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

Thanks, Kris. Another question we had was around the kind of the makeup of these Glauc wells from a liquids perspective. And one of the questions I got last night was how much wetter are these? In other words, what is the NGLs component of the wells? Maybe I'll flip that back over to Terry to discuss.

Sure. Thanks. With regards to the wetness of the location, I mean, it will vary from location to location. It gets a little bit drier as you go west from East. So -- but our concentrated land position, we're still trying to vet it out a little bit, but I don't think it's going to change appreciably across our land base. So I think we'll be fairly consistent on liquid production on our future wells as we are in our existing well. From a condensate versus NGL makeup, initially, the wells are about 20% to 25% condensate and NGL on the total BOE, and that will taper down over time. So the condensate value will come down over time. But initially, of the 1,100, we're about 20% to 25% condensate. And it is condensate, not oil.

Thanks, Terry. I think those who have been following our story for some time will recognize the fact that as these wells come on, each time they come on, it has an impact on, obviously, our liquids. And so we've gone from -- at one point, Pine Cliff was 96% natural gas weighted. And with the acquisitions that we've done over the last few years, starting in 2019, we did each of the AlphaBow, Apogee, Certus acquisitions, all kind of have added more liquids exposure. And clearly, this drilling inventory is definitely liquid exposure with the majority of it. And because of where AECO is at, it actually is even from a revenue and from a cash flow standpoint, it's even more than just the percentage of the volume and is well above its weight because of where WTI is these days. And as some of you may not be aware, WTI is very highly correlated to the condensate price that Terry mentioned. So quite often, condensate is actually even higher than WTI. When you've got the lower Canadian dollar like we do right now at $1.39, that even has a greater impact on kind of what the Canadian dollar impact for -- on to our balance sheet is. A few more questions here. The -- one of the questions was the -- asking us -- I'll just read it. It says that we've done 16 transactions in 14 years, and we haven't issued equity in 9 years, that's accurate. With the Shell-ARC deal, LNG Canada Phase 2 momentum and $22 billion of infrastructure announced in Q2, is the M&A environment starting to look interesting again? Or does the current strip suggest sellers are holding off? I think my own view is we're going to continue to see consolidation. And so the reference there is for those who aren't watching really closely, Shell, which is obviously one of the largest oil and gas producers in the world, just recently announced an acquisition of ARC Resources, which is West Canada as it was a $22 billion company, very heavily weighted towards natural gas and to condensate. I personally took that as a positive signal that foreign investors that can put capital anywhere they want in the world, were making significant investments into Western Canada and saw this environment as finally an environment that they could come back and deploy capital to. And that's not been the case for 10 years. We saw a lot of U.S. and international groups leaving the country from an investment standpoint. Now we're seeing a lot more interest of coming back to Canada. And I think that goes as a testament to the governments, both at the federal level and at the provincial level, welcoming back that foreign direct investment. And we really -- as a country, we really do need that foreign direct investment. We can't get the projects that we're talking about building, the pipelines across the country, the LNG facilities, all of these things need a tremendous amount of capital, frankly, more capital than our country has. So it's nice to see the foreign direct investment returning, and I think that one project, bringing it back down to a more -- a level for the juniors and for the intermediates in the space. The reality is that it's changed a lot in the last -- I've been at Pine Cliff now for 15 years. There was a lot more junior capital energy pools available. When I first started, I remember you go to different cities to do marketing and you would have a tremendous amount of interest and you would have days of meetings with different groups. The reality is that, that is not the case anymore. So you've got a smaller number of pure energy investors. You have a lot more generalist investors. And they, I believe, will come back to the natural gas and to the energy space when they see the return of capital being deployed and the free cash flow that's being generated. And that's already started. And I think that the -- everybody's balance sheets are in much better shape. There's a lot less companies in the sector, and I don't think that trend is going to stop. Part of it is as a junior company, and we're 20,000 BOE a day, that -- 10 years ago, that would have been considered a decent-sized intermediate. Now we'll be junior, smaller compared to the rest of the market. There's companies obviously smaller than us, but there's not a lot in the public domain that are smaller. And your regulatory costs, your just cost of doing business has gone up. That's just the reality. And so it's -- we continually look for assets that make sense or acquisitions or mergers that would make sense to us as shareholders. And that's -- I mean that's been the constant theme ever since we've started Pine Cliff. It's all about what -- how do we make the shares more valuable. And if a transaction has the potential to make that -- make our shares more valuable, then we're definitely interested in it. We haven't done a transaction -- a material transaction now in a couple of years, but that's not from lack of looking. I think there is -- when you get this volatility in commodity prices, it does make transactions more difficult. Like I said, we've done a lot of transactions, and our team has been involved at different places that they've worked and tremendous amount of transactions. You almost need a little bit of