Pipestone Energy Corp
TSX:PIPE
Earnings Call Analysis
Summary
Q2-2023
Pipestone Energy experienced an 8% year-over-year production increase to 33,143 BOEs per day in Q2 2023, offset by a roughly 3,700 BOEs per day negative impact due to cumulative production issues. Financially, adjusted funds from operations jumped to $53.4 million, a stark 52% climb from Q2 2022's $110.4 million. The company is on target to hit its revised annual production goal of 34,000-36,000 BOE/day. Capital expenditures for the quarter were lean at $6.8 million, part of a $170.5 total H1 investment, pacing at 67% of the set $255 million annual budget. A shareholder-friendly approach is evident with a declared Q2 dividend of $0.03/share, backed by a renewing of the reserve-based loan (RBL) at $280 million, with a healthy net debt to annualized funds flow ratio of 0.8x. In a significant move, Pipestone is set to merge into Strathcona Resources, postulating Pipestone shareholders with a 9.05% stake in Canada's soon-to-be fifth largest liquids producer.
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Good morning, and welcome to the Pipestone Energy Corp. Q2 2023 Financial and Operational Results Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Dan van Kessel, Vice President of Corporate Development. You may begin.
Thank you. Good morning, everyone, and thank you very much for joining the call. With me, I have Dustin Hoffman, Chief Operating Officer and Interim President and CEO; as well as Craig Nieboer, Chief Financial Officer.
On today's call, Dustin will start by providing an update to Pipestone's operations. Craig will follow with an overview of our Q2 2023 financial results, and I will follow with an update of the recently announced transaction with Strathcona Resources.
I will now hand the call over to Craig Nieboer, Chief Financial Officer for Pipestone Energy to provide the disclaimer and some opening comments.
Thanks, Dan. Listeners should be advised that some of our remarks today will contain forward-looking statements within the meaning of applicable securities laws. I refer you to our advisories regarding forward-looking statements, non-GAAP financial measures, capital management measures in today's press release and in our Q2 2023 MD&A. All dollar amounts referenced in our remarks today are in Canadian dollars, unless otherwise specified.
I will now hand it over to Dustin Hoffman, Chief Operating Officer and Interim President and CEO.
Good morning, everyone, and thanks for taking the time this morning to join our Q2 call. During the quarter, Pipestone delivered an average quarterly production of 33,143 BOEs per day, representing an 8% increase over Q2 2022 production of 30,770 BOEs per day. Along with many of our neighboring Montney peers, our May 2023 production was negatively impacted by wildfires. The cumulative production impact was approximately 11,000 BOEs per day in the month of May 2023, which equated to a negative production impact of approximately 3,700 BOEs per day for the second quarter of 2023.
We would like to again give our sincere thanks to all our staff, third-party infrastructure partners, local fire authorities and all those involved for their efforts in managing the May 2023 wildfire situation. Following the wildfires, we are pleased to announce that Pipestone was able to ramp up production and set a new corporate monthly record of 37,327 BOEs per day for June 2023. After a very active first quarter, Pipestone continued execution on its front-loaded capital program for 2023 in order to gain operational efficiencies and accelerate free cash flow generation in the back half of this year.
In the 6 months ended June 30, 2023, a significant portion of the full year capital budget is utilized to drill 16 of 27 planned wells, complete 17 of 23 planned wells while also investing in various infrastructure projects. During the second quarter, the company drilled and rig released a single well from the existing 14 to 14 pad sites South of the Wapiti River, 5 additional wells on the second phase of operations at the 14 and 19 pad and 1 delineation well at our northernmost pad at 15 to 34 for a total of 7 wells.
Completions in Q2 included 2 Southeastern delineation wells at the 11-09 pad and a single well on the 14-14 pad for a total of 3 in the quarter. We are also active in Q2 investing in production equipment and facilities, which included the equipping and tie-in of the 14 to 14 pad and the kickoff of the pipeline construction connecting the 11-09 delineation pad to Pipestone's 12-14 battery sites.
