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

My name is Su Riddell Rose. I'm the Chairman [Audio Gap]. At this time, I would like to introduce [Audio Gap]. Starting with [Audio Gap] Bob Maitland, Geoff Merritt [Audio Gap]. We also have some of our officers in the room. [Audio Gap] Our Vice President, [Audio Gap]; Ryan Goosen, our [Audio Gap]; Jeff Green, our Vice [Audio Gap] Services. [Audio Gap]. Mr. Maitland is not standing for re-election [Audio Gap] and Perpetual would really like to extend our [Audio Gap] for his 14 years [Audio Gap] as a member of Perpetual [Audio Gap] including in the role of [Audio Gap]. Rob has been steadfast in his commitment [Audio Gap] stewardship and price cycles that we've experienced [Audio Gap] his time and efforts and [Audio Gap]. So today's meeting has 2 parts. The first part will deal with the formal part of the business [Audio Gap]. Second part will include a presentation. [Audio Gap] We'll now begin the business portion of the meeting. Any shareholder or duly appointed proxy [Audio Gap] welcome to ask it. [Audio Gap] Item of business. However, if you wish to make [Audio Gap] I kindly ask that [Audio Gap] in order to expediate the shareholder meetings [Audio Gap] recorded. However, no one attending is permitted [Audio Gap] any audio recording device or [Audio Gap] we would also like to remind you that our answers to your questions [Audio Gap] by its very nature that [Audio Gap] forecast assumptions and [Audio Gap]. The meeting will now come to order. I'll ask as the Chairman of the meeting and with your approval, I'll ask Christian [Audio Gap] corporation's legal assistant [Audio Gap] secretary of the meeting and Bart Wingerak, representative of Odyssey Trust Company. [Audio Gap] I've received confirmation from Odyssey as for the mailing of the notice of the [Audio Gap] holders, the management, [Audio Gap] notice of access notification [Audio Gap] as applicable to shareholders and compliance. [Audio Gap] Business may be transacted at this meeting if [Audio Gap] are present, holding or representing by proxy, not less than [Audio Gap] is entitled to vote [Audio Gap]. I've been advised by the scrutineers that there are present by proxy a sufficient [Audio Gap] shares entitled to vote at the meeting. Accordingly, I now declare that the meeting is regularly called and properly constituted [Audio Gap] voting on the election of individual, Directors will be conducted [Audio Gap] in addition, the approval of the [Audio Gap] share option plan and the unallocated rights under the corporation [Audio Gap] all be conducted by way of ballot of [Audio Gap] voting on the balance of the matters to be considered [Audio Gap]. As the first item of business, I'd like to present the financial statements to shareholders, which include the auditor's report and the financial statements of Perpetual for the fiscal year ended December 31, 2021. A copy of the financial statements and the 2021 annual report has been mailed to each registered shareholder and there are extra copies of the financial statements [Audio Gap] at the back of the room. The next item of business is the election of Directors of Perpetual. In accordance with Perpetual's bylaws, the Board has fixed the number of nominated Directors to be elected at this meeting at 5. Accordingly, 5 Directors are to be elected at this meeting. The only person -- persons who have been nominated and stand for election as Directors of Perpetual and in accordance with the procedures set forth in the advanced notice provisions contained in Perpetual's bylaws are the nominees set forth in the information [Audio Gap]. May I have a motion to elect these nominees as Directors [Audio Gap]. There being no further nominations delivered in accordance with our bylaws, I declare nominations closed. All registered shareholders who have not already submitted proxies were provided with a form of ballot for their use in connection with [Audio Gap] when they register with our scrutineer before entering the meeting. If any shareholder or proxyholder has not yet completed a balance [Audio Gap] ballot, please identify yourself. [Audio Gap] Have all the ballots now been collected. We will now allow the scrutineers time to tally the ballots. And in the interim, we'll carry on with the next item of business. I will now entertain a motion for the appointment of auditors to the corporation. [Audio Gap] Thank you. Is there any discussion or question from a registered shareholder or proxyholder? All in favor then signify by raising their right hand. [Audio Gap] Any withheld? The next item of business to be considered is the adoption of the resolution approving all unallocated options under the Perpetual share option plan, all as more particularly described in the information circular. [Audio Gap] Thanks, Josh and Lewis. Does anyone wish the full text of the resolution read? Is there any discussion on the motion? Great. We will now allow the scrutineers time to tally the ballots. And in the interim, we'll carry on the next item of business. The next item of business to be considered is the adoption of a resolution approving all unallocated rights under the