Pengrowth Energy Corporation (OTCQX:PGHEF) Q3 2018 Earnings Conference Call November 8, 2018 11:00 AM ET
Tom McMillan – Investor Relations
Pete Sametz – Chief Executive Officer
Chris Webster – Chief Financial Officer
Randy Steele – Chief Operating Officer
Shailender Randhawa – RBC
Good morning, ladies and gentlemen, and welcome to Pengrowth Energy Corporation's Third Quarter 2018 Financial Results Conference call. After the presentation, we will conduct a question-and-answer session and instructions will be provided at that time. Please note that this call is being recorded today, November 8, 2018, at 9:00 a.m. Mountain Time.
On the call today, we have Pete Sametz, our Chief Executive Officer; Chris Webster, our Chief Financial Officer; and Randy Steele, our Chief Operating Officer. My name is Tom McMillan, and I manage Pengrowth's Investor Relations.
Please note that while talking about our results and answering questions today, we may make forward-looking statements. These statements reflect current expectations, estimates, projections and assumptions of the company that are not a guarantee of future performance. These statements are subject to known and unknown risks, and future results may differ materially. For additional information on these risks, see Pengrowth's Annual Information Form under the headings Risk Factors and Forward-Looking Statements.
We will also be discussing non-GAAP measures in today's call, including total debt before working capital; adjusted funds flow; operating netbacks; net operating cost; and more. For more information about these non-GAAP measures and the reconciliation to GAAP measure, please consult our management's discussion and analysis for this quarter.
Our financial statements, management's discussion and analysis and Annual Information Form can be found on our website as well as the SEDAR website. Dollar amounts discussed in today's call are expressed in Canadian dollars and are generally rounded.
I will now turn the call over to Pete Sametz, to review the quarter. Pete?
Thanks very much Tom, and thanks everybody, who has called in for attending. The first thing we're going to start with is our waterfall chart, which compares our adjusted funds flow from the third quarter of 2018 to the second quarter of 2018. So quarter-over-quarter waterfall and provide a snapshot of Pengrowth’s ongoing progress to growing adjusted funds flow.
As you can see, compared to the second quarter of 2018 increased volumes and realized pricing contributed to a combined $6.9 million improvement. As WTI prices improved sequentially, our WTI hedging led to a $2.7 million negative variance in the quarter. Royalties improved sequentially as the result of the 4% general override royalty – growth overriding royalty at Lindbergh being priced off of post the WCS pricing.
Adjusted operating costs increased on an absolute basis on increased production levels and a 6% increase per BOE. Cash G&A, which we'll explore later as well as interest expenses improved on a sequential basis. The absolute cost of our WTI hedging was $23 million in the quarter without our WTI hedges, the financial hedges that we put on last year, we would have reported $38.5 million in adjusted funds flow this quarter. These hedges fall off at the end of 2018 and we do not have any 2019 WTI hedges.
Our budget was approved by our Board yesterday. We have elected to go with the low end of our initial 2019 capital spending guidance of $45 million provided in June 2018. The vast majority of this capital will be allocated to Lindbergh and will include infills and well pairs on our D02 pad as well as some debottlenecking. This also includes $8 million in annual maintenance capital, which includes dollars for our annual turnaround at Lindbergh in September 2019. And we expect that 2019 turnaround reduce production by approximately 2,200 barrels a day for the month of September.
Economic AECO pricing will lead to a limited amount of capital spending for Groundbirch as well. Now, Pengrowth intends to use excess funds flow to continue to pay down debt and intends to finance all capital spending internally. Our strategic deferral and increased capital spending will allow Pengrowth to focus on aggressively paying down debt and synchronize the ramp in our production at Lindbergh with the addition of pipeline capacity expected after 2020. We don't see any point in ramping production now when pipeline capacity is constrained.
In light of our budget, I do want to point out that our multiyear development plan hasn't changed. And aims to grow Lindbergh production to approximately 35,000 barrels a day by the end of 2023, those are the same numbers you've heard from us earlier this year. Timing to further expand production of 40,000 or even 50,000 barrels a day will depend on commodity prices. Again, we plan to grow with the cash generated by operating activities, while also paying down debt.
Another press release that you will have seen as we've also updated a reserved report as of September 30, 2018 with GLJ using their October first 2018 commodity price forecast. The net present values on company interests reserves increased based on Lindbergh, which took into account or incremental approach to expansion as per our five year planning. The third-party cogen, carbon tax revisions, increased pricing and lower fuel gas price. Lindbergh's reserves remained unchanged but reflect production year to date, and as you can see that NPV’s increased 20% to $2.6 billion.
