Pengrowth Energy's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 1.13 | About: Pengrowth Energy (PGH)

Pengrowth Energy Corporation (NYSE:PGH)

Q2 2013 Earnings Conference Call

August 1, 2013 05:30 PM ET

Executives

Derek Evans - President and CEO

Chris Webster - CFO

Marlon Mcdougall - COO

Fred Kerr- VP, Investor Relations

Analysts

Grant Hofer - Barclays Capital

Dirk Lever - AltaCorp Capital

Gordon Currie - Salman Partners

Operator

Good afternoon ladies and gentlemen. Welcome to the Pengrowth Energy Corporation's Second Quarter Results Conference Call and Webcast. I would now like to turn the meeting over to Mr. Derek Evans, President and Chief Executive Officer. Please go ahead, Mr. Evans.

Derek Evans

Thank you very much. Good morning, ladies and gentlemen. I'm Derek Evans, President and CEO of Pengrowth. Joining me today on the call are Chris Webster, our CFO; Marlon Mcdougall, our Chief Operating Officer; and Fred Kerr, Vice President of Investor Relations.

Before we begin, I remind you that certain information today – presented today may constitute forward-looking statements. Such statements reflect current expectations, estimates, projections and assumptions of the Company. These forward-looking statements are not guarantees of future performance and are subject to certain risks, which could cause actual performance and financial results in the future to vary materially from those contemplated in the forward-looking statements. For additional information on these risks, see Pengrowth's annual information form under the headings Risk Factors and Forward-looking Statements.

Let me begin by reiterating as we do every quarter, that we intend to maintain Pengrowth’s dividend at the current level of $0.04 per share per month. This afternoon I will describe Pengrowth’s strategy and highlight some of the recent milestones we’ve achieved as we execute that strategy before moving to second quarter results. I will conclude by describing Pengrowth’s outlook for our business.

I want to leave you with three key messages today. The first is that our 12,500 barrels a day commercial phase of Lindbergh is now fully funded. The second, the Lindbergh project has now been substantially derisked with the higher performance and finally that Lindbergh will begin having a positive impact on our financial performance in terms of cash flow per share in a major way in 2015.

I’ll begin with a review of our strategy. As we’ve said in the past, we believe that the western Canadian sedimentary basin has fundamentally changed. Natural gas business in North America is challenged by low prices as our industry has become a victim of its own success in expanding the supply of that commodity.

The light oil business offers quick kickback, but is challenged by high decline rates that make achieving real growth a huge challenge. The metrics are back in our basin, competing in the liquids rich gas business, taking on large oil sands projects. They have very long time horizons and we cannot go toe to toe with them and hope to be successful.

Pengrowth is one of the few companies that employs a differentiated strategy to address these challenges inside of this new paradigm. We’ve identified a niche for a medium size player, already generating cash flow to enter the thermal oil business, with the right team and the right approach, developing projects that are too big for a single play juniors to fund and too small for the majors to consider. That is Pengrowth’s niche.

Thermal oil projects offering us 50,000 barrels per day, per project, with low steam oil ratio, low declines, low capital reinvestment requirements, long reserve lake and high probability. Our first of these projects is Lindbergh.

Lindbergh is well suited to supporting a dividend and is expected to allow Pengrowth to boost its portion of oil and liquids from just over 50% today to over 80% by 2018. More importantly, Lindbergh has the potential to almost double Pengrowth cash flows by 2018. During and subsequent to the second quarter of 2013, we’ve demonstrated our ability to execute on our strategy by delivering on what we committed too.

On the disposition front, in the first quarter we closed the sale of our non-operated Weyburn unit interest for gross proceeds of $316 million. Subsequent to the end of the second quarter, we announced entering into an agreement itself $510 million of non-core assets, namely our southeast Saskatchewan assets comprising approximately 5700 boe a day of production.

While these were good assets, we want shareholders remember that we’re trading them for a lower decline, longer life, lower maintenance costs assets at Lindbergh. We also announced that we had sold or had signed letters of intent to sell, an additional $203 million of non-core assets. All of these dispositions are expected to close by the end of September 2013.

At Lindbergh, we proceed regulatory approval and an updated reserve report. As you all have read in our recent news releases, we obtained Environmental Protection and Enhancement Act approval for the 12,500 barrels per day first commercial phase of the Lindbergh project on July 15. Pengrowth expect construction of the first commercial phase to be commenced during the third quarter of 2013, with first steam in the fourth quarter of 2014.

GLJ Petroleum Consultants Limited completed a full evaluation and provided an update of reserves and resources at Lindbergh, which resulted in an increase in proved reserves of 69.2 million barrels to 82 million barrels and an increase in proved plus probable or two key reserves of 48.1 million barrels to a 142.9 million barrels compared to estimates at December 31, 2012.

This change in two key reserves represents a 51% increase for Lindbergh reserves and a 9.4% increase to Pengrowth’s total corporate two key reserves reported at December 31, 2012. Although many a big news items occurred after the second quarter, let me highlight a few key results from the quarter.

