Strathcona Resources Ltd.

Good morning. My name is Lara and I'll be your conference operator today. I would like to welcome everyone to the Q2 2024 conference call of Stress Corner 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 the number two. I now introduce Rob Morgan, President and CEO of Strathcona. You may begin your conference.

Thank you and good morning, everyone. Welcome to the second quarter 2024 conference call of Strathcona Resources. As the operator mentioned, my name is Rob Morgan, President and CEO of Strathcona. And with me today is Connor Watrous, our Senior Vice President and CFO of and Angie Lau, our treasurer. Yesterday, Strathcona was pleased to release our second quarter results, second quarter 2024 results, and the news release financial statements and MD&A, which are available on Strathcona's website as well as on CDAR+. We encourage investors to read those documents in full and please take note of the advisories regarding forward-looking information and non-GAAP measures included therein. Production for the second quarter averaged approximately 182,000 BOE per day, with funds from operations of $548 million or $2.56 per share, capital expenditures of $297 million, resulting in free cash flow of $247 million or $1.15 per share. Oil production for the second quarter was consistent with the first quarter at approximately 131,000 barrels per day. Oil sales volumes increased to approximately 135,000 barrels per day in the quarter, Due to a drawdown of inventory related to the commissioning of Strathcona's new crude by rail offloading facility on the U.S. Gulf Coast. At Cold Lake, we continue to make progress on de-bottlenecking projects that have resulted in an 8% reduction in our steam oil ratio compared to the same period in 2023, improving the efficiency of our operations. Production of natural gas was $237 million per day, down 6% or approximately $16 million per day from the first quarter due to planned and unplanned third-party outages. Associated natural gas liquids production was essentially flat to the first quarter at approximately 11,500 barrels per day. At Kakwa, Strathcona has sanctioned our first pad to incorporate 2.5-mile horizontal laterals to more efficiently exploit our land base. These wells are expected to reduce costs by 10% on a per-meter basis versus our previous 2-mile laterals. At Ground Birch, initial testing of our three new drills has indicated strong results comparable to our initial two wells. The wells have been tied in and are awaiting stronger natural gas prices to preserve the economics of our investment. As third-party outages have extended into the third quarter, along with a significant turnaround at one of our facilities late in Q3, and with the continued deferral of dry gas from our ground birch wells, Strathcona is reducing its year natural gas guidance by approximately 15 million cubic feet per day, resulting in a revised corporate guidance range of 185,000 to 190,000 BOE per day. with an increased oil weighting of 72%. Our capital budget guidance remains at $1.3 billion. As of June 30th, Strathcona achieved our previously disclosed debt target of $2.5 billion. As a result, Strathcona's Board of Directors has approved a quarterly-based dividend of $0.25 per share payable on September 27th to shareholders of record on September 16th. Going forward, Strathcona's run rate debt target remains at $2.5 billion, leaving 100% of excess free cash flow beyond the base dividend available for further shareholder returns or additional investment opportunities. On July 10th, Strathcona was pleased to announce a first-of-its-kind partnership with Canada Growth Fund to develop up to $2 billion in carbon capture infrastructure on Strathcona's thermal assets with a targeted FID for the first project in mid-2025. We are excited to be a leader in the decarbonization of thermal oil production in Western Canada. Strathcona is also pleased to announce its first Investor Day to be held on Thursday, November 14th, coinciding with the release of our Q3 results. The Investor Day will provide shareholders with further details highlighting both our near and long-term plans for our assets and to properly introduce additional members of the Strathcona team. Thank you very much for your time this morning, and we'd be very pleased to answer any questions you may have.

Thank you, sir. As a reminder, please press star then the number one to ask a question. One moment please for our first question.

Our first question comes from the line of Minho Hoshaw from TD Cowen.

Go ahead please.

Thanks and good morning everyone. I'll start with a question on the looming rail strike. Presumably, it's not going to last that long, but how could it potentially impact your 30,000 barrel per day crude by rail business and maybe even supply for inputs like diesel? What proactive steps have you taken to mitigate the overall risk?

Sure. It's something we've been super focused on. I've been in close contact with the folks from CN over the past couple months to be as prepped as we can. The first thing to bear in mind is we've got about two to three weeks of available storage capacity at our various Lloyd thermal fields, which we will be able to use to effectively cushion the blow of a strike if it lasts in that two to three week time frame. If the strike lasts longer than two to three weeks, we still have the option to effectively truck the vast majority of our Lloyd thermal crude to various pipeline terminals and sell a blended crude until the CM strike ends.

Terrific. Thanks for that, Connor. And then maybe the second question is on the CCS agreement that was reached with Canada Growth Fund during the quarter for up to $2 billion. Can you just walk us through the next steps and key milestones that you hope to achieve over the next, say, 12 months or so as it relates to CGF specifically? And where is the risk in delivering on those milestones?