Perpetual rights -- restricted rights plan, all is more particularly described in the information circular. [Audio Gap] Okay. Thanks, Brad and Jim. Does anyone wish the full text of that resolution read or any discussion on the motion. All right. Well, I have received the scrutineers report on the votes conducted by ballot. And with respect to the ordinary resolution electing each of the nominated Directors, I'm advised by the scrutineers report that the nominated Directors have been duly elected to serve as Directors of the corporation again until the next annual election of Directors or until their successors are elected or appointed. And with respect to the resolutions to approve all unallocated option under the company's share option plan and restricted rights plan, I'm advised by the scrutineer that these resolutions have been duly carried. So we'll be filing the vote results in a press release and SEDAR filing after the meeting. So at this point, we've now completed the business portion of the meeting. And as there is no further business to come before the meeting, with the approval of shareholders, I'd like to declare this meeting concluded. [Audio Gap] Okay. Thanks, Rachelle and Ryan. I don't think anyone will oppose that, but all in favor, signify by raising your right down. Any contrary? I'll declare this meeting concluded. And I'm now really delighted to give you a little bit of an update on what Perpetual has been up to the last year and I think more importantly, what we're going to be, what the rest of 2022 actually looks like. So I'd like to start with thank you for all of you that have made time to attend today. We're delighted actually to be hosting the meeting after 2 years now in virtual form again, in-person. A special thank you really to our Perpetual team. Many of you are here in the room. Some of you are listening online or will listen to the playback. And our team here is incredibly committed. We've been through a lot of ups and downs together and it's a really fun time I think, to be back and working together on some of the exciting things that we've been doing. And anyway, on behalf of our shareholders and our other stakeholders, your efforts are just really very much appreciated. I'd also like to thank our professional service advisers, our bankers, KPMG, our auditors, McDaniel, our independent reserve evaluators. There are a number of folks here from investment firms that have helped us raise money in the last year and we're very appreciative of all of that and some representatives listening online from our talented legal teams that have been many actually as we worked through a lot of creative deals, I think, over the last maybe decades, but actually, particularly over the last year. And we have a really good turnaround story to share with you today as we've come out of the challenging times of the last 2 years, what I would say has positioned to really thrive. Those dark days of the oil price collapse in March of 2020 are really firmly in the rearview mirror now. And today, I really want to share some of the exciting new things that we're doing going forward. I would draw your attention to the forward-looking advisory statement next, but now it takes 9 pages in our presentation deck. So I've moved it to the back. So I'm going to ask you to review that at your own time at some point in the future because there definitely will be forward-looking statements today. Okay. Well, probably the single biggest accomplishment last year was really our Rubellite transaction. And when we reflect back to this time last year, we were working hard to refinance our second-lien term loan. It was a $45 million loan. It was really actually literally passed its maturity date with extensions. Our bank line was stacked up behind that. We had spoken to all sorts of different investors in the debt refinancing world. And it looked like we could get that done. It was going to be expensive. It -- but universally, there was a lot of interest in, in these emerging Clearwater assets that we had compiled and that led us into what I would call Plan A and we really launched Plan A in June and publicly launched it in July. We incorporated Rubellite with our Clearwater assets. We worked through a plan of arrangement to transition Rube to a new publicly-traded company in early September, and we raised some equity dollars on the back of that. All done at $2 a share for Rubellite, but it included a broker-private placement, which Peters & Co. helped us with, a non-brokered private placement that kept pace on that and then an arrangement warrant financing. So all of our shareholders were given the opportunity to own up to 46% of the new entity. So importantly, for Perpetual, really what Rubellite did is, it provided us a full capital solution to restore our business plan. The cash proceeds of $53.6 million were brought in. We reestablished a sustainable cost structure, eliminated the majority of our second-lien debt and our interest, of course, related to that and also dropped our bank interest. We, most importantly though, restored our liquidity so that we could invest in the assets and the opportunities that