Earnings Transcript for BKBEF - Q1 Fiscal Year 2021

Operator: Good morning, and welcome to the Pipestone Energy Corp. Q1 2021 Financials 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.

Dan van Kessel: 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 Pipestone’s progress in achieving its guidance and corporate business plan over the next three years. Craig will follow with an overview of our Q1 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 and how we're performing against Street estimates. I will now hand the call over to Craig Nieboer, Chief Financial Officer for Pipestone Energy to provide the disclaimer and components relating to upcoming financial disclosure.

Craig Nieboer: 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 Q1 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's strategic progress.

Paul Wanklyn: Thanks, Craig. And good morning everyone. Our business plan is solidly on track and we're very pleased with the results achieved so far this year. Before I review the achievements for the past quarter, I'd like to highlight the vision our team has for Pipestone. The objective for the three-year plan is to organically build scale to the business, such that the company can generate significant and sustainable annual free cash flow beginning next year in 2022. We believe that continued success across the north, south breadth of our 140-section land base has demonstrated a very high quality of the Montney resource base in the Pipestone area. As we begin to step up eastward from our existing pad sites in the second half of 2021, we will begin de-risking large, undeveloped areas for future development. At the company's base price deck of US$55 per barrel WTI, we forecast or organically growing production to between 37,000 and 40,000 BOEs per day in 2023, effectively filling our existing and currently planned infrastructure capacity. In 2023, we expect to generate $125 million of free cash flow, assuming a maintenance budget of $130 million at US$55 WTI. And nearly $200 million at US$65 WTI in line with current prompt oil prices. This growth and free cash flow starting next year allows Pipestone to strengthen its balance sheet through debt repayment also looking at opportunities to provide shareholder returns. During this past quarter, Pipestone made significant progress on its business plan, achieving corporate records for quarterly production, operating netback and cash flow. Our operations team continues to demonstrate improving capital efficiencies with new pacesetters established on both the drilling and completion side. The condensate deliverability on our latest pads are outperforming expectations, while the Lower Montney has recently been established as an additional, highly economic target on our acreage. Over the remainder of 2021, we expect to continue demonstrating the strength of our assets and our team. With that, I'll pass it onto Craig to discuss the financial highlights for the quarter.

Craig Nieboer: Thanks, Paul. During the first quarter, the company generated record quarterly revenue of $71.5 million and record adjusted funds flow from operations of $28.2 million. These impressive revenue and adjusted fund flow results were powered by record average quarterly production of 21,595 BOE per day, comprised of 33% oil and condensate, 13% liquids NGLs and 54% natural gas. This represents BOE per day production increase of 22% over Q4 2020, and an increase of 54% over Q1 2020. Alongside the significant growth in production, the company achieved the record quarterly operating netback of $17.54 per BOE, an increase of 74% over Q4 2020 and a 29% increase over Q1 2020. Pipestone commenced its 2021 capital program with seven wells drilled and rig released in six wells completed during the first quarter of 2021. Total capital expenditures for the quarter, including capitalized G&A were $46.3 million. Onto the balance sheet. Subsequent to the quarter end, Pipestone successfully redetermined its reserve-based loan or RBL and maintained its borrowing capacity at $225 million on a fully conforming basis. The revolving period of the RBL was extended to May 30, 2022 with an additional one-year term out period thereafter. The next redetermination is scheduled for November, 2021. Additionally, the company has closed the renewal and expansion of its letter of credit facility with Export Development Canada. This facility was increased from $15 million to $22.5 million resolving in Pipestone having a total available credit capacity, including LCs of $247.5 million. The business is fully funded and has sufficient liquidity to execute its growth objectives as outlined in the three-year business plan. And as Paul mentioned, the plan will generate material free cash flow beginning in 2022, while deleveraging the balance sheet. I will now hand it over to Dustin to provide a production and capital program update.

Dustin Hoffman: Thanks, Craig. Production continues to track well against expectations. Based on field estimates, April 2021 production averaged 22,850 BOE per day comprised of 31% condensate and 44% total liquids, with no new wells brought on production since the three well 8-15 pad in February. The company expects to bring 18 additional wells on production during 2021, including three wells on the 6-13 pad in May, and six wells on the 15-25 pad in July. The 6-13 pad includes one additional Lower Montney well, following up on the recently disclosed Lower Montney success at our 3-12 pad. Construction and commissioning of the production facilities and pipeline connecting Pipestone’s 6-30 pad to the Veresen Midstream 16-28 battery and compressor station remains on-track for Q4 2021 start-up. This will add an additional 50 million cubic feet a day plus associated liquids of processing capacity for Pipestone. Well results thus for in 2021 had demonstrated strong condensate deliverability. The six well 3-12 pad has achieved an IP90 of 490 barrels per day at wellhead condensate and 4.3 million cubic feet of raw gas, with the previously disclosed step-out Lower Montney ‘D’ well performing in-line with the average Montney ‘B’ well performance. The three well 8-15 pad has achieved an average per well IP60s of 754 barrels per day of wellhead condensate and 3.3 million cubic feet of raw gas, which equates to a condensate/gas ratio of 236 barrels per million. The condensate yields at 8-15 are significantly higher than previously seen in the southwest corner of our land base. Pipestone is following up on the success with two southeast directed wells on the six well 15-25 pad, located approximately three miles to the north of 8-15. Capital cost efficiencies continued to improve in the field. The six well pad at 15-25 achieved an average drilling cost of $2.1 million per well with a pad average lateral length of 2,914 meters, which equates to a $752 per lateral meter cost. This is in-line with previous pacesetter pads. Additionally at 15-25, Pipestone drilled its longest lateral since inception, measuring 3,772 meters at a cost of $2.3 million or $617 per lateral meter. At the 6-13 pad, the company complete three wells piloting 3.5 tonnes per meter of proppant intensity with an average lateral length of 2,633 meters for $3.3 million per well. At $358 per tonne of proppant placed, this pad represents the new pacesetter on a dollar per tonne placed basis. With that, I will turn it over to Dan to provide an update on our risk management program and tracking in relation to Street estimates.

