Pine Cliff Energy Ltd. (PNE) Earnings Call Transcript & Summary

Good morning, and welcome to the Pine Cliff Energy Q4 year-end and results webcast. Before we start, I would like to remind participants that the comments made on this call may include discussion of forward-looking information. We refer participants to the cautionary statements on forward-looking information in our presentation, which can be found on our website. We're going to start the call with overview comments from Phil Hodge, President and CEO. Remind participants that they can register questions on the webcast. We'll then flip over to questions from the webcast. Also in the room with Phil is Austin Nieuwdorp, Vice President, Finance and Controller; Dan Keenan, Vice President, Exploitation; Terry McNeill, Chief Operating Officer; and Kris Zack, Chief Financial Officer. With that, we'll turn it over to Phil.

Thank you, Chris. Good morning, everybody. Thanks for your time today. We appreciate it. We'll dispense with reading the press release or kind of rereading my President's letter, both of which you should have access to. But I'd like -- we'll just start with some general comments and then get right into the questions that are already in the queue here. The one thing that we talked about at the Board level yesterday was we've never had a stronger inventory here at Pine Cliff from a drilling perspective in the history of our -- we're now going on 14 years. And so that -- it raises a lot of really relevant questions given all the uncertainty in the market right now as to how we allocate capital in 2025. We chose not to go with exact guidance for this year for what we're going to do on the CapEx side. There's a lot of uncertainty, as everybody on this call knows, with the tariffs, with the start-up of LNG on the horizon. There's -- with the kind of a storage situation which is kind of much improved over the last few months with the colder weather in both the United States and Canada, but still a lot of moving parts. And so for our -- from our perspective, it's really all about capital allocation and that discipline that I think that we've displayed over the last 13 years. How do we go forward? How do we -- what is the proper way for us to allocate capital? Now with an extra variable in there, with this deep drilling inventory that we've got because there's some very good economic opportunities that we definitely would like to start to exploit in the back half of this year. So that's kind of the overall overreaching kind of discussion that has been kind of consuming our management team and the Board level going forward. And so there's -- when we look at capital allocation, there's obviously debt repayment, there's the CapEx, there's the dividend, there's other operational decisions that have to be made on capital and the timing of that, all of that goes into the mix as to kind of where we want to go going forward. Want to keep our balance sheet strength for opportunities and transactions. As many of you who have been shareholders for many years, you're well aware that our model has always been to opportunistically take advantage on when we can see accretive acquisitions, we've been able to successfully get those into the portfolio. We've grown from 100 barrels a day to now to 23,000 in the last 13 years. We think there's going to be more opportunities in the back half of this year and into '26. So that's also in our back of our mind is making sure that we are in a position to take advantage of those opportunities should they present themselves. And so there's -- it's just a lot of uncertainty right now. That's -- this is not particular to Pine Cliff. This is going with every business owner across Canada right now. It's got a lot of uncertainty as to what the horizon is going to be? What does the back half of this year look like? What is the impact of tariffs? I mean one of the questions we had here was to what extent do we think the tariffs are going to impact our business and with regard to the pricing. It is very unique on the energy side, and that's why I think the President Trump has already kind of lowered the tariff that he imposed upon the Canadian energy is currently at 10% versus the 25% across some of the other sectors. A big part of that is because the -- our energy that we export to the U.S., which is about 8 Bcf a day of gas and about over 4 million barrels a day of oil are pretty integral to the U.S. system. And it's not as easy to just to find alternative sources on either the natural gas or the oil. So there's a complicating factor with regard to the tariffs because this question is going to be who's going to bear the cost of that. In many cases, I think it's going to be the consumers within the United States, which is going to create an extra pressure on the President going forward because inflation is not what he's trying to do with the tariffs. So there's that kind of backdrop across a lot of our decision-making. The guiding force for us is about cash flow per share growth, always has been. And that when we look at acquisitions, that's the key factor, the key metric that we're looking at. And then also how we allocate our capital going forward. So it's going to be something we're going to continue to watch very closely. We did highlight in the President's letter and the press release, the fact that we're moving forward with data center development. We've got multiple sites that we think would be very good locations for data centers. We announced the one. We continue to work on potential other sites. I think that's going to be a good long-term diversification opportunity for us and for our natural gas production. And I think the one extra piece I would add to this is that the capital allocation, when we talk about ways that we can increase the cash flow per share, there's has -- there's always a kind of a give and take with that transaction. We've always got -- we only have so much capital. It seems to be -- we've had some good last week in AECO pricing. We're starting to see the forward strip start to move up, not just the spot price, but also the forward strip for the rest of the year and into next year. And so we're starting to see winter pricing get around that $3 level which is a very -- that's a good level for us. And we've always talked about that being a price level where we generate a lot of free cash flow. So the question is, how do we again optimize our position going into the back half of '25 and into '26?

So with that, I think we'll get to some of these questions which -- one of the questions is about providing some detail around the strategic drilling opportunities that we're evaluating in the second half. Maybe I'll turn that over to Terry McNeill to talk a little bit about that.

