Peyto Exploration & Development Corp.

Good day, and thank you for standing by. Welcome to the 2024 Second Quarter Paytos Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I'd like to hand the conference over to your first speaker today, J.P. Lachance, President and CEO. Please go ahead.

Thanks, Marvin. Morning, folks, and thanks for joining Pato's second quarter conference call.

I'd like to remind everybody that all statements made by the company during this call are subject to the same forward-looking disclaimer and advisory set forth in the company's news release issued yesterday. Present with me to answer your questions in the room here is Riley Frame, our VP of Engineering and Chief Operating Officer, Tavis Carlson, our VP of Finance and CFO, Lee Kern, our VP of Drilling and Completions, Todd Burdick, our VP of Production, and Derek Zember, our VP of Land and Business Development. Firstly, we'd like to thank the entire Payto team, both in the office and in the field, for their strong execution this past quarter. And it was a strong quarter for Payto, despite very low gas prices. In fact, the lowest we've seen since 2019 at ACO, anyway. We still managed to generate $155 million of funds from operations and $51 million of earnings, in large part due to our systematic hedging program, which realized $68 million in gains, along with our industry-leading low cash costs. And a reminder that our mechanistic hedging program is designed to de-risk to de-risk and smooth out prices and give us predictable revenues so we can provide confidence to run our capital program, manage the balance sheet, and pay shareholders a dividend. Ideally, we'd be out of the money on our hedges, but this approach to date has accumulated over $350 million in hedge gains since we started. And the other point I would like to point out about the quarter is that I think Pato's operating margin is 62%, with these low gas price screens, very well as compared to our competitors, and it's a testament to how we run the business. So let's talk a bit about the drilling program. We completed another string of very long laterals in the second quarter, mostly wheel bridge across different areas in Greater Sundance and in our core Brazzo area. The average lateral lengths of these wells drilled in the program were just over 2,300 meters, which I think is another record for the size of the program from a quarterly program perspective. We were set up on three well pads for the most part through Q2. During what was typically what was a typical wet season to a spring breakup? And of course that minimizes moving equipment around and slogging through the mud Obviously that slows down our on stream timing But you know certainly helps to keep and even drive costs down as we saw Overall improvements in our average cost per meter on both drilling and completions operations of this past quarter we continue to be excited about the drilling results and the newly acquired reps all lands and We had 21 wells on stream to the end of Q2, with enough history that shows a sustained 30% increase of average well productivity as compared to the performance of recent legacy programs. These wells were drilled in the Wilrich, the Flair, the Nottaquan, and they were drilled over a large portion of the Repsol land base. And that's important because it provides us confidence that it isn't just one species that's outperforming, but the good results are coming over a wider area and up and down the strata. The other thing that's important here is that the cost to attain these outcomes are similar to or even slightly cheaper than what we're currently spending on our legacy lands since we're using the same well-designed to drill and complete them. Cash costs for the quarter were $1.50 per MCFE or $1.24 per MCFE, excluding royalties. We had an annual GCA adjustment to our royalties on the Repsol assets this past quarter that inflated our costs by about $0.05 per MCFE. Going forward, we expect our royalty rates to be around 7% to 8% on a pre-hedged sales revenue basis, or if you include the revenue from our hedge gains, our royalty rate is more like 5% to 6%, since, of course, we pay royalties based on Alberta reference prices and not our hedge book. Payto continues to have the lowest cash costs in the business and one of the highest margins. But despite the fact that we have the lowest cash costs, we still endeavor to improve. We set a goal last quarter to reduce our operating expenses by 10% per MCFE by the end of this year, and we're pleased that we are basically on target with that goal, having reduced 5% in the second quarter already. Part of that gain was the redirection of gas volumes from a third-party deep cut facility where we used to extract low-value ethane as a liquid, and we moved that over to our owned and operated Edson gas plant through the Central Foothills gas gathering system. It meant we had to give up about 2,000 barrels a day, VOEs a day, of MGL liquid by selling that ethane back in the gas space, but the value we realized was essentially no different, and we were saving third-party fees and increasing the plant utilization at the etching gas plant. And I think this is a good example of the way we look at the business, the way we run the business. It's about making money, not about VOEs. Along the same vein, we recently shut down the sour gas sweetening side. of the Edson gas plant. Although we had some third-party income coming in from that, it wasn't enough to offset the cost to run and maintain that part of the plant. Not to mention running it impacted plant reliability, higher emissions, and slightly higher safety risks to operate sour gas, of course. We had to shut in a small amount of our pedonet production from the sour gas unit that fed that part of the plant. But those wells produce very little NGLs, and they have higher shrinkage, and so the cost to operate them doesn't make economic sense, especially at today's gas prices. Currently, we have four rigs running across our core areas, three in Sundance and one in Brazzo. Two of those Sundance rigs are on the former Repsol land. We have a steady diet of non-Ecumen wells for the balance of the year, along with several Dunbeg and Wilberch and some Flair wells that are all left on the docket here for the rest of the year. We plan to drill and complete these wells, and we may or may not bring them on production, or if we do, it'll be at restricted rates, depending on where gas prices are. But at the very least, we'll use this time to evaluate the gathering system impacts, to determine de-bonding projects and build productive capability for later when we expect prices to be better. We're still planning to spend around $450 million this year at the low end of our guidance, and we're targeting year-end exit around 135,000 BUEs a day, of course, assuming prices cooperate and the improvement there as we expect. As mentioned in the release and previous monthly, we have been providing gas to the Cascade Power Plant directly through our pipeline for some time now for testing and commissioning purposes. Our contract is expected to formally kick off here on or before September 1st, so soon. In closing, I'd like to remind everyone we remain bullish on natural gas for the near future as demand forecasts continue to rise in North America. Natural gas is a reliable, critical fuel for industrial use, for power generation, or just to heat our homes. Significant LNG egress is coming online in North America in the near term. You know, and the potential for data center expansion to meet the needs of AI is also being contemplated in many places that should be constructive for both gas prices and, of course, our power deal. And, you know, specific to Pato, we've been, you know, we've protected revenues with our low-cost focus and disciplined hedging strategy, not only for the balance of 24, but we have lots of gas hedging to 25 and even 26 at prices that are at or above $4 an MCF. And as I mentioned earlier, we hope prices go even higher, but it's It's kind of nice to know we have that cushion in our business so we can grow modestly while we return a healthy dividend to our shareholders. Our new assets are working great. We have room to grow without large infrastructure costs to expand. So despite the current gas price environment, things are looking pretty good. So I imagine there's some questions. We have a few come in overnight here via email, but I think we'll go to the phones first. Marvin, if there's some questions, folks have queued up for some questions. We'll take those now.