International Petroleum Corporation (IPCFF) CEO Mike Nicholson on Q1 2022 Results - Earnings Call Transcript

International Petroleum Corporation (OTCPK:IPCFF) Q1 2022 Earnings Conference Call May 3, 2022 3:00 AM ET

Company Participants

Mike Nicholson - Chief Executive Officer

Christophe Nerguararian - Chief Financial Officer

Rebecca Gordon - Vice President, Investor Relations

Conference Call Participants

Teodor Nilsen - SpareBank 1 Markets

Mark Wilson - Jefferies

Lars Dollmann - Aramea

Mike Nicholson

Okay. So, very good morning to everybody and welcome to IPC’s First Quarter Results and Operations Update Presentation. My name is Mike Nicholson. I am the CEO of IPC. Joining me this morning is Christophe Nerguararian, the CFO; and Rebecca Gordon, who is our VP of Investor Relations.

I will begin in the usual fashion by walking you through the highlights and the operations update. And then I will pass across to Christophe and he will walk through the financial numbers. And then at the end of the presentation, we will – you have the opportunity to ask questions and you can submit those online or also we can take calls from the conference call number.

So to get started then with the highlights from the first quarter, it’s been another phenomenal performance for the company and record high financial performance. And if we start with our production numbers for the first quarter, 45,800 barrels of oil equivalent per day and that was actually above the high-end of our guidance range for the first quarter. We are retaining the full year production guidance of 46,000 to 48,000 barrels of oil equivalent per day. And then operating costs, the first quarter OpEx was marginally above our guidance, $17.70 per BOE, $0.50 per barrel above guidance, but really driven by higher gas and energy prices and Christophe will go into more detail, actually a net positive for us given how much gas that we produce in Canada. But we are taking the opportunity with the stronger gas prices to nudge up our guidance, up from $15.20 to $16 to $17 per BOE OpEx for the full year. In terms of free cash flow netback though with the higher gas prices, that should be more than offset by our free cash flow netback.

In terms of our capital expenditure program, retaining our full year CapEx budget of $127 million, we spent $40 million in the first quarter, which is about a third of our CapEx, so exactly in line with forecast. And in terms of the cash flow numbers, the strong production, above high-end guidance, combined with strong gas prices and oil prices means that we have had another quarter of record cash flow generation. Operating cash flow of $145 million. First quarter free cash flow of $96 million. And given the strong pricing that we have seen in the first 4 months of this year, we are revising up our full year free cash flow guidance up to now between $275 million at the low end to $480 million at the high end and that represents a $70 to $100 per barrel Brent oil price forecast range for the remainder of 2022.

As you can imagine, with such strong cash flow generation, the balance sheet is in really good shape. Our net debt was down to just over $40 million by the end of March. And with the big receivables, Christophe will talk about that in his presentation, we actually moved into net cash position in April. In terms of the hedging, we don’t – IPC doesn’t have any benchmark hedges, so no Brent or WTI hedges. So we are fully benefiting from the strength that we are seeing in oil prices. We have some of our differential, our WCS differential exposure hedged 60%, is hedged at $13 per barrel and that’s currently where the market is pricing that differential. And on the gas side, around a third of our gas production is hedged for the second and third quarter at CAD3.60 per Mcf.

In terms of the ESG performance, it’s been another strong quarter. We haven’t had any material incidents to report during the first quarter. And with the carbon offsets that we secured, we’re well on track to meeting our emission reduction targets through 2025. And last but not least, in terms of share repurchases, we are announcing this morning our fourth share repurchase program since the company was started back in 2017 with an intention to launch a $100 million Dutch auction to return value to our shareholders. So that’s the highlights.

If we first get into a little bit more detail on our production, as I mentioned, first quarter production was just under 46,000 barrels of oil equivalent per day. And if you look at the chart on the right hand side of the screen, you can see the production guidance range that we had for the first quarter. Pleased to say that we performed, on average, just above the high end of that guidance. And we have had exceptional production performance from all of our assets. Daily production records achieved at Onion Lake Thermal. And we had a stronger delivery on our gas production from our Suffield property given that the weather in Canada was relatively milder, so we didn’t have as much freeze-off impact as we would typically see during the winter.