So thanks again for the question, Mano. Where we progress now, and we've been looking at CCS for quite some time, given the nature of where our assets are, particularly in Saskatchewan, where we do have access to sequestration or pore space there and basically support for ejection and sequestration of CO2, we expect that our first project likely will be in the province of Saskatchewan at this point. and we are progressing with initial feed assessments. We actually have done some feed work previously on our Saskatchewan thermal assets, and so we'll progress through that over the next year or so, finalizing on both technology as well as the appropriate partners we would need for that project. We are working in partnership, as you highlighted, with Canada Growth Fund, And there essentially will be a committee of individuals from Canada Growth Fund and Strathcona that will work through to get to essentially what will be our first funding agreement, which we expect will be in that mid-2025 timeframe. So I think you can expect us to provide some updates as we go down this path. And we still are working with the Alberta government. in terms of securing pore space in Alberta, and we feel fairly confident that we should be able to get something resolved there as well and be progressing our decarbonization strategy both in Saskatchewan and our Alberta thermal projects.

Thanks, Rob. I'll turn it back.

Our next question comes from the line of Patrick O'Rourke from ATV Capital Markets. Go ahead, please.

Hey, good morning, guys, and congratulations on the inaugural dividend announcement there. I guess, you know, sort of first question with respect to some of the commentary on go-forward return of capital strategies, you've put the base dividend in place. It looks pretty defensible, I think, in the presentation down to $54. But with respect to sort of the $2.5 billion net debt target and the commentary around ad hoc decisions, sort of what, you know, how often you'll be looking at, will that be on a quarterly basis? And then appreciating that, you know, the opportunities for both growth and acquisitions might not necessarily, you know, coalesce with a specific quarter. You know, do you plan to go below that $2.5 billion at any point in time? Or, you know, can we expect sort of a cash sweep if there's no opportunities out there?

Yeah, sure.

So on that front, Patrick, so the way that we've always thought about it is that we're still comfortable with a long-term debt on the business of that $2.5 billion number. That equates to about one times debt to a cash flow of what we view as a mid-cycle price of about $70 WTI. And, of course, based on the cash flow that the business is forecasted to be making at anything close to the price levels that we're at now, there's certainly going to be a lot of excess free cash available beyond the quarter-per-quarter base quarterly cash dividend. And the way we have thought about the use of that cash flow going forward is that our first choice is always going to be able to, is always going to be looking to find things to further grow the per share value of the business, either on an organic or on a M&A basis. In the event that we can't find something like that to do, then it just makes sense to send that excess cash flow out to the owners of the business. In the short term, when our public float is small, unfortunately, a buyback is not going to make sense for us, even though at our current share price with a bigger public float, it certainly would. But in the short term, what that means is, you know, we'll likely pay out a series of special dividends with the excess cash that is made. Importantly, we don't want a, you know, fixed quarterly formula and a series of quarterly special dividends. Instead, you know, that might be something that's paid out, you know, at a, you know, one to two times per year based on what we see as the current and forecasted alternative, forecasted all alternative uses of that cash. And in turn, what that will mean is that prior to getting to one or two moments per year where we choose to pay out some form of special that the debt will fall sub that $2.5 billion level. And in turn, we will draw back up to it to fund that special.

Okay, terrific. And then just a little bit more on the operational side, obviously some strong improvements in the steam oil ratio at the Cold Lake projects there. Sort of looking at Lindbergh and the public data, it looks like it's below where its long-term trend is, Tucker's maybe a little bit above. I know the net back advantages of the crude grade and transportation probably outweigh the steam oil improvement here, but just kind of where these things could go to over sort of the next 12, 24 months and what sort of the opportunities for improvement that are left are.

For sure, Patrick, thank you. Obviously, as we move towards filling our capacity and where we have the most available capacity today is in our Tucker asset. We've continued to reactivate some of the legacy operator drills that maybe were not optimum drills at the time, but now benefited from the fact that the steam chambers have matured. We continue to bring those online. We've been pleased with the results of our first H-East pad, first eight wells. We're drilling our C-Central pad, and that's, again, production will start to come online. So just by virtue of bringing that production into the capacity, we'll start to improve our steam oil ratio. And I think when we look at the longer term, we suggested that as an overall, all three of our assets you know, we could get into that sub four, maybe mid three category over the next sort of 24 months as we bring on those new wells and continue to optimize our lower steam oil ratio wells. At Orion, we're, you know, Orion is primarily a clear water asset. The formation is the clear water, but we also have some upper Grand Rapids that typically is a lower steam oil ratio. We had some success on our G5 pad last year and have sanctioned, you know, our next pad pursuing that upper Grand Rapids. So All little bits and pieces that, you know, over the course of the next, you know, we expect 24 months, you know, we'll bring our steam oil ratio down and improve the overall thermal efficiency of the business on top of the already strong economics.

Okay. Thank you very much.

Our next question comes from the line of Greg Party from RBC Capital Markets. Go ahead, please.

Hi there, this is Rob Mann on for Greg Pardee and thanks for taking my question. Just one for me, I know you touched on the shareholder returns earlier with Patrick's question. So just on the production side of things, just given a deferral of some natural gas production from the ground birds pad, maybe you could just frame your outlook for natural gas in 2025 and maybe how you're thinking about production for next year. Thanks.

