. U.S. natural gas requirements are high as there's been a lot of coal conversions, and that market needs to actually rebalance itself now. And we've got low inventories coming out of the winter, and we're starting to see some strong price rallies going forward. So the question really will be, what's the discipline of producers as we see -- will we see supply additions that offset those very quickly? Or will we be in a longer-term rally as we start to see the whole global LNG mechanics kick into play? But both very supportive and I think the recovery in commodity prices has really set up this opportunity for us with Rubellite. So the Rubellite transactions really advance all of our strategic priorities to drive value creation. And for the last number of years, our priorities have really been focused on the balance sheet, growing the value and impact of the Clearwater play, since our first acreage was acquired in 2018 and first drill actually came on in 2019. We've also continued to be focused on maximizing the value from our base assets at Edson and Mannville and advancing those technology-driven, diversifying new ventures. And the Rubellite transactions really serve all of those priorities very well, particularly the top 2. So just to go through the strategic rationale a little bit. The -- from Perpetual's point of view, the Rubellite transactions are really a full capital solution. We bring in cash proceeds of $52 million after all of the dust settles with the close of the financings and the transactions. And that will allow us to eliminate the majority of our second lien term loan and significantly reduce our bank debt. So we've got a materially stronger balance sheet. Our leverage ratios are normalized, and it improves our liquidity so we can invest in our assets going forward. Our cost structure is much more sustainable. In fact, we're in very good shape. We dropped interest and benefit from the G&A savings with -- as we share services with Rubellite, and that should generate annualized savings of about $6 million to $7 million. Our liquidity becomes sufficient to invest to keep pace with our JV partner in the Edson development; on the Mannville heavy oil waterflood; enhances our ability to accelerate our asset retirement obligation spending, which we -- I would say we're -- we've really established as a core competency for us, and that is value-generating for us as well; and then it also allows us to invest in other new ventures and other ideas that come our way; and it certainly allows us to maintain our exposure to stronger commodity prices that we're seeing. At the same time, though, it surfaces value from the highly attractive Clearwater play through Rubellite and does that in a variety of ways directly for our shareholders. We have the opportunity to own about 46% of the Rubellite shares. There's initial capitalization shares that will be received by Perpetual shareholders. And then they also -- we also will have the ability to participate in the arrangement warrant, which is an effective rights offering. Corporately, though, Perpetual also benefits. The 5-year Rubellite share purchase options that we'll retain, on a fully diluted basis will give us about 10% of the company down the road. Those are priced out of the money today, but we are hopeful and working hard to turn those into value for Perpetual shareholders as well. And then we'll also have the benefit of the share G&A through the MSA. So our Board of Directors have unanimously recommended voting in favor of the plan of arrangement. And we'll have our information circular that will describe the detailed mechanics of the transaction that will be mailed after our interim court date, which is scheduled for July 29 right now. So I'd now like to turn to Rubellite and tell you a little bit more about Rubellite specifically. So we've been accumulating Clearwater acreage really since 2018. We've executed over 30 different transactions to assemble the position of over 100 net sections that we've acquired, and that will make up the asset base of Rubellite initially. Those assets will be acquired by Rubellite for a total consideration of $60 million, which is comprised of $58 million of cash and a 5-year option valued at $2 million using a Black-Scholes model. That also -- the $60 million is also inclusive of the 4 million of initial capitalization shares that Perpetual shareholders will receive as well as some purchase price adjustments. On the financing side, we'll be bringing in $73 million in equity financing. That has 3 tranches: the arrangement warrant financing, which is effectively the rights offering is $32.3 million of that, so a little under half. That will be fully backstopped. We've closed the sub-receipts financing that will -- for $30 million. That will actually convert to shares upon closing simultaneously with the other financings upon closing in September. And we'll also be executing a $10.5 million non-brokered private placement. And that's -- actually, the $10.5 million is spoken for by our second lien lender as well as insiders to make up that $10.5 million. So our insider ownership will be creating strong alignment with the new Rubellite shareholders and that position, depending on how much of the backstop is taken up, would be 27% to 49%. On the management services agreement, how we envision that working is the 2 entities will actually be sharing people, office and information