Thanks, Phil. The -- as Phil had indicated right off the top, our inventory has really never been better. You'll see it in our reserves report with our reserves bookings. I believe we have 18 booked Glock locations in Sundre now. Those locations are the same ones that one of the top plays of Tourmaline and Whitecap are quite involved in. And our team was able to, through the lands we acquired in the Certus acquisition, do some strategic land swaps to be able to increase our working interest and consolidate our interest around our owned and operated infrastructure. So a lot of that work was done. In 2024, our team did a fantastic job consolidating the land base and setting up the locations to drill. So we've got an excellent inventory of top quality wells, the wells based on the current forward strip, pay out in about a year, give or take, depending on commodity prices. But -- so the very, very low payout and excellent wells. So we're excited about the over-pressured Glock in the Sundre Caroline area. Also, there's the emerging Basal Quartz play that's just north of Drumheller. There are several private equity companies that are out there actively developing the play. And we've got an excellent land base and light bookings on our reserve, and we have a lot of infrastructure that we control in that area. So those are the 2 biggest emerging plays that we have, and we're very, very excited about both of them. Our previous inventory, the Pekisko is still booked inventory that we still have, and we're still very, very much excited about it. But at this point in time, both the Basal Quartz and the Glock wells pay out in 12 months, give or take. So they're very, very quick payout, lucrative wells, high rate of return even at today's commodity prices. So those are the opportunities that we have in front of us.

Thanks, Terry. The -- just to add to that, the one thing that was highlighted in our reserve report that some of you have already commented on and some of the analyst have commented on is that even though we didn't drill a well in 2024, we actually had an increase in our proved plus probable reserves even after taking into account the production for last year, which is pretty impressive. And as Terry said, we've now added locations. There's booked locations in both the Glock oil and also in the Basal Quartz area. So these are areas that we're pretty excited to get to. One of the questions we've got is how do you free up cash flow to take advantage of those opportunities. And like I said, it-- there's -- we've got a cash flow coming in. And luckily, it seems to be it's -- in the last couple of weeks, it's been rising. But we've got to measure that against, okay, how do we look at debt repayment for the year? How do we look at kind of drilling? We've got the dividend commitment that we continue to watch very closely and monitor and assess. So there's a few levers that we can pull. And for us, again, the test is how do we -- what do we think is the best path to increase cash flow per share for our shareholders. And it's not just about this quarter or next quarter. It's about how do we do that for the years to come. So we've got the -- another question we had here is about the Canadian dollar and the U.S. dollar affecting our business. Maybe I'll pass that over to Kris.

Yes. Thanks, Bill. So the Canadian dollar is, obviously, there's a lot of uncertainty in the market right now with respect to commodity prices. AECO prices are higher than they were at this point in time last year and continue to move, creep up a little bit higher here. But WTI prices are lower. Fortunately, when the U.S. dollar or when WTI moves down, generally, we get some offsetting impact by a weaker Canadian dollar. So we're seeing that a bit in the numbers. It's not a perfect offset. Oil prices are still weaker than where they were at this point in time last year, but it certainly helps.

Thanks, Kris. Another question we had here is about the storage situation in Canada and whether or not there's regular announcements in storage levels in Canada like there is in the U.S. There isn't any -- we don't -- the U.S., for those who don't follow it, every Thursday typically is when they announce what their storage levels are. And so it's a very clear and it's the -- everybody waits for that announcement. The Canada is an ongoing monitoring, but it's very transparent. If you're on the TC Energy website, you can see where storage are. And you can actually see on a hourly basis, what is the storage draws or ejections that are going on at that time. So the -- I highlighted it in my e-mail that went out, and I think everybody probably on this call is probably a subscriber to our quarterly e-mail. But the storage has dropped a lot in the last little bit. And a lot, meaning it's now -- we start -- went into this winter with the highest storage level we've ever had. I mean we were actually testing the maximum limits of what our storage was, which is not good for pricing, which is why AECO was as weak as it was. We've had a cold winter. So this is -- after 2 abnormally warm winters, this winter is much more on the normal to cold side. Because of that, we've seen a really quick reduction in natural gas storage to the point that it is now below the 5-year high and heading -- in Canada and heading below right now on a trajectory that would take it below the 5-year average, which is pretty amazing given where we started at. And so -- and that's all in the backdrop of having LNG Canada starting up this summer, which will be a big draw. It could be -- depending on how fast it ramps up, early indications are that it could be as high as a bcf a day in the summer months, ramping up to close to 2 bcf a day by the end of the year. So the United States is already ahead of us from their -- in that context because their storage is already under their 5-year average, which is why NYMEX has had as much strength as it has over the last month here. So it is a -- there is no specific -- like I say, no specific announcement on the storage, but it's a -- but it is a very readily accessible data that you can get. We've got a question just about our liquidity level. The -- this is something that we watch very closely, and maybe I'll hand it over to Kris. I mean when we talk about the payout ratio, that's something that we watch very closely. And the payout ratio is essentially all the money that you bring in and then all the money that you send out. And obviously, we've had a -- our dividend since 2022. We treat that like a variable dividend. Like we obviously, in a perfect world, continue to hold it or increase it, but we've reduced it before where we didn't feel it was in the best interest of the business, we've also increased it a couple of times. So the -- that's an important toggle or lever that we have if we're looking at how do we access cash flow if we need it, if we see better opportunities to use that cash flow in the longer term. Again, I think shareholders -- most of our shareholders do take a longer term around why they own Pine Cliff. There's -- you've got the longer-term prospects around where we think natural gas is going in Western Canada and having that exposure to it. I don't know, Kris, if you want to add anything?

