Pengrowth Energy Corporation (NYSE:PGH)
Q4 2016 Earnings Conference Call
February 17, 2017 08:30 AM ET
Derek Evans - President and CEO
Chris Webster - CFO
Steve De Maio - SVP, Thermal Operations
Shailender Randhawa - RBC Capital Markets
Nick Lupick - AltaCorp Capital
Aaron Bilkoski - TD Securities
Good morning, ladies and gentlemen. Welcome to the Pengrowth Energy Corporation’s 2016 fourth 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.
Thank you, Brian. Good morning ladies and gentlemen and thank you for joining us on this call this morning. I’m 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 remind you that all figures presented are in Canadian dollars and that certain information 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, please see Pengrowth's Annual Information Form under the headings Risk Factors and Forward-Looking Statements.
Pengrowth delivered strong operating and financial results in 2016. We increased the net asset value per share by approximately 70% to $6.30 per share, delivered robust production and significantly increased reserves, while reducing cost across all segments of our business. We reduced outstanding debt, built a substantial cash position and positioned the company to further improve the strength of its balance sheet with a significant reduction of its outstanding debt early in 2017.
Lastly we continued to build the required foundation for long term production and reserves growth. With the successful approval of our Lindbergh phase II EPEA application and our February 2017 scheme of management application, coupled with December 2016 EPEA application filed for our 50% working interest in the Selina project, a 12,500 barrel a day thermal bitumen project, the company’s pipeline of growth projects is very strong.
We delivered full year’s fund flow of $429.7 million or $0.79 per share which was slightly lower than 2015’s full year fund's flow of $459.3 million or $0.85 a share. This was in a year in which commodity prices fell by approximately 18% and production declined by 20%. This stability in fund flow is attributable to our commodity risk management program, which has generated realized gains in excess of $700 million over the past two years and has provided Pengrowth with significant protection and stability to our funds flow since the downturn in commodity prices began back in mid-2014.
Our continued emphasis on cost control was demonstrated by the achievement of significant and sustainable savings across all segments of the business totaling a $125 million in 2016. Operating expenses declined by $96.7 million or 27% year-over-year to $275.4 million or $13.19 per Boe. Similarly general and administrative expenses fell by $16.8 million or 19% year-over-year to $70.4 million or $3.37 per Boe, while transportation expenses fell by $11.8 million compared to the same period in 2015.
These realized cost savings are expected to be sustainable going forward. We also made significant progress on our debt reduction efforts in the year and were able to repay a $108 million of debt outstanding on the credit facilities, finished the year with $287 million of cash on hand, which grew to approximately $530 million by January 6, 2017. This significant cash position is providing the company with the ability to repay a $126.6 million or 6.25% convertible debentures and the prepayment of U.S. $300 million of the 6.35% senior term notes, which are scheduled to mature on July 26, 2017.
When taken together our pro forma debt will be reduced to approximately $1.1 billion representing an approximate 32% decrease indebtedness from December 31, 2015 levels. This will also reduce our interest expenses on an annualized basis by more than $30 million per year.
In 2016 we were successful in selling [ph] 4% non-convertible gross overriding royalty on Lindbergh together with certain proprietary seismic for $250 million. This sale closed on January 6, 2017 and resulted in our cash position increasing to approximately $530 million on that date. We are continuing with our asset sale processes as a means to further delever the balance sheet. The company remains confident in its ability to complete additional transactions to further advance its debt reduction objectives.
Despite the reduced level of spending in 2016 our teams did an exceptional job to drive improvement in every aspect of our company, to deliver strong production performance. We achieved full year 2016 average daily production of 57,058 barrels of oil equivalent per day which represents a 9% decline from 2015 after taking into account asset sales in the absence of an active drilling program, highlighting the low decline nature of the asset base.
At Lindbergh, which is Pengrowth’s flagship asset and represents the company’s long term growth vehicle, full year average daily production was 15,296 barrels per day at an average steam oil ratio of 2.39 times. Production from Lindbergh continues to track well above the project's 12,500 barrel per day name plate capacity.
Building on the success achieved thus far at Lindbergh, Pengrowth has included in its 2017 capital program a Lindbergh optimization program that will see the company drill the first new wells into the project since commercial production commenced in April of 2015. In 2017 Pengrowth plans on drilling seven new well pairs to infill wells and expanding these associated infrastructures. The completion of the plant optimization activities in 2017 are expected to increase production from the first phase to approximately 18,000 barrels per day by the end of the year.
In May 2016 the company received a EPEA approval for the second phase expansion of Lindbergh which would increase the nameplate production capacity of the project by an incremental 17,500 barrels per day to a level of 30,000 barrels per day. In December 2016 an EPEA application was filed for Pengrowth’s 50% working interest in the Selina thermal project. The Selina project is located approximately 30 kilometers northeast of Lindbergh and is designed for an annual production of 12,500 barrels a day of bitumen.
