Earnings Transcript for PTOAF - Q2 Fiscal Year 2024

Operator: Good day, ladies and gentlemen, and welcome to the Pieridae Annual General Meeting and Q2 2024 Financial Results Conference Call. Please be advised that, today's conference is being recorded. [Operator Instructions]. I would now like to turn the meeting over to Mr. Dallas McConnell, Vice President, Corporate Finance. Please go ahead, Mr. McConnell.

Dallas McConnell: Thanks very much, Daniel, and good morning everyone. I would like to welcome you to Paradae's second quarter 2024 conference call. Apologies for the error in the operator script. This is not, in fact, an Annual General Meeting. With me today are President and Chief Executive Officer, Darcy Reding; Chief Financial Officer, Adam Gray; Chief Commercial Officer, Paul Kunkel; and Chief Operating Officer, John Emery. Darcy and Adam will begin today with a review of our operating and financial results and certain other company developments. Following their prepared remarks, we will turn the call over to the conference coordinator for your questions. Before Darcy begins, I would like to remind you that, our remarks today will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the reports filed by Pieridae with Canadian Securities Regulator on sedarplus.ca. With that, I will now turn the call over to our President and CEO, Darcy Reding, who will provide more detail on our performance in the second quarter along with recent corporate developments.

Darcy Reding: Thank you, Dallas. Good morning and thank you for your time today. For those of you following along on the webcast, the PowerPoint slides will provide additional details you may find useful. The second quarter of 2024 was marked by the continuance of historically low AECO natural gas prices, with the AECO benchmark languishing below $1.50 per gigajoule for most of the quarter and below $1 per gigajoule for the last half of the quarter. Fortunately, our strong natural gas hedges continued to mitigate the negative impact of this pricing, resulting in a commodity hedging gain in the quarter of nearly $20 million and helping us post a net operating income of just under $8 million. We will continue to benefit from our natural gas hedges for the foreseeable future with approximately three quarters of our forecasted natural gas production for the remainder of 2024 and 2025 hedged at $3.32 per gigajoule. In a few minutes, Adam will provide additional details on our commodity hedges. Sales production for the quarter was approximately 31,900 BOEs per day. This reflects the impact of both the unscheduled dumping pound gas plant outage, during the first half of the reporting quarter to repair a tube leak in a sulphur condenser heat exchanger, as well as the shut-in of production in Northern British Columbia in early May and in Northern Alberta in the third week of June. Both of these areas produce dry gas with no natural gas liquids. Consistent with our strategy to build and strengthen our customer-centric raw gas processing business, a bright spot was the increase in third-party processing at the Caroline Gas Plant. Third-party volumes were up 40% in the quarter, largely on the back of two new multi-well pads drilled in 2024, by an area operator developing their sweet Manville liquids-rich gas near the Caroline Gas Plant and Gathering System. We are extremely pleased to offer our customers an opportunity to process their raw gas at a competitive cost with the benefit of deep-cut liquids recovery. Our focus will remain on growing this business, as we strive to fill our ample processing capacity at this facility. Subsequent to the quarter end, additional dry gas volumes in central Alberta that produced into a third-party gas processing facility were shut in. Along with the processing facility were shut in during the second quarter, we have elected to withdraw our production guidance for 2024, given the uncertain duration of these low AECO gas prices. It is important to note that, we now have approximately 9,400 BOE per day of production shut in, virtually all of it being uneconomic dry gas producing to third-party facilities. This represents more than 25% of our corporate production capability, which exceeds 36,000 BOE per day. While we are confident in longer-term tailwinds that will strengthen AECO gas pricing, we will only resume production from these shut in areas, when natural gas prices is recovered to levels that support sustainable economics. Furthermore, with respect to our corporate guidance, we have also revised our net operating income and netback guidance to reflect the low actual and forecasted natural gas prices for the calendar year. Adam will elaborate on our corporate guidance in a few moments. I'm extremely pleased to highlight a couple of additional events that occurred subsequent to the end of second quarter, as noted on this second quarter highlights slide and detailed on the next slide. As our news release of July 25th stated, we have successfully closed the sale of our Goldboro