Pipestone Energy Corp

TSX:PIPE

Earnings Call Transcript

[Operator]

Good morning, and welcome to the Pipestone Energy Corp. Q1 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.

[Dan van Kessel, executive]

Thank you. Good morning, everyone, and thank you very much for joining the call. With me, I have Dustin Hoffman, Interim Chief Executive Officer and Chief Operating Officer; and 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 Q1 2023 financial results, and I will follow with 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 opening comments.

[Craig Nieboer, executive]

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 our Q1 2023 MD&A. All dollar amounts referenced in our remarks today are in Canadian dollars, unless otherwise specified.

To begin, and as you would have seen in our Q1 release earlier today, our President and CEO, Paul Wanklyn, will be taking a leave of absence for health reasons. We remain optimistic about this recovery, but we have no certainty on time line for his return. Our Board has appointed Dustin Hoffman to fulfill the dual roles of COO and Interim President and CEO. Listeners should be reminded that Dustin joined Pipestone as CEO back in September 2019 and prior to that, spent more than 25 years building a successful career at Ovintiv and its various predecessor companies.

With that, I would like to pass it over to Dustin, who will provide an update on Pipestone's operations.

[Dustin Hoffman, executive]

Thanks, Craig, and good morning, everyone.

I'd like to start by saying our thoughts are with our founding CEO, Paul Wanklyn, for a speedy recovery and with the people and communities being impacted by the wildfires.

I'm very pleased to announce our record Q1 2023 production results of 35,162 BOEs per day, which puts the company well on track to achieving its annual production guidance range of 34,000 to 36,000 BOEs per day. Pipestone had a very active first quarter, executing on approximately $106 million or 42% of our planned capital program at the midpoint of our $245 million to $265 million guidance range.

The company's first quarter development activity included drilling 9 of the 27 planned 2023 drills and completing 14 of the 26 planned 2023 completions. Approximately $40 million of this year's capital program is being spent on delineation activities, focused particularly on the southeast portion of our acreage situated within the Montney volatile oil window.

During the first quarter, we drilled 2 new wells on our 11-09 pad with an average lateral length of approximately 4,500 meters. Average drill costs were $3.4 million per well or $765 per lateral meter drilled, which is 14% below our 2023 budget drilling cost per lateral meter. We completed these 2 wells in April of 2023 with wellsite facility construction underway to enable extended flow tests during Q2 of this year.

In April, we retested the original well on the 11-09 pad, which was completed by Pipestone's predecessor company in 2018. Over the 7-day flow test, the original 11-09 well produced an average of 710 barrels per day of condensate and 3.4 million cubic feet per day of raw gas, which equates to a condensate gas ratio of 209 barrels per million cubic feet.

It should be noted that the 2 new wells on the 11-09 pad are double the lateral length of this original well. We plan to commence construction of a new gathering pipeline to tie the 11-09 pad into Pipestone's existing 12-14 battery this summer.

During the quarter, the company conducted a number of land swaps with offset producers south of the Wapiti River to create a more consolidated, operated land position. And as a result, we have drilled an additional delineation well off the 14-14 pad site. This well was completed in April 2023 and is expected to commence initial flowback operations later in Q2.

In addition to the delineation activity on the 11-09 and 14-14 pad sites, we have drilled and rig released the final 3 of 4 planned wells on the second occupation of our 02-31 pad. We rig released 4 wells during the second occupation of our 02-25 pad and also drilled a water disposal well at our 06-30 pad.

In late December of 2022, we commenced frac operations on a 6-well pad at the 11-05 location, which continued into January of this year. The 11-05 pad facilities were constructed in February 2023, and all 6 wells were brought on production at the beginning of March. These 6 wells have achieved an average IP60 of 382 barrels per day of wellhead condensate and 4.4 million cubic feet of raw gas equating to a condensate gas ratio of 87 barrels per million cubic feet, meeting our VRGC1 type curve expectation.

Eight additional wells drilled at the 02-31 and 02-25 pad sites were also completed in March with initial flowback operations ongoing. These wells are expected to be on production by mid-May of 2023.

We firmly believe that we are on track to meet our objectives for 2023 in delivering continued efficient production growth and unlocking the value of this asset through compact delineation.

I will now hand it over to Craig to provide an overview of our Q1 2023 financial results.

[Craig Nieboer, executive]

Thanks, Dustin. As a result of the record production volumes in the quarter and despite weaker commodity prices, the company's Q1 2023 adjusted funds flow from operations of $84.9 million remained largely consistent with the adjusted funds flow from operations of $86.3 million in Q1 2022.

As Dustin mentioned, Pipestone has front-loaded its capital expenditures in '23, which will derisk the company's ability to deliver on its annual production guidance. The total capital investment in Q1 of $106.6 million, excluding capitalized G&A, represents 42% of the full year budget of $255 million at the full year guidance. As a result of the higher capital spending in Q1, the company exited the first quarter of '23 with net debt balance of $150.4 million and was drawn $98.3 million on its $280 million bank lending facility.

Pipestone's ratio of net debt to annualized trailing quarter adjusted funds flow from operations at March 31, 23 was 0.4x, down from 0.6x at March 31, '22, which demonstrates the continued strength of the company's financial position.

We will continue to target a run rate net debt balance of about $100 million, which we expect to achieve later this year as the capital program levels out. We're also pleased to report this morning that we have successfully redetermined and extended our $280 million RBL with maturity out to May 2025. This provides ample liquidity and optionality for the business going forward.

Pipestone executed on its enhanced shareholder return framework with the payment of its inaugural $0.03 per common share quarterly dividend on March 31, '23. The quarterly dividend represents the cornerstone of the company's strategy to return capital to shareholders and represents an annualized yield of approximately 4.7% based on yesterday's market close of $2.53 per share.

It was also announced today that the company's Board of Directors declared a second quarterly dividend of $0.03 per common share, which will be payable on June 30 to common shareholders of record at the close of business on June 15, 2023.

I'll now hand it over to Dan to provide an update on our risk management activities.

[Dan van Kessel, executive]

Thanks, Craig. Pipestone views commodity price risk management as integral to protecting its capital program and preserving optionality with respect to its shareholder return objectives. The company capitalized on improvements to the WTI futures prices in early April due to the surprise OPEC output cut announcement to significantly expand its oil hedge position through the end of 2023. Further details on our updated hedge decisions can be found in today's press release and MD&A.

With respect to the condensate market through -- between January and April of this year, condensates traded at a large premium to WTI. Through the remainder of Q2, we expect it to trade at a small discount to WTI as a result of the turnaround activity happening in the oil sands with pricing expected to resume -- to strengthen through the back half of the summer and trade in and around par to WTI.

I'll now turn it over to Craig to conclude the call.

[Craig Nieboer, executive]

Thanks, Dan, and thanks, everyone, for listening today. With that, we'll turn it over to the operator for any Q&A.

[Operator]

[Operator Instructions] 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.