Internationally, continued strong performance both in Malaysia and in France. And you’re starting to see, again, if you look at the top right-hand side of the chart, the impact of the capital program that we’ve just completed on Bertam, technical potential in the company can now assume – actually produced on a number of days above 50,000 barrels of oil equivalent per day. So, quite an impressive growth in the first 4 months of this year for the company.

If we look at the full year guidance, though, this was the chart that we showed in our Capital Markets Day forecast. We did expect Q1 to be slightly lower on production because we had the rig moves in Malaysia and typically, the colder weather in Canada, but still above high-end guidance and full recovery of our production relative to the pre-COVID production levels. And we expect to see some growth through the year as we continue to complete our capital projects for 2022.

Turning to the operating cash flow on the left, the blue bars was the guidance that we gave in our Capital Markets Day forecast. First quarter Brent prices averaged $102 per barrel, so we’re trending towards the high end of that guidance range. And as a result, in 4 months – the first 4 months of ‘22, above $100 per barrel, we are re-guiding the $70 per barrel range to reflect the strong pricing we’ve seen year-to-date. So at the low end of the range, our operating cash flow is expected to be now between $430 million to $445 million, and we’re retaining the high-end guidance of $600 million to $635 million.

In terms of the capital expenditure program and focused on strong free cash flow generation this year with a measured budget just below $130 million, $40 million was spent in the first quarter, so slightly more front-end loaded in CapEx and investment program. So we should see higher free cash flow generation in the remaining quarters of the year with a third of that CapEx already having been spent in Q1. The investment plans this year, as you can see from the chart on the right-hand side of the screen, is targeted at growth across all of the IPC assets in Malaysia, in France and in Canada. And the 2022 program is fully funded at less than $50 per barrel Brent. That’s why we can generate such significant free cash flow. Of course, with the balance sheet, you’ll see, as Christophe takes us through the balance sheet, the company is in really strong position to continue to mature our organic growth opportunities and still continue to be opportunistic with respect to growth in the M&A space.

If we look at the free cash flow guidance, likewise, on the left hand side, was our Capital Markets Day forecast. The fact that we’ve generated just under $100 million of free cash flow in the first quarter means that we are also guiding up our low-end range at $70 per barrel for the rest of this year to now $270 million to $280 million. And again, we’re retaining the high-end free cash flow guidance of $460 million to $480 million. And given where forward markets are at this level, we look to be trending towards the high end of that guidance range. And at $480 million, that represents 33% free cash flow yield on a full year basis for 2022.

If we look at IPC also through the value lens, the stock has performed well this year, but still trades at a large discount to just our 2P reserves base on a relatively conservative reserve auditor’s price deck. The $2.4 billion of 2P net asset value assumes a $75 per barrel Brent price this year dropping to $70 by 2024 and then escalating at 2% per annum. And if you plug that oil price into our 2P reserves book that gives you that $2.4 billion value. And given where the stock is trading today at just below $1.5 billion, that represents a 40% discount to our 2P value. It doesn’t apply a single dollar value to our 1.4 billion barrels of undeveloped contingent resources.

So as a result of the strong operational performance and the robust financial outlook, we’ve decided to accelerate our share repurchase program in line with our capital allocation framework that we announced back in February. We started the year with a normal course issuer bid. So far, under that program, we’ve repurchased and canceled 4.4 million shares. The average cost of those shares has been SEK 60 per share or $29 million. And what we’ve decided to do on this one is to pause for the time being the NCIB process to allow us the chance to accelerate our share repurchases under a substantial issuer bid.

As I mentioned, given the company’s operational performance, the fact that we’re in a net cash position and we have such a strong free cash flow generation potential for the rest of the year as well as the robust value proposition, we feel that we can add a lot of value to shareholders by accelerating the share repurchase. And we plan to do $100 million Dutch auction to repurchase our shares with a target price range of between CAD12 and CAD14 per share, which translates on a SEK per share basis at the low end to SEK0.92 per share to the high end of SEK107 per share. And that represents either a 3% discount to the 10-day VWAP or a 13% premium to the 10-day VWAP. And of course, if prices stay at this level, around $100 per barrel, there’s room to return up to even $30 million more over and above the $100 million we are announcing this morning.