stability in commodity prices to help get transactions across the board because it's really difficult right now. For instance, on the oil price, when we've had this huge -- fairly big significant run-up in oil prices, what do you use for -- how do you value the assets? Do you use today's price of $83 -- or do you use next year's price where it's under $70? And that's -- so there's that spread that needs to be kind of negotiated. Natural gas is a bit more consistent. I mean it's -- I think on Western Canadian gas, it's a contango. In other words, prices are higher in the future. We think that strip is probably being conservative. We think that gas prices are going to be probably stronger than what current strip is at. But that's our view. And we hope to be able to add more assets. In the meantime, we'll grow organically. When we've got the kind of inventory that we are fortunate enough to have, that's a great place to allocate capital to. So hopefully, that answers that. The -- I did get a question about data centers in a couple of different capacities. One is an update on where we are and then just generally, what's the impact that it could have on Western Canada? It's -- we watch this very closely, and we've had a lot of conversations with a lot of different groups. And it's not just data centers. It also includes the cryptocurrency mining space because that's still very active and still what we kind of think of it simply as turning gas into power. And how they use that power? It can be used for different applications. What trend we are seeing? There's definitely -- and I mentioned this in my quarterly e-mail, is we're seeing a real push to go to distributed generation. And what I mean by that is where these power generation sites are not connected to the grid, and they're going to be set up very close to where their energy source is. And in the case of Alberta, that's going to be natural gas. There's the odd case where these data centers are being set up near nuclear or around the globe, they're quite often attached to coal. But in North America, the reality is that every time that we add more demand for electricity, we're increasing the demand for natural gas. The statistic that I often use when I talk to people in the U.S. and they don't realize that 43% of all of their electricity in the United States comes from natural gas. And second place is nuclear and coal, each in and around that 16% to 18% level. So it's pretty significant. And this goes to the same argument around electric vehicles. If you're going to be a shift towards electric vehicles, with this rise in WTI and oil pricing, that's become a topic again is what's going to happen with all electric vehicles. Again, that's great, but you're going to need more electricity. And so the power grid is going to come under pressure. And what we have seen in just about every jurisdiction is that almost nobody has got extra power. The grids have been kind of maintained at a level for decades. And now you're seeing this power surge and electricity demand surge and the grids are having to deal with it. That's where you're getting a lot of pushback from a lot of areas and jurisdictions around data centers because they're worried about their power bills going up. And that's a legitimate concern, which is again why there's a real trend towards people finding distributed power generation. And so there was a big announcement up in the Edmonton area, the biggest data center that will be built in Canada, close to 1 gigawatt size, but they're building right beside it a huge natural gas power facility. And so you see different projections as to how much natural gas demand might be impacted by the data centers. I've seen numbers, like kind of that 3 to 8 Bcf a day. That's a North American number, just to give everybody context, I mentioned the 19 Bcf a day is what the natural gas supply is in Western Canada, Canada essentially. It's about 107 right now Bcf a day in the U.S. But there's the 2 big demand sources besides the power grid that is really the LNG and then what these -- how many data centers are actually going to get built. And there's -- these projects just take on an immense amount of power demand. And therefore, if they're going to try to stay away from the grid, they're going to need a lot more natural gas. And so that's -- it has the potential to be pretty significant. Here in Alberta, I think it could be probably more like 1 to 2 Bcf a day, maybe as high as 3 Bcf a day depending on -- I mean, the Alberta's government has come out and said that they want to attract $100 billion of data center investment into the province. That's a big number. And we -- like I said -- but it is very real. We have multiple sites that we think would be very attractive to data center groups. We announced the one data center transaction. They continue to tell us that they're very close to getting financing. We are very hopeful that they'll get the financing and that we can move forward with the permitting of that site. But we also are talking to multiple groups about other sites and what we might be able to do. So it's kind of a -- it is not a tomorrow impact on natural gas prices in Western Canada. It's -- I think we'll start to see the impact of it probably starting next year. Some of these projects that have already started to break ground and get built. But I think you're really going to see it more in kind of '28, '29, which is interesting because that time frame is the exact same time that you're going to start to see more LNG demand. One of the questions was -- that we got here was -- is the Phase 2 of LNG Canada built into the AECO price? And I would say, no, I don't think it is because -- so Phase 2, for those of you who aren't familiar with the project, LNG Canada is in Kitimat BC. They have 2 trains for -- 4 trains today in Phase 1, and their plan is to do another 4 trains in Phase 2. Each phase is about 2 Bcf a day of exports. So they've got -- Phase 1 started exporting in July 1 of last year, and it's been ramping up, quite sporadic, but in June was at the highest we've ever seen it before. And then like I said, July and August it fell off again. And it looks like it's ramping back up for this fall, which is fantastic. The second