I will now turn the call over to Chris to talk about our financial outlook, balance sheet and guidance.
Thank you, Pete. As we indicated in the second quarter, lighter capital spending, free funds flow and receipt of $9.6 million in deferred disposition proceeds allowed us to pay down debt in the third quarter. Total debt before working capital decreased 4% or almost $30 million to $672 million compared to $702 million in the second quarter of 2018. $20.5 million in the sequential decrease was a result of us paying down our credit facility and $8.8 million was the result of favorable foreign exchange rates on our U.S. dollar-denominated transact.
We've provided our guidance for 2019 and our remaining firm with the 2018 guidance could previously curtail gas production in Groundbirch due to low natural gas prices has been brought back on stream in the fourth quarter of 2018. The remaining three infill wells at Lindbergh are targeted to be on production in what remains for the fourth quarter of 2018. Year-to-date, 2018 cash G&A expenses per BOE are higher than the full year 2018 guidance due to the inclusion of costs related to administration support associated with those properties, increase professional costs and salaries of staff subject to corporate restructuring.
Fourth quarter cash G&A expenses are expected to further decrease and coupled with strong production in the fourth quarter, drop to a range of $2.50 to $2.80 per BOE. Pengrowth, therefore anticipates full year 2018 cash G&A expenses per BOE to be in line with its full year 2019 guidance as for the table above.
I'll now turn the call over to Randy to provide an operational update. Randy?
Thanks, Chris. As Chris has mentioned, we liked it to curtail production at Groundbirch through part of the second quarter and the third quarter due to natural gas pricing. In addition, we went through our normal maintenance act at Lindbergh, which Pete mentioned earlier, which reduced production by approximately 40% for seven days in September.
However, as you just heard, Chris has reaffirmed our guidance. There are two major drivers of our ability to meet 2018 guidance. And they are Groundbirch production, which we increased in Q4, due to better pricing. And Lindbergh production growth, which is meeting and exceeding our expectations from the D05 infill wells. Lindbergh’s production averaged 18,350 barrels a day in October with just five of the eight infill wells on production. And as we bring the rest of the infill wells online, we expect Lindbergh to reach approximately 19,000 barrels a day by the end of the year.
I'd like to thank our field teams and our technical teams here in Calgary for efficiently driving towards our production targets. We're tracking well towards meeting our guidance.
As you can see on this slide, with the exception of September, when we conducted our turnaround production at Lindbergh has been steadily ramping throughout the year. As expected, we were also seeing steam oil ratios decrease as the new infill wells begin to produce.
I'm now going to turn the call back over to Chris to talk about our physical delivery contracts that protect us from both apportionment and differentials. Chris?
Thanks, Randy. For the remainder of 2018, we have 17,000 barrels a day of diluted bitumen [Audio Dip] and sold at Hardisty at an average fixed differential of $16.82 for WTI versus sliding apportionment protection fee. This covers roughly 72% of our expected average daily production of Lindbergh.
For 2019, we’ve just signed another deal to protect an additional 5,000 barrels a day from apportionment, bringing the total daily diluted bitumen sales volume that is protected to 15,000 barrels a day or 59% on our expected production. We will continue to look for ways to ensure our barrels go-to-market at a price effective manner.
I would like to remind listeners that the physical contracts we have in place for diluted bitumen, while we report on netbacks on raw barrel bitumen basis. We have produced a graphic that to help those phrase very much. On the left, we've provide the netbacks as they are calculated per barrel bitumen. However, we have to dilute the bitumen to get it into the Husky system and then Husky brings diluted bitumen up to its specifications for the Enbridge Mainline at Hardisty.
We have provided two ratios here to help understand Lindbergh netbacks. Diluent as percent of bitumen used to gross up the volumes to get the raw bitumen to diluted bitumen called Dilbit. And Diluent as a percent of Dilbit, which helps you calculate our netbacks and the impact of that physical sales contracts. Once we gross up our third quarter Lindbergh volumes, you will note that we have sold 22,700 barrels of Dilbit on the Enbridge Mainline.
17,000 barrels per day were price of fixed differential and apportionment protected contracts. We have ended up selling 400 barrels a day of spot prices, which is one of the reasons why the Pengrowth is well insulated from the large differential spreads that you would have noted in the third quarter.
