Petrus Resources Ltd
TSX:PRQ
Earnings Call Analysis
Q4-2023 Analysis
Petrus Resources Ltd
2023 was a tumultuous year for Petrus Resources, shaped by market challenges as oil and natural gas prices descended from previous highs. The company entered the year with proactive capital plans, completing 7 wells by mid-March. However, faced with declining resource prices, Petrus suspended these plans to adopt a more cautious capital strategy focusing on long-term infrastructure investments. This shift included the construction of the North Ferrier pipeline and drilling of wells tied to this infrastructure. Despite the setbacks, the company achieved a noteworthy 35% surge in production, averaging 10,301 barrels of oil equivalent (BOE) per day, and retained robust cash flows at $78 million, only an 11% decline from 2022. The decision to put on hold aggressive growth in favor of strengthening the core business underscored Petrus's resilience in a volatile economic climate.
Amid the financial prudence and operational achievements, Petrus was able to progress towards a return of capital model. The firm's efforts to reduce and restructure debt in the preceding year, coupled with increased cash flow, culminated in the announcement of a special dividend in Q4 2023 and the initiation of regular dividends commencing January 2024. The regular dividend, set at $0.01 per share monthly, represents a substantial yield of approximately 9%, a significant shareholder value proposition and an indication of the company's ability to withstand price fluctuations.
As Petrus Resources looks ahead to 2024, it has laid out a measured budget strategy that is focused on maintaining production levels to safeguard dividends. The company's Q1 performance saw drilling activities that, while not yet contributing to production, promise to do so in the subsequent quarter. The company is monitoring the market closely, delaying capital expenditures where prudent, and preserving operational flexibility. This cautious approach is balanced with an underlying optimism for a rebound in resource pricing — the early rise in oil prices and stronger gas futures suggest potential for increased profitability and a solid position for Petrus to benefit from these positive market shifts.
The dividend's sustainability was raised as a concern during the conference call, highlighting the close margins between expected free cash flow and dividend commitments plus automatic share buybacks. However, CEO Ken Gray expressed confidence in the dividend's viability through the year, indicating that there are budget models at various price scenarios that support this assurance. Gray emphasized the company's considerable leeway to reduce capital spending if necessary, a testament to Petrus's flexible financial planning aimed at honoring shareholder returns even in less favorable market conditions.
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Ladies and gentlemen, thank you for standing by. Welcome to Petrus Resources Year-end 2023 Results Conference Call and Webcast. [Operator Instructions]. Please be advised that today's conference is being recorded.
I would like now to turn the conference over to Ken Gray, Chief Executive Officer. Please go ahead.
Hello and welcome to Petrus Resources conference call to discuss our 2023 year-end results, give you a quick update on current activities and answer any questions you may have. This is the first time we are doing this, so we appreciate you calling in and hope you find it useful.
My name is Ken Gray and I'm the CEO of Petrus. I'm joined here by our CFO, Mathew Wong; COO, Matt Skanderup; and VP, Commercial and Corporate Development, Lindsay Hatcher. So let's get right to it.
2023 was a challenging year as oil and natural gas prices retreated from the post-COVID and Ukraine war-induced highs in 2022. We had ambitious capital plans for 2023 and started drilling right at the start of the year, finishing 7 wells by mid-March, with 3 of those completed and put on production in early March.
In light of the rapidly retreating prices, we elected to suspend our capital program and reevaluate our capital strategy. We quickly pivoted from an aggressive growth strategy to a more future-oriented strategy with investments in infrastructure, in particular, our North Ferrier pipeline connecting our North Ferrier lands to our 100% owned and operated gas plant and drilling some key wells in North Ferrier that tied into the pipeline and allowed us to both acquire additional working interest in highly prospective lands and generate gathering and processing revenue from the area. The pipeline was completed in December and the North Ferrier wells drilled in the second half of 2023 were put on production right at the end of the year.
Highlights for the year include a second year in a row of significant production growth, averaging 10,301 BOE per day up 35% from the 7,604 BOE per day in 2022. We generated strong cash flow of $78 million, which was down only 11% from 2022 despite prices being down almost 40%, increased production plus lower cash costs kept our cash flow strong.
Petrus has been building towards a return of capital model, reducing and restructuring our debt in 2022 and growing our cash flow. And we were pleased to be in a position to declare a special dividend of $0.03 per share in Q4 2023 and then initiate a regular dividend starting in January 2024 of $0.01 per share, which at our current price provides a yield of about 9%. That we were able to introduce a regular dividend at this time is a testament to the strength of our business and ability to generate strong cash flow even at low prices.
Looking forward, we announced our 2024 budget guidance in February. The plan is to drill to maintain production and protect our dividend. Q1 2024 is almost in the books. We've drilled three 100% wells and participated in another 2.3 net wells in Q1. None of the wells are on production as of yet. We have deferred the completions on our operated wells until Q2, while the nonoperated wells are currently being completed. We have additional drilling planned for later in the year with lots of flexibility, so we'll continue to monitor market conditions and resume capital spending when it makes sense.
There is a lot of optimism with regards to pricing later this year and next year. Oil prices are already ticking up and gas futures are much stronger for next winter and 2025 than where we are today. Petrus is well positioned to take advantage.
With that, I'll open the floor to questions.
[Operator Instructions]. The first question comes from Brian Davis.
Just one of the questions, kind of reviewed everything that you guys sent out last night and one thing that kind of popped into my head is, it looks a little tight on that dividend. I think you said you're going to have $15 million to $20 million of free cash flow for next year and you're pretty close at $14 million for the dividend plus your automatic buyback. How confident are you guys that you can keep that dividend in place?
Yes. Thanks, Brian. No, you're right. Current pricing in that is challenging but we're quite confident that we'll pay the dividend throughout this year and that we can sustain that dividend. We have a lot of flexibility in our capital spending. We anticipate $40 million to $50 million of capital spending on drilling this year.
And -- but we can certainly reduce that if we need to and we're prepared to do that if we need to in order to pay the dividend. So yes, we see no real issues. We've run our budget models at various pricing scenarios and we're quite confident that the dividend is sustainable.
[Operator Instructions]. I show no further questions in the queue at this time. This will conclude the conference call for today, want to thank you for your participation. You may now disconnect.