Pieridae Energy Ltd

TSX:PEA

Good day, ladies and gentlemen, and welcome to the Pieridae Energy Q4 and Full Year 2024 Financial Results Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to turn the meeting over to Mr. Dallas McConnell, Vice President, Corporate Finance. Please go ahead, Mr. McConnell.

Thank you very much, Gigi, and good morning, everyone, on the line. I would like to welcome you to Pieridae Energy's Fourth Quarter and Full Year 2024 Investor Conference Call. With me today are our President and Chief Executive Officer, Darcy Reding; Chief Financial Officer, Adam Gray; and Chief Commercial Officer, Paul Kunkel.

Darcy and Adam will begin today with a review of our operating and financial results and certain other company developments. Following their prepared remarks, we will turn the call over to the conference coordinator for questions.

Before Darcy begins, I would like to remind you that our remarks today will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the reports filed by Pieridae with the Canadian securities regulators on sedarplus.ca.

With that, I will now turn the call over to President and CEO, Darcy Reding, who will provide more detail on our performance in Q4, along with recent corporate developments.

Thank you, Dallas. Good morning, and thank you for joining us. Our comments today are supported by the short slide deck that, as usual, can be followed along by those tuning in through the webcast. 2024 was a year of significant achievement for the company despite facing stiff headwinds caused by low natural gas prices that were stubbornly persistent for most of the year.

Although our strong natural gas financial hedge position in 2024 helped protect the company's cash flow from these low gas prices, we made the difficult but prudent decision to shut in a large portion of our dry natural gas mostly in the second half of the year. The vast majority of this shut-in production was tied into third-party-owned facilities, where Pieridae was contractually burdened by uncompetitive operating costs as compared to our own infrastructure, rendering the production uneconomic.

These shut-ins impacted our full year and fourth quarter results. We are maintaining our focus in 2025 on consolidating third-party facilities in Central Alberta to our own, a strategic forward-looking milestone that we will further elaborate on later in this call.

In July, we formally achieved the first of our 2024 strategic milestones by wrapping up our efforts to establish a Canadian East Coast LNG facility in Nova Scotia, which was the founding goal of Pieridae Energy. Although management's communication to the market since early 2023 indicated our strategic priority was to pivot our focus into our Western Canadian upstream and midstream assets, the Goldboro sale nevertheless, formally closed a chapter on Pieridae's history.

The Goldboro sale helped the company to fully repay the remaining $20 million principal amount on the bridge loan, our second completed strategic objective in 2024. This high interest loan had been in place since 2019 and extinguishing it not only decreased debt servicing costs but simplified the business, delivering new efficiency improvements.

The third strategic milestone accomplishment was the successful completion of our $33.5 million equity raise through 2 phases consisting of a private placement and an equity rights offering to existing shareholders. These equity proceeds were partially allocated towards existing debt and working capital liabilities with nearly 50% of the proceeds earmarked for investment into short-term, high-return optimization opportunities.

Our fourth strategic 2024 milestone was the successful completion of Phase 2 of the Waterton gas plant maintenance turnaround in Q4 after Phase 1 was completed in 2023. With this milestone, the next turnaround at this, our highest netback major gas plant is not scheduled until 2029.

Net operating income of $13.7 million was generated in the fourth quarter, while just under $65 million was generated full year 2024 bolstered by a healthy full year hedge gain of $74 million. Adam will speak in more detail about our cash flow, hedge book and forward-looking expectations in the next few minutes.

Full year 2024 production was approximately 27,800 BOE per day while lower fourth quarter production of approximately 22,600 BOE per day was realized as the quarter experienced more fulsome effects of the previously mentioned shut-in of dry gas tied into third-party processing facilities.

Capital expenditures of approximately $6 million in the fourth quarter and $26 million full year were directed primarily towards the Waterton gas plant turnaround and optimization investments, including debottlenecking of the Caroline demethanizer tower. This debottlenecking aids our strategic objective to grow third-party processing revenue and volumes. Third parties delivered nearly 72 million cubic feet per day of raw gas to our gas plants in the fourth quarter, a new quarterly benchmark for the company.

Turning now to our net asset value summary. On the left-hand side of the current slide, Pieridae's current share price of approximately $0.26 yields a market capitalization of approximately $75 million and an enterprise value of $273 million based on our current net debt of $198 million. Our NI 51-101-compliant 2024 year-end reserves report evaluated by Deloitte, shows the corporate PDP of $621 million on a PV10% basis and a PV10% of $1.25 billion on a 2P basis, both using consensus pricing.