Nova Scotia property and assets, marking a milestone, where we have completed the pivot to our strategically focused upstream and midstream business. We are tremendously excited by the opportunity to simplify our corporate structure and concentrate on our core business. Simultaneous to our Goldboro sale, we also announced a private placement of 12.8 million common shares to AIMCo, an existing shareholder in Pieridae. Using the proceeds from the Goldboro sale, the approximately $4.5 million raised through the private placement, along with existing company liquidity, we were able to successfully pay back our highest cost debt in July. This high-interest bridge loan was repaid in full, including principal and accrued interest totaling $24 million. The table on the right shows our resulting market capitalization of app $60 million profit forma, with the additional $12.8 million private placement shares. With the supplemental funds from our existing liquidity, we have successfully extinguished this $24 million bridge loan, reducing our net debt by approximately $17 million or $0.20 per share to $203 million. Also notable is the significant reduction in the cost of debt servicing with the revolving loan coupon being approximately 600 basis points lower than the bridge loan. We are very pleased with the ongoing support of AIMCo and our lenders through this transaction, and as we continue to execute our strategic plan to deleverage our balance sheet. This is an appropriate time to take a moment to summarize the status of our strategic plan. Over the past three years, management has focused on strengthening our company skill sets, implementing efficient processes and initiating our performance excellence strategy. While these require ongoing maintenance and continuous improvement, heavy lifting has largely been successfully completed. In 2023, we announced our strategy to pivot away from East Coast LNG to focus on our upstream and midstream business in Western Canada. With our July '25 announcement, we have successfully completed this pivot, while repaying our bridge loan, which was scheduled to convert to common share equity in December 2024 without -- At present, we continue to concentrate on our strategic priorities of asset optimization, cost structure improvement, and building a more robust midstream gas processing business, while maintaining our priority on emissions reduction and responsible energy production. We also continue to make inroads on several new venture opportunities that may include the implementation of electrical power generation, carbon sequestration or renewable energy development. As we look beyond 2024, the continued improvement in our core business, our unique and strategically-located infrastructure ownership, and our pursuit of new opportunities synergistic with that infrastructure, we are confident in our ability to drive improved cash flow, deleverage our balance sheet, and ultimately deliver robust returns to our shareholders Returning now to our focus on second quarter results. Production of approximately 30,900 BOE per day was negatively impacted by the previously mentioned unscheduled Jumping Pound gas plant outage and the shut-in of non-economic dry gas production. Operating costs of $53 million in the quarter experienced upward pressure on a per BOE basis due to the resultant lower production in the quarter, given the majority of our costs are not significantly rate-dependent. As previously stated, net operating income in the quarter of approximately $8 million was bolstered by $20 million of commodity hedging gains. Capital expenditures for the quarter were a modest $5 million concentrated primarily on the capital maintenance required to remedy the Jumping Pound gas plant outage. We continue to defer discretionary capital spending given the ongoing challenges to free cash flow generation at current pricing, but we continue to allocate funds to maintain our safety and operational reliability standards. Referencing the chart in the lower left of the supporting slide, operating expenses in the green bars continue to trend flat to slightly improving, while per barrel operating expenses shown in the green line remain flat to slightly inclining as the impact of production outages and shut-ins reduce the volumes available to dilute our high proportion of fixed operating expenses. It is again worthwhile pointing out that our, adjusted operating expenses shown in the same chart by the red line are approximately $2.50 per BOE lower than our unadjusted operating expenses. As always, the adjusted operating expense is calculated by including third-party revenue and sulphur sales revenue to offset the unadjusted operating expenses. This third-party and sulphur sales revenue is only possible through our ownership in our facilities and infrastructure. At this time, I would like to pass things over to our Chief Financial Officer, Adam Gray, to speak to our quarterly financial results and provide insight to our corporate guidance and current hedge book.

