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Good morning, and welcome to the Pipestone Energy Corp. Q3 2021 Financial and Operations Update 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, Corporate Development. You may begin.
Thanks, and good morning, everyone, and thank you very much for joining the call. With me, I have Paul Wanklyn, President and Chief Executive Officer; Dustin Hoffman, Chief Operating Officer; and Craig Nieboer, Chief Financial Officer. On today's call, Paul will start by providing an overview of Pipestone's strategic objectives; Craig will follow with an overview of our Q3 2021 financial results; and Dustin will provide an update on our production and development operations. I will provide an update on our risk management activities. I will now hand the call over to Craig Nieboer, Chief Financial Officer for Pipestone Energy, to provide the disclaimer and some comments relating to upcoming financial disclosure.
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 and capital management measures in today's press release and in our Q3 2021 MD&A. All dollar amounts referenced in our remarks today are in Canadian dollars unless otherwise specified. With that, I would like to pass it over to Paul Wanklyn, President and Chief Executive Officer, who will provide an update on Pipestone strategic progress.
Thanks, Craig, and good morning, everyone. Before providing an update on the company, I would like to express our team's appreciation and thanks to all of the veterans on Remembrance Day this Thursday. I'm extremely pleased to announce our record Q3 production results of 24,700 BOEs per day. Our team continues to advance our business plan as promised by delivering strong capital program execution, including pacesetter well costs for our most recent 3 wells on the 6-13 pad. Subsequent to the quarter, Pipestone completed the construction of the new Veresen-owned water hub and pipeline tie-in to the Hythe gas plant, which gives the company access to an additional 50 million cubic feet per day plus liquids handling capacity. This third midstream option, in addition to our existing capacity, gives Pipestone access to sufficient total processing capability to facilitate 40,000 BOEs a day of sales production, which is critical to achieving our 3-year plan objectives. On November 5, Pipeline began gradually ramping production into the newly constructed Veresen infrastructure. As a result, total corporate production based on field estimates has averaged approximately 31,600 BOEs per day over the past 3 days, which includes over 10,000 barrels per day of condensate. Production for November and December of 2021 is expected to average over 30,000 BOEs a day which will bring average production for 2021 within our forecast guidance down of 24,000 to 26,000 BOEs per day. We are pleased to set formal guidance for 2022, highlighted by forecast production growth of 40% to a midpoint of 35,000 BOEs per day, coupled with the generation of approximately $150 million of free cash flow at our current base price forecast of $70 WTI and $3.50 AECO, which is lower than the current forward strip pricing. Since going public in early 2019, we have successfully executed an ambitious development program which has resulted in the rapid organic growth of -- required to achieve critical mass. Capital spending has exceeded cash flow during this period. Pipestone has now made the pivotal shift to begin generating free cash flow starting in Q4 2021. Our first priority for free cash flow utilization remains deleveraging the balance sheet. We expect net debt at year-end to decrease to approximately $180 million or 1.1x 2021 cash flow. Coincident with debt repayment, our Board has approved a normal course issuer bid to commence this quarter. We believe our shares are materially undervalued, and our expectation is to buy back up to 5% of the basic shares outstanding over the next 12 months. This is the first step in delivering returns to shareholders. Upon achieving an additional debt target of $100 million, which we expect to be achieved by mid-2022, Pipestone remains committed to follow up the NCIB with additional return of capital initiatives. With that, I'll pass it over to Craig to discuss the financial highlights for the quarter.
