Earnings Transcript for BKBEF - Q4 Fiscal Year 2019

Operator: Good morning, and welcome to the Pipestone Energy Corp. 2020 Guidance and Operations Update Conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [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: 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 a summary of changes to our 2020 capital and production guidance, Craig will follow with an overview of our financial position and available liquidity, Dustin will provide an overview of our current operations and achieve capital efficiencies, and I will provide an update of our risk management program. 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.

Craig Nieboer: Thanks Dan, and 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 as well as in our Q3 released earlier this year or last year. 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 a summary of changes we are making to our 2020 guidance.

Paul Wanklyn: Thanks, Craig, and good morning, everyone. I am pleased to provide an update on the Pipestone Energy's development activities. As a company, we are responding decisively to the dramatic decline in crude oil pricing experienced over the past two weeks. The combined impact of COVID-19 and the lack of cooperation between OPEC and Russia is causing tremendous uncertainty on future commodity prices. Thankfully, Pipestone Energy is well-positioned to navigate this downturn as a result of our capital flexibility and our financial liquidity. As noted in our press release this morning, we are revising our 2020 capital expenditure guidance down 60% from a midpoint of CAD 150 million to our forecast midpoint of CAD 60 million. As a result of one fewer six-well pad being brought on production this year originally scheduled for Q4 our 2020 production guidance is being revised to between 17,000 and 18,000 BOEs a day from 18,000 to 20,000 previously a decrease of approximately 8%. The drilling of 16 wells and the completion of six wells are being deferred under this revised capital plan. For the full year WTI had a full year WTI price of US$40. We expect this capital budget to be cash flow neutral, which helps preserve our available liquidity. To the extent commodity prices recover over the coming months, Pipestone Energy can respond as rapidly as it has this week and resumed drilling operations. By using two drilling rigs in the future and two completion rigs per pad, we can achieve cycle times of 100 days from spud to on production for a six well pad. The combination of high condensate productivity and our continued improvement in total well costs underpinned Pipestone Energy's ability to take this defensive position through this turbulent market and emerge well positioned to add future value for shareholders. Craig is now going to give us some highlights on our financial plan.

Craig Nieboer: Thanks, Paul. And as many listeners on the call will know we had originally intended on filing our year-end audited financial statements and accompanying MD&A today. However as detailed in our press release we are still working through the analysis and implementation of the non-cash related IFRS 16 leases standard with our auditors and expect to have that resolved in the coming days. We will then file our audited financial statements and accompanying MD&A and AIF, hopefully, as early as next week, but no later than March 31. Saying that, at this time, management would like to provide some of the key highlights for the quarter and the year. Sales production for the three months ended and year ended December 31 2019 was 14,885 BOEs per day and 4,762 BOEs a day respectively, despite third-party processing facility challenges, including curtailment and intermittent run times experienced throughout the fourth quarter. From a liquids perspective, Pipestone production for the quarter was comprised of 36% condensate and 43% total liquids and for the year 38% condensate to 45% total liquids. Overall, we are very pleased to have successfully exceeded our 2019 exit guidance of 14,000 to 16,000 BOE a day, with average December production of approximately 17,000 BOE a day. Always very important, but it's extremely important at times like this is our balance sheet and our liquidity position. Pipestone is well positioned from a liquidity perspective to weather the storm. As of December 31, 2019, Pipestone was drawn CAD 163 million on its reserve-based loan, or RBL, and had adjusted working capital deficit of CAD 6 million. As of this release, the company has a net draw of approximately CAD 153 million on the RBL and about CAD 20 million of negative working capital. The RBL has current available capacity of CAD 225 million, and has also a CAD 25 million accordion feature subject to mutual consent of the lenders. So, once again, I'd just highlight, we have significant liquidity available to us in this operational plan. I'll now hand it over to Dustin to review the quarter's operations update.

Dustin Hoffman: Thanks, Craig. In early March 2020, Pipestone Energy began bringing on our newly completed wells on the 6-24 pad. As of this release, three of the six wells have been brought on production with the remaining wells to be brought on in the coming weeks. The average first five day production rates per well through permanent facilities are 1,530 barrels per day of wellhead condensate and 4.2 million cubic feet per day of raw gas, which results in a condensate gas ratio of 365 barrels per million cubic feet. The next pad to be placed on production will be the 6-30. This six well pad is directly north of the 6-24 pad and we are currently drilling the lateral section of the final well. XLE or extreme limited entry completion operations on the 6-30 pad with proppant loading of approximately 2.5 tonnes per meter are scheduled for Q2, with production to follow in early Q3, 2020. From a capital efficiency perspective, costs continue to improve with each pad, as Pipestone Energy continues to optimize its drilling completion and well-site designs. The first five of six wells being drilled on the 6-30 pad have an average lateral length of 2,400 meters and achieved average realized drilling costs of approximately CAD 2 million per well, as compared to the company's CAD 2.3 million type well cost. The fifth well at 6-30 pad was a pace setter for the company, which achieved the spud to TD time of less than 10 days and a drilling cost of CAD 1.6 million. On the recently tied in 6-24 pad, Pipestone Energy achieved its target equipping cost of CAD 800,000 per well, down from its previous estimate of CAD 1.2 million. As a result of further pad facility design improvements, the company has set an approved target of CAD 600,000 per well on future pad sites. In aggregate, we expect the all-in drill, complete, equip and tie-in cost on the 6-30 pad to achieve a corporate record of CAD 6.5 million per well which compares to Pipestone Energy's type well cost of CAD7.1 million. Dan will now go through an update on our risk management program.