After applying the appropriate abandonment and reclamation burden and other applicable financial liabilities, the company's PDP net asset value is $312 million and almost 940 -- and $941 million on a 2P basis. Based on our 290 million outstanding common shares, PDP net asset value calculates to $1.07 per share, while 2P NAV is a robust $3.24 per share. I have obviously summarized a lot of numbers here, but suffice to say the appropriate conclusion is that Pieridae shares currently trade at a deep discount as compared to our net asset value, clearly evidenced by the data. with share price to NAV ratios well below those of our peers.

Turning now to the right-hand side of the slide, our 2024 2P reserves, PV10% shows a modest decrease of 9% year-over-year. Perhaps more importantly, 2P condensate and gas liquids reserves of 40 million barrels are complementary to our 1.2 Tcf of sales gas reserves. Note, our PDP annual base production decline is only 7%, amongst the lowest of all Western Canadian producers with a corresponding reserve life index exceeding to 25 years. Pieridae has historically been successful in further mitigating its base decline to approximately 5% annually with the implementation of low-cost, high-impact well and facility optimization. We expect this trend to continue in 2025 and beyond.

Not to be overlooked, our 9 million metric tons of sulfur reserves are a further interest, particularly given our pending exposure to market pricing of 100% of our sulfur production beginning in January 2026. It is noteworthy that sulfur prices are currently fetching approximately USD 200 per metric ton prior to transportation and other customary fees. Note that the incremental net operating income that can be generated in 2026 at this pricing, is approximately CAD 50 million annually, net of Crown Royalty.

I would caution that sulfur pricing is historically volatile and current sulfur pricing may not be representative of sulfur prices in 2026. However, capturing this upside sulfur revenue opportunity represents yet another forward-looking strategic objective for the company. You will find our current MD&A contains additional information pertaining to historical sulfur pricing and revenue which provides further insight to justify our eager anticipation of gaining full market price exposure on our sulfur sales in 2026. We are optimistic that sulfur sales will generate new sustained cash flow increments for Pieridae starting in 2026.

Focusing on fourth quarter operating results, specifically now, production was negatively impacted by nearly 9,400 BOE per day of dry gas production shut-in for the entire quarter as previously discussed. Recently, most dry gas production in Ekwan, British Columbia and Northern Alberta that was shut in during Q4, totaling approximately 2,500 BOEs per day was restarted given marginally stronger recent AECO gas pricing. However, we expect gas price volatility will continue as we approach the summer months and Pieridae does not expect these production volumes will be continuously sustained over the longer term.

Operating cost reduction remains a primary focus for the company. Fourth quarter operating costs of $43 million were equivalent to $20.61 per BOE with the per BOE cost experiencing upwards pressure largely as a result of lower production volumes realized over the period as has already been extensively discussed. Pieridae continues to compare our per barrel operating expense to our adjusted operating expense. The adjusted expense is simply our operating cost, offset by both our realized third-party revenue and sulfur sales revenue. We believe the adjusted operating expense is a more accurate representation of the net cost to run our sulfur recovery and midstream processing businesses neither of which are possible without our ownership in the sour gas facilities and their excess processing capacity that is available to grow our midstreaming business.

In the fourth quarter, adjusted operating costs were $17.52 per BOE, a 15% improvement over our unadjusted operating expense. We expect to continue to deliver operating expense reductions over time, building on the 15% year-over-year actual reduction in 2024. We also anticipate third-party revenue growth and starting in 2026, sulfur revenue growth, as I explained a moment ago, when our current sulfur sales contract that applies to most of our sulfur production expires at the end of 2025. Similarly, full year 2024 production was impacted by our dry gas production shut-in with the annual impact being less severe than in the fourth quarter since the majority of the dry gas was only shut in for less than half of the calendar year starting in July.

Operating expense for 2024 was $186 million, as mentioned, a 15% year-over-year decrease. Significant operating expense reductions are expected to continue as our strategic priorities remain laser-focused on meaningfully reducing operating expenses to improve corporate netback while sustaining a safe and regulatory compliant business.

As with my review of the fourth quarter operating results, third-party processing and sulfur sales revenue streams were meaningful in 2024 and the adjusted operating expense was $14.95 per BOE or 18% lower than the unadjusted operating expense. The improvement in the adjusted operating expense in 2024 was slightly less in comparison to prior years, primarily due to some third-party producers, also making decisions to shut in lower-margin gas production. That went to our facilities.

We expect to restore and grow third-party revenue with improving natural gas prices and through attracting new sources of broad gas production to our midstream business, which remains a strategic priority in 2025.