Approximately $45 million of this year's capital program is being spent on delineation activities, which includes 4 step-out wells drilled and completed in addition to significant northern and southern extensions of our gathering system. In June 2023, Pipestone brought the delineation well drilled off the 14 to 14 pads on production. This well was drilled with a short lateral length of approximately 1,900 meters and has delivered an IP60 of 1.6 million cubic feet per day of raw gas and 394 barrels per day of condensate, equating to a CTR of 241 barrels per million cubic feet. We expect future adjacent wells to scale linearly to Pipestone's typical well length of greater than 3,200 meters.
The 2 new wells drilled and completed earlier this year off the 11-09 pad will begin flowback operations into the 12-14 battery once the new gathering pipeline is complete in September 2023. And flowback operations on the 15 to 34 delineation pad have just commenced with meaningful production results expected over the next few months. We firmly believe that we are on track to meet our objectives for 2023 and delivering continued efficient production growth and unlocking the value of this asset through high-impact delineation.
I will now hand it over to Craig to provide an overview of our Q2 financial results.
Thanks, Dustin. As Dustin mentioned for efficiency reasons, we front-loaded our capital expenditures in '23, which has also derisked the company's ability to deliver on its annual production guidance, which we are reopening today to achieve between 34,000 and 36,000 BOE per day for '23. Capital expenditures in the second quarter to $6.8 million, and the total capital investment in the 6 months ended Q2 was $170.5 million, excluding capitalized G&A representing 67% of the full year budget of $255 million at the mid-point guidance.
The company delivered adjusted funds flow from operating in the quarter of $53.4 million, representing an increase of $57 million or 52% versus Q2 2022 adjusted funds flow from operations of $110.4 million, mainly due to year-over-year weaker realized commodity prices. Pipestone successfully renewed its reserve-based loan in Q2 with a $280 million borrowing base and availability capacity maintained, providing ample and putting an optionality for the business. The maturity date of the RBL was extended to May 2025.
The company ended the second quarter of '23 with a net debt balance of $172.4 million and was down $138.3 million on its $280 million RBL. Pipestone's ratio of net debt to annualized trailing quarter adjusted funds flow from operations at June 30 was 0.8x, which demonstrates the continued strength of the company's financial position. With the majority of the '23 capital program behind us, we expect the Pipestone business will delever into the back half of the year.
Pipestone and executing on an enhanced shareholder return framework with the payment of its second $0.03 per common shareholder dividend on June 30. The quarterly dividend represents a cornerstone of the company's strategy to return capital to shareholders. The company has also declared second quarterly dividend of $0.03 per common share, which will be payable on September 29th to common shareholders of record of record at the close of business on September 15, 2023. The base dividend represents an annualized yield of approximately 4.7% based on yesterday's market close of $2.53 per share.
I'll now hand it over to Dan to provide an update on the recently announced transaction with Strathcona Resources.
Thanks, Craig. As outlined in our August 1st press release, Pipestone has announced that we have entered into a definitive agreement with Strathcona Resources, whereby Strathcona will acquire all of the issued and outstanding common shares of Pipestone for 100% share consideration. Pursuant to the transaction, Strathcona and Pipestone will be amalgamated and will continue to as Strathcona Resources Ltd. Upon completion of the transaction, existing Pipestone shareholders will receive approximately 9.05% of the equity in the pro forma entity on a fully diluted basis, accreting to an exchange ratio of 0.067967 shares per Pipestone share.
The company has called a special meeting of holders of common shares of Pipestone to be held on September 27, 2023, to approve the transaction. The record date of the meeting is set as August 25, 2023. The Board of Directors at Pipestone has approved the transaction and will recommend that shareholders vote in favor of the transaction at the meeting. Pipestone has also retained Kingsdale advisers as a strategic shareholder adviser and proxy felicitation agent in connection with the meeting. Details regarding Kingsdale contact information can be found in today's press release.