technology costs on a relative production split. So initially, for Rubellite, that number will be low, but that will grow quickly as Rubellite's production grows in accordance with the capital investments that we'll be making in the drilling programs. And then each entity will pay its unique professional fees and corporate costs borne by -- and those will be borne separately, so things like audit, et cetera. And what that really does is it allows 2 relatively small junior oil and gas companies to have really efficient G&A cost structures. So looking at the investment highlights of Rubellite, as I mentioned, we're a pure-play Clearwater asset base. We do plan to list -- or to apply to list on the TSX, and the goal would be to be listed at the -- after the close of the plan of arrangement in late August. So this will provide access for public investors to participate in the Clearwater play or it'll add a new player in the public landscape. That 100 net sections of Clearwater land has what we view as 370-or-more identified drilling locations. We've got extensive infrastructure to drive strong capital efficiencies and good line of sight to add exploratory acreage, and perhaps, explore secondary recovery potential. The growth plan will be organic initially, and we'll be targeting high growth, over 2,000 barrels a day estimated in 2022 from our current levels of about 350 barrels a day. The single-well drilling economics are highly profitable. Full cycle rates of return give us well payouts that are less than 1 year, and that allows us to reinvest the capital and continue to grow quickly. Less than 30% of our inventory is expected to be used up in the 5-year plan, and we expect to grow that inventory through -- as we continue to operate on a going concern and expand our footprint. And about 7% of the drilling locations are booked in the McDaniel reserve report today, and that's a fresh report that we had generated for the Clearwater assets effective June 1. The drilling development activity will be fully funded. The summer program actually is funded by a strategic GORR financing at Figure Lake. We announced that last Friday morning as well. We'll be drilling 4 wells in the Figure Lake area to advance that. We've already been drilling in our Marten Hills area. We've got 2 wells that rig released last week. Those are funded by Perpetual as part of the assets that came into the transaction. So we'll be rapidly growing without any new debt financing and building cash on the balance sheet very quickly. Our cash costs are expected to be in the $18 per barrel range, which is going to drive free funds flow very quickly. And Rubellite's going to be in control and -- of our pace and timing of development and will operate at 100% of the assets. The capitalization, as I mentioned, the balance sheet is conservatively capitalized. We'll have about $12 million of cash pro forma, the transactions on the balance sheet in mid-September. And we've secured a $3 million committed bank facility that we'll enter into at the time of the closing of the financings again in September. We will plan to do some hedging to ensure that we can execute the production ramp-up as we've envisioned. And certainly, as we grow cash on the balance sheet -- at the current strip prices, the forecast would be that by 2023, the cash on the balance sheet should be material. We'll either be allocating that for accelerating organic growth, additional exploration, acquisitions and potentially, even returns through distributions to shareholders. And as I mentioned on the ESG front, we certainly have strong management alignment. Up to $38 million of the equity financings will actually be Perpetual shareholders -- or insiders, sorry. Using this multilateral drilling technology, which is really what's unlocked the Clearwater play, we have a very environmentally responsible development plan, very limited surface footprint. And there's no fracking in this play. And so we don't use any material freshwater. And in terms of governance, we do have 3 independent Board members planning to join the Board in late August when Rubellite has actually -- shifts after the plan of arrangement from being a wholly owned subsidiary of Perpetual to its own going-concern entity owned by the shareholders at that point in time -- Perpetual shareholders at that point in time. So to -- for those of you that haven't been following the Clearwater play, it really is one of the hottest plays in North America. And that's really driven by the very attractive single-well economics of the play. Since 2017, there's been over 500 wells that have been drilled. The production levels have grown from virtually nothing to over 40,000 barrels a day currently. And certainly, with 16 active rigs in the Clearwater play in Q1, and we expect more as conditions have dried up and Q3 drilling programs are starting, we expect to see that growth continuing. There are some public entrants, and there's been some significant investments that have shown up over the last 6 to 9 months. And those, I think, are also speaking volumes about the attractiveness of the play. In terms of Rubellite's asset profile, we have 3 main operating areas that I would call sort of development delineation stage. Ukalta, which I spoke about a little bit earlier, is pretty much proven up and poised for growth. We have 6 wells on production there -- offset production from an area competitor. And