were in front of us. And we did actually -- we were able to keep pace with our JV partner at East Edson and get back to executing that drill-to-fill strategy at Edson and grow our production back and that's translated into stronger production, which in the face of the improving commodity prices that we're experiencing right now has really turned out to be a wonderful opportunity for us. So we surface value for that -- those Clearwater assets. For all of our Perpetual stakeholders, directly, the shareholders could own up to 46% of the Rubellite shares at that point in time. But corporately, Perpetual retained 4 million, what we call Rubellite share purchase warrants. And those actually resulted in about 7.3% ownership of Rubellite at that time. And then we also entered into a management services and operating agreement. So Perpetual actually, and our Perpetual team manages all of the activities for Rubellite. So we're very much connected to what's going on there. So I said the timing was good. And really, this is a long-awaited opportunity I think, for us. We've been a natural gas producer for over 20 years or almost 20 years, I should say, of which the first 10 were great and the last 10 were not very good. And it has been a very challenging environment for us as we've transitioned our asset base. But here we are realizing the macro environment and we're now experiencing prices at their highest levels in over a decade. Yesterday, AECO gas was trading at close -- over $8. So really the foundation of that is supply-demand fundamentals that are encouraging in the market. And they're also starting to bring the forward market prices up to -- U.S. production is actually at record highs, but the supply growth has really just been keeping pace with demand growth both in North America, but really global demand growth. We've seen LNG exports and Mexico exports increase very significantly over the last 5 years. And now we've really moved into what we would say is a foundational undersupply situation. And that's really what's exploding -- that tight balance is exploding markets. And in the micro, what's happening right now is we've had a very late end to the winter season, extending with -- cold weather extending into May here. So that's delayed the start of the storage season. We're already at record low storage levels and then people are looking forward and say, well, how we usually solve that problem is that we set in -- or we don't have gas going to power demand and coal kind of fills that spot and then gas can go to filling storage. Well with U.S. coal balances that have -- and I think we all know what's happened to investments in coal, we're actually seeing that ability to -- from the coal to gas switching -- or gas to coal switching that would normally take place is really not that available to us this year. So we're enjoying some very strong pricing on the natural gas side, which we're excited to have production to play into. And then on the oil side, which is a smaller piece of our business at Perpetual, but still very material. You can see on the chart here, the low of oil prices in March of 2020 with the collapse related to COVID shutdowns and complete demand destruction and then also the OPEC-Russia price war. From there, we've seen a steady build, 2020, a little bit better, 2021, things really stabilized and started to improve and then in 2022 year-to-date and particularly with the Russian invasion in Ukraine, low inventories have really developed and strong demand for products. And so we're really just seeing an explosion in price. And the back end of the curve is actually although tempered somewhat is following that up. So it's been very exciting. And I think what's actually unique in this wave of -- or this cycle, I would say, for oil is that Western Canada is actually finally participating in that. We've got the Canadian dollar weak on a relative basis for this kind of oil price environment. And then we finally, have enough egress to actually move our oil out. So our differentials are relatively normalized sort of reflecting transportation cost. So while we've seen other [ $100 ] oil price environments, we had Western Canada didn't always get to participate in that, but this is a little bit different from that perspective and it's certainly improving our bottom line. So Perpetual is really positioned well, I think for value capture when you factor in the Rubellite transaction, what it did for our balance sheet, the investments we've been able to make to grow our production. We just put out our Q1 results on May 4, and our adjusted funds flow was up materially at $14.1 million for the quarter. And so looking forward to that and thinking about our balance sheet now, which is also -- we've seen debt come down by over 50%. You combine those 2 things and really going forward, our balance sheet looks very healthy. We're growing our production. We've got enhanced netbacks with the cost savings that we've experienced due to interest costs coming down, G&A coming down. So really, I think you could summarize by saying we actually cut our debt by 50%. At the same time, we grew our production by 85%. And