At this time, I'd like to hand things over to Adam Gray for additional information on our financial results along with our guidance and current hedge position.

Thanks, Darcy, and good morning, folks. I'll begin this morning by touching on a few key financial metrics for the quarter, then provide an overview of the changes to our loan balances before digging into our annual financial results, our hedge book and our guidance as well as some of the things we're excited about for '25 and '26.

During Q4, our hedge book continued to deliver stability during this extended multiyear low in gas pricing. We were pleased to have generated $0.05 per share in net operating income and $0.01 per share in operating funds flow. There's no question that our ability to deliver net operating income in this environment is very influenced by our risk management contracts. During the quarter, we realized natural gas pricing of $1.55 per Mcf on an unhedged basis and $3.36 per Mcf on a hedge basis. Our natural gas production was approximately 95% hedged in Q4 and assuming currently shut-in volumes remain shut in, we will expect to remain similarly hedged throughout 2025. Our condensate production was approximately 81% hedged during the quarter.

As Darcy mentioned, by proactively shutting in high-cost production, we demonstrated a meaningful reduction in operating expenses as well. Our processing fee arrangement in Central Alberta obligates us to pave flow-through operating costs at a third-party facility on a full annual basis regardless of whether volumes are shut in during a calendar year or not. So operating expense reduction in Q4 was not quite as meaningful as it could have been, but will be more impactful in 2025, while those volumes remain shut in and pending a commercial solution as Darcy discussed.

During the quarter, we also closed our rights offering, raising over $29 million in equity and immediately started to deploy a portion of that capital into the field and into facility optimization projects. Those projects began delivering operational improvements in late Q4 and will be impactful to our netback in 2025 as the capital program continues to roll out.

Following the rights offering closed, we also made a number of changes to our debt structure. We drew USD 3.5 million of the available USD 10 million delayed draw term loan which is in place to fund the Phase 2 of the Waterton Turnaround. And we issued USD 1.5 million of subordinated notes with the same terms and conditions as the original notes along with $1.2 million associated $0.30 warrants. While these debt changes were complicated together, the flexibility they allowed has ensured strong liquidity exiting 2024 and a path to ongoing deleveraging in 2025, accelerating into 2026.

We ended the year with CAD 179 million of total debt, down from CAD 189 million at the beginning of the year. Hidden in that debt reduction figure is a CAD 14 million unfavorable FX balance sheet revaluation adjustment as 100% of our long-term debt is denominated in U.S. dollars. In U.S. dollar terms, we ended 2024 with $125.7 million in long-term debt, with current projections suggesting we could exit 2025 with at or less than USD 100 million outstanding which I'll talk a little bit more on the next slide.

The Canadian dollar lost $0.12 against the U.S. dollar in 2024, which, as I said, impacts the Canadian equivalent value of our debt. However, I'll make 2 comments about the cash flow impact of a weaker Canadian dollar. First, we've hedged nearly 100% of the mandatory U.S. dollar cash debt service costs for 2025 at various rates which reduces FX volatility on a cash flow basis. Second, because many of the commodities we sell are denominated in U.S. dollars, a weaker Canadian dollar is actually net beneficial to our cash flow position in 2025 as increases in revenue are only partially offset by higher input costs for certain operating expense items.

Next slide. Touching briefly now on our 2024 annual financial results. Darcy described the year pretty fulsomely already, and we have previously discussed many of the annual highlights listed on this slide. I'll turn your attention to the funds flow waterfall at the lower right corner, which describes how 2024 compared to 2023. The most impactful change year-over-year was the $93 million reduction in commodity sales. As we've discussed, that's a combination of lower volumes on the proactive shut-ins as well as substantially lower gas prices, partially offset by a $14 million larger hedge gain.

Operating expense was a significant positive to cash flow year-over-year, coming in $39 million or 17% lower than 2023. The reduction in third-party processing revenues of $10 million year-over-year was disappointing and deserves explanation as our commercial teams have been very successful in attracting significant new processing volumes particularly into our Caroline facility. Processing during 2024 was lower primarily because of the extended jumping pound outage we experienced in Q1 and Q2 which impacted our ability to accept third-party volumes and less significantly by the 2-week outage at Caroline during Q3 which was actually conducted to debottleneck the processing facility in order to continue meeting demand for higher third-party volumes.

Secondly, much like us during the year, several of our long-term processing customers chose to shut in their volumes during the particularly low gas prices experienced during the year, which impacted our revenues, both at Caroline and Waterton. As prices recovered in Q4 and Q1, the majority of these volumes have returned to production and we have strong expectations for comparative third-party revenue growth in 2025.