So if we go now into a little bit on the individual assets on our Suffield oil property, as you can see from the chart on the slide, very strong and stable performance, above 8,000 barrels of oil per day during the first quarter. We’ve managed through investment mainly in our N2N project to offset the historical declines, and we’re producing more oil today than we did 4 years ago when we acquired this property. Given the success we have seen from our alkaline surfactant polymer flood at N2N, we’ve decided to expand that project this year, and we’re going to drill 4 new wells in the third quarter that should allow us to continue to sustain production at around those levels.

On the gas side, Christophe will go into more detail, we’ve seen extremely strong Canadian gas pricing in the recent weeks and months. And the fact that we had modest freeze-offs through the first quarter means that we’re able to deliver a lot of free cash flow from our gas business in Canada. More wells have been drilled, extremely impressive performance by the team on the ground to essentially keep production relatively flat with just optimization activity. And you can see from the chart on the bottom left-hand side of this slide that we’ve been ramping up that gas optimization activity. And of course, with such strong gas pricing, we’ll be looking at ways to see if we can further accelerate our gas activity from the existing well stock that we have at Suffield.

Turning now to Onion Lake Thermal project, record production was achieved in the first quarter of 2022 with daily rates, as you can see from the chart on the bottom of the slide, in excess of 13,000 barrels per day. Obviously, last year, we concluded the drilling of our deep prime pads as well as 5 infill wells, and that’s starting to really pay dividends in terms of that production growth that we are seeing. And within our capital plans for this year, we plan to move on to the next pad, which is our L Pad, as well as an additional 2 infill wells on the back of the success that we saw in 2021.

Ferguson property, we are very excited to get moving to this one. This was the Granite acquisition that we made back in early 2020. We of course paused our investment plans because of the COVID crisis. We’re really happy that we sanctioned this year pretty active 13-well horizontal development program. We plan also to convert 3 oil wells into gas injectors and upgrade the compression facilities on this project. And we’re well ahead of schedule. We’ve completed already the drilling of the first 3 wells, and we’ve moved on to the second pad to commence the next 3 wells. And we should actually start to see first production contribution from well pad 1 within a matter of days.

And then final slide on our Canadian business is our Blackrod project. This is a slide we showed back in February in our Capital Markets Day based upon the technical work that our teams have done in Canada. We saw a material uplift in our 2C numbers for Blackrod. Our Phase 1 resources were lifted from 180 million barrels to just under 220 million barrels. I am very pleased that as part of our budget plans this year we are moving ahead with FEED studies. The contractor has now been appointed, and we should be in a position to conclude those studies by the fourth quarter of this year, extremely attractive project. It has a $50 per barrel WTI breakeven. And on the reserve auditor’s price deck, that gives a value of around $860 million. So we’re really happy to be further maturing our Blackrod contingent resource project.

Turning to the international business. And if we start with Malaysia, our Bertam asset continues to deliver extremely solid performance, another quarter of uptime close to 100%. And if you look at the chart on the bottom of the slide, we’ve just finished the drilling of the A15 sidetrack and the pump-upsizing program. And if you look at the red dot, which is the current spot rate, you can see that we’re currently producing in excess of 6,000 barrels of oil per day. And you have to go back to 2019 to get back to those rates. So, for a relatively mature asset, really good to see some material production growth, particularly given the high oil price environment that we’re seeing right now.

Turning to France, again, good production from all the major producing fields. The biggest single contributor in our French business is our VGR113 well. That continues to outperform. If you look at the chart on the bottom right-hand side of this slide, you can see the actual production level is still significantly above our investment case level. We still have not seen any water break through from this well. It was originally planned in our simulation models to come in the third quarter of 2020. So we still haven’t seen any water in the first quarter of this year. And the boost in production from the conversion of the VGR5 producer into water injection is allowing us to continue to sustain production at those levels.