In late February 2017 Pengrowth submitted a schema management and an EPEA update to increase Lindbergh Phase II production capacity to 27,500 barrels a day increasing maximum production capacity following the Phase II development to 40,000 barrels per day in aggregate.
In 2016 proved reserves grew by 33.7 million barrels of oil equivalent to 285.8 million Boe, representing a 39% increase from year end 2015. On proved plus probable basis, we added 39.4 million Boe’s representing a 7% increase from year end 2015. The strong growth in reserves translated into replacement of 289% of 2016 production with proved plus probable reserves additions after the impact of dispositions. These additions translated to proved plus probable finding and development cost of $3.38 per barrel of oil equivalent and funding development acquisition cost of $1.23 per Boe, including the change in future development cost.
The growth in reserves resulted in net present value of future net revenue before income tax discounted at 10% increasing 39% from year end 2015 to $4.5 billion for proved plus probable reserves. This translates into a net asset value per share of $6.30 an approximate 70% increase from 2015 year-end value of $3.75 per share.
In closing we’re continuing to work to improve the strength of our balance sheet by materially reducing our outstanding debt. In 2017 Pengrowth will continue to seek additional financial flexibility from asset sales as a means to delever its balance sheet. The company plans on directing all proceeds from asset divestitures to further reduce its outstanding debt by repaying the remaining outstanding senior notes in order of maturity.
Company remains in discussions with lenders of syndicated bank facility and the holders of its senior term notes to achieve the financial flexibility it needs to move forward with the development of the expansion phase of our Lindbergh thermal project. This concludes the formal part of the call and we’ll now take questions from analyst. 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. Brian, please open up the queue for questions from any of our analysts at this point in time.
[Operator Instructions] Our first question comes from the line of Shailender Randhawa from RBC Capital Markets. Your line is now open.
Hello, hi thanks. Good morning, Derek. Two questions from me. One, I don’t want to box you into an answer in terms of deleveraging, but just as you think about covenants and then capital structure go forward, how would you characterize a priority like between liquidity versus deleveraging? And then secondly just on the application that you’ve submitted to take Lindbergh to 40,000 after Phase II does that potentially change the scope of what phase II may look like in terms of size and cost?
On your first question Shailender, I think the liquidity issue we’re going to continue to address by asset sales. And I don’t think we've necessarily done a tremendously clear job in laying out all of the alternatives on how we’re perhaps giving you the visibility that you need or would like to have with respect to where those asset sales are.
But fundamentally our plan is very clearly to continue with asset sales and we think the asset sale market is much stronger and much better than it has been at any other time in last two years and that’s from our experience, the combination of those asset sales driving down the debt and then really looking at the alternatives for what we call the remaining debt, should we be looking for something that gives us a lot more flexibility that we may find in something like the high yield market. So I hope that answers the first part of your question.
On the second part, we’re really looking at ensuring with our Phase 2 expansion that we are looking somewhere in the neighborhood of $600 million and I think we’ve already indicated that to the market. What we’re seeing with the most recent amendment that says that, that we think that taking it from 30,000 barrels to 40,000 barrels is recognizing what we saw on the first stage. The first stage is producing well in excess 12,500 barrels. We think the combination of the first stage and the second stage is likely going to produce well in excess of the nameplate capacity of 30,000 barrels, and hence the amendment, scheme amendment to allow us to produce up to 40,000 barrels.
Okay. Got it.
So again more specifically there is no additional capital associated with that. There will be additional well pads and infill to maintain or sustain that production at that level though.
Right, but it generally it's a performance -- better performance I guess, is how we should think about it?
I think the way you should think about it is recognizing the existing level of better performance over Phase 1, where instead of waiting to see that happen in Phase 2 we’re saying we believe that is going to happen with the development of Phase 2 and therefore we’re really saying the production level as likely to be closer to 40,000 barrels a day for development Phase 1 and Phase 2.
Our next question comes from the line of Nick Lupick from AltaCorp Capital. Your line is now open.
Thanks, good morning guys. Quick question from me, just on the application process at both Selina and the amendment of the Phase 2, just wondering if you had any color on kind of the timing of what you expect that to be like, I know there has been changes at the regulator level. So, it -- are we still kind of thinking like a three year timeframe for a greenfield application like this? And then also if you have any kind of thoughts on how long you think you’ll take to get that amendment?
I assume it would be obviously much faster? And then with that just given the timing can we assume that Phase 2 will take precedent over [indiscernible]?