Thanks, Paul. During the quarter, the company generated record revenue of $100.2 million, more than tripling the revenue from previous year Q3 2020, as well as record adjusted funds flow from operations of $43.7 million. These impressive results were driven by a record average quarterly production of 24,704 BOE a day, comprised of 30% oil and condensate, 40% other NGLs and 56% natural gas, which included a planned 10-day outage at a third-party gas plant during July. This represents a 6% increase over Q2 2021 and an 80% increase over Q3 2020. Alongside the increase in production, the company achieved a record quarterly operating netback of $22.01 per BOE, an increase of 12% over Q2 2021 and 122% increase over Q2 2020. The company continued its 2021 capital program with 7 wells drilled and rig released and 12 wells completed during the third quarter of 2021. Total capital expenditures, including capitalized G&A, were $53.8 million during the 3 months ended September 30. From a returns perspective, the company generated strong returns on invested capital, with Q3 2021 annualized ROCE and CROIC being 17.6% and 21.4%, respectively as compared to Q3 2020, annualized ROCE and CROIC of negative 1.3% and 6.2%, respectively. As Paul mentioned, in Q4 2021, Pipestone will begin its transition from a net consumer of capital to a net distributor. Pipestone will begin a deleveraging process, and we will also expect by the end of November to receive TSX approval of our 5% NCIB program, which based on the current flow, will allow us to purchase up to 9.6 million shares over the next 12 months. To repeat what Paul described, we believe the Pipestone shares are significantly undervalued. And at this time, the NCIB is the most effective use of free cash flow to enhance shareholder value. I'll now hand it over to Dustin to provide the production and capital program update.
Thanks, Craig. Our teams continued to deliver an efficient and safe development program, and following the addition of our 30 [ gas ] point last week, we have been ramping production field-wide. As Paul mentioned, current corporate production is nearly 32,000 BOEs a day, and we expect to average greater than 30,000 BOEs per day through November and December. As we ramp volumes over the coming weeks, in total, Pipestone will have brought on 12 new wells across the 6-24, 6-13 and 14-4 pads. Early results from all these new wells are very encouraging. We will provide more details to the market once longer-term production data is available. During the quarter, the team continued to demonstrate peer-leading capital efficiencies. During our latest phase of development on the 6-13 pad, which included 3 new wells with an average lateral length of approximately 2,500 meters, we achieved an all-time pad average pacesetter well cost at $4.9 million per well, all in. At current commodity prices, we expect these wells to pay out in less than 6 months from the onstream date. Additionally, the 3 well 14-4 pad averaged $5.9 million per well, all in. Those wells are approximately 3,000 meters in lateral length and include a greenfield well site production facility build. During the fourth quarter, Pipestone opportunistically added a second drilling rig to accelerate the drilling of 3 wells on the 6-30 pad prior to year-end. Alongside the 6 wells currently being drilled on the 2-31 pad, we expect to exit this year with 9 drilled and uncompleted wells, which puts the company in a strong position to maintain its production growth trajectory into 2022. With that, I will now turn it over to Dan to provide an update on our risk management program.
Thanks, Dustin. Over the past quarter, Pipestone has modestly added to its oil and natural gas hedges for 2022. The objective of our hedging program is to secure the rapid deleveraging that is forecast to occur at current strip prices over the coming quarters. Currently, Pipestone has 2,500 barrels per day of Canadian dollar WTI hedged for Q1 2022 at an average price of $83 per barrel and 1,500 barrels per day for Q2 2022 at an average price of $86 per barrel and no oil hedges in place yet for the second half of 2022. Over the coming months, Pipestone expects to increase its full year 2022 oil hedge position to be approximately 25% of its forecast condensate production. With respect to natural gas, Pipestone has a full year 2022 average of approximately 23 million cubic feet per day swapped at an average AECO price of $3.21 per Mcf. The company is ultimately targeting to be approximately 35% hedged on natural gas for full year 2022 with an emphasis on the summer months. Condensate pricing, which drives approximately 2/3 of our revenue, has been robust thus far in Q4 2021. Current condensate differentials have ranged between $1 to $3 per barrel U.S. premium to WTI which is expected to continue through the winter as a result of increasing domestic demand and relatively flat supply growth in Western Canada. I'll now turn it over to Paul to conclude the call.