We are also very pleased to be moving forward with rig contracting for the next major investment program in our French business. We’re planning to drill 3 wells into the western flank of our Villeperdue field and that activity should commence in the fourth quarter of 2022. So lots of activity in Canada, in Malaysia and in France, all driving that production growth.

And finally, on sustainability and ESG, we didn’t have any material incidents through the first quarter on the health and safety side. In terms of our climate strategy to reduce our net emissions intensity by 50% through the end of 2025, you can see last year, we’re already well on track to do that, and we’ve secured enough carbon offsets for this year to continue to meet that long-term target. And last year, we produced our second sustainability report, which is fully GRI-compliant. And alongside our second quarter results, we plan to publish our third sustainability report.

So that concludes my part of the presentation. I’ll pass across now to Christophe and he will walk you through the financial numbers for the first quarter. So, Christophe?

Christophe Nerguararian

Thank you very much, Mike. Good morning to everyone. You will agree, as Mike mentioned that this quarter results are really, really good.

In terms of production, so with 45,800 barrels of oil equivalent per day for this quarter, we were close to 1,000 barrels higher than what we guided at our Capital Markets Day for first quarter, so really strong operating performance there. And we are well on track to deliver within the full year guidance of between 46,000 to 48,000 barrels of oil equivalent per day. Obviously, I think one of the main most important points during this first quarter was the strength of oil and gas prices. And so the Brent averaged in excess of $100 per barrel, which hasn’t been the case for many years now. The flip side of this overall high natural resources prices environment is that with the high gas prices, the gas we have to purchase as part of operations in Canada was more expensive. And so our operating cost per barrel were higher.

Now because we are selling roughly 3x more gas than we’re purchasing in Canada, this increased gas price in Canada is a very strong and positive element for IPC. So it’s not about looking at operating costs and thinking the costs are not under control, directly imposed on us through gas prices, but beneficial to the business case for IPC. And so that resulted into the highest EBITDA and operating cash flow for IPC ever at $145 million just for the quarter. And with a capital expenditure at $40 million, which was a bit front-loaded, closer to 30 – to third of the overall CapEx plan for the year, we generated just shy of $100 million of free cash flow for this year, translating into a net profit of $81 million and a very, very low debt at 42 – net debt at $42 million and the leverage at 0.1.

Realized prices were very high, as I mentioned, with Brent averaging in excess of $100 a barrel for the quarter. When you look at the realized prices in Malaysia, it’s a bit misleading because we sold our cargo from Malaysia in March at the peak of the quarter. Now this being said, it’s worth mentioning that we’re able these days to sell our cargoes in Malaysia at a Dated Brent plus a premium ranging from $5 to $8 per barrel. So very, very positive there. In France, again, a bit misleading because we sold more oil from Aquitaine in the first month of the quarter, but we’re continuing to sell our oil in France on parity with Brent. Maybe one point to notice in this first quarter was the slightly wider differential between Brent and WTI, which is just showing how tight the physical oil market was in the North Sea. Now with the WTI/WCS differential remaining below $15 for that first quarter, we had WCS, which is our heavy oil benchmark reference for the – for all of our Canadian oil sales, at above $80. And that was as high as it’s ever been since IPC went to Canada back in January 2018.

I think looking at the gas prices, this slide is very important because one point to obviously notice is that we realized gas prices. We sold our gas from just below CAD5 per Mcf. But if you look on that chart and you see the trend of gas prices in Western Canada in the month of April, and the outlook certainly remains very, very strong, regularly above CAD5, sometimes above CAD6 per Mcf for the following quarter, so we – that is why we re-guided our operating cost per barrel because we know or we believe, if you look at the forward curve, that gas prices will remain high, which again is a positive because we sell 3x more gas than we have to purchase for operations. Just looking back, if you look at the comparison between the first quarter 2021 and the first quarter 2022, it’s staggering. It’s more than both operating cash flow and EBITDA. They more than doubled over that period, while oil prices increased by less than 70%. It’s already a lot, but you can see the multiplying effect with OCF and EBITDA increasing more than twice.