phase, they've already started work on it, construction on the pipelines -- or sorry, on the adding compression to that pipeline facility, it's important to know that they don't need to build a new pipeline for Phase 2. The pipeline that's been built, the Gateway project already has the capacity of about 5 Bcf a day. So they can add another LNG facility or another -- sorry, another phase to that without having to do anything but add compression. So even though they haven't announced that their Phase 2 has gone positive FID, which is final investment decision, the work has already started. So that's very positive. We expect that we hear a positive final investment decision on that project this year. That's what the indication has been as we head into the back half of the year here. And then we also -- the Ksi Lisims project is another project that is expected to go positive final investment decision, and that's another 2 Bcf a day. And you'll see in my newsletter -- or sorry, my e-mail, the projects that are now being talked about would take Canada to over 7 Bcf a day of exports in LNG by the end of the decade. 7 Bcf a day, again, keep coming back to that same number of 19 Bcf a day is a tremendous amount, high -- incredible high percentage of our total production. So as you add more and more demand, you're going to need that supply. And it's not that we don't have the gas in the ground, the question is at what price do we bring the gas out of the ground. And so our view is that it's setting up quite positively for natural gas in the next few years as all these major projects come on in addition to the data center demand that's going to be coming on during that same time frame. So I hope that's a good update on that. Another question we had is when -- what percentage of U.S. LNG exports is relative to their production? The U.S. LNG growth is really one of the greatest industrial stories of our time. I mean in 2016, the United States exported 0 LNG. Today, they're the world's largest LNG exporter. So it's been an incredible growth. And that number is around -- they've been as high as 20 Bcf a day. They've got some maintenance projects going on right now. And I think Freeport has had some operational issues. I think they're around today about 18 Bcf a day of exports. And then as I mentioned before, they're about 107 Bcf a day of production. Now keep in mind, though, not only do they have the LNG exports, which is in that 18 to 20 Bcf a day, and that number is going to over 35 Bcf a day. So almost double in the next 5 years. So by the time we exit into 2030, we're talking about that LNG being over 35 Bcf a day. In addition, they export about 6 to 8 Bcf a day to Mexico every day by pipeline, which is about the same number that they bring in from Canada. So in Canada, at times, half of our production goes to the U.S. by pipeline. And we've -- so it's an incredible amount of investment that's gone into that Gulf area, which is where the exports come out of. The big advantage for Western Canada is that our shipping time to Asia, and Asia is the biggest importer of LNG in the world, and that includes Japan and China and Taiwan and South Korea. We're about a 10-day shipping as opposed to 24 days out of the Gulf. So Canada has got a real advantage for sending gas off the West Coast, so much so that even Mexico, which is an importer of natural gas, is building LNG facilities to take advantage of that same shipping advantage or timing being off the West Coast. So it's an exciting area. It's been incredible growth, one of the biggest growth areas from an industrial standpoint in any industry in North America, and it's not slowing down. I mean it is picking up speed. And you can see right now, there's no reason why that's going to slow down given the shortage of LNG and the high prices elsewhere in the world. We've talked about the North American prices. Today, AECO is like $1.60 roughly. I'd say the NYMEX, which is the U.S. natural gas price, is a little under $3 in Asia and in Europe, over $20 an Mcf for the exact same molecules. So that arbitrage, the only way that arbitrage gets closed is by more LNG facilities being built in North America to export gas. So again, we think that's a positive because we believe that what will happen is that the international prices will come down to a more sustainable level for them, which is good because you don't want them to go into alternatives. We want them to continue to use a clean source natural gas, especially in the Asian communities where if they're going to go to coal, the carbon emissions are substantially 30% higher. And if that price comes down, so it makes their economies go around better. It also, at the same time, it should be pulling up our pricing. And therefore, there's -- the arbitrage price, you see difference usually between $6 and $8 is kind of the expected price of what it costs for liquefaction and transportation. We did have a question about carbon tax. Maybe I'll pass that over to Terry.

Sure. The question was the impact of carbon tax on Pine Cliff going forward. And the short answer is we don't expect any impact on carbon taxes. We are classified as a small emitter. And under the current regulations, we are not subject to carbon tax going forward. So as long as the Feds don't reinstate federal fuel tax, we -- at that time, we potentially would be impacted, but that's not anticipated at this point in time. So going forward, we've made no allowances for carbon tax as we are not taxable under that program right now.

Thanks, Terry, and thank you to everybody for all the great questions. We really appreciate that. It makes the webcast a lot more interesting for us and hopefully also for you as opposed to just reading our press release. You know you can reach us at any time. So if there's any further questions that you want answered, you want to talk to any one of us, just reach out. We're happy to chat with you. We continue to believe that we've positioned ourselves well going into this winter and into '27. We're looking forward to drilling another Glauc well. And so until next quarter, thank you very much. Thanks for those of you that are shareholders. Thank you very much for your support. We very much appreciate it. Have a good day.