Yeah, so we expect or hope that there is some recovery in prices And, you know, maybe late this year, we'll be able to bring those ground birch wells on. We're very cognizant, particularly that ground birch being the dry gas, they're very prolific wells. And so much of the rate of return of that investment is captured in basically the, you know, sort of initial 12 months. So, you know, we would like to see supportive gas prices 250-ish and above when we think, you know, if we're comfortable in that point, we'll bring the gas production on. And that will allow us to fill, we did do a modest expansion at that ground bridge facility to about 30 million a day of capacity. And that will allow us then to fill that capacity and we would go forward in that. So that will add probably in the order of 15 million a day, 20 million a day of new production that we expect we could maintain with supportive prices in 2025. Beyond that, expectations of 2025, I think that's partly where we will highlight in our investor day presentation not only our expectation for 2025, but how we see our growth plans over the next number of years play out as we look at the opportunity base we have in each of our assets.

That's great. Thanks for your time. I'll turn it back.

Thank you.

Ladies and gentlemen, just a reminder, should you have a question, please press star followed by the number one on your touchstone phone. Our next question comes from the line of Dennis Fong from CIBC World Market. Go ahead, please.

Hi, good morning, and thanks for taking my question. My first one is maybe following along, following on from Meadow's question on carbon capture and the next steps. With a mid-2025 FID timing, can you talk towards your view of, we'll call it, cadence in capital associated with carbon capture infrastructure, the recovery of said capital spent via the investment tax credits, and balancing that with returning free cash to shareholders over the next couple of years? And I've got a second one on operations. Thanks.

Sure. So in terms of how we see the cadence of capital and the cadence of the build-out of our carbon capture hubs in both the Lloyd side of the border and in Cold Lake, as Rob said previously, what we're hoping to do is reach FID on our first effectively pilot project on the carbon capture front in mid-2025. You know, to give you a very you know, round number on the size of that, that might be around 200,000 tons per, you know, tons per year, and in turn about $200 million of gross capital spending. And then effectively, assuming that that hopefully goes well, that's going to be coming on in the, you know, early to mid-2027, mid-27 timeframe. And then our hope would be to follow follow that up with a much bigger set of carbon capture projects to fully fill the total $2 billion partnership that we formed with the Canada Growth Fund folks over the subsequent couple of years. In terms of how that $200 million of gross capital for our first pilot is going to be funded from Strathcona's perspective, The big picture math to think about is effectively $100 million of that gets funded by the Canada Growth Fund folks and $100 million from the federal carbon capture in investments, a tax credit, and a few other small grants that Strathcona has earned over the past couple of years. The actual timing of the cash investment inflows and outflows will be such that all of the $100 million from the Canada Growth Fund will effectively throw a flow through to fund their 50% share on an as-needed basis as the project is built. And then on the tax credit piece, there might be a couple quarter time lag prior to us being a cash taxpayer. between when we spend the CapEx on the project and when we get the tax credit back from the federal government. Post us being a cash taxpayer in the 2027 plus timeframe, there will effectively be no lag in terms of when we earn the cash from the carbon capture tax credit. So in turn, what that means for Strathcona and the Strathcona balance sheet is that effectively there should really be no burden or no net use of cash from us as we go to build these carbon capture assets. And in turn, there should be no change to any kind of base or feature special dividend for our shareholders.

Great. I appreciate that context, Connor. Shifting gears more to the operations side and focusing on development at Druid, Can you talk towards the potential on your existing land base to develop the man-built staff through multilateral wells? And can you also kind of touch on leveraging some of the expertise you view your team as having to optimize that asset base in the Lloyd region?

Yes. Thanks for that, Dennis. I think we are fortunate where our assets are located. And it's always the benefit of having assets in this region is you have often that Manville stack as part of your ongoing business. So certainly in the Druid area, we will drill our first well. I think every formation has unique characteristics, and we just want to make certain that this technology, we've had some, there's been a small amount of I'll call two-leg wells that have been drilled here. But this is the first time that we'll get a little more into the pure multi-leg technology. If that is successful, we think there could be a number of follow-up locations in Druid in the order of half a dozen to a dozen, I guess, at this point in time. There are other parts of the reservoir that we also want to assess the applicability of that technology. And then that will lead us to, I guess, the other parts of our asset base and And hopefully as we get to the investor day, we'll be able to provide even more context of what the potential could be for Strathcona. Again, having those multiple manville horizons in a number of our assets.

Thanks, Rob. Appreciate the context and also appreciate that you don't really want to front run your investor day in terms of the takeaways from there.

I'll turn it back. Thanks.

Thank you. There are no further questions at this time. I'd now like to turn the call back over to Mr. Morgan for any final closing comments.

Well, I want to thank everyone for taking the time today and the great questions. And we look forward to seeing all of you, not only for our Q3 conference call, but at our investor day in November. Thanks very much. Enjoy the rest of your summer and have a great day.

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.