Pipestone Energy Corp

TSX:PIPE

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, and welcome to the Pipestone Energy Corp. Q4 2020 Financials and Updated Corporate Guidance 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.

[Dan van Kessel, Vice President of Corporate Development]

Thanks. 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 update on the company's 2021 guidance and 3-year corporate forecast. Craig will follow with an overview of our Q4 2020 financial results and liquidity strength and Dustin will provide an update on how operations are proceeding thus far in 2021. I will provide an update on our risk management activities and the continued strength of the Edmonton condensate market. I'll 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.

[Craig Frederick Nieboer, Chief Financial Officer]

Thanks, Dan. Listeners should be advised that some of our remarks today will contain forward-looking statements within the meaning of applicable security 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 Q4 and full year 2020 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's 2021 guidance and 3-year corporate forecast.

[Paul Wanklyn, President, CEO & Non]

Thanks, Craig. And good morning, everyone. Along with our management team, I'm pleased to provide an update on our results and our go-forward business plans. 2020 was a very challenging year for the energy business. By effectively managing our capital program, coupled with our strong asset level performance, Pipestone delivered excellent finding and development costs, while growing its proven developed producing reserves by 71%. We believe that our PDP F&D cost at $5.40 per BOE ranks in the top decile for industry performance as does our 2020 PDP recycle ratio of 2x. Pipestone released its initial 3-year corporate forecast last August, in conjunction with the $70 million financing that supported a resumption of development in the fall of 2020. As our plan has evolved, we've added an additional midstream partner at Pipestone, which will expand our processing capacity in Q4 2021 to approximately 40,000 BOEs per day. Our key financial objective is to begin generating material annual cash flow -- free cash flow, sorry, which can be used to accelerate shareholder value through initiatives, including, but not limited to, accelerated deleveraging, share buybacks or the payment of a cash distribution. With the recent improvement in crude oil and condensate prices, Pipestone has updated its financial forecast to reflect a budget price of USD 55 WTI over the next 3 years. Under this higher pricing scenario, the company has elected to increase capital modestly in 2021, with capital guidance increased by $10 million at the midpoint to $155 million to $165 million from a previous range of $145 million to $155 million. This increase is weighted towards the latter half of the year. For 2022, our forecast spending plan increases to $195 million, primarily by shifting capital from 2023 back into 2022, to efficiently fill our available infrastructure capacity. Cumulative 3-year capital from '21 to '23 is virtually unchanged at $485 million in total as compared to $475 million previously. In 2023, we are now forecasting capital spending of approximately $130 million, which equates to maintenance capital at the top end of our guidance -- production guidance for that year. At the base budget price of $55 WTI, we would expect to generate approximately $125 million in free cash flow in 2023, which would increase to approximately $190 million at USD 65 WTI, in line with current commodity prices. Pipestone's demonstrated ability to generate excellent capital efficiencies on its asset have positioned the business to thrive across a wide range of commodity prices, offering a compelling combination of growth and free cash flow to investors. With that, I'm going to pass this on to Craig to discuss the financial highlights for the quarter.

[Craig Frederick Nieboer, Chief Financial Officer]

Thanks, Paul. In a difficult year, Pipestone is proud to have achieved all of its public guidance metrics. During Q4 2020, Pipestone achieved record quarterly production of 17,340 BOE a day, comprised of 31% condensate and 44% liquids, which generated revenue of $45.8 million and adjusted funds flow of $11.1 million. It should be noted 2020 results and in particular, adjusted funds flow in Q4, do not incorporate the expected contingent business disruption insurance proceeds of approximately $1.8 million from the Keyera -- 5-week Keyera Wapiti plant outage that occurred in August and September. Proceeds are expected to be received and recorded in Q2 2021. Full year 2020 production of 15,517 -- 15,570 BOE per day was in the top half of our 15,000 to 16,000 BOE a day annual guidance range. The full year cash flow of $40.5 million exceeded the guidance of $38 million. The company has an -- had an active capital program during the quarter with 7 wells drilled and 6 wells completed. Total drilling and completion expenditures were $31.1 million for the quarter. Total capital expenditures during Q4, including pad facilities, land and other capitalized G&A was $43.7 million, resulting in full year 2020 capital spend of $102 million, well under our guidance of $108 million. The company's balance sheet and available liquidity is strong. As of December 31, 2020, the company had $133.5 million drawn on its $225 million credit facility and $37 million working capital deficit for combined net debt of approximately $171 million. Total available funding as of December 31, 2020, inclusive of the company's working capital deficit, totaled $54 million. Our $225 million RBL provides adequate financial headroom and liquidity to execute our fully funded 3-year growth trend -- plan that Paul just outlined. I'll now hand it over to Dustin to provide an operations update.

[Dustin Hoffman, Chief Operating Officer]

Thanks, Craig. As previously disclosed, during January 2021, we completed the 3-well 8-15 pad with pace-setting costs of $438 per tonne. That pad has since been equipped and tied in with production commencing in late February. Results from these wells have been very encouraging thus far during the initial 15 days of production. The 3-12 pad, which was brought on in January, including the Step Out Lower Montney well, continues to produce in line with type curve expectations. During Q1 2021, Pipestone drilled 3 wells on the 6-13 pad, including a follow-up Lower Montney well, which we are being -- which is being completed during March, and expected to be brought on stream in Q2 of 2021. Drilling costs on this pad are in line with the offset 3-12 pad at approximately $2 million per well and a comparable average lateral length of 2,650 meters. In late February, Pipestone spudded a 6-well pad at 15-25, utilizing 2 drilling rigs. Completion operations are scheduled for May 2021 with production timing of Q3 2021. Regulatory planning, procurement and construction operations are on track for the production facilities and gathering line that will feed into the Veresen Midstream 16-28 battery and ultimately to the Hythe Gas Plant. Expected completion and commissioning of this infrastructure in Q4 2021 provides Pipestone access to an incremental 50 million cubic feet per day of gas and associated condensate handling capacity with no take-or-pay obligations until late 2022. Pipestone's production ramp-up during Q1 2021 has been proceeding as expected, with January and February, averaging approximately 20,500 BOE per day, which is comprised of 33% condensate, 46% total natural gas liquids and 54% natural gas. Additionally, with the wells from the 8-15 pad cleaning up, March month-to-date sales production is currently above 23,000 BOE per day. With that, I will turn it over to Dan to provide an update on our risk management program.