so the future is looking a lot brighter from a funds flow perspective. And that's really translating in our forecast to actually delivering free funds flow, which we're partially investing and then also continuing to delever. So we've got our -- our asset base is really 2 proven properties at Edson and Mannville. I'll talk more about those going forward, but there's exciting things going on at both of those properties. We've got a spectrum of other new venture opportunities for the longer term. Our bitumen property, we've got a few helium prospects, a couple of clean hydrocarbon new ventures that we've looked at and we're certainly actively exploring as well. So going forward, the work that we've done over the last 2 years and combining that with commodity prices where they're at, the future is definitely looking bright. So I'll talk to you a little bit today about our strategic priorities for 2022. They're really -- you'll see bits and pieces of these show up through the presentation. But we're really focused on maximizing our funds flow from Edson and also from Mannville, reigniting our exploration efforts for tight oil and gas, advancing those technology-driven, diversifying new ventures that we've been working at and then further strengthening our balance sheet and managing risk. So what do we look like post the Rubellite transactions. Well, financially, we have an enterprise value today of about $128 million. That's comprised of debt of about $49 million. That was a Q1 -- end of Q1 number. And then market cap is around $78 million. So those things combine for the $128 million enterprise value. Management is very much aligned with our shareholders. We own about 47% of the shares. We also own a bunch of the senior notes that are actually on the balance sheet. And so I think decisions that we're making as management are also good for our shareholders and other stakeholders. In terms of our assets, we have a diversified asset base where it's largely resource-focused, we would call it. We've got large oil in place in Mannville and certainly a large gas accumulation, liquids-rich gas accumulation in the Wilrich and Edson and some -- our assets are entirely in Alberta. In West Central, that's where we have our Edson in property exposed to liquids-rich natural gas. In Eastern Alberta, our Mannville property is heavy oil. The production split is about 80% at Edson, 20% at Mannville and from a value split because oil is still a little bit more valuable than gas on a BOE basis, it -- the value of Edson is about 75% of our total base based on the reserve report anyway. In the first quarter, our production averaged about 6,800 BOEs a day and year-end reserve report, roll forward actually is forecasting about 7,000 BOEs a day for the remainder of 2022 based on the spending that was in the McDaniel report. Our spending profile is slightly different than that. We have about 31 million barrels of reserves recognized in the McDaniel report and adjusted for that April 1 effective date and using the April 1 price deck for the 3 Consultant Average that would put our reserve value at about -- a little over $300 million. And then we also have our bitumen resource in Northeast Alberta. We have several properties that we've been moving along slowly, watching technology and the goal is in the long term to turn that into value as well. So a little deeper dive at East Edson. As I mentioned, this is a low-cost liquids-rich natural gas. We're primarily producing from the Wilrich formation. In April of 2020, we actually sold 50% of this property to our partner, Tourmaline and they've done a very good job, actually operating at on our behalf. We've been able to participate with them. The arrangement actually involves the drilling and carrying us in the next -- the first 8 wells that were drilled in the property. So they executed that in 2020 and early 2021. And then in late 2021, we actually participated in the next 6 wells or 3 net to fill that 10-3 gas plant. So with the size and scale of Tourmaline's other programs, we've actually really benefited from about close to 30% drop in capital cost and the operating costs are also back in line, particularly since we've basically filled the plant infrastructure and it's a largely fixed cost asset base. So the strategy here is really -- we've rightsized the infrastructure to the assets. We're going to continue to drill to fill in a development style over the next several years, depleting probably our Wilrich inventory and then eventually moving into our secondary zone inventory. And this year, in fact, we're planning to drill 7 wells, 3.5 and 1 of those will actually be a Notikewin test later in the year. So we're excited to see how that turns out. And I think there's quite a bit of secondary zone potential that we'll see how that translates. So the investments here, the drills are highly profitable. The PV10 varies depending on where we are from kind of $5 million to $15 million per location and rates of return are in excess of 200%. As I mentioned, the liquidity injection from Rubellite really helped us get in a position so that we could fund that program. That was our primary