Pengrowth’s reported solid second quarter production of 87,909 Boe per day, which was ahead of quarterly expectations due to lower than expected impacts from plant maintenance in the second quarter, a robust drawing program as walk in, higher Lindbergh production and strong production performance at Pengrowth’s conventional assets. Although production was down from the first quarter, this decline was mainly attributed to the disposition of the Weyburn assets, approximately 2,500 Boe a day that occurred late in the first quarter.

Fund flow from operations of $146 million or $0.20 per share in the quarter was slightly below expectations due mainly to higher operating costs and one-time royalty adjustments. Second quarter 2013 operating expenses were $130 million, an increase of approximately $11.9 million or 10% compared to the prior quarter, mainly due to a significant increase in electrical power cost.

Second quarter Alberta power prices were the highest quarterly prices in over 10 years as a result of several coal-fired power plants being offline during the quarter. Total power costs in the second quarter represented 27% of our quarterly total operation costs.

While we tried to mitigate our exposure to fluctuations in power costs through our hedging program, we also strived to reduce costs and improve the efficiencies throughout our operating business. We expect our efforts on costs minimization will result in lower operating expenses in the second half of the year allowing us to achieve our annual guidance targets.

Operations at Lindbergh pilot project continues to show strong results during the quarter with combined field production from the two well pairs averaging approximately 2,000 barrels per day of bitumen, with flush rates reaching 2,500 barrels per day in May following the April turnaround.

The average Instantaneous Steam Oil Ratio for the quarter was 1.5 times. Since steaming commenced in February 2012, cumulative productions from the two well pairs is approximately 640,000 barrels of bitumen to the end of June 2013 at a cumulative steam oil ratio of two times.

In the second quarter, $38.7 million was spent on procurement and engineering costs. At Lindbergh we have ordered all major equipment and over 60% of the minor equipment required for the first commercial phase. Process design is 90% complete and mechanical design is 40% complete.

Vendor packages have been ordered and skid fabrication has commenced. Engineering and procurement work is on track and Pengrowth plans to commence civil construction activities in August.

Mechanical construction of the central processing facility and the drilling of 23 additional well pairs to supplement the two well pairs currently producing at the Lindbergh pilot will commence in September 2013. The $590 million project is on time and on budget with first steam expected in the fourth quarter of 2014.

With the completion of our $700 million disposition program, we've provided an update to our corporate annual guidance which included an update of anticipated production for 2013. Taking into consideration the volumes and the timing of the disposition, Pengrowth now estimates full year 2013 production to be in the range of 82,000 to 84,000 boe per day.

A complete list of our updated guidance is included in our second quarter news release, the second quarter MD&A and also in the July 16, 2013 news release. We continue to execute on our differentiated strategy of becoming a sustainable, lower decline thermal bitumen producer.

We continue to deliver solid operational results from our conventional assets. We've realized significant value from our disposition program in a very competitive market and our Lindbergh project continues to surpass expectations.

Pengrowth is poised for the next phase of our strategy, the development of the 12,500 barrel a day first commercial phase of Lindbergh and we look forward to providing shareholders with updates as we commence construction of the first phase in the coming months.

We continue to place strong emphasis on improving sustainability which implies balancing cash inflows and outflows, slowing down the declining treadmill, generating meaningful growth in cash flow per share and shifting productions effectively toward oil and liquids over the next few years.

That concludes my prepared remarks. Operator, do we have any questions in the queue.

Question-and-Answer Session

Operator

(Operator Instructions). The first question is from Grant Hofer at Barclays. Please go ahead. Your line is now open.

Grant Hofer - Barclays Capital

Hi, guys. Were there – just a quick question for Chris, were there any disposition proceeds included in the Q2 results from the 700 million recently announced?

Chris Webster

No, there wasn't. We had a couple of properties that we promoted to what's called asset helms for trading, but the actual proceeds do not come in, so you would not see them reflect against the balance sheet.

Grant Hofer - Barclays Capital

Okay, thanks for that. As well on the volume front, you guys had indicated heading into the second quarter that volumes will be down by 3,000 to 4,000 boe a day, predominately just on turnaround activity and the [Weyburn] disposition. Obviously, volumes are a bit stronger than that. Is there anything meaningful you would point to that contributed to that?

Marlon McDougall

Hi, it's Marlon here. I think as Derek highlighted, we had stronger performance from Lindbergh and we had less than anticipated turnaround volumes that came into play, so I think that and our base performance was also strong. So I think all of those things combined certainly pointed to better performance.

Grant Hofer - Barclays Capital

Okay, great. That's it for me. Thanks.

Derek Evans

Thank you.

Operator

Thank you. (Operator Instructions). The next question is from Dirk Lever at AltaCorp Capital. Please go ahead. Your line is now open.

Dirk Lever - AltaCorp Capital

Thank you very much. A simple question. As we go forward, conventional production you're going to be aiming to keep flat. So with the assumed dispositions done, what do you see your corporate decline rate on those assets? And how you see the capital efficiency in order to keep your production flat during the ramping up of Lindbergh?