I'll now hand it back over to Dustin Hoffman to conclude the call.
Thanks, Dan. The Pipestone Board and management team view the transaction with Strathcona as being in the best interest of Pipestone shareholders. This all-share combination provides Pipestone shareholders with a meaningful ownership stake in what will be the fifth largest liquids producer in Canada, a pro forma company will be a large, low decline rate oil-weighted producer with more than 35 years of highly economic development inventory and significant tax shelter to optimize future growth.
The 3 core areas of the company will include Cold Lake Thermal, Lloydminster Heavy Oil and Montney. Each will have meaningful scale and inventory and in aggregate, a balance of heavy oil, condensate, NGLs and natural gas production. A pro forma company will be strongly positioned against other large oil-weighted Canadian producers on production growth rates, netback, reserve life and free cash flow generation. This transaction is a good piece of business that will drive increased long-term value for Pipestone shareholders. Thanks, everyone, for listening today. And with that, I'll turn it over to the operator for Q&A.
[Operator Instructions] Our first question is from Luke Davis with RBC.
Wondering if you can provide some expectations just around those longer lateral delineation wells that you outlined. So maybe just some parameters around costs, expected rates in terms of how you model that stuff. And then just curious if improves our efficiencies more broadly and how much inventory that might add the portfolio or whether or not this is more just targeting specific areas where it makes sense.
Yes, I'll take that on Luke Davis to fill in the blanks. New longer laterals, it's been a priority for us for sure. And we've seen one-for-one production scaling on lateral lengths, well past 3,000 meters. So when we look at the 14 or 14 delineation well, we intentionally drilled that lateral short. It's 1,900 meters. It was a key well for us from a land retention perspective.
So when you scale that well up to a full 3,000 or 3,200-meter lateral, it's a material well and definitely when he was -- I would classify exceeding our type proof expectations today. So it is a key well for us because it's really the first well south of the river that was completed with, call it, a new completion scope with high-intensity XLE design that we typically employ north of the river, and it's definitely scaling on a per lateral meter basis. relative to the legacy wells in that area. So we're pretty excited about it, for sure.
Yes. Just the final point on some of the numbers, if you were to scale that linearly to the 3,200 meter or 2-mile lateral that we've typically utilized on the asset, that's going to be just under 700 barrels a day in terms of an IP30. And then the cost structure that we see in that area on a CCMP basis would be in and around $7.5 million to $7.8 million for that same [ 5200 ] meter lateral. So overall, we think those economics will be extremely attractive in this part of the asset.
That's helpful. And maybe just one more for me. Just curious on the transaction. I'm not sure if you can share much background here at this point, but wondering if there are other alternatives that you might have looked at? What management's thinking mind it was why you think it's sort of the best alternative for Pipestone at this point?
Yes. Maybe I'll take the first stab Luke, and then Van can fill in the blanks. I think this was an extensive process that we went through. We really keyed on some key factors when we thought about what to do go forward. This particular transaction really provides Pipestone shareholders with very, very strong long-term fundamentals, right? The reserves contribution this material, the inventory depth for this pro forma company is best-in-class, right? And the sustainable long-term production growth that this provides just made a ton of sense for us to transact on.
Yes. And maybe just to add to that, again, we've had other alternatives on the table. We view this as the best alternative that was on the table and was available to be actioned on. We think our job as a Board and management needs to optimize the relative risk-adjusted returns in generate versus our peer group. And in order to be able to do that, we needed to broaden from being a single asset entity. And in our mind, having the opportunity to do an all-share transaction, which allows investors to continue to be exposed to what we think are improving long-term fundamentals for Canadian oil and gas. This is the best transaction that's able to deliver on that. We think it's going to be incredibly competitive from a long-term per share, liquids production per share, free cash flow generation per share and ultimately think that best-in-class shareholder returns.
At this time, I'm showing no further questions. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.