International Petroleum Corporation

Welcome to TSX Quarterly, the podcast that brings you publicly available earnings calls from companies listed on the Toronto Stock Exchange in one convenient location. Gone are the days of looking through confusing websites. You'll find the important information right here. Enjoy the call.

Okay, so very good morning to everybody and welcome to IPC's third quarter results and operations update presentation. My name is Mike Nicholson. I'm the CEO of IPC. Also joining me in presenting this morning is Christoph Nergararian, the CFO, and we also have Rebecca Gordon, who's our VP of Corporate Planning and Investor Relations. I'll begin in the usual fashion by walking through the third quarter operations update, and then I'll pass the floor to Christoph, who'll walk through the financial numbers. And then at the end of both of our presentations, we'll open up and you'll have the opportunity to ask questions. Before I get into the highlights, though, for the first quarter, we do talk internally with an IPC a lot about excellence, and you're going to see and hear this morning a phenomenal performance on the operations side. And I'd really like to thank all of our teams in Canada and in Malaysia, in France, and corporately in Geneva for really lifting our production levels back to pre-COVID highs and delivering such a phenomenal operational performance. And when you combine that with the strong commodity prices we've seen across the entire energy complex, you're going to see record high financial results when Christophe runs through his numbers. So to start with the highlights for the third quarter and with production, our third quarter average net production was just under 47,000 barrels of oil equivalent per day above our high end guidance for the third quarter. And as a result of the very strong year to date production performance, we're now revising upwards. our full year guidance to in excess of 45,000 barrels of oil equivalent per day, and that's an uptick of 1,000 barrels a day from our second quarter guidance. Continued good control on the cost front, operating costs for the third quarter were slightly below guidance, $14.70 per BOE, and we're leaving our full year forecast of $15.50 per BOE unchanged. Investment and capital expenditure front. We are reducing our capital expenditure forecast down by $23 million to $50 million. And I'll come back to that, but that's mainly as a result of the re-phasing of some of our Malaysian expenditure into early 2022. And turning to the cash flow numbers, record high numbers across the board. Third quarter operating cash flow was above 90 million US dollars And as a result of that, we're now increasing our full year guidance to between 315 and $335 million. Likewise, record high free cash flow generation, $77 million for the third quarter. And again, we're increasing our full year free cash flow guidance to now between 240 to $260 million. And that translates into a full year free cash flow yield of somewhere between 28 to 30 percent. Phenomenal numbers there on the cash flow side. That's, of course, fed into significant deleveraging through the third quarter. The net debt has dropped to just over $160 million. And of course, that's had a profound impact on our leverage ratio, which has now dropped to 0.6 times compared with three times net debt to EBITDA at the end of 2020. Christoph will come back to it in his presentation. But as we see the hedges roll off, the bank mandated hedges, that's obviously feeding through into stronger free cash flow generation. And of course, we don't actually have any oil hedges in place in 2022. So that should set us up for continued strong cash flow generation as we move into 2022. Continued excellent performance on the ESG side, no material safety or environmental incidents to report. And we did, alongside our second quarter results, deliver our second annual sustainability report. And in that report, we did confirm that we'd secured the carbon offsets that we need for 2021 to bring our net emissions intensity down by 50% by 2025. And as a result of the exceptional operational delivery and strong financial performance, very pleased to be announcing this morning that we're applying to commence our third share repurchase program since the company was spun off back in 2017. So that's the highlights. Let's start now to go through in a bit more detail the production performance. A third quarter production was 46,800 barrels of oil equivalent per day. Exceptional production performance across all of our business units. If we start with Canada, you can see from the production plot on the slides that we did take the shutdown at Onion Lake Thermal during the second quarter. That was to set us up for our Onion Lake Thermal D prime pads. That's been brought on stream and has been ramped up ahead of schedule and is delivering above our forecast expectations. So a really good start from the Onion Lake Thermal team. And during the fourth quarter, we're making good progress with our five well infill campaign. Don't really expect much production contribution during 2021, but that will add some production growth as we move into early 2022. On