On the operating costs, as we explained, because of energy costs and gas prices, we were slightly above in this first quarter. But as you can expect, with our production increasing over time from the first quarter on the back of the drilling activity in Malaysia, Mike showed that we are producing more than 6,000 barrels a day in Malaysia. And so the overall production of the company is going to increase from the first quarter level. Having a positive effect on reducing, on a unit basis, the operating cost going forward, still, we’ve slightly increased from $15.2 our guidance for operating costs to $16 to $17 per barrel of oil equivalent.

Looking at the netback, I really like this slide. If you look back at the Capital Markets Day, originally, our base case, which was set at $70 per barrel, both the operating cash flow and EBITDA netback were $21 per barrel, and it’s not quite twice as much. But for this first quarter, our netback on an operating cash flow EBITDA basis remained in excess of $35. And we are again well on track, if oil prices stay where they are, to deliver a high case at the equivalent of $100 per barrel for the full year and certainly believe that we could maintain those netbacks at $35 to $36 per barrel for the year.

Looking at the cash flow and the impact of our free cash flow during this first quarter on our net debt. So we reduced the debt from – our net debt from $94 million to $42 million. But – so what’s important to understand is we generated $96.5 million of free cash flow. Out of this, we used $21 million to buy back our shares as part of the normal course issuer bid in the first quarter. And also because on average, the December revenues, which we cashed in January, compared to the March revenues, which we cashed in April, because oil prices increased from December to March by $40, the receivables are much higher. And so you have a change in working capital eating into this free cash flow. That change in working cap is $25 million. So, $21 million used to buyback shares, $25 million to fund that change in working cap and $50 million of net debt reduction.

Now as Mike mentioned, all of the March oil and gas sales proceeds, we cashed in during the last week of April. And so as of the end of April, we were net debt free. So on the 5th anniversary of IPC, as we started to list on the 24th of April 2017 in Stockholm and Toronto, we were born debt-free and we are net debt-free again, having increased production 5x and reserves almost 10x in those – over the last 5 years. On the interest financial items and G&A, so we now have issued bonds on the 1st of February this year. So the interest expenses, you can see here, reflects the cost of the reserve-based lending facilities we had in the months of January. But then we repaid those with the proceeds from the bond issuance, and those interests are the accrued coupon for the bonds for the month of February and March. G&A are slightly higher. It’s a technicality as a long-term incentive plan date was moved by 2 months. And so this reflects actually 4 years of long-term incentive plan instead of 3. But you can see that the G&A remained well under control, and the cost on a unit basis remained below $1 per barrel at the company level.

Looking at the financial results, very strong again, a cash margin of close to $150 million, a gross profit of $120 million almost and net result of $81 million just for one quarter. So very, very good results. Looking at the balance sheet, two points to note. The size of the balance sheet has increased by $300 million, and this is really the result of the – having issued bonds. Before that, we used to have only net debt. We didn’t have cash on the balance sheet. Now we have a lot of cash and a lot of bonds outstanding. And as I mentioned, we are actually, as we speak, sitting on as much cash as debt. The other point to mention is the actual increase in receivables. As I was explaining, there is a change in working cap of $25 million, and that is reflecting higher receivables at the end of March compared to the receivables at the end of December last year.

The capital structure, I just touched upon. So we’ve replaced and refinanced all our debt from reserve-based lending facilities, both internationally and in Canada, with the issuance of $300 million of bonds in the Nordic markets. It’s – those are 5-year bonds, unsecured with a non-core period of 3 years and coupon at 7.25%. And we got a corporate rating of B and the bonds are rated B+. We still have a French unsecured loan for €13 million, which is really small and reducing over time. And we have a Canadian RCF, a backup liquidity line which we are not using with the exception of $3 million worth of letters of credit. This is really a backup liquidity line which we are not using.