we view about 120 prospective development locations in the area. At Marten Hills, where there's been a lot of industry activity, we have quite a small land position. That has 2 now wells that are just going to be producing. Just as I mentioned, we rig released them. 4 net wells -- we're 50-50 with a partner in that area. So 4 net wells are actually booked in the reserve report. We've got a little bit of additional drilling inventory there as well. But the Marten Hills opportunity actually not only gave us the opportunity to capture some value on the 3 sections that we have there, but also to earn the opportunity to explore in the Cadotte and West Dawson areas. And we plan to do that as we progress over the next couple of years. And then Figure Lake is the area where we have the most potential, I would say, 68 net sections captured there. There's just 1 well on production now; 5 though by the time we get through the financing as we're planning a 4-well drilling program this summer on 2 separate pads. Eight of the locations around one of the pads are booked as reserves, and the other 200-plus locations are actually what we would call inventory. And we're hoping to get a very strong understanding of what the potential of those assets are from the first 4 wells that we're drilling. So in terms of the indicative development plan, we guided to in 2022 and 2023 about 20 to 24 wells per year in our press release. And really at that same level of activity, over the 5 years, we expect to drill about 100 net wells or spend about $145 million. So not to go too deep into each of the assets, but it will be preserved in the slide deck. We'll just walk through the 3 properties. Ukalta, the -- has 3 zones. The main zone that we've got certainly the most confidence in is the lower sand zone. There's 17 producing wells in that zone now. The upper Clearwater sand, which is penetrated by many wells through the area, not only older shallow gas wells but also some of the new wells that have been drilled just for the Clearwater itself. So we have a good line of sight to what the zone looks like on logs, just one producing well through that, but it's a little thinner and slightly less prospective than the main lower sand that we've been pursuing. And then the third facies on the west side of the property is our channel sand, and we have captured a number of sections of land on that and have identified about 11 locations. So in terms of the value potential of Ukalta, we have laid out a development plan which is fairly extensive over the -- highlighted in -- on the map sheet here. That would cover a large portion of the lands that we've captured. You can also see the offsetting drills by the area competitor in that area. We plan to drill 8 wells in the fourth quarter, and that should kickstart the production profile again here, assuming the type curves that we've forecasted and -- which are very similar to what McDaniel has used in the reserve report. So just looking at the economics, and all 3 of the plays look -- they're slightly different type curves -- or I shouldn't say the plays, but the properties, slightly different type curves that are matched to the actual performance and estimates of the offset producers in each area. But for Ukalta, we're expecting IP rates in that 140 barrel a day range, ultimate recoveries of about 140,000 barrels and very strong NPV10 values at current strip pricing of a little under $2 million a well. At Figure Lake, much more extensive property land base there. And we also have a very extensive road infrastructure, which will, in the future, I think, help us capture the value as we build into not -- beyond the reserve report and into what we would call our unbooked inventory. But there's significant infrastructure in the area. Again, 2 zones. There's a valley fill zone and a shoreface sand zone, just 1 producing area -- or 1 producing well. It's a 2.5-leg well in the south end of the map sheet. And as I mentioned, we'll have 4 wells drilled here by the time we finish the summer. In terms of the type curves in this area, McDaniel has utilized the offset producers to the extent that it can. But the -- in terms of how analogous it is to what we have at Figure Lake, we do think we have a thicker zone, and the oil quality is fairly similar to some of the offsets that McDaniel has used in their type curve forecast. So our internal type curves are slightly stronger than what we've seen in McDaniel's. But the McDaniel economics, which are highlighted on the slide below, are also very strong. And then finally, at Marten Hills. Again, just 3 sections of land, 1 quite thick zone that we're targeting in there. And we have drilled, as I mentioned, the 2 wells on the south end of the pad. We're offsetting -- Deltastream's got some wells to the end lands to the west of us -- or sorry, the east of us and Headwater to the west of us. And we think that -- and McDaniel's also agrees as they booked it as reserves. But we think that we've got some significant opportunity to add some value with the drilling in the short term there. So in terms of the plans for Marten Hills, 2 of the wells in the south end on -- south that are actually down, and we're planning to return to this area in Q1 of 2022 and drill 4 additional wells. And that will complete the earning requirements that we have for the lands at Marten Hills. So finally, to wrap up with Rubellite, a little bit of a