the international assets, again, continued strong production in Malaysia and in France. In Bertam, we did complete the shutdown during the second and third quarter, and that was to set us up for the infill sidetrack drilling campaign on our A15 well in our Bertam field. That shutdown was completed ahead of schedule, and we're on track to commence drilling operations in the fourth quarter with a production start-up early in the new year. I'll come back and give a bit more colour on that later in the presentation. But if we look at that strong third quarter production performance, that's allowed us to now raise our fuel year guidance to in excess of 45,000 barrels of oil equivalent per day, up from our Q2 guidance of 44,000 barrels of oil equivalent per day. And if you look at the chart on the bottom of the page, you can see that this is our third quarter in succession of delivering our production above the high end of our guidance estimate. So again, huge congratulations to all of our teams for delivering such a solid performance. And we've seen production recover to pre-COVID highs, which is no mean achievement. Turning now to operating cash flow. Operating cash flow for the first nine months was $226 million. That's on the back of an average Brent price of $68 per barrel. So in the first nine months, we've been able to generate more than our original CMD high-case forecast of $220 million, which was a similar Brent oil price of $65 per barrel. The reason we've been able to deliver such strong cash flow generation is a combination of that higher production performance better Canadian crude price differentials and stronger Canadian gas prices. And that causes us now to increase our full year guidance for operating cash flow to now between $315 and $335 million, assuming a $75 to $85 average Brent price through the fourth quarter. Capital expenditure, as I mentioned in the highlights, we have reduced our full year capital expenditure forecast by $23 million to $50 million. That's just due to the latest estimates of when the rig is expected to arrive in early December on our Bertham field location. So the majority of that drilling expenditure is now re-phased into 2022. So full year CapEx expenditure forecast now of 50 million US dollars. When we combine that strong operating cash flow and a relatively light capital expenditure budget, you're seeing record high free cash flow generation for the company forecast for the full year 2021. the first nine months alone we've generated more than 20 million dollars above our original cmd high forecast 176 million dollars for the first nine months and when we look forward for the fourth quarter we're significantly increasing our full year free cash flow guidance now up to between 240 to 260 million dollars between 75 and 85 dollar grants up from $195 million for the full year that we announced alongside our second quarter results. And when you look at IPC's closing market capitalization at the end of last week, that translates into very attractive 28 to 30% free cash flow yield for the full year. And if we just put that free cash flow yield in context with the rest of the global integrated EMP industry. It compares extremely favorably. This slide shows a survey of the expected forecast free cash flow yields across that entire integrated EMP industry space. It was a report recently issued by RBC Capital Markets. And you can see that the range of free cash flow yields expected for 2021 are between eight and 16%, with an average for the industry of 12%. So when you look at IPC's numbers of somewhere between 28 and 30%, we're producing cash flow more than double the industry average, which is quite extraordinary. And when we look beyond just the 2021 numbers in our five-year forecast, which only assumes that all we're developing is our 270 million barrels of 2p reserves, we're in a position to hold our production levels today of around 45,000 barrels a day flat over the next five years. You'll notice at the bottom end of the range, we're increasing our guidance by 140 million, so increasing it from 600. to now $740 million to take account of the strong 2021 cash flow performance. And at the high end of $75 per barrel, you can generate up to $1.2 billion of free cash flow. And that translates into an annual free cash flow yield of between 17% per annum and 28% per annum. So all prices, $10 a barrel below where we are today, we can sustain these free cash flow yields that we're generating this year for the next four years, which I think is extremely impressive. And of course, that sets us up to continue to generate significant shareholder value in the years ahead through a combination of stakeholder returns in the form of further debt reduction. And today we're announcing our third share buyback program. Obviously, IPC's history and our DNA is M&A, and we've conducted four transactions and acquisitions in the last four years. And of course, we have the capacity to do more in the years ahead as we see the energy transition and we see the majors look to dispose of some of their non-core assets. And of course, we still have a very significant contingent resource base in excess of a billion barrels. So