objective last year and we were able to do that and participated in the Q3 and Q4 drilling program. And that has actually converted our unbooked or our booked inventory into PDP and also allowed us to bring some of our unbooked -- booked inventory into our pad locations. So where we're sitting right now from a value point of view is PV10 on the McDaniel 3 Consultant Average price deck, it's about $230 million of value. And if you run that out at strip prices last week, it was about $270 million of value. So I'm pretty sure that would be a little bit up this week. Prices are so volatile for oil in particular or for gas, particularly. On the oil side, our main property, as I mentioned, is Mannville. We've had this property for a very long time. It was a shallow gas property that we looked to find some of the or bring some of the heavy oil on production. So we originally started developing this in maybe 8 or 9 years ago and we've pretty much brought all of the resource that we've discovered in place on to production of some kind, mostly 3 of the 5 pools are actually on waterflood and we've got a development drilling plans in the other couple. So it's a large oil resource, over 190 million barrels of oil in place. And our goal here is to continue to find ways to get more and more of that oil out at a reasonable cost. So in 2022, we took a I guess, a bit of a play from our -- or a page out of our Clearwater playbook and we tried some multi-lats in the Sparky formation here. Early results are that those are working out very well. We put a well into 2 different pools. So we drilled 2 wells and the early production data, which just came on in the last 6 weeks or so is quite positive. And so we're excited about the follow-up opportunities that we'll have there. The Sparky B pool well, which was drilled with OBM, actually, we had released IP30 rates of about 247 barrels a day. It came on production after its OBM recovery on April 1. The second well, which we actually drilled with the KCL-Amine system was 60 barrels a day, and it's cleaning up. And so we think that there's opportunity to do more of most likely the OBM type of style drilling. We've got 4 wells planned for the rest of the year. So in terms of value, the reserve value at Mannville, again, with that April 1 price deck is about $77 million. We have some ARO here that we've been dealing with the -- non-producing ARO where we think that the opportunities are fully depleted. And so we've been slowly but meaningfully, actually reducing that. And so when you sort of factor that work ahead of us, the reserve value here would be about $70 million. So in terms of capital spending, we're planning -- we've put some guidance out. We're planning a $30 million capital program for the year, of which $5 million was in Q1, so go forward another $25 million. We've got 9.5 net wells total planned, of which 1 would have been clocked in that Q1 drill program. The other one actually rig released just in Q2, the other second drill at Mannville. So total drilling, we're going to get back to work, I think in West Edson in late June here and then in -- at Mannville sometime in Q3 as well. So we'll start to see the fruits of that labor showing up in terms of translating into increased production. We've guided to average production of 6,500 to 6,750 for the year and we're expecting we'll be at the top end of that guidance. So I think a little bit of a walk-through history where we've been and where we're going from a production point of view. You can see the chart, starts out with 2018 and 2019 production. We were in that period of low prices. We actually were allowing our asset base to deplete, trying to preserve reserves in the ground and waiting for a better day. And that was a very challenging time as that happened and lasted longer than we would have liked. And then as we came into Q2 of 2020 and the price collapse, we found ourselves in a position where we had to sell our Edson, 50% of our Edson property. But we've climbed out of that hole. We had oil shut-ins in Q2 of 2020 as well. And really, we've seen steady and progressive growth back in our production since then. And when we had our Clearwater properties, those started adding to our production in sort of Q3 of 2021 and -- sorry, as Rubellite as Q3 of 2021. And you can see, as I forecast Rubellite out on here too, by the end of this year, inclusive of the growth of the Clearwater that's being capitalized within Rubellite now, you can see we've more than restored our production to where we were in 2018. So that's an exciting story. But for Perpetual going forward, it's -- we're forecasting 25% growth in production in 2022 alone and line of sight to something similar in 2023. And then from an operating netback point of view, certainly, the top line is really largely impacted by -- that revenue line is largely impacted by price and we're seeing that increase. We've had some hedges on to lock in our cash flow Q2 and Q3 a little bit. But you can see in Q4 when those hedges fall off that really opens up for us. So we reported Q1 netbacks of about $28.80 per BOE and we see that continuing kind of through Q2, Q3 and then