net asset value buildup to work through the pricing that we got to on the $2 per share NAV level. So all components of the financing for the Rubellite transactions are priced at that $2 per Rubellite share. And when you factor in the proved reserves, the probable reserves at a 2P NPV10 valuation at current strip pricing, plus the undeveloped land, which we had independently assessed in June, again, here by Seaton-Jordan and consider the corporate attributes that we have with equipment that we'll deploy for the 2021 drilling program seismic that will be utilized -- and it's proprietary seismic, but it will be utilized to develop those reserves. And then ultimately, as we convert the Figure Lake land into production, we'll be using that road infrastructure to -- and upgrading it so that we can improve our capital efficiencies going forward there. So all of those elements actually build up to a range of values in the -- sort of approximating around $2 per share. And when we looked at that along with all of the precedent transactions in the Clearwater, in the area, other oil and gas trading metrics, et cetera, the $2 share valuation was determined to be appropriate. And that was certainly ground truth when we did the sub-receipts financing that closed and was announced last week as well, raising the $30 million. And investors actually agreed that we'd hit the mark with the value proposition. So lots of opportunity, but very much had to establish a fair value for the assets as they were in Perpetual today. So that's the Rubellite transactions, and we'd be happy to answer questions about that down the road. But I am going to spend a little bit more time on Perpetual as well. So post the Rubellite transactions, Perpetual is still a very strong entity. In fact, if you didn't know much about the Clearwater assets that we had been accumulating over the last 1.5 years, you would actually maybe think nothing has actually changed for Perpetual because we still are exposed to our West Central liquids-rich gas in the Edson area and the multi-zone potential that comes with that as well as our medium to heavy oil in the Mannville region and then, of course, for the longer term, our bitumen assets. So this chart just really describes all of the operating parameters of the asset base. Going forward, we will be around 5,800 BOEs a day, and that will grow as we invest in Edson in the capital program in Q4 here. We have a rig arriving next weekend, I believe, to actually start that program. We have one more carried well there from our partner, and then we'll be participating in the joint venture going forward. We have a significant inventory of locations there as well, both at Edson and at Mannville and then, of course, a very significant opportunity in our bitumen resource play, and we continue to try to advance that. So in terms of the balance sheet, post the Rubellite transactions, the balance sheet is really repaired with adequate liquidity to capture the value of the assets that we have. Our proceeds from the transaction net of everything are actually about $52 million. We will use those proceeds to repay $38.5 million on the second lien loan and also materially reduce the bank line. That bank line will be drawn again as we invest to fund the Edson drilling program, but we'll have ample liquidity to execute that. So just in terms of what the balance sheet looks like, we've got a first lien bank line that will -- with a $17 million syndicated borrowing capacity. We've got the $45 million -- second lien term loan is actually settled. And really all that will remain on that is $2.7 million of the 8.1% second lien term loan. We have the ability to pay that in kind and repay it at any time prior to its maturity, which is December 31, 2024. So we've got good term on that. There are contingent payments that would become payable, up to $4.5 million over 3 years, triggered by various commodity price levels. But the max contingent payments will certainly be manageable by the cash flows that we should see -- or the fund flows that we should see if we are actually realizing those commodity price levels. And then finally, on the third lien, we have $35 million that remains outstanding. Those were refinanced in January, and they're termed out to January 2025, and again, with the ability to pay those in kind if required. So the balance sheet is -- certainly still has the 3 tranches, but all 3 tranches are becoming smaller and more manageable for sure. And at the end of the transactions closing in September, we should have about $59 million drawn, so a 45% reduction from where we were at during Q1. In terms of Edson, I won't spend too much time on here. But the plan is to carry out the one carried capital well that was part of the sale transaction, and that will be in Q3 of 2021. We've been very happy with our partner there. Tourmaline has definitely brought the cost down to drill complete and tie in those wells by 25% to 30%, and that certainly translated into strong improvement in the asset value of the assets that remain for us. And that was certainly envisioned when we did the transaction as we're partnered up with a capital execution machine in Tourmaline. The plan at East Edson will be to drill to fill that existing infrastructure, and that will be a plan on an ongoing basis. And we'll basically be harvesting then the property level free funds flow. It takes about 6 gross wells a year, we