Dan van Kessel: Thanks Dustin. From a risk management perspective Pipestone Energy has approximately 60% of its net after royalties condensate production hedged through Canadian dollar WTI hedges at approximately CAD79 per barrel. Additionally, close to 50% of our net after royalties natural gas production for the year is hedged weighted towards the more volatile summer months. The company also engages in months ahead physical condensate differential sales at Edmonton where we have locked in approximately 2,000 barrels a day from March 2020 at WTI plus $0.50 per barrel and approximately 2,000 barrels a day for April 2020 at an average premium of CAD2 per barrel to WTI. With that I'll hand it over to Paul to provide some closing remarks.

Paul Wanklyn: Thanks Dan. While we've taken decisive action to protect Pipestone's balance sheet and we are confident we're going to emerge from these prices in a strong position. I want to thank our team both here and in Grand Prairie for their continued hard work and dedication and I also want to thank our Board of Directors for their continued support. With that I think we're ready to take any questions.

Operator: Thank you. [Operator Instructions] And our first question comes from Amir Arif with Cormark. Your line is open.

Amir Arif: Thanks. Good morning guys. I apologize if you've touched on this in the call I had to step off for a minute. But of the CAD55 million to CAD65 million capital spend how much have you spent in the first quarter or committed to already in terms of through let's say April-May?

Dan van Kessel: Yes. So, out of the total CAD60 million, about half of that is going to be spent in Q1 and then the majority of the remaining capital in Q2 with minimal capital budgeted for Q3 and Q4 at this time.

Amir Arif: Okay sounds good. And then I know you've got good hedges in place on the oil side here in the first half. Just curious how you're thinking about adding hedges? And I mean given the backwardation everyone had less hedges as you go out. So, just curious is it just too late to add hedges right now? Or is the volatility too high to add puts or just how are you thinking about the second half in 2021?

Dan van Kessel: Yes, I mean I think we're still developing a strategy for what hedging further into the back half of this year would look like. We're not naked. We got call it 15% to 20% of the back half on at similar pricing to what we have in the first half. So, we'll have to make a determination of what price levels and what percentage of production levels like hedge at just on the -- in terms of swap on the put side with the volatility and where we're at right now. And our desire to preserve capital, it would be pretty expensive to be putting out cash to day for puts on price decline in the future.

Amir Arif: Okay. Makes sense. And then just final question. On the 6-24 pad there's some excellent initial results that you're seeing there. How much of that is just -- or it's -- I guess it's hard to break it out. But much of that do you feel is due to change in completions versus just the fact that you're moving further north in your acreage?

Dustin Hoffman: Yes, I'll take that one. This is Dustin. So, the 6-24 pad if you remember we had the original element pad on production last year and we had reported very strong CGR rates in the 237 barrels per million mark after the first 20 days. So, the CGRs that we're seeing so far 365 barrels per million out of the gate is pretty much what we expected. What we are seeing though is the XLE completion has increased the deliverability of these wells. So the new wells are definitely stronger than the original well which is a suboptimal completion. So we're pretty excited to report on more production as we get it through the coming months.

Amir Arif: Sounds good. Thanks.

Operator: Thank you. [Operator Instructions] I'm not showing any further questions at this -- pardon me, there's another question from Arnold McCain [ph], a private investor.

Dan van Kessel: Hello, hello? [indiscernible].

Operator: Arnold McCain, your line is open.

Dan van Kessel: Hello.

Unidentified Analyst: Yes. I'd like to address the stock prices, which has never been addressed on any of the conference calls in the past year. The company has lost 85% of its value over the year. And I know the -- what's happening right now doesn't come into account. But I'm just wondering if you could touch on what has happened over the year with regard to stock prices and what you envision for the future?

Craig Nieboer: Well Arnold, this is Craig. I'm the CFO. As management our job is to execute the business plan as effectively and efficiently as possible and that's what we delivered in 2019. We delivered our capital plan under budget and under time. We added nine fracs to that plant within the original guidance. Our well performance has been excellent. And so really that's what's in our control and what we've delivered so far for shareholders in 2019 and we've continued that pace into 2020. Reducing our capital cost per well basis, we see really significant great results from our 6-24 pads. And again these are the things and decisions that we have in our control. A lot of the capital markets movements on stock prices for us and others is somewhat out of our control. It's absolutely not something that we don't take seriously and feel very responsible for. But at the end of the day those are things that we can't control directly. And all I can tell you is that, we are all shareholders too and we're just as interested in you in setting our hard work and great results transforming into a great stock price. But that's something especially in this current market that we're all going to have to wait for.

Unidentified Analyst: Well, we've been waiting for quite a while and it hasn't happened. And I -- the -- when you relate this to the peers in the industry, Pipestone is right at the bottom of the list as far as stock performance so?

Paul Wanklyn: That's actually not correct Arnold. It's Paul Wanklyn here. We do plot our performance against our Montney peer group as a larger group and we are solidly in the middle of the pack when we plot a number of different timeframes. So I appreciate your comments today and thank you very much.

Operator: Thank you. And I'm not showing any further questions at this time. I'll now turn the call back to your speakers.

Paul Wanklyn: Thanks everyone for coming today. These are difficult times and I think we've shown we're prepared to take a strong action to support the balance sheet and further the development of the company as times get stronger here in the future. Thank you.

Dan van Kessel: Thanks everyone.

Operator: Ladies and gentlemen this concludes today's conference call. Thank you for your participation. You may now disconnect.