Derek Evans

So, Dirk, its Derek. I guess a couple of things. We don't see a substantial difference in our corporate decline after taking into account all of the dispositions. We've actually run those numbers and they look approximately the same to where it was prior to those dispositions taking place. On the capital reinvestment efficiency I think – and I don't want to get too far ahead of ourselves here but we had been pointing to a capital reinvestment efficiency of something in the neighborhood of $4,000 of flow in boe. I expect that as we look at our performance and where our costs are coming in that we're going to be able to lower that number as we get ready to roll out a budget later on this year. With respect to production performance or holding production flat, our intention has always been that we would likely underfund the conventional side of business not on the oil side but on the gas side and that our production would continue to fall away a little bit year-over-year until really the end of 2014 when you saw the first phase of the Lindbergh commercial project kick in.

Dirk Lever - AltaCorp Capital

Thank you.

Operator

Thank you. The next question is from Gordon Currie at Salman Partners. Please go ahead. Your line is now open.

Gordon Currie - Salman Partners

Hi, guys. Can you just remind me what your share of Weyburn production was?

Derek Evans

Our share – we have working interest in the Weyburn and it was approximately 10%.

Gordon Currie - Salman Partners

And what would that translate into in terms of barrels?

Derek Evans

2,500 boe a day is what we sold.

Gordon Currie - Salman Partners

Okay, thanks. And then this other smaller acquisition recently, the $200 million one, how many barrels went along with that?

Derek Evans

Sorry, I'm not following. An acquisition…

Gordon Currie - Salman Partners

No, I think you referred to another small $200 million disposition.

Derek Evans

I'm sorry. That's the – the $203 million disposition program, there's about 5,900 boe associated with that, particularly disposition and it's about 60% gas and about 40% oil.

Gordon Currie - Salman Partners

5-9-0-0?

Derek Evans

5-9-0-0.

Gordon Currie - Salman Partners

Okay, good. Thank you.

Derek Evans

Welcome.

Operator

Thank you. The next question is from [Terry Portwood], a private investor. Please go ahead. Your line is now open.

Unidentified Analyst

Hi, guys.

Derek Evans

Hi, Terry.

Unidentified Analyst

I've got a lot of your stock for the last 10 years. When will well 3 and well 4 be completed?

Derek Evans

So, well 3 and well 4 or the full development of the first phase of the Lindbergh project won't be – they'll be drilled and they will be set up, but they won't start to see any steam until likely the fourth quarter of 2014.

Unidentified Analyst

The fourth quarter?

Derek Evans

The fourth quarter. So we're in the process or we will be in the fourth quarter of this year, in the fall of this year starting to build the facility, the steam generating facility to go along with the 23 wells that we're going to drill here in the next little while.

Unidentified Analyst

So the 12,500 barrels are not going to come online until next year?

Derek Evans

That is correct.

Unidentified Analyst

So you're going to have a decline in barrels per day for the next year then?

Derek Evans

So we're going to see a small decline in overall production as we move from 2013 to 2014. Some of that decline in production is going to be due to asset sales, but you should expect to see that cash flow per share will be relatively flat, even though there may be less barrels per day and that is a function of the fact that our percentage of producing barrels will be more highly weighted to oil barrels than to natural gas barrels.

Unidentified Analyst

Are you developing any other fields at the same time, any other wells on any other property?

Derek Evans

Yes, we've got a big development project on our Cardium horizontal multistage fracking program just northwest of Calgary on a property called Lochend and we've been very active out there this year. We're just in the process of tying in 11 wells into a factory that we expanded during the second quarter.

Unidentified Analyst

You're going to put 23 wells at Lindbergh?

Derek Evans

Yes. That's number of wells that we're going to require to make that – to fill that facility up at 12,500 barrels a day.

Unidentified Analyst

Okay. I thought I read that you had 23 wells going to a potential 50,000 barrels a day?

Derek Evans

No, the first phase of the project is based on 23 further wells in addition to the two wells that I already have on production, so that will be a total of 25 wells and that will support production of 12,500 barrels a day for the first phase. The second phase will take production to 30,000 barrels a day and require another incremental set of wells and we have the potential to go to 50,000 barrels a day and that will require even further wells.

Unidentified Analyst

That's way down the line though, years in the line then.

Derek Evans

No. Well, it's years down the line but we can show you an actual model in our presentation that points to how we move from where we are today to that potential 50,000 barrels a day by 2018.

Marlon McDougall

That's on the website.

Derek Evans

And that is on the website.

Unidentified Analyst

Okay. All right, that's about it. Thank you very much.

Derek Evans

Thank you, Terry.

Operator

Thank you. (Operator Instructions). There are no further questions. I would like to turn the conference back over to you, Mr. Evans.

Derek Evans

Thank you, operator, and thank you everyone for taking the time to listen in on our second quarter conference call today. We're very excited about prospects in the way Pengrowth and in shareholders. We've achieved several significant milestones this past year which support our long-term goal of becoming a sustainable, low decline dividing paying thermal energy producer. Pengrowth's business plan is now fully funded. Our Lindbergh project is [derisk] and is already making a meaningful contribution to our improving profitability. We look forward to providing further updates in the fall. Thank you very much.

Operator

Thank you. Ladies and gentlemen, your conference has now ended. All callers are asked to hang-up their lines at this time. And thank you for joining today's call.

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