In terms of hedging, Mike touched on that. I think the important point is that IPC has not hedged any Brent or WTI. So we are fully exposed to the current oil price environment. What we did is because we believe there is more downside than upside on the WTI/WCS differential, we hedged roughly 60% of that differential between now and the end of the year. And we actually had some positive margin, positive revenues from that hedging position. And on the gas side, we hedged just above third of our second and third quarter Canadian gas production at CAD3.6 per Mcf. But the rest is floating, if you wish, and we are fully benefiting from the very high gas prices that we see in the market. And based on our new capital structure, we don’t have specific hedge covenants. So for the time being, we intend to focus on some forward gas sales, some hedging of the WTI/WCS differential, but essentially to leave open or exposure to Brent and WTI.

Thank you very much and Mike will conclude.

Mike Nicholson

Okay. Thank you very much, Christophe. And I think everyone would agree that’s an excellent set of numbers and certainly a record for IPC. And as Christophe mentioned, we just passed our 5-year anniversary on the 24th of April of this year. So, really good to be setting new highs for the company. Production, just as a recap, above high end guidance at 46,000 barrels of oil equivalent per day for the first quarter. We’re retaining the full year guidance of 46,000 to 48,000 BOEs per day. And as we’ve seen in April, the company, on a technical potential day, has produced in excess of 50,000 barrels.

On the OpEx side, we’re pushing up our OpEx guidance to $16 to $17 per barrel. As Christophe mentioned, that’s largely the result of higher gas and energy prices in Canada, and that’s more than offset by the fact that we’re generating much higher cash flows from our Suffield gas property. CapEx is exactly in line with expectation. One-thirds of the CapEx budget was spent in the first quarter, and the growth projects will now focus in Canada and in France for the remainder of 2022.

Record high cash flows in the first quarter, just under $100 million of free cash flow. And we’re guiding upwards our full year free cash flow forecast now at the low end of $70 Brent for the rest of the year to $275 million to the high end of $100 per barrel, $480 million and that $480 million represents third of our entire IPC market cap as it stood today. Obviously, with the strong cash flow, we’ve been able to substantially reduce the debt. It was down to just over $40 million at the end of March. And as Christophe mentioned, exactly in our 5th anniversary, we went debt-free, which is a major achievement, given the growth that we’ve seen in the company over these last 5 years.

Sustainability remains key to our strategy, and we had no material incidents to report during the first quarter. And as we said, we’re well on track to achieving that 50% net reduction in our emissions through 2025. And as we articulated in our Capital Markets Day presentation and our capital allocation framework that sets out the clear terms under which we will be distributing our free cash flow to shareholders, we’re really accelerating that return of value to shareholders through a substantial issuer bid whereby we plan to repurchase up to $100 million of our stock at a price of between SEK92 and SEK107 per share. So phenomenal first quarter. I’d like to thank all of the teams in Malaysia, in France and in Canada and corporately here in Geneva for delivering such a phenomenal quarter.

That concludes the presentation part. I guess we can now pass back to the operator, and we can take questions, and also you can send in your questions via the Internet.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Teodor Nilsen from SpareBank 1 Markets. Please go ahead.

Teodor Nilsen

Hi, good morning, Mike and Christophe. Thanks for taking my questions and thank you for the update. I had three questions from me. First, on the guidance you provided on net debt to EBITDA, your EBITDA below 1, should we interpret that as our guidance through the cycle or something that you aim to reach over the next few quarters? And then my second question, on the supplier market in Canada, we heard that, that is pretty tight now. If that may get challenged for you over the next few quarters, and what do you see on cost inflation? And my third question is on M&A environment, just in general, Canada versus outside Canada. Should we still expect it to pursue opportunities primarily in Canada? Or are you also looking outside of it? Thanks.