Adam Gray: Thank you, Darcy. I don't have too much to add this morning, but we'll begin by touching on a few key financial metrics for the quarter. During this multi-year low in natural gas pricing, we are pleased to have generated $0.05 a share in net operating income and to have preserved and subsequent to the end of the quarter enhanced our balance sheet strength while making very prudent value-retaining decisions around expenditures and production. Our realized gas price during the quarter was $2.71 per Mcf, which was 231% of the benchmark AECO price for the quarter. Our realized price is also only 11% lower than the comparative quarter in 2023 while benchmark AECO price is 51% lower, thanks to our robust hedge position, which delivered $20 million in gain or $0.12 per share in the quarter. Realized price on our condensate production was $87.75 per barrel, which is slightly lower than the C5 Edmonton price, which came in at $105 per barrel for the quarter, again as a result of our WTI hedge, which was slightly out of the money. Operating expenses, as Darcy mentioned were $18.87 per BOE and $16.55 on an adjusted basis. This is slightly higher than Q1 on a per BOE basis, but flat on aggregate. Adjusted operating expense will become an increasingly important metric for our business, as we continue to grow our gathering and processing business, most particularly at Caroline. The majority of our operating expenses represent the cost to process both our own and third-party volumes through our facilities. As third-party volumes increase as a percentage of total facility throughput, adjusted operating expense will be a better measure of our cost efficiency, as the denominator includes all the volumes we process, as opposed to just our own. This point is also very relevant when you look at our decisions made over the past couple of months to shut in certain uneconomic production. A key component of our corporate strategy is to deliver maximum value from the hydrocarbons we produce, by participating in as much of the value chain as possible. This means, we seek to gather process fractionate and market our own products and be the customer focused and creative in attracting new volumes to our facilities, which have the capacity to produce much more than we produce. Production we have shut in, represents the vast majority of our total production, which does not flow to our own gas processing facilities and which as a result does not assist us in maximizing the use and efficiency of our facilities and diluting our largely fixed operating costs. Turning your attention to a couple of other financial metrics. I'll note that, our royalty burden has stayed very consistent at around 12% of revenues over the last few quarters. The exception was Q2 of 2023, when we received a significant $18 million unexpected gas cost allowance rebate from the province of Alberta. That payment certainly skews the period-over-period comparison in many of our key financial metrics. Finally, we delivered $1.78 per BOE and G&A costs for the second quarter in a row, the lowest G&A burden in company history. This reflects our ongoing program to increase efficiency, improve organizational structure, reduce the use of contractors and simplify our business structure and processes. That point on simplification is a nice segue to turn your attention to the debt capitalization table on the lower right of this slide. We are very pleased, as Darcy mentioned, to have repaid the 18% convertible bridge loan subsequent to the end of the quarter. That loan was a legacy amount remaining from the original debt package structured to finance the 2019 Shelf Foothills acquisition. The bridge loan was the most expensive component of our total debt balance and was convertible, which increased the risk of a significant dilution event without any corresponding injection of fresh capital. Its repayment along with the associated sale of our legacy Goldboro asset will allow us to further simplify our business structure and focus on sustaining and growing our assets in Alberta. Notwithstanding the very challenging macro environment, we exited Q2 with just under CAD40 million of available liquidity, well set up to sustain low gas prices until we expect pricing to significantly improve in the later half of this year. You'll notice our total debt quantum is up a bit from the beginning of the year. The bulk of that increase is actually as a result of changes in the CAD-USD exchange rate, which increased our USD-denominated debt quantum when converted to Canadian dollars. Our underlying USD debt is largely flat. We do have a number of hedge instruments in place to protect us from currency fluctuations on our debt service costs, which roll on a 12-month basis. These have recently gone into the money as the Canadian dollar has weakened. Turning your attention now to our hedge position and guidance update. I'll start with the chart on the lower left of this slide, which shows our natural gas hedge position and pricing in green versus the current multi-year strip price in red. As you can see the entirety of our gas hedge book is now in the money, representing an unrealized gain of approximately $85 million between now and the end of 2026. That gain is partly offset by unrealized loss of about $10 million on our condensate hedge book, which is linked to WTI pricing. At the moment, we sell nearly 100% of our gas production at AECO and have it as a result hedged to AECO pricing. These hedges are financial contracts, so are not impacted by the production we have shut-in, although performing the shut-in has increased the percentage of remaining production, which is hedged for the time being. Finally, as Darcy mentioned, we have amended our guidance for the quarter, both on the production metric and on NOI. The slight decrease in our NOI guidance to $55 million to $70 million is fully as a result of the change in gas strip pricing, which impacts our revenue for the non-hedge component of production. We have decided to withdraw our production guidance as a result of those 9,400 BOEs a day of production, which are shut in, because this production is uneconomic on a cash basis and costs in the properties impacted are highly variable as opposed to fixed, there is a slight positive NOI impact to the shut-ins. However, because we do not know, when pricing will recover and when we will choose to restart this production, it seemed prudent to withdraw production guidance at this time and we will update the market, when we know more. That concludes my comments on the quarter. And I'll turn the call back over to Dallas to wrap up the call.