great strength on the financial front to continue to generate material shareholder value. On the valuation side, if we look at how IPC stands and compares, based upon very conservative year-end 2020 pricing, which assumes $48 rent for this year, rising to only $57 per barrel by 2025, that gives you an asset value of $1.63 billion. If we take off the beginning of the year debt, that gets you down to a 2p net asset value of $1.3 billion or 72.50 sec per share using the current exchange rate, which translates into a 34% discount on some very conservative oil pricing. So either through the cash flow lens or the value lens, I think IPC screens extremely favorably. So turning now to the announcement this morning and the share repurchase, and those that follow the company know that we have already completed two share repurchase programs since the company was created back in 2017. In those first two programs, we've acquired and canceled a total of 34 million shares, and the average share price was just below 33 million. set per share, so a lot of value created from those first two share repurchase programs. This morning, we're announcing the third share repurchase program. And as I've mentioned, we've seen very, very good operational performance. Our production this year looking to be around 5% above our original high-end capital markets day guidance forecast. We're seeing continued strong pricing across the entire energy complex. And as we've seen, our 2021 free cash flow is significantly above our original tie-side guidance and is more than double that of the global E&P industry average. Leverage is dropping like a stone, 0.6 times net debt to EBITDA at the end of the third quarter. And from a value perspective, looking extremely attractive with a close to 34% discount from our 2p net asset value and that does not include a single dollar of value attached to our in excess of a billion barrels of contingent resources. That's a very attractive value proposition and that's why we're seeking approval to repurchase up to 10.8 million shares or approximately 7% of our shares outstanding over the next 12 months under the Canadian normal course issuer bid rules. Turning now to dive into a bit more detail on each of our assets and starting with the Canadian business and our Suffield oil asset. Strong production performance continued through the third quarter, averaging around 8,000 barrels of oil per day, back to above early 2016 levels. And we're seeing continued strong outperformance from our end-to-end EOR development project that we started a couple of years ago. don't have any major capital activities planned this year but what we do still have a significant drilling inventory ready for execution that's likely to to feature in our 2022 drilling programs this year focus was really on entry and well conversions and some optimization work on our south gibson field to keep those production levels relatively stable through the year Turning to Cepheal gas, and it's no surprise that we've seen extremely strong gas prices across the globe. And that's also been a feature of the Canadian market. And Christophe will show in his presentation some of the recent gas price trends, which have been very strong in Canada. Our asophial gas asset continues to generate very strong cash flow. We aren't investing any capital in 2021. We haven't drilled a new well since we took over operatorship. But what we can do, and you can see from the chart on the bottom left-hand side of this slide, is be very active on our optimization front. And since we've taken operatorship of this asset, we've close to doubled the amount of swabbing activity and that's allowed us to to keep that gas production relatively flat and offset those natural declines in our canadian suffield gas business so great job done by the teams on the ground with very minimal capital there turning to our onion lake thermal asset you can see on the production slide that we successfully completed our planned shutdown and turnaround during May. That was to allow us to tie in our new D-prime well pad. That D-prime well pad was completed and brought online ahead of schedule in the third quarter, and we expect that to ramp up and add production in excess of 1,500 barrels of oil per day on plateau. The rigs now moved, and we are in the midst of our five-well infill drilling campaign, which is due to complete before the end of the fourth quarter. The wells are drilled, and we're just working on the completion and the tying, and we should see the production impact start to really ramp up during the first quarter of next year. So really good performance by the team in delivering the shutdown, getting deep prime on stream, and making great progress on our five-wheel infill drilling program. And just as a reminder of the numbers that we showed alongside our second quarter results for that five-wheel infill program, extremely attractive metrics. We're tackling about 3.5 million barrels of unswept oil with a break-even WCS price of $20 per barrel. When you look at WCS prices today, trading at close to $70 per barrel, And with a payback at Brent prices of $55 per barrel in only one year, these are extremely attractive