Mike Nicholson

Okay. Yes, thanks, Teodor. Yes, I mean, so the first question on the target leverage ratio to be below 1x, yes, I mean that’s our target is to be through the cycle at that level. Obviously, we’ve moved into a net cash position. So we’re comfortably within that level right now. And that allows us to, as we mentioned, to accelerate the share repurchase program this morning. On the second question, there is no doubt that markets are getting tighter. And I think it’s going to be – that’s certainly going to increase. But I think we are in a fortunate position that certainly for the activity plans that we have set out for this year, we have the rig available for us, for our Ferguson drilling program. And we do have the option to extend that. We haven’t seen a material increase in the cost for those services. I guess the biggest inflationary pressure, as Christophe referred in his presentation, has been with respect to energy prices, electricity prices and gas prices. And we do have a natural hedge within the portfolio with our 100 million scarcity of gas production. And then your final question with respect to M&A, whether it’s just focused in Canada or internationally, nothing has changed since we started back in 2017. We’re still looking for opportunities in Canada. But internationally, of course, the majors are looking to dispose of some non-core properties and as they focus on growing their renewables business. So we still see opportunity international and outside Canada.

Teodor Nilsen

Okay, thank you.

Operator

And the next question comes from the line of Mark Wilson from Jefferies. Please go ahead.

Mark Wilson

Hi, good morning, gentlemen. Congratulations on another very good quarter. First question from me is just to clarify, Mike, you talked about the longer period of cold weather in the U.S., which we do storage, and that helped gas pricing. But you also said how production had benefited from milder winter in Canada. The freeze-up, is that just happens to be the geographies we’re talking about? Could you just expand on those two contrasting points?

Mike Nicholson

Yes. Thank you, Mark. Yes, so as I mentioned, so mainly U.S. gas prices with a much colder period, which meant that storage levels did not manage to replenish. Actually, even if you go back to the summer of last year in the U.S., it’s an extremely warm summer. So demand for air-con meant usually during the time when you’d be able to replenish storage inventories that just wasn’t happening. So you had tightness in U.S. markets. The Canadian situation, obviously, in Southern Alberta where our Suffield gas property is, typically, we see extremely cold weather in January, February and into early March. And what that does is it does curtail the amount of gas production that we do have in that very cold period. Because it was relatively milder in Southern Alberta during that period, it meant that we produce more gas than we normally would as a result of the cold weather, so, two slightly different things going on there.

Mark Wilson

Got it. Okay. And then just to dig into the gas side of things a little bit more. The production performance you have had from Suffield oil and Ferguson, you are looking to drill there again, has been very good. Can you just outline again regarding Suffield gas, your steady – slowed the rate of decline there by the well swabs, and you talk about keeping on with that program from existing well stock. Could you just outline to us quite why you are not discussing planning new gas wells at Suffield, or could that be a plan for 2023 or beyond?

Mike Nicholson

That’s a very good question, Mark. So, I guess the short answer is we can generate high returns from incremental investments on the oil side. But of course, what we are looking at, and if you go back to 2019, we did run a refrac and recomplete program on some of our gas wells. And the team is very actively looking at that right now to see if we can accelerate some of that activity in the second half of this year. In terms of new gas drilling, when we bought the Suffield property from Cenovus back in 2017, they did carry 30 million barrels of oil equivalent in addition to what we have got on our books in their 2P reserves. We actually reclassified that into contingent resources because it did need much higher gas prices. So, we do have an insignificant amount of contingent resource bases within our portfolio. And if we continue to see very high sustained gas prices, I guess those then start to become more competitive with some of the oil projects, which has been the focus so far for new drilling in Canada.

Mark Wilson

Okay. Got it. Thank you. And then last for me. You talk about the Ferguson oil production potentially doubling. I was wondering if you could give us a timeline on that and what we – where we should offset that in the portfolio, given the longer term guidance for flat production around 47?

Mike Nicholson

Yes. So yes, so we should be able to see that by late this year, early 2023, Mark, by the time that we have concluded the initial 13-well development program. Included within the reserves as part of the acquisition of the Ferguson property, we have more than 50 infill drilling locations. So, even if we get to that level, as long as we run a similar activity set into 2023 and beyond, we should be able to sustain those kind of rates for a number of years.

Mark Wilson

Yes. So, the offsetting scenario in the portfolio?

Mike Nicholson

The offsetting in terms of…

Mark Wilson

How do you maintain the 47 of the year if you are going to increase…

Mike Nicholson

Yes, I mean you have got natural decline coming from the Malaysia and the French business, natural decline from our Suffield gas and all business and some growth coming from Onion Lake Thermal. So, I would say the big picture, it’s Onion Thermal and Ferguson growth that offsets low declines from the rest of the assets in the portfolio.