As you can see from these results, the team at Pipestone is delivering on its business plan to become a significant and sustainable Montney producer through profitable organic growth, while delivering free cash flow with a strong balance sheet. Our new NCIB is the first step in our strategy to deliver capital back to shareholders in the coming years. And with that, I'll turn it over to the operator for Q&A.
[Operator Instructions] Our first question comes from the line of Christian Cuomo from Peters & Co.
I just had a question related to like you certainly have a lot of flexibility at current strip prices to allocate free cash flow to other uses outside of buybacks next year. So I was just wondering what you need to see or, I guess, get comfort in before you would look at accelerating more growth past 40,000 barrels a day?
Thanks, Christian. That's an excellent question. And I think what we've tried to telegraph is in relation to deleveraging the central block on our Pipestone land base, which is proceeding initially with the 14-4 pad, we'll be looking at opportunities -- any opportunities in the field to increase our processing capability over the coming year or 2, and we're actively looking at all those possibilities now. But we're excited about the future inventory and the potential to grow past 40,000 BOEs a day past 2022.
[Operator Instructions] Your next question comes from the line of Luke Davis from RBC.
Just as it relates to the NCIB, wondering if there's any kind of parameters or rules around how you plan to execute there. Just trying to get a sense for how we should model that going forward.
Yes, Luke, this is Craig. I'll take that one. I mean we're looking at it as kind of be opportunistic. Obviously, our shares have moved significantly in the last month. We still think they're extremely undervalued. I think we're going to look at applying the NCIB similar to how we've done hedging, which is sort of taking it from a moderated approach and spend some dollars and get into the market, and we'll be reporting that on [indiscernible] kind of on a more regular basis than a lot of issuers. So we see it as a methodical transactional, opportunistic NCIB that we're going to be hopefully in the market every week once it's approved.
And we also have your next question from Lloyd [ Pierre ], an investor.
Just congratulations on another great quarter, looking forward to many more. Just had a question on well production. Have you seen any significant drop-off in the liquids production and more gas as time goes on?
Lloyd, Dustin here. I'll take that question. I think we've demonstrated we do have some variability in our CGR profile kind of from the southwest corner of our map sheet to the north where we do see CGRs vary. And we've got multiple type crude wins today, but what I can tell you is all of those type crude windows are extremely economic at current pricing. And all the well performance that we've seen to date is aligning with our type curves. So we're very confident in our ability to deliver and really happy with the performance we're seeing so far.
And maybe -- it's Paul here, I'll just add one other comment to that. On Page 20 in our corporate deck, we have a condensate -- or type curves for all the 3 areas we see in the pool. And wellhead condensate production is noted in one of those curves. So I mean you can see the rapid drop-off as these wells start to produce and then stabilize nicely over time. So that's a good illustration of how we model things out.
I guess my question more was on the ratio of liquids to gas like I know in other plays, as time goes on, the liquid number drops as the gas increases. Just wondering if that was reflected in those charts.
The slide Paul described shows that, that obviously started at a high level and the well stabilized over time. But everything we've seen to date is kind of fitting the shape of those curves.
Okay. Just one other small question. You're saying that the mid-2022, we'll be looking at other ways to return capital to shareholders. Just wondering if a dividend was discussed.
This is Craig, CFO. I think everything is on the table. We don't see the utility on trying to pin ourselves down to one mechanism or another at this point in time. It will be reflective of where the share price is, where commodity price is. If you go again, focusing on our corporate presentation on Page 5 and also in the press release, it clearly shows that there's significant additional free cash flow expected beyond the capital program, the deleveraging commitment and an NCIB. So obviously, something else is going to be available to us. But at this stage, we're not prepared to pin us down to one particular mechanism.
Okay, understandable. No problem.
And there are no further questions at this time. I would now like to turn the call back to the speakers. Speakers, please go ahead.
Well, thank you all for joining our conference call this morning, and we're proud of our results and happy to share them with all of you, our shareholders. So thanks very much for joining this morning.
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.