Dallas McConnell: Thanks, Adam. Thanks Darcy. I'll now ask the conference coordinator to manage the question-and-answer portion of the call. The management team is available here to answer your questions. Go ahead, Daniel.

Operator: Thank you. [Operator Instructions]. At this time, I'm showing no further questions over the phone line. At this time, I'd like to turn it back to Mr. McConnell for closing remarks.

Dallas McConnell: Thanks, Daniel. We do have some questions coming through on the webcast, which we can field here. The first is from Rick and the question is, please comment on the pending property sale currently in the market? Thanks. I'll ask Paul Kunkel, our Chief Commercial Officer to respond.

Paul Kunkel: Thanks very much, Dallas. We have gone through a process to market the assets, and we have identified an appropriate purchaser of those assets. We are in the process of negotiating a sale agreement with them and hoping that, we can have that sale agreement completed sometime in third quarter.

Dallas McConnell: Thanks, Paul. Next question is from Ken. Have the license transfers from the Shell purchase been resolved? I'll ask Darcy to respond to this one.

Darcy Reding: Yes. That's actually quite an easy answer. There has been no material change to the status of the Shell license transfers. There will be no attempt by Shell or Pieridae to transfer those licenses until there's a very high chance of a successful license transfer application with the ADR.

Dallas McConnell: Thanks Darcy. Next question is from Nick. Great job getting your debt levels to below $190 million. For illustration purposes, can you provide us with how high your debt levels once were at the peak to where we sit today? I'll ask Adam to respond to that.

Adam Gray: Sure. Thanks, Nick. I don't have specific numbers for you, but in late 2021 and early 2022, I believe our net debt levels were between $270 million and $280 million. We continue to prioritize above many other things, repaying debt and certainly look forward to commodity prices supportive of doing so.

Dallas McConnell: Thanks, Adam. The next question is from Mark. For the first half of 2024, how much revenue was forgone due to the sulphur sales agreement?

Darcy Reding: I can take that. The first half of 2024, the sulphur prices were relatively depressed compared to historical levels. In fact, we probably didn't forego, all that much revenue, because of the sulphur contract in the first half of the year. Prices have since perked up a little bit, so we're hoping that, in the last half of the year we see sulphur revenue increase.

Dallas McConnell: Next question is from Mark. Can you provide a range of what the incremental third-party processing revenue opportunity is once the Caroline debottlenecking is done? I'll ask Paul to comment on that.

Paul Kunkel: In terms of potential, we are looking to unlock approximately 3,000 E3 M3 a day, which could bring in the order of $10 million in revenue per year.

Dallas McConnell: One more question. This is from Joseph. Can you please walk us through your debt maturity schedule? I'll ask Adam to do that.

Adam Gray: Sure. We have two components of debt remaining. Some are not maturing until 2027. So, we have a term loan with an associated revolver with a syndicate of lenders that matures in the first quarter of 2027 and a sub-ordinated own component of that, which is with prudential directly, which matures in the second quarter of 2027. So, we've got lots of time between now and those maturities to repay and or refinance that debt.

Dallas McConnell: Thanks, Adam. That concludes the questions. Thanks to all of you for participating today. We very much appreciate your interest in Pieridae. If you have further questions, please call us at 403-261-5900 or email at investors@pieridaeenergy.com. Thanks again, and we look forward to speaking to you soon.

Operator: Thank you. The conference call has now ended. Please disconnect your lines at this time. We thank you for your participation.