Yes. No, I think I would just reiterate, Phil, thank you, that we continue to be very sensitive to the fact that we need to run a balanced budget over the course of the year in 2024. We managed to keep our payout ratio below 100% by pulling different levers and managing through things like strategic dispositions and hedging, and we'll continue to look at all of those options to be able to protect the liquidity on the balance sheet.

Thanks, Kris. Yes. I mean the -- from our perspective, it's -- again, all the decisions we're making on capital allocation are long term. And so it is not -- we're -- we've been around now for -- this is our 14th year. We think we're going to be around a long time to come in what we believe is going to be a much better natural gas environment here in Western Canada. And the fact that we've stabilized our cash flow and our balance sheet with adding oil and liquids production, that has turned out to be very prudent. I think one of the things we're quite happy with was the transaction that we did in December of 2023. That production that we added, which was over 5,000 barrels a day, about 50% of it, which was liquids, has been very consistent all through 2024 and still remains over 5,000 barrels a day. So that's -- again, we continue to look for resilient assets within drilling inventory that we can add. Like as I started this call off, our drilling inventory has never been stronger in the history of Pine Cliff. And that's -- we're very fortunate that we now have got some very economic drilling locations that Terry touched upon in his question. The -- one of the questions is about AIMCo. The question was if the AIMCo Board change will impact the holding of the company's stock. We have -- AIMCo has been a fantastic shareholder for us for many years now. They've now been -- so they are -- for those of you who aren't aware, the Alberta -- AIMCo is the Alberta Investment Management Company, which manages about $160 billion. They're one of the biggest pension funds in Canada. They have been with us now for over 8 years as a shareholder and they own over 10% of our stock. They -- we have ongoing discussions with them at the -- every indication is that they're very happy to be a shareholder. They continue to be very supportive. We do not think that any of the changes that have happened at the Board level with AIMCo will have any negative impact on their shareholdings in Alberta. In fact, one of the -- from a -- taking one step back, the Alberta government is -- one of the reasons they made some of the changes or at least they seem to have indicated is they'd like to see a bit more focus on Canadian investment by AIMCo and not -- and so that's why they closed some of their international offices, which I think would be positive for us because if we see opportunities in the future that we could -- if equity is part of that solution, then we hopefully have got a partner who's going to be supportive in those transactions. Another question is, what is our hedging position today? I'll pass that over to Kris.

Yes. Thanks, Phil. So our hedging position, we continue to build out and add positions opportunistically. At the end of the year or at the time of the report that we published last night on gas, if you use 2024, the fourth quarter 2024 volumes as a benchmark, we're about 35% hedged on natural gas at an average price of around CAD 2.91 an Mcfe, that's Canadian. So that's certainly helpful to our gas exposure. And then on the oil side, we're around 31% of our Q4 2024 volumes hedged at just about USD 69 a barrel. So again, certainly helping at the margin with our cash flow.

Thanks, Kris. I think that covers all of the questions that we've currently got in the queue. The -- I think most of the shareholders are well aware that if there are any other follow-up questions or comments that they're welcome to send e-mails to the management team and we'll get back to you as soon as we can. We appreciate the ongoing support from the shareholders. It is a tumultuous time. This is a one of the -- it's always been volatile. It's -- we've always had different stresses and tailwinds and headwinds that are competing with each other. This one is a bit unique. We haven't had the tariff. This is a new circumstance that we're dealing with. But it's still too early. I get asked about the tariffs quite frequently. And it's just too early to say what the impact is going to be on Pine Cliff specifically or even on a broader base, the natural gas energy sector in Canada. Time will tell. Are these tariffs going to be here for a long period of time? How are -- or is it going to be -- are the prices -- or sorry, are the tariffs going to be impact really picked up by the end consumer or will that be borne in any way by the producers? We're all kind of guessing. And I guess we'll keep a close eye on all of that. And again, it comes back to us. It's all about the cash flow per share. And so what are the impacts on that? If there's capital allocation decisions that we have to make in response to kind of that uncertainty, then those are the decisions we have to make. I mean, so we're -- as I've often highlighted to those who follow our story, management owns a lot of stock. So we are totally aligned with the shareholders where every decision we make is trying to increase cash flow and the value of our shares. And so the -- we're very close to it. We watch it and we discuss it on an ongoing basis. And this is no different than at any time during the past 13 years. It's just a little different circumstances and we will continue to make decisions that we think are prudent for the shareholders. Thank you to everybody for their time today. Very much appreciate it. Look forward to talking to you again in the future.