believe, to get to that stage. And certainly, the natural gas price rally and improved NGL pricing is something that we'll be very exposed to through this property. And it's about $3 million of incremental cash flow for every $0.25 per GJ and realized natural gas prices. In terms of the value that we have recorded or at least recorded in the reserves at Edson, we're now, being adequately capitalized, able to capture all of that. And we've put down here the -- basically, the mechanically rolled forward reserve report at June 15 strip pricing. You can see that on a PV10 basis, the total reserves are evaluated to be about $125 million of value and on the 3 consultant average pricing, a little bit stronger on the PV10 basis. So in 12 to 18 months, East Edson is going to be generating over 5,400 BOEs a day of production. That's about 16 barrels per million of liquids, and 64% of which is conde. Operating netbacks are kind of in that $23 million to $28 million per year range. And -- so significantly in excess of the spending of about $12 million a year, net for the 6 gross wells. At Mannville, there's a lot on this slide, but really just to say that the production in this area is about 1,100 BOEs a day. It's mostly oil now, although we still have legacy shallow gas. We've got 5 oil pools that are producing, and we've also got a little power generation facility there that has been benefiting from strong electricity prices as of late. There's a large oil in place there. We do have most of the pools on waterflood, and we're actually seeing strong waterflood performance and an improvement in the recoveries there, and that's been adding to our recoverable reserves year after year. Development here has been using single laterals and lined, but we may have the ability to use the multilateral technology in some of the thicker tight sands that we see. We'll certainly be considering exploratory work in that regard. The big project for 2021 is this battery consolidation project to reduce our operating costs and then also to double up on our ARO execution and fully utilize the site rehabilitation program funding that's coming from the Alberta government. And that helps us to reduce that nonreserve ARO and eliminate our carrying costs there. So in terms of the value of the Mannville asset, with all of that battery consolidation work not really incorporated yet because we haven't seen the significant cost savings that we think that we'll see through that, we're estimating the value of that property from a -- on a June 15 strip pricing, the reserve value anyway, to be about $32 million. That doesn't include any of the unbooked inventory locations that we've identified as -- or any additional waterflood work. In terms of the capital spending program, although this is not guidance, this is sort of an indication of our intentions once the financings have closed. At West Central in Edson, we expect to finish the last carry capital well and participate in the 3 nat or 6 growth sort of drill to fill wells in that Q4 time frame. At Mannville in Eastern Alberta, we'll be spending on the capital -- or sorry, battery consolidation program. But that's mostly operating -- recorded as operating costs as opposed to actual capital. And then certainly, we'll be spending on our ARO activity. We forecast about $2.2 million. About $1.2 million of that is expected to be funded by the SRP program. So putting all of that together in terms of what production will look like, maybe a little bit of a look back is in order. Our first Clearwater production really didn't come on until Q4 of 2018 -- 2019, and our sort of corporate production at that point in time was around 9,000 BOEs a day. We had the sale of the East Edson property in April of 2020. We also shut in some heavy oil volumes in response to prices in that April 2020 time frame as well. Slowly, we brought that production back on. We've had the investment, that carried capital investment, that has brought us sort of to this 5,300, 5,400 BOE a day range. And now through the Rubellite transactions, we believe that we'll be able to, one, grow the Clearwater play again through Rubellite, and that's the dark green bars that you'll see. With the investment program that we're planning, we should see that grow materially, but also, two, to grow the Edson property by participating in the development program there. And so both the Perpetual and the Rubellite production profiles will increase. And really, by the end of Q4 of 2022, we expect that we'll be back -- in the combined entity to -- in excess of where we were in 2019. So from a sum of the parts buildup on the net asset value for Perpetual post the Rubellite transactions, we start with our balance sheet on the left-hand side, where we've got our multiple levels of debt, some losses in our market diversification contract and our hedge book and also some nonreserve ARO that isn't inclusive in the reserve report specifically. So liabilities then build up with the proved reserves and the probable reserves that we have recorded in the Perpetual assets post the transaction; and then also in the undeveloped land, our bitumen project; and also a notional $2 million amount for the Rubellite share purchase options that we believe will be translated into additional value for the shareholders over time. So all of that rolls up to be about $1.90 per share net asset value for Perpetual post the Rubellite