Peyto Exploration & Development Corp. (PEY) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Peyto Q2 2023 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr. JP Lachance, President and CEO. Sir, please go ahead.

Thanks, Chris. Good morning, folks, and thanks for joining Peyto's second quarter results conference call. I'd like to remind everybody that all statements made by the company during this call are subject to the same forward-looking disclaimer and advisory set forth in the company's news release issued yesterday. In the room with me today, we have Kathy Turgeon, our Chief Financial Officer; Riley Frame, our VP of Engineering; Tavis Carlson, our VP of Finance; Todd Burdick, our VP of Production; Derick Czember, our VP of Land and Business Development; and Lee Curran, our VP of Drilling and Completions. Before I recap the quarter, on behalf of the management group here, I'd like to acknowledge and thank the Peyto team, as we always do, for their efforts over the past quarter, including our people in the field for their commitment to Peyto for their contribution to the successes that we enjoy. There's been a lot of talk about the impact of wildfires in this past quarter, and although it did affect Peyto's operations with some curtailed production, about 1.5%, and some increased trucking costs, I think the team did a great job, a really good job, redirecting production to the unaffected plants, warming up our refrigeration units to produce less liquids, remotely operating some of our facilities longer than we normally would, and always while maintaining safe operations. I think this is a really good example of how effective Peyto's strategy is around owning, controlling our infrastructure and our production. This is how we can make these operational adjustments easily and react quickly to these situations. So kudos to the team. AECO monthly gas prices averaged around $2.22 gigajoules during the quarter, yet we received an average price of around $2.72 a gigajoule, thanks to our mechanical hedging program. Although our diversification program and our extra Empress service didn't really pay off this past quarter since prices across North America were all quite low, we still have lots of exposure going forward to some of the premium markets such as Malin in California, Ventura and Chicago in the U.S. Midwest and Dawn in Eastern Canada. And we're getting closer to the start of our supply agreement to the Cascade power plant. The pipeline is built, and we're finishing up the connections at each end right now. And despite the fires and floods, we believe the plan's on schedule, and we expect to be to sending them some gas sometime at the end of this year when we'll expect to receive some premium pricing relative to the April forward curve. As a reminder, Peyto's -- Peyto's gas will be baseload supply for this highly efficient 900-megawatt power plant. So we'll be supplying it constantly while it's up and running. Despite lower realized prices and the impact of wildfires on production costs, Peyto was able to maintain a strong operating margin during the quarter at 70%, something we've been consistently delivering over the last 2 years. We moderated our capital program throughout Q2, and we only spent $82 million. Most of that was on wells, I think, about 88%. And production has stabilized around 100,000 BOEs a day. The effects of inflation seem to have steadied, and we're now seeing some efficiency gains in our longer laterals. We've been increasing lateral lengths over the last 1.5 years. But with inflation happening at the same time, it's tough to see the gains on a cost per unit length or a cost per stage basis until now. [ We've been ] cautious with our summer drilling program, and we're -- but we're ready to ramp up in the fall, assuming prices continue to climb as the forward strips suggests they will. We've seen some positive movement lately or this past week, but we're really looking for a sustained price support as a trigger. In the meantime, we have some solid hedges on for the winter. Over 55% of our forecasted gas volumes are at a healthy $4.77 an Mcf, including our diversification costs. Next summer is also well hedged for about 45% of our volumes at $3.69 per Mcf. Both of these are above the current strip, and when you couple this with exposure to the other exciting markets I mentioned earlier, it gives Peyto the confidence to maintain the dividend and continue to pay down some debt. And we can and we will react quickly if prices continue to rise as winter approaches. Coming up in this October, we're going to celebrate our 25th birthday, or anniversary. I think we're one of a handful of companies that still standing all this time. And we've stayed true to our strategy of offering long-term shareholder value even at times when it wasn't the cool thing to do. And we still believe that gas is the fuel of the future. And the build out of LNG facilities in both U.S. and Canada in the near term will enable us to be a preferential supplier of this fuel with our low cost, long reserve life assets for years to come. So I know this is a busy reporting season, so I'll keep it short and sweet at that, and maybe we'll open up the phone lines for any questions that shareholders might have. So Chris, can you turn it over to your questions?

[Operator Instructions] Our first question will come from Chris Thompson of CIBC.

First on Cascade, JP, you mentioned it sounds like projects on schedule on the Peyto side. So does Cascade intend to be up and running then by January 2024, or what's the status of that project right now?

Yes. I mean this is their project, but our understanding is that they are, and they will be ready to go here either at the end of December or the 1st of January of 2024. So that's how we're modeling our cash flows here in expectation that they will start off at that time -- at that point in time. We believe there -- yes, they're relatively -- they're on schedule for that period for sure.

And then second, I just noticed you drilled a couple of Dunvegan wells, you mention in your press release, and there's only a handful of these that you show as being kind of in inventory. Should we think about there being potential upside to your Dunvegan opportunities as you continue to explore this play?

