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spk00: Good morning, my name is Joanna and I will be your conference operator today. I would like to welcome everyone to the Q4 2023 conference call of Strathcona Resources Limited. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. For attendees on the conference call that would like to ask a question, press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. I now introduce Rob Morgan, President and CEO of Strathcona, to begin the conference.
spk02: Good morning, everyone, and thank you for joining us. Welcome to the fourth quarter 2023 conference call of Strathcona Resources. I am Rob Morgan, President and CEO of Strathcona, and with me today is Connor Watrous, Senior Vice President and CFO, and Angie Lau, our Treasurer. Yesterday, Strathcona released its fourth quarter and annual 2023 results, a summary of which was included in yesterday's press release, with full details available on Strathcona's website as well as on CDAR+. As a reminder, on March 11th, we released details of our year-end reserves and provided shareholders with a look at how Strathcona has grown and created value in the private market over the last seven years. I would encourage prospective shareholders to visit our website and review our 2023 reserves overview. Production for the fourth quarter was on plan at 186,000 BOE per day, highlighted by record performance at our Cold Lake thermal segment at 60,000 BOE per day. Cash flow from operations was $470.8 million, or $2.20 per share, with free cash flow of $150.8 million, or $0.70 per share. We finished the year with a simplified capital structure as we were able to pay off our term loan ahead of the February 2024 maturity, and we are also pleased to announce an increase in our covenant-based syndicated credit facility from $2.3 billion to $2.5 billion with a revised maturity of March 2028. As we approach the end of the first quarter, we are very encouraged by the signs of line fill occurring on the Trans Mountain expansion pipeline. As a reminder, Strathcona's oil-weighted production base is highly leveraged to WCS prices, with a U.S. $1 move in the WCS differential or top-line WTI equating to $40 million of annual cash flow. Strathcona's 2024 development plan included production from three dry grass wells at our ground birch property in northeast B.C., We spotted the wells in the first quarter and expected to complete them this spring, but given weak natural gas prices, we are choosing to defer bringing the wells on until the winter months when we expect much improved pricing. This will impact Strathcona's year average production by approximately 15 million cubic feet per day, and we have adjusted our guidance accordingly. I would like to thank the entire team at Strathcona for their tireless work over the course of 2023 as we emerge from the private world into the public markets, and we are very excited about what the future holds. I would also like to thank our new public shareholders for the confidence you have placed in us. We are conscious that building a public track record takes time, but we're looking forward to sharing the accomplishments as well as the setbacks that we might have on this journey with you. Thank you for joining us this morning, and we would be pleased to take any questions you might have.
spk00: Thank you. As a reminder, please press star 1 to ask a question. The first question comes from Greg Party at RBC Capital Markets. Please go ahead.
spk03: Hey, thanks. Thanks. Good morning. And apologies to the dogs in the background. You can probably tell where I'm working today. A couple of questions maybe just on the financial side. In hitting the $2.5 billion net debt target, does that look like you're on track there to hit that in the first quarter? What does the timing look like? And then maybe just in terms of shareholder returns that might come after that, understanding, you know, it might be a dividend, might be variable dividends or what have you. Is there actually any appetite for buybacks, just given the limited flow?
spk01: Sure. So, Greg, on the timing of hitting our $2.5 billion of debt target, so we finished Q4 2023 with about $2.7 billion of debt. We're only about $165 million shy of that $2.5 billion. So we think we're going to hit that in the mid-2024 time frame. It's important to bear in mind that we ended 2023 with a slightly bigger working capital deficit than we think we'll probably have on a more go-forward basis. So the first couple quarters of the year might see a bit of a paydown of that working capital deficit, but certainly something that we think we are very much on a track for soon. In terms of what the framework will look like in terms of paying back capital to the owners of the business post hitting that $2.5 billion of debt, I think our plan is certainly still the same of a combination plus a base plus a variable dividend. The base dividend is going to be sized so that it is always fully funded at a trough point in the price cycle. And then it will be a bunch of variable dividends beyond that. The important thing, I think, for our shareholders to know is that fundamentally we don't see a need of paying down debt past that $2.5 billion level. So if we aren't going to pay down debt Well, that means that the vast, vast, vast share of the cash will be going back out to the owners of the business.
spk03: Okay, got it. And I guess just apologies for a follow-up. But in completely shifting gears, so you talked about the unit train facility expansion. I'm just wondering, can you give us an idea as to what does that mean in terms of how many barrels you've now – plan to ship. And then the other part related to that is just in terms of the premium you're getting to WCS and the Gulf Coast, just any color there would be great. Thanks.
spk01: Sure. So in terms of the total volumes that are going to be shipped by our rail business down to the Gulf Coast, it's still going to be plus or minus 30,000 total barrels a day for the calendar 24-year, which is pretty much the same volume we had over the 2023 year. The difference for 24 versus 2023 is that close to 40% of the volumes we sold in the Gulf Coast were sold into the so-called spot market down there. And the price that we get for our spot barrels on the Gulf Coast isn't as good as the price that we set as part of a medium to long-term crude purchase agreement. What this new plant that we have set up down in the Gulf Coast means for us is that effectively 100% of all crude by rail that we sell in the Gulf Coast as of March of this year is all going to be sold on a termed-up basis. So there's not going to be any barrels sold in a Gulf Coast bought market. What in turn that means is there was probably a third to 40% of our barrels over the course of 23 getting a, let's call it, $5 to $10 discount to the base at WCS Houston price. And now all of those barrels barrels are going to be sold at a premium, you know, to the benchmark price. So, it's a, you know, call it, you know, $5 to $10 per barrel swing on about one-third of that 30,000, you know, 30,000 per barrels that we sell down on the Gulf Coast.