Dan van Kessel: Thanks, Dustin. Last fall, we initiated a substantial 2021 hedging program to protect our capital program and ensure the company could execute on its growth trajectory within a volatile commodity price environment. As Pipestone matures and we transition into free cash flow generation in 2022, we will be more judicious in our hedging approach. To date, we have been focused on hedging the early portion of 2022 to limit the impact of severe backwardation in crude oil futures unrealized swap prices. Pipestone currently has 1,000 barrels a day of Canadian dollar WTI swap in Q1 2022 at an average price of $74.88 per barrel. Additionally, Pipestone has 500 barrels a day at first half 2022. Canadian dollar WTI swap at an average price of approximately $74 per barrel. Both swaps are significantly above Pipestone’s base-case price target of Canadian dollar WTI, $70 per barrel. We expect to continue opportunistically adding to our first half 2020 hedge levels through this year as prices warned. In terms of our first quarter performance based on our internal annual survey, our production and cash flow results are in line with the average estimate, while our capital expenditures screen about 7% below driven by the capital efficiencies delivered by our operations team. I'll now turn it over to Paul to conclude the call.

Paul Wanklyn: Thanks, Dan. The outlook for Pipestone is very exciting and our fully funded business plan remains differentiated from our peers. Our team is executing the build-out phase where the asset based to reach critical mass. Beginning in 2022, we're going to start generating significant free cash flow for investors. Pipestone’s strong production efficiencies and large undeveloped land base will ensure the sustainability of this business. With that, I'll turn it over to the operator for Q&A.

Operator: Thank you. [Operator Instructions] Our first question comes from Luke Davis, RBC.

Luke Davis: Hey, good morning, guys. Thanks for taking my question here. Things obviously are looking good on the drilling and completion side. Just wondering if there's any more you can do either the components or things kind of looking really tapped out here. And then maybe just try a little bit of commentary on how you expect that to progress going forward?

Paul Wanklyn: Yes, Luke. Just to be clear when you suggest the components you're suggesting other elements that we could improve on the completions in drilling side.

Luke Davis: Yes, that's right.

Paul Wanklyn: Okay. I'll hand it over to Dustin to give you some.

Dustin Hoffman: Yes. Hi, Luke. Dustin here. I'll take a stab at this one and the guys can chime in as necessary. The way I kind of characterize where we're at today in Pipestone is, we restarted this capital program last fall and kind of reestablished our baseline. Our performance has been extremely repeatable over the last three or four pads, which is fantastic. But what I can tell you is there's still room to improve point taken, we just finished the frac campaign on the pad where we managed to increase our pumping hours per day over our previous pacesetter. So, I think what you're seeing and Paul alluded to this is our pacesetters are continuing specifically around the drilling side, we've done some things to change our wellbore construction again. And I think we're confident, we're going to build the shape additional days off of our drilling program. And then, the completion efficiencies, where they are going to come from is as you see us drill, we're probably going to be drilling longer wells and that's going to lead to improved capital efficiency in itself. But we still got a few nuggets that we're chasing to get more efficient than we are today, Luke.

Luke Davis: Helpful. Thanks. And then can you maybe comment on what you're seeing in terms of service costs, any discussions that would suggest any kind of inflation coming maybe in the back of the year or anything like that?

Paul Wanklyn: Yes, I mean, the only obvious place that, I think, everyone is aware of is steel prices definitely seen some pressure on that front. We're pretty secure in our steel for the rest of this year. So not really anticipating to see any significant inflation through the back half of the year.

Luke Davis: Great. Thanks very much.

Dustin Hoffman: Thanks, Luke.

Paul Wanklyn: Thanks, Luke.

Luke Davis: I appreciate the color.

Operator: At this time, there are no other questions in queue.

Paul Wanklyn: Okay, great. Thank you all for joining us on the call this morning and appreciate the time. Take care.

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.