Nick I am going to turn that question over to Steve De Maio, our Senior Vice President of Thermal Operations.
Steve De Maio
Yeah, with regards to our recent application to update Phase 2 to 40,000 barrels a day, that process is anticipated to take between six and eight months to get that approval through. It’s not as sophisticated or complicated in application as in EPEA, or an NEIA level application. So six to eight months is sort of the target for that application to get that entry. At the Selina project, it is EPEA application, though not a fall EPEA application. So it’s -- overall production is 12,500 barrels a day. So it does not require the full four seasons of baseline gathering data like a full EPEA application does. So we’re anticipating that the approval process with the regulators at Selina will take between 18 and 24 months.
Wonderful. Thank you.
Our next question comes from the line of Aaron Bilkoski from TD Securities. Your line is now open.
Thanks, good morning guys. I have a question, you indicated that in order to comply with debt covenants through 2017 and 2018, you run a scenario that includes a combination of accessing capital market and higher commodity prices. Can you provide some additional clarity on what commodity prices you guys are using for modeling and how much outside capital would be necessary to remain on side of the existing covenant and I’m assuming that's absent any asset sales?
Aaron I am going to turn that over to Mr. Webster.
Great, thanks, Aaron. So this is a statement in the MD&A, it’s a required process that we describe in the MD&A, where Pengrowth model of forecasted the next 12 months where we continue to stay on side of our financial covenants and meet our commitments. This is required as we repair the financial statements as a going concern.
As we do it and as you noted, we do not consider asset dispositions because it has to be something that’s within our control, or it's actionable and asset dispositions do not qualify. The general statement of capital markets transactions does not necessarily always captured new equity as an example, but it could be issuing high yield to replace debt that has covenants on it. Our current path and our efforts do remain on the asset dispositions where we look to get full value and as Derek talked about an improved asset market.
The one thing that you did ask specifically, as we basically started with the $55 WTI that was more or less present at beginning in the year and we essentially kept that price for the first half for the year and then we had a [indiscernible] equate to $60 per -- at the end of 2017. And I believe we use the $0.75 as well.
I am showing no further questions. I would now like to turn the call back to Mr. Derek Evans, President and Chief Executive Officer for any further remarks.
Thanks Brian. The only thing I’d like before we terminate the call is just to make some other points that we had addressed to us questions. So in terms of making sure that everybody is hearing some of the questions that we’re asked. We have been asked whether Bernadet, our Montney asset is an asset that we would consider selling and probably an appropriate time to provide a bit of an update on Bernadet, we plan to get out there and to do our initial round of drilling, that will secure the lease. We’ll be doing that in 2018 and we think that’s probably going to cost us somewhere in the neighborhood of $20 million.
But if people are trying to assess and understand the value of that acreage, I would get them to take a look at some of the offsetting acreage and ConocoPhillips. There is some pretty spectacular wells that they have drilled recently, [indiscernible] results, Painted Pony's results and Kelp [ph] all surrounding our acreage all pointing to significant production rates and really where we see ongoing value.
As I said, all of the assets inside of the company are available for sale. They are at any point in time and Bernadet if somebody came to us and said we would like to buy this, we would certainly consider that. I mentioned a little bit earlier that we’re finding a much more constructive divestiture market. We have as you know been active in the divestiture market for the last three years. We’re probably the most -- have the most experience and the most data points with respect to what is going on.
We are active on a number of assets and continuing to move those forward, primarily as a result of our ongoing efforts to deleverage the company. We’re pointing to this and continue to believe that this is the most appropriate way to move forward on this. I can tell you that on the assets that we have in the market we’re seeing multiple bids at what we would consider to be an acceptable levels from multiple qualifying buyers.
As you are probably aware there is only 40,000 barrels a day of product in the market at this point in time. So there is very good market attention and part of the reason we are seeing such strong multiple bid.
I think one of the best indicators that the market is much more constructive is the lack of private equity activity we have seen. Private equity it tends to be -- the buyers are on the lower end of the scale. We are not seeing as many of those sorts of companies in our processes as we go forward.
But I wanted to make sure people saw or had a feeling for where we were on the divestiture process. We think it’s a much more constructive and we look forward to updating our shareholders on our ongoing efforts in that market, and of course you saw our Lindberg sale in the latter part of last year which was, I think a very good indicator of how strong that market has become.
The last point I would like to make is really I would like to acknowledge and thank Seymour Schulich for his ongoing support of both the company and of the management team. Mr. Schulich now owns 19.9% of the shares. He has continued to buy over the last little while. His support is very much appreciated and I would be remiss if I did not thank him for that.
With that, thank you ladies and gentlemen for joining us on the call today. This ends our call. We hope you all have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now disconnect. Everyone have a great day.
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