Next slide. Okay. I'll finish my section of this call with a few positive notes. First, we're currently forecasting to be at the high end of our guidance range on NOI and see potential positive upside on our production guidance if the slowly strengthening natural gas dynamic continues to hold, allowing us to turn more of our volumes on.

Second, we conducted a partial hedge unwind last week, which we're very excited about. As you can see from the dashed green bars on the lower left chart, we monetized about 30% of our natural gas contracts corresponding to approximately 25,000 GJs per day for the period from January 2026 through May 2027. We simultaneously accelerated additional cash flow for that -- for part of that period by restriking the remaining gas hedges from 378 a GJ to 340 a GJ from June 2026 through May 2027.

We felt that as gas fundamentals begin to improve, we were slightly overhedged in these periods and desired a bit more gas market exposure. Our lenders were also supportive of conducting these transactions, which netted just over CAD 10 million, 100% of which has been applied as a permanent repayment to our senior term loan. This transaction comes with the added benefit of lowering cash debt service costs. As of today, our total debt, including the term loan, revolving loan and subordinated notes sits at USD 113 million. Our remaining hedge book has a net mark-to-market this morning of approximately CAD 45 million.

Third, I'll conclude my comments with a discussion about sulfur just to reinforce Darcy's previous comments. We are a fairly significant producer of sulfur in the Canadian market, representing roughly 10% of our national production. It's often considered a byproduct, and its price is highly volatile but we believe sulfur represents a significant long-term opportunity for Pieridae. As we've disclosed in the past, approximately 85% of our sulfur production, which averaged just over 1,300 tonnes per day in 2024 has been sold under a fixed price CAD 6 per ton contract since November of 2019. That contract concludes at the end of 2025, allowing us to gain 100% market exposure thereafter.

In 2025, with the fixed price contract in place, we forecast gross sulfur revenue to represent approximately $0.05 per share in cash flow. If market prices were to stay where they are today at roughly USD 200 a ton before transport and marketing fees, that production stream would represent $0.32 per share in 2026 cash flow prior to royalties of approximately 16.7% with no additional operating costs. At USD 150 per ton, that amount would be $0.21 per share in 2026 cash flow prior to royalties. We are excited about this upcoming ability to recognize the full value of our product in 2026 and the corresponding acceleration of our deleveraging and reinvestment strategy.

On that optimistic note, I'll turn the call back over to Dallas for concluding any questions.

Thanks, Adam and Darcy. The conference coordinator will now manage the question-and-answer portion of our call with any questions over the phone. Darcy, Adam and Paul are available to answer any questions you have.

[Operator Instructions] There are no further telephone questions at this time. I'd like to turn it back over to Mr. McConnell.

Thanks, Gigi. We do have a couple of early questions here on the webcast. The first is from Bill. The question is, does Pieridae have an opportunity to forward sell 2026 sulfur production at prices near today's $200 per ton. I'll turn that over to Paul Kunkel, our Chief Commercial Officer.

The $200 per ton price that Darcy had mentioned earlier is actually a spot price. And unfortunately, there is no market to sell that forward at this time at that price.

The second question from Hans. Could you please clarify what is meant by repositioning the company's sulfur business to benefit from the upcoming expiry of the long-term sulfur marketing agreement as stated in the recent news release. Specifically, I would like to understand the intended strategic changes and how they are expected to impact operations, market positioning and overall business objectives.

Yes. I think the short answer to this is there's really no operational or market positioning changes required. This is just a contractual relationship where we're going from a $6 per ton forward sale to an open market position.

Maybe to build on Paul's answer, I think it's easy to understand how a more robust sulfur price could start to support or highly support economics around our drilling inventory and some other development opportunities within the company. So we're going to continue to monitor the impact of sulfur on the economics of developing our drilling inventory and reserve base. Those are opportunities that may come to fruition with stronger sulfur prices.

Next question from Bill. Was the net interest rate on the $10 million debt repayment approximately 10.7%.

Yes, that's right, Bill. That's pretty much bang on.

Next question from Joseph. Has the current sulfur buyer tried to get a new contract at higher prices?

Yes, we've been in discussions with the current buyer, but we still have the position that an open market price is better off for the company.

Thanks for the questions, those are great. Given there are no further questions at this time, I think we'll wrap up. I'd like to thank everyone for participating today. We very much appreciate your ongoing interest in Pieridae. If you have further questions, please call us at 403-261-5900 or e-mail at investors@pieridaeenergy.com. Thanks again, and we look forward to speaking with you soon.

Thank you. The conference call has now ended. Please disconnect your lines at this time. We thank you for your participation.