transactions. That's based on strip pricing. And then if you consider the opportunities beyond the -- what's recorded in the reserve report, we've got room to materially grow from there. So to wrap up, post the Rubellite transactions, Perpetual still has very high-quality assets. We've got a diversified resource-style asset base for short and long-term value growth; Edson, Mannville; meaningful exposure to the Clearwater play through the Rubellite; share purchase options; and then prospects for new technology-driven ideas. We have a track record of operational performance that is excellent in our chosen strategies. The G&A is rightsized for our -- and optimized for our asset base. And we have a focus on ESG performance that we've always had really, but an ability to fund even further advancements on that. We're capitalized for success within Perpetual. The leverage ratios are normalized. We've got runway to our debt maturities. We've got liquidity to invest and line of sight to free funds flow for further deleveraging, especially if oil and gas prices continue to be strong. So in terms of the value potential, the reserve base net asset value is certainly significantly above our current trading price and some value to be captured and converted in that front. And also shareholders have the opportunity to directly own 45% of an exciting new growth entity in Rubellite. So Rubellite really enhances the value for all our stakeholders and positions Perpetual very well for value creation going forward. And then specifically for Rubellite, really, I think this junior oil and gas company is going to have the ability to create differentiated value for our shareholders. We are a pure-play Clearwater asset base, a robust organic growth profile, fully funded to unlock free funds flow very quickly. With the conservative capitalization, we should be able to do some other things. And certainly, management is aligned to capture the value and -- for our shareholders and our other stakeholders going forward. And we're well positioned for -- to be leaders on the ESG front as well. So that was a long go through, but if anyone has any questions, I would be happy to take them now.

[Operator Instructions] At this time, there are no verbal questions. I'll turn the floor over for any questions over the web.

Thanks. We have one question over the web. It's -- the question is, why not just do all of this within Perpetual? Presuming you have lots of tax loss carryforwards in Perpetual, the rights offering with Perpetual, including the Rubellite assets would be more interesting. So I think the question is really why use this vehicle to unlock the value in the Clearwater. Did you want to take that, Ryan?

Go ahead.

Yes. No, I'll take that. So in terms of why do this through the new entity, as we went through the whole refinancing process, we -- first off, really, Perpetual didn't have any -- the liquidity that it needed to actually unlock the value of these assets and unlock the value that's inherent in our Edson asset and the other assets at Mannville. So we needed to find a way to enhance our liquidity. We went through a very detailed process on looking at all the different refinancing options, and it really became evident that the best way to improve that liquidity, and really maybe the only way to improve that liquidity was to bring equity capital into the asset base. And really, what we -- if we looked at the ability to bring equity capital through Perpetual, it would have been highly dilutive to the Perpetual shareholders. In fact, we couldn't have with the current structure actually been able to find the liquidity that we needed to actually adequately unlock the play. So having worked all of those ideas, I think, to the ground, this became the best one. And I think it's exciting because it allows our Perpetual shareholders to stay connected to that value-creation opportunity within the Clearwater. It brings in new equity capital to the assets, and it really makes, I'd like to call it a win-win-win for everybody. It's a win for the Rubellite shareholders, which are initially Perpetual shareholders going forward. It's a win for Perpetual. And it's a win for all the other stakeholders of Perpetual as well, the creditors. The -- it allows us to continue to meet our obligations on asset retirement obligations. And really, it's a win-win-win every way you look at it. So there's another question on the webcast, which says, do you think the potential to expand in the Clearwater will be focused in the Greater Jarvie area or elsewhere? So the Greater Jarvie area is actually where our Figure Lake asset is. We also have 3 or 4 other sections that are within the Greater Jarvie area to the west of Figure Lake. We'll -- that will be a focus area. We're very excited about what Figure Lake has to offer. We do have some expansion opportunities in that region, for sure. We're also interested in the lands that we have in West Dawson and Cadotte though to the north. Those are exploratory now. Some of the acreage is being -- I wouldn't call it fully derisked, but we're learning things from other competitors that are putting wells down in those areas. And particularly at West Dawson, we're just a couple of townships north of the Peavine area, where Baytex actually announced a couple of strong wells. They're certainly been drilling in Cadotte as well. So we are excited about that as an exploration area as well.