As you can see both in the table on the previous slide and in the graph here, netbacks improve sequentially as a result of better realized pricing thanks in large part for fixed differential physical contracts we have in place.
I'll now turn the call back to Pete to wrap up.
Thanks, Chris. I want to thank everyone for their continued efforts and focus. Our resilient team, which is frankly smaller and leaner now is beginning to redefine what is possible in their work to unlock the value from our two world class assets. And I think that is a message we want to repeat to everyone's sick of us, but we have two world class assets in Montney Groundbirch and our Lindbergh thermal asset.
With that in line, we believe our 2019 capital spending of $45 million is the right path for the greatest value creation. While, our multi-year development plan continues to target approximately 35,000 barrels a day by the end of 2023, our strategic deferral increase capital spending will allow Pengrowth to focus on aggressively paying down our debt and synchronize the ramp up in production at Lindbergh with the addition of pipeline capacity expected after 2020. And frankly, we don't see any point in ramping up production, for example, next year when pipeline capacity is constrained and will continue to be constrained.
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 will be happy to address any of your questions. And operator, if you don't mind, if you can please open up the queue for questions from our analysts.
[Operator Instructions] Your first question comes from Shailender Randhawa with RBC. Your line is open.
Q - Shailender Randhawa
Good morning, Pete. Questions for me, just one. Can you comment that all on the progress towards the third-party agreement for cogen for the larger expansions? And then just as you look out to 2020 in your guidance, how much of that is predicated on non-condensable gas and improvement in steam oil ratios?
Okay. Randy is gone running our cogen negotiation, so if you want to just make a few comments, Randy.
Yes, I guess my comments would be. We're well advanced in the conversation with our counterparty on the cogen deal. We are working diligently through and as you can imagine, this is not an insignificant deal to coordinate and finalize because of the complexity and the significant time period we're talking about, but we're well advanced. We've gone through pretty much all details related to the technical side of what the cogen we'll look like. We're working through definitive kind of terms, right now, that will bring forward to our board, hopefully in the coming weeks for them to review and access and opined upon. And then finalize this deal, early in the new year.
The NCG based on our capital forecast is essentially a tool that we use as required. So non-condensable gas gets blended in with – for those that aren't sure what it, we’re talking about. So we add some non-condensable gas to our steam and same volume will go down the injector well. But have total of gas and steam, however, some of that steam that we no longer putting in that particular well, it can be used somewhere else. And so we'd been doing that to kick off our infill wells because sometimes you need a little steam stimulation or little spritz of steam to get going, where the NCG will be more important in terms of a technique or a tool, given we are steam limited at our plant is until we have a cogen for our next growth phase, the natural gas that will be injecting for NCG is really going to be important when it comes to freeing up steam for well pairs.
So I think as we indicated in our budget for next year, for example, we have a new well pairs on D02 and we'll be using it at NCG. So likewise, our budget in 2020, we have a plan obviously and we'll be doing the same thing. So it will be – it's not a constant thing all the time. It's going to be based on what kind of wells we're drilling, whether infills or well pairs. And how many of each are we doing. That is long winded answer to a simple question.
Okay. And just on the – going back to the third-party arrangement. So if you come to terms then did you change your view of 2019 CapEx activity?
No, no. Currently, that wouldn’t be the case. We’ll continue the path with the $45 million. It’s not impactful, frankly, our plans for 2019 will not be impactful to cogen on production time.
Okay, thanks. That’s it for me.
[Operator Instructions] Your next question comes from [indiscernible]. Your line is open.
I was just wondering where do you see Pengrowth stock wise price in the next year and 18 months?
Yes. We’re not going to speculate on stock price because there are so many variables involved in that. So we can’t really answer that question. If we could, we’d have a crystal ball in front of us.
All right. Do you have – I would check at this time Pengrowth is not in a – it would be still be in a deficit or whether not?
Sorry, a deficit.
A Deficit position, in other words your cost of production everything will be. Just I am asking are you running the net loss.
We did report a net loss for the quarter, but we are cash flow positive for the quarter. We were adjusted funds flow of $15 million, $15 million.
No, that was positive cash flow or positive adjusted funds flow.
Is the $45 million that you are going to spend for development comes from where?
That will be produced via cash flow next year.
There are no further questions at this time. I will now turn the call back over to the presenters.
Thanks very much and thanks for everybody for attending or listening in. We look forward to making continued progress. We are building momentum and we look forward to reporting to you in the next in the New Year. Thanks very much.
This concludes today’s conference call. You may now disconnect.