spk03: Got it.
spk01: Thanks very much.
spk00: Thank you. Next question comes from Mano Halsholt at TD Cowan. Please go ahead.
spk05: Thanks. Good morning, everyone. Thanks for taking my question. Maybe I'll just follow up with a question on Greg's line of questioning. Should we just assume that it's going to be a flat 30,000 barrels per day of unblended crude by-rail to the Gulf Coast from here on in then? Or is there a reason to expect that to fluctuate with what heavy differentials do, or is there no tie whatsoever?
spk02: No, there's no real tie to the heavy differentials. It should be relatively flat across the year.
spk01: Yeah, and the key on that, Meadow, is we think, you know, the net realized price post-transportation that we get on our crude by rail barrels, certainly post this new premium, is going to be at or better than the pipe net back that we get, you know, down to a, you know, call it $10 a local differential on the WCS benchmark.
spk05: Okay. Thanks, Connor. That makes sense. And then maybe I'll just flip over to M&A since it's been such a big part of the growth story. What are you seeing in the market today in terms of the opportunity set And how are those opportunities competing for capital with organic development?
spk02: Yeah, so thanks for the question. As we've talked about, done 10 transactions over the last seven years, the first nine transactions with cash, obviously our last one was equity-based. Where you're seeing us talk about our cash flow and how the use of proceeds of our business is that we're focusing on that $2.5 billion debt target and then announcing following achieving that target a shareholder return policy, whereas Connor highlighted we would expect to return a majority of our free cash flow to shareholders. So using cash at this point for M&A activity is not something that we're focused on. We did obviously now have a public listing and part of our rationale of getting a public listing was to potentially use our equity for M&A transactions. But I think, as we've highlighted, building a space in the public markets is going to take a bit of time. And the current valuation of our shares is we just don't feel that it makes sense using that equity for M&A transactions. So our focus is, from a returns perspective, we think reinvesting in the business, growing organically, which we have done over the last seven years. is the best use of our cash at this point in time. And we'll obviously keep an eye on the market and see what opportunities may occur. But I think in the near term, you'll see us focus on that organic growth.
spk06: Thanks, Rob. I'll turn it back.
spk00: Thank you. As a reminder, please press star 1 to ask a question. The question comes from Dennis Fong at CIBC World Markets. Please go ahead.
spk04: Hi, good morning, and thanks for taking my questions. My first one might follow on a little bit from Menno's second question there. I was hoping you could elaborate a little bit more about the strength and production from Cold Lake. Obviously, you're seeing a good ramp from Tucker H pad. Can you talk a little bit about where the production from that pad could go? And secondarily, maybe touch on Lindbergh a little bit as well. I want to understand what the production trajectory happens to be for this asset this year and where it could maybe get to over the next 12 to 18 months.
spk02: Sure. Thanks, Dennis. As we look at Tucker, obviously, the eight well pairs that we drilled were some of the first well pairs at Tucker since 2017. and it was really a combination of the initial production from those well pairs, which I think we've generally ramped up to fairly full capacity, but also the reactivations of some of the legacy well pairs that had been shut in for quite some time, given how the heat now has been distributed in the reservoir, has really supported that production base at Tucker. We are in the process of drilling another new pad at Tucker, But we don't expect that production growth to come on until later 2025 into that sort of 2026 timeframe, given the profile of the ramp-up of those pads. As we look at Lindbergh, yeah, we've had some very good response to some of the very basic bottlenecking work that we've done at that asset. And I think with the plan that we have in place of installing some incremental steam generation capacity, Again, a lot of that activity comes on is sort of later 2025 into 2026. So we'll see a bit of ramp through the latter part of 2024 and then a lot more of that growth into 2025 and 2026 on those thermal assets. But we think we're on track towards ultimately filling that capacity as we've highlighted over the next couple of years.
spk04: Great. Appreciate that color. Switching up a little bit towards hedging, saw some kind of reorganization of the contracts that you had there. Can you discuss how you think about this? We'll call it refreshed commodity risk program and potentially what that means for we'll call it cash flow stability and pre-cash flow sustainability or generation or the ability to cover capex and generate free cash over the next few years.
spk01: Thanks, Dennis. So when we look at what the hedge book looks like now as the end of March, we effectively just have a little bit of a legacy TI swaps in place over the first part of Q2 and then have some gas callers in place through May. When you look at how we've built the business the last seven years, in general, we've had quite a strong hedge profile on the business. And in part, what has driven that is, you know, we've been, we've built the business in close partnership with our bank group and, you know, and part of getting the capital from our banks is a, is a, uh, is a ongoing, uh, uh, mandate, uh, you know, uh, to, uh, to put hedges in place. Uh, when we, you know, think about what the balance sheet looks like now, and, you know, uh, as, as Rob says, um, a view that we're probably not going to be doing, uh, you know, any kind of big, cash transactions in the near term. What that in turn means is that the focus on trying to put swaps and other sorts of contracts in place is just a lot less than it used to be. So I think you'll still see us do some hedging with the business going forward. but it will be much more with callers where the floor of that caller is picked to make sure that even in a real trough point in the oil and gas price cycle, that the balance sheet is still in a very strong shape and not as a way to lock in revenue, so to speak.
spk06: Great. Thanks. I appreciate that caller. I'll turn it back.
spk00: Thank you. That is all for questions. I will turn the call back to Rob Morgan for closing remarks.
spk02: All right. Well, thank you very much for joining us this morning, and we look forward to discussing our first quarter remarks in May of this year. Thanks very much, and have a great day.
spk00: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.
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