Pengrowth Energy Corporation (PGH) Q3 2016 Earnings Conference Call November 3, 2016 8:30 AM ET
Derek Evans - President and CEO
Chris Webster - Chief Financial Officer
Steve De Maio - SVP, Thermal Operations
Randy Steele - SVP, Conventional Operations
Shailender Randhawa - RBC
Josef Schachter - Schachter Asset Management
Dennis Fong - Canaccord Genuity
Good morning, ladies and gentlemen; welcome to the Pengrowth Energy Corporation's 2016 Third Quarter Results Conference Call and Webcast. I would like to turn the meeting over to Mr. Derek Evans, President and Chief Executive Officer. Please go ahead Mr. Evans.
Thank you, Donna and good morning everyone. Good morning ladies and gentlemen, thank you for joining us on the call this morning. I am Derek Evans, President and CEO of Pengrowth. With me on the call this morning are Chris Webster, our Chief Financial Officer; Steve De Maio, our Senior Vice President of Thermal Operations; and Randy Steele, our Senior Vice President of Conventional Operations.
Before we begin, I’ll remind you that all figures are presented in Canadian dollars and that certain information presented today may constitute forward looking statements. Such statements reflect the 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.
As we entered 2016, we set out initiatives that were intended to safeguard the financial health and well being of the Company and articulated the actions that we were prepared to take to achieve these objectives. Our third quarter results clearly demonstrate the continued success of our efforts on cost reduction, production optimization, and debt reduction. One of the objectives that we were keenly focused on is managing and reducing cost structures across the organization. The relentless focus by our teams on this front and the effort put forth has resulted in us achieving substantial savings and operating costs, general and administrative costs, as well as reduced transportation costs.
In the third quarter we carried on with these cost cutting efforts with operating expenses for 2016 now expected to come in approximately $72 million below our original guidance; this is a further reduction of 7 million on the 65 million reduction we reported in second quarter. All costs are now trending towards the lower end of the updated Q2 lower guidance. We also continue to realize additional cost savings in both general and administrative costs, as well as transportation costs.
Year-to-date G&A expenses have fallen by 18.6 million, compared to the same period for 2015; while year-to-date transportation expenses have declined 10.4 million year-over-year.
We are pleased with the progress that the company has made on this front and we'll continue to look for sustainable cost improvements going forward.
Pengrowth delivered average daily production of 55,137 barrels of oil equipment per day in the third quarter; a decline of approximately 3% from the second quarter mainly due to production interruptions from planned maintenance at Carson Creek, and unplanned maintenance at the Lindbergh Terminal facility. Production from our Lindbergh Terminal project averaged 15,190 barrels per day at an average steam oil ratio of 2.46 times in the third quarter. Production in the quarter was 2% below the second quarter, production due to an unscheduled maintenance outage that required the complete shutdown of the facility for two days in September and extended for one day into October.
The impact of the outage coupled with a higher frequency of pump replacements in the quarter was approximately 450 barrels per day of lost production during the quarter; and it has reduced average annual outlook for Lindbergh to approximately 15,500 barrels per day for the year. The company's production performance continues to deliver exceptional results, given a capital program focused only on asset maintenance with no active drilling program. After accounting for the impacts of these divested properties and scheduled turnarounds, our production has remained essentially unchanged from year-end 2015 demonstrating a low declining nature of Pengrowth's asset base, coupled with the optimization efforts of Pengrowth's operation stints.
Turning to our financial results. We reported third quarter funds flow from operations of 122.7 million or $0.22 per share, an increase of 38% from the second quarter of 2016, contributing to the increased funds flow or proceeds of $41.6 million resulting from the early monetization of some of our 2018 and 2019 commodity risk management contracts. As a result the company's cash position increased by 85.4 million to a total of 139.5 million at the end of the third quarter. The company has now scheduled debt maturities prior to the approximately 127 million of convertible debentures which are due on March 31, 2017, and expect to have approximately 200 million of cash on the balance sheet at the end of 2016.