Maybe I'll -- it's a good question. Maybe I'll ask Riley Frame here, our VP of Engineering, to respond to that one, Chris.

Chris, thanks for the question. Yes, at the time, we only have a handful of locations booked out here. So we'll continue to delineate this play as we go. Overall, I don't -- we don't have a massive inventory. But I think the way to sort of think about these locations is that they're very complementary to our current drilling program and infrastructure. And with the above average slip [ widths ] and really great economics, it's sort of something that we'll just continue to feather into our program as we go here.

Okay. And then just one last question for me. How are you thinking about production over the next -- over the second half of 2023?

I think, Chris, that we're going to be careful here. We're going to want to see, like I said in the opening remarks, prices continue to move to the upside. And if we see that constructiveness and we're seeing the sort of the strip as it's played out, we will ramp up here. But if not, then we'll hold things relatively flat. And that means we'll come back to you with some new advice around where we're going to land as far as production and capital goes. Obviously, if we don't ramp up, we're not spending as much capital either.

[Operator Instructions] Our next question will come from Hank [indiscernible].

I have a question regarding your payout ratio of 98%. And in light of that, how safe do you feel your dividends are in the next several quarters? Can you talk to that, please?

Sure. Thanks, Hank. Good question. Yes, we're fairly comfortable with our dividend levels because, remember, we -- as I mentioned earlier, we've hedged a lot of our production out there to give us security around our future revenues. Certainly that coupled with the -- with our low cost gives us confidence. Certainly prices are in contango. So if that materializes, not only will we be able to maintain the dividend, we'll also pay down some debt. But we're watching this carefully. So prices are important, and we're going to look at our capital program and make sure it still makes sense under these prices. I don't think anybody is getting us to drill wells and bring on a bunch of production at low prices, if that makes any sense. We'll just be very cautious and careful with our payout ratio in that regard.

So do you see yourself or you see the company attempting to reduce that ratio? It's -- from an investor point of view, it's getting a little high.

Yes, we've always actually ran that even higher than 100% in the past. I don't anticipate us doing that, and -- maybe in the short term, if we have the kind of timing of capital is such that we spend a little bit extra and -- to realize future volumes or future value and future revenues later. So I could see that maybe only on a short-term basis, but not over the long term.

Thank you for your answers.

[Operator Instructions] I am not seeing any more questions in the queue. I would now like to turn the conference back to JP Lachance for closing remarks.

Okay. Thanks. Yes. I have some other questions that have come in overnight through e-mail or to the website. So maybe I'll ask those. One of the questions was just around our royalty rates, they were down a little bit here this past quarter. We had a true-up, I think, of our royalty rate, our royalties with the government there, and maybe, Tavis, you can run us through there, what we might expect going forward over the rest of the year, on current [ strip ], is that a royalty rate we should expect to see or we're going to go back to something more in line with the past?

Yes, JP. Really 2 factors impacted our royalties in the second quarter. The first and the biggest reason would have been just the low Alberta reference price. It approximates AECO. So AECO was averaging $2.22 on the 7A and $2.32 on the 5A for the quarter. So I think the reference price that we were modeling was around $2.15, which would have been down from $3.50 in the first quarter. And then secondly, we did get our annual gas cost allowance adjustments in the quarter. And just based on higher costs over the last 12 months, the Crown compensates us for processing and gathering. So we did a get a true-up from last year, which lowered our royalty rate for the quarter. So I think going forward, I'd expect the rate to be around 9% to 10% for the rest of the year.

Okay. Thanks. And I guess that's an important point to make. With our hedging and those values being higher than AECO's prices, we kind of gain on both sides of that equation, don't we, with respect to the fact that we pay less royalties on the actual realized price that we're getting.

Yes, exactly.

Maybe one other question for Riley here. There was a question around the flare channel plays in the release. We talked a bit about that as well as Dunvegan, which was asked earlier. But what are we doing differently from these flare channel plays, to provide us some context? And what about future location counts and things like that? Riley, maybe you can answer that question.

Yes, sure. So as far as what we're doing differently, I wouldn't say it's totally different. We're kind of applying what we've learned in other formations to the flare really. So some of these tighter flare channels that we haven't necessarily developed in the past, we've really been able to make them work [indiscernible] horizontals. So we'll continue to test out different areas of this and continue to develop the inventory. So from the inventory perspective, I think right now we have sort of 50-plus locations [ but ] some pretty good visibility on them. It's really the kind of play where the more we drill, the more we'll be able to develop additional locations. So it seems like there's some pretty good legs on the flare for us here. So...

Good news. Thank you. That's great. Okay. Unless there's any more questions on the phone lines. I know it's been -- it's a quiet time, the summertime. We'll stop there unless there's more questions on the phone. I'll turn it back to you, Chris.

I see no questions in the queue. [Operator Instructions] And no questions have come up in the queue.

Okay. Well, thanks for tuning in, folks, and we'll talk again here in November about our third quarter results.

This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a pleasant day.