infill wells to be executing. Turning to our Ferguson asset in Canada, minimal investment activity during this year. We have done some gas injection and repressurization work through some low-cost effective well conversions. We've got the potential with this asset. This is the asset that we acquired from Granite in late 2019. We did suspend all redevelopment activity during the pandemic last year, but we have got the potential to more than double our production with multiple drilling locations execution ready, and this is likely to feature in our development plans as we move into 2022. On the conventional side, Our John Lake and Onion Lake primary has been ramped up with the very strong Canadian pricing environment that we've seen. Likewise with our Mooney asset, we're also ramping up production that we started in the second quarter, again with the strong Canadian crude pricing. When we look at our overall Canadian conventional assets, we've been able to ramp up production at around 1,800 barrels of oil equivalent per day. tremendous job done by the team to reduce that production last year through the pandemic and bring it back up to pre-shedding rates following the recovery that we've seen in Canadian crude pricing. Blackrod, which is the biggest portion of our contingent resources, just under a billion barrels of our contingent resources the third well pilot program continues to exceed expectations you can see the the recent production we're sustaining production at above 800 barrels of oil per day and that's close to 50 percent increase in the productivity that we saw from from well pair two that's important because if we can drain more oil from a smaller number of wells It can improve the overall project economics through less well pads, less infrastructure, reduces our environmental footprint. So continued good response that we're seeing on that third welfare pilot on our Black Rod project. Turning now to the Malaysian business, every quarter we have the same story, close to 100% facility uptime on our Bertan FPSO. and a strong base well production performance. And during the third quarter, we did complete a planned maintenance shutdown slightly ahead of schedule and on budget. And one of the main reasons that we wanted to take that shutdown was to increase the produce water handling capabilities of the Bertam FPSO. And that sets us up to drill the A15 sidetrack, produce at higher liquid rates, and also the pump-up sizing campaign that will follow the A15 drilling. So again, great job done by the team to deliver that Bertam FPSO de-bottlenecking project. The A15 sidetrack well has been sanctioned. As I mentioned in the highlights and the capital guidance, this still is scheduled to commence drilling in Q4. It's now likely to start in December of this year. Slightly delayed from our original plans, and that's as a result of the operator who has the rig having to sidetrack the last well in their drilling program, resulting in a delay in us picking up that rig. So first oil is now not expected until early 2022. Amazing project, one and a half million barrels of resource to attack, breakeven Brent price of less than $20 per barrel. And of course, our Bertram crude trades at a premium to Brent. So with Brent prices in above in excess of $85 a barrel with the premium, amazing rates of return from this project. 150% rate of return at $55 per barrel and a $55 barrel per grant one year payback. So results are likely to be much better than those that we're publishing here on this slide. The pump-up sizing campaign, which will continue after the drilling of the A15 well in the first quarter, is expected to be completed before the end of the first quarter. That should add incremental production on average of around 800 barrels a day and very similar metrics to the A15 drilling, $20 per barrel brent break-evens and paybacks around one year at $55 per barrel brent. So a nice production bump that we should see on our Berta Masset as we move into the new year. In France, same story again, excellent performance and delivery from all of our producing fields. If you look at the production plot on the top right-hand side of this slide, you can see the performance of our long reach horizontal VGR113 well. Production rates have stabilized at around 900 barrels per day. And you can see from our pre-investment forecasts, which were around 600 barrels a day, we're producing at 50% above those expectation levels. So it's been a tremendously successful drilling campaign on our VGR project. We had originally expected water breakthrough to come a year ago in the third quarter of 2020, and we still haven't seen any water in this well through the third quarter of 2021 and good results that we're seeing from that VGR5 injector conversion that we did to support pressure to the 113 well. So very stable production in France over the last quarter at around the 3,000 barrels per day level.

With MailChimp, you get more than a URL. You get an all-in-one marketing platform to help drive sales with things like data-driven recommendations and powerful automation tools. Get started today at MailChimp.com slash smart marketing. MailChimp, built for growing businesses.