increasing in Q4 based on the forward strip. So we've been maximizing our revenue, obviously, through price, but also through our production and then reducing our costs as best we can. We've reduced our interest costs. The top-quartile operating costs at Edson have been reestablished by our production growth and then also our G&A is much lower. So the future is looking good. And that adjusted funds flow that is resulting from those increasing operating netbacks is marrying up nicely with our balance sheet. And so when you combine the debt reduction that we've had, which is significant and then think about the Q1 annualized funds flow, we're now looking at a net debt to annualized funds flow ratio on a Q1 annualized basis of 0.9x. And I think by the end of this year, we would forecast that to be closer to 0.5x. So our balance sheet is really healthy and giving us -- setting us up for some opportunities. So just to tie that all together, we do a little bit of a sum of the parts net asset valuation and all the balance sheet items are sort of listed in the column on the left of the screen and the assets build back up on the right of screen on a reserve basis anyway, and that's translating into what we would say on 3 Consultant Average pricing, about $3.80 a share at April 1. So lots of room to create some value for our shareholders as we are able to capture and turn that captured value potential into funds flow and other value opportunities. We've got high-quality assets. We're still meaningfully exposed to our Clearwater play through the Rubellite share purchase options. And we've got some prospects for the future, which we're excited about. We do have a track record of executing and operational excellence. We have creative and entrepreneurial team that actually make that happen. We're now well capitalized for success. Our leverage ratios are normalized. We have ample runway to our debt maturities, sufficient liquidity to invest in our assets and material free funds flow now for further deleveraging. So all of that combined, we think that we're trading at a fairly compelling discount to our reserve base net asset value and we have some other torque to strengthening oil and gas prices. So we're well positioned for growth and value creation for the future. So with that, I'd just like to turn it over if there's any questions. Jeff, has a microphone for us. Thank you, Jeff.

[Audio Gap] Lenders are these days not that receptive to ESG or because of ESG fossil fuel industry. Are you getting any blowback or any -- could you make any comments on the lending side of it and how you're finding that?

I think there's been a general flight away from particularly small oil and gas companies. And so our balance sheet getting stronger is well timed here. There are people that are willing to put capital or excited to put capital actually into oil and gas properties, but they tend to not be the large banks anymore. So we've had the opportunity to explore so many different pathways to finding capital and I think we'll be able to find things when we have good ideas to put that capital to use. And in the meantime, we're deleveraging at a great rate and I'm hoping at this time next year, our balance sheet doesn't look [Audio Gap].

I'm wondering how has COVID affected, say, your employees in the sense of with all the different problems over the past 2 years? Do you have the same set of employees sticking with you through the whole COVID issue that's come up? And also in so far as you need to hire skilled people who are accountants or geologists or people of [ shorts ] that you may need for your company, has the COVID problem made it difficult to find those people?

Yes, I can definitely put some color on that. So obviously, we were shut down like everybody from -- or shifted to working from home back in March of 2020. We've, over the last 2 years, been through multiple cycles where we've had people back in the office. And we've created basically a hybrid environment now where people are -- our teams in 3 days a week, Tuesday, Wednesday, Thursday and then Monday and Friday, they have the choice to work from home, which I think there was some wonderful things that were I guess, discovered in terms of the efficiencies of working from home at some point in time. And so we found that balance of being together some of the time and being able to manage your priorities from remote work at other times is a good recipe for us. So we're doing that through the summer and we'll see how that goes kind of going forward. In terms of the team, I can't say enough about how committed the team that we have at Perpetual has been, they're fantastically talented folks and they work hard every day. And we have lost a couple, not because of COVID, just because of -- well, but I would say maybe a few that have left the industry, it was a hard time. But we found some great talent on the accounting side to replace them. We've built a new a strong team, I think, going forward on our accounting and finance side. And so we're excited about that. All right. Well, with that, we'll call today to an end, and thanks very much for attending and participating.