Our reported total debt as of September 30th was CAD$1.65 billion, this was essentially unchanged from the end of the second quarter debt of CAD$1.63 billion with a slight difference resulting from moves in the foreign exchange rate between the Canadian dollar versus the U.S. dollar. As a reminder Pengrowth's long term debt and interest payments are denominated in U.S. dollars and as such are subject to fluctuations in the exchange rate between the Canadian and U.S. dollars.
Pengrowth was in compliance with all financial covenants under its senior unsecured notes and credit facility as at September 30, 2016. The company anticipates it'll remain in compliance with such covenants for the remainder of 2016, and into the middle of 2017. However absent an improvement in oil and natural gas prices Pengrowth may not remain in compliance with certain financial covenants in a senior unsecured notes and credit facilities during the second half of 2017.
Pengrowth is proactively in discussions with lenders of a syndicated bank facility and with holders of its senior term notes in an effort to seek covenant amendments to provide the company with additional financial flexibility as it works to reduce its debt position. If the company is unable to obtain a waiver or realization of its debt covenants and is not able to remain in compliance with them, the senior unsecured notes and credit facilities may become due on demand and the underarm portion of the credit facility may no longer be available to the company.
We continue to evaluate asset sale opportunities, while the asset sale market remains somewhat challenged given current commodity price environment. The company will continue with its marketing efforts on the assets it has historically held in the market and all other monetization opportunities including risk management contract or monetization will be pursued. The company remains confident in its ability to complete additional transactions to further advance its debt reduction initiatives.
Pengrowth has realized a total of 308.5 million from its commodity risk management program for the first nine months ended September 30, 2016. For the fourth quarter Pengrowth remains well hedged with 23,000 barrels per day of crude oil hedged at CAD$83.27 per barrel and 128 million cubic feet per day of natural gas hedged at CAD$3.30 per Mcf.
As of September 30th, Pengrowth hedged 18,500 barrels a day of expected 2017 crude oil hedged using WTI fixed price contracts and average price of CAD$65.54 per barrel and 105 million cubic feet per day of expected 2017 natural gas hedged using an AECO fixed price of CAD$3.37 per Mcf.
Subsequent to the end of the quarter the company further monetized a portion of its 2017 commodity risk management contracts for proceeds of $9.6 million. Following these monetization's the company had 15,000 barrels per day of oil hedged at an average price of CAD$62.54 per barrel and 105 million cubic feet per day of natural gas hedged at an average price of CAD$3.37 per Mcf. The remaining commodity and foreign exchange hedges in place as at October 31, 2016, has realized market-to-market value of approximately $108 million.
The continued strong corporate performance despite minimal capital spending in 2016 demonstrates the quality of resilience of Pengrowth's producing assets. This stable base will backstop the further development of our deep inventory of thermal and natural gas opportunities as the business climate improves; the company is in discussion with lenders of the its syndicate bank facility and with the holders of its senior term notes in an effort to gain additional financial flexibility during this challenging environment and looks forward to updating shareholders regarding these discussions in the future.
This concludes the formal part of the call; and we will now take questions from our analysts. We encourage all of our shareholders with questions to follow-up with our investor relations team. We'll be happy to address any of your questions.
Donna, please open the queue for questions from our analysts at this point in time. Thank you.
Thank you. [Operator Instructions] And the first question is from Shailender Randhawa from RBC. Please go ahead.
Just one question from me Derek, what's the program like for 2017? Specifically with respect to your Montney assets, how are you thinking about those as we head into winter?
The way we're looking at our Montney assets is really highly depended upon two things, what the underlying gas price is going to be, as you know we wouldn't put capital to work in an environment unless we could generate at least to 20% rate of return and as we look at the Montney we think we need gas price somewhere in neighborhood of $2 in Mcf to do that. And the second is probably a more important concern, deals with the assets to transportation, as you are aware up in Northeast we see there's not a lot of excess transportation. And at this point in time we're utilizing all the transportation that we have; so as we look at the Montney for the remainder of -- for 2017 I think you'll see us in last half of 2017 getting ready to drill the existing Groundbirch plant, that's 30 million cubic feet to take advantage of some local firm service that we have coming available. I think it's in April 2018. So, our transportation is cheap, of course we're not prepared to go ahead and get that facility or expand the capacity until we've got the transportation. But it does -- that project does kick the second loss in terms of generating a 20% rate of return at the gas prices we see today.