[Dan van Kessel, Vice President of Corporate Development]

Thanks, Dustin. Pipestone Energy continues to implement its robust commodity price hedging program to reduce volatility in expected future cash flows. Currently, for full year 2021, the company has 42,450 gigajoules per day of AECO natural gas hedged at a weighted average price of approximately $2.35 a gigajoule. Additionally, approximately 4,000 barrels a day of Canadian dollar WTI is hedged at a weighted average price of approximately CAD 58 per barrel, the majority of which was put in place prior to year-end 2020. On the recent strength in oil prices, Pipestone has added 250 barrels a day of Q1 2022 Canadian dollar WTI swaps at approximately $74.50 per barrel as compared to our budget price of approximately CAD 70 per barrel. We expect to continue gradually adding to our 2022 hedge program to support the forecast capital program and expected free cash flow generated at these oil prices. Edmonton condensate pricing has remained strong relative to WTI since early Q4 2020, consistently trading at par to a slight premium to WTI, with April 2021 pricing as high as at USD 2.75 per barrel premium. With the largest Canadian condensate producers focused on production maintenance, through 2021, we expect differentials to remain tight through this year. Pipestone Energy is capitalized on these differentials by swapping approximately 3,000 barrels a day in Q2 2021 at a net premium of approximately USD 0.45 per barrel. I'll now turn it over to Paul to conclude the call.

[Paul Wanklyn, President, CEO & Non]

Thanks, Dan. Our updated 3-year capital program puts Pipestone on track to deliver top decile cash flow per growth -- cash flow per share growth while deleveraging through the generation of material free cash flow beginning in 2022. We believe this business plan builds the foundation for a sustainable free cash flow model to provide pipestone shareholders excellent long-term value. And with that, I think I'll turn it over to the operator for Q&A.

[Operator]

[Operator Instructions] Our first question comes from Josef Schachter with Schachter Energy.

[Josef I. Schachter, Author & President]

Congratulations on the good quarter. Two questions for me. On the preferred, you have 2 years on them and then 20 days trading at $1.70 to have them convert into common. Are there any other conditions where the stocks right now are close to $2, that you can trigger that earlier and save the 6.5% dividend payment?

[Craig Frederick Nieboer, Chief Financial Officer]

Josef, this is Craig. I'll take that one. The investors have a 2-year hold off on our forced conversion and so as you noted. So they could convert voluntarily before that time, but no, we do not have a trigger to convert in advance of that. Just to remind you and investors, the dividend is a pick dividend, so it's not actually cash going out the door right now.

[Josef I. Schachter, Author & President]

Okay. Have any of the owners of the preferred converted now that the stock has doubled over their exercise price?

[Craig Frederick Nieboer, Chief Financial Officer]

Not as of yet, no.

[Josef I. Schachter, Author & President]

Not as of yet. And the second question, are you expecting any downtime in the plants for maintenance in the next few months that will impact your production in the summer months?

[Dustin Hoffman, Chief Operating Officer]

Josef, Dustin here. I'll take that one. Our current outlook does include any known downtime at the facilities. We're not anticipating significant downtime in the short-term here. If you look at our run time over the last 4 or 5 months, through our major midstream partner. They've been north of 95% run time over the last 5 months. So things have been very stable. And we do monitor our midstream's planned maintenance schedules pretty closely, and we're working with them to optimize it for when it makes sense for us.

[Dan van Kessel, Vice President of Corporate Development]

And just from a -- in terms of a production forecast, any known and planned downtime from either of our midstream partners has been incorporated into the production guidance we've provided for 2021.

[Josef I. Schachter, Author & President]

Okay. Super. Again, congratulations, and the outlook is excellent for shareholders. Much appreciate it.

[Operator]

[Operator Instructions] And our next question comes from Luke Davis with RBC.

[Luke Davis, Analyst]

Just wondering if you guys have seen any cost inflation in the conversations that you've been having or if you have any built into your plans for later in this year?

[Dustin Hoffman, Chief Operating Officer]

Sure. I can take that one, Luke. This is Dustin here. I think our recent corporate presentation, Slide 8, shows kind of our kind of cost progression over the last number of pads. We've shown a pretty continuous reduction in our dollar per meter and dollar per tonnage metrics. We haven't seen a lot of cost pressure as of yet from our service providers. I mean obviously, with the increased WTI, things are a little bit busier than they were at this point last year. So we don't -- we're not baking in any inflation, but I think it's pretty evident by our numbers that we're carrying that $5.7 million well costs into this year, and we've demonstrated costs that were well below that to date. So I think we've got a natural buffer baked into our numbers, Luke.

[Operator]

I'm not showing any further questions at this time. I would now like to turn the call back over to Paul Wanklyn for closing remarks.

[Paul Wanklyn, President, CEO & Non]

Thanks. Thanks, operator. Appreciate everyone dialing in this morning. We're excited about the prospects as we move forward. And as Josef said, I think we're setting a great foundation for future prospective for the business. So thank you all for dialing in.

[Operator]

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.