Thank you. The next question is from Josef Schachter from Schachter Asset Management. Please go ahead.
There are two questions, the first one is on the asset sales, you mentioned that is challenging but we've seen a quite a lot of transactions at some very nice prices, are you looking at trying to do something like 5,000 or 10,000 Boe's a day in the west side popular areas, where you could maybe do a significant transaction which would really change the debt situation in Q1, Q2?
Yes, we're definite -- I think for the last few years we've been looking for any asset transaction that could attract a premium type bid. Clearly we're aware of people selling their Viking assets or their Cardium assets, we saw one of those transactions in the last sort of while; I think it's fair to say we continue to see a fair amount of traffic on our Cardium assets, and we're going to continue to opportunistically find ways to take advantage of that as we move forward. I think though -- probably as importantly, I'd say more importantly is the overlying sort of commodity price environment; as through 2015 as assets -- commodity prices were declining, we tried to sell a number of different packages and we found that that was a very frustrating process as commodity prices came down and we're trying to put the assets in the market. With the recent strengthened on both oil and stronger gas prices, we've seen a renewed level of interest. That renewed level of interest has not quite got us to what we think the economic value of these assets are, but we continue to work to find the opportunity to get some of those assets sales across the line.
Second question, looking at the website yesterday I didn't see a presentation on there -- are you in the process of updating it or is there any reason there's no presentation on the website?
No, we are -- the only reason there's no presentation on the website is that we're quiet right before the quarter. We'll be putting one up in the next day or two that reflects our third quarter results.
Thank you. [Operator Instructions] And your next question is from Dennis Fong from Canaccord Genuity. Please go ahead.
I just had a quick question, just a follow-up on the Montney side. How are you guys looking at potential land expirees and so forth within the Montney and deploying capital into that region?
The way we look at land expirees, on the Montney, as you know we've two pieces in Montney, we've Groundbirch and we have our Bernadet piece. So I think one piece that most people look to is when are you going to do the drilling to hold the land up in Bernadet, this would be 31 half sections of liquids at Montney that we acquired in 2014. That has a primary term of three years and an additional one year term. We need to have drilled those wells or earn that anchorage by November of 2018. So, fundamentally we're in the planning process as we speak to get out there and get those wells drilled. We actually we're running seismic on the western half of that block, which would help support that first two horizontal locations in vertical wells that would get us the anchorage we need to lock and load, or basically hold that anchorage. And the cost on that just to give you a little bit of color, is somewhere between $14 million and $16 million depending on how much seismic we run and where cost actually endeavor. And we also have an expiry at Groundbirch later on in 2019 and we'll do whatever we need to do to manage that; and I think require to get a well down there on that block.
And then just one last question on kind of additional options that you guys have for I think on size with respect to the debt covenants, I understand that previously you had talked about the $65 million or north of that, I guess it changes on quarter-to-quarter of mark-to-market on the FX hedges side, are there any other kind of I don't want to call it bullet, but are there any other levers you guys can pull to kind of additionally stay onsite through potentially tough commodity environment in 2017?
That's the single largest arrow in our quiver is the FX hedges, and then absent that it will be closing on some of asset dispositions and redeploying the cash that's already on hand to actually repay debt. Those are the biggest movers. So, $200 million of cash by the end of this year we'll still have the FX hedge crystallization opportunity and then its asset dispositions.
Thank you. As there are no further questions registered at this time, I'd like to turn the meeting back over to Mr. Evans.
Thank you, Donna. I'd like to remind all our shareholders and investors that should they have any follow-up questions please do not hesitate to reach out and to call our investor relations group. They would be delighted to answer all your questions. That wraps it for today. Thank you ladies and gentlemen for joining us on the call today; hope everyone has a great day.
Thank you, Mr. Evans. The conference has now ended. Please disconnect your lines at this time; and thank you for your participation.