Mark Wilson

Excellent. Very clear. And yes, excellent quarter. Thanks guys.

Mike Nicholson

Thank you very much, Mark.

Operator

And we have one more audio question from the line of Lars Dollmann from Aramea. Please go ahead.

Lars Dollmann

Hi everyone. Good morning gentlemen and Rebecca I suppose. I have a question as I was not on the phone early enough. I only started 10 minutes late, sorry about it, was impressed by the numbers. I have a question starting with, how did you come up with a range of the SIB?

Mike Nicholson

Yes. So, Lars, if you – it’s a fairly common instrument that’s used in Canada. And typically, the range is between kind of 3% to 5% discount to a 10% to 15% premium. So, I guess we are kind of pitched right in the middle with the typical range that you see for these SIBs in Canada.

Lars Dollmann

And then another question would be – thanks Mike for that. And then another question would be, obviously, we run into net cash by now, and I really appreciate the SIB. So, obviously, M&A, as you said, is nothing is imminent. So, if oil prices continuously stay high, as we see in your guidance, what it would mean on the cash build side? Should we expect, and I know it’s a bit out because we just started the SIB now, should we expect more from IPC in that regard if we stay in net cash? And after the SIB later in the year to do another SIB and no M&A target?

Mike Nicholson

Yes, if we go, Lars, back to the capital allocation framework that we set out in the February Markets Day presentation, it was very clear about our intentions as to exactly how much we will distribute to shareholders. So, if we see oil prices sustained at a $100 per barrel level through the remainder of this year, and under that framework, what it means is just around $170 million would be allocated to shareholder returns. So, if you look at the fact that the NCIB thus far has returned just under $30 million, that we are planning to do the $100 million SIB provided that prices stay at $100 per barrel. There is room for another close to $40 million of returns. So, whether that’s done through the NCIB and/or through other mechanisms remains to be decided. But absolutely, that would be our intention.

Lars Dollmann

Coming on a bit more on that part, Mike. If that’s the case, let’s assume oil price is pretty high, that would mean that we are building up a significant net cash position on top of, obviously, because 60% is still staying with IPC. If for whatever reason, there is no M&A target imminent or there is nothing which you consider attractive enough from a terms point of view, do you think that it’s okay for the management to build up a significant net cash balance in IPC?

Mike Nicholson

Yes. I think, Lars, it’s prudent because it still gives us the ability to continue to look for further M&A opportunities. I mean there is no secret to the success of IPC thus far. There has been the huge value that we have created from the first four acquisitions. And I think M&A will still be part of our strategy going forward. And having the resources to demonstrate to sellers that there is a low degree of completion risk, then that definitely puts us in a more favorable position. I think on the second pillar of value creation, which is contingent resources, we have 1.4 billion barrels of contingent resource. And of course, FEED studies are ongoing in Blackrod. So, I think it’s still prudent for the company to retain some firepower for either M&A or for organic growth.

Lars Dollmann

Okay. And last but not least, on the M&A front. Can you elaborate a bit more on, as you said in the release, there is no imminent target. Do you see it’s getting – is it more difficult these days because of seller expectation versus buyer expectation on price, or just the right deal hasn’t come around the corner from an operational perspective, meaning resources, development potential, region, etcetera?

Mike Nicholson

Yes. It’s an excellent question, Lars. And I think that is the big challenge because as some of the bigger companies look to optimize their portfolio and what we have seen is there are sometimes a bit of a dislocation in terms of value expectation. Smaller mid-cap companies like us, obviously, can see where we trade that in terms of our discount to net asset value or where our free cash flow yield is. So, when we look at new M&A opportunities, they have to compete with share buybacks, so our projects like Blackrod with a $50 per barrel breakeven. And my sense is right now, the majors have perhaps too lofty value expectations. So, you have got to try and find ways to bridge that gap. And I think it will make it more challenging for them to pursue their renewable ambitions if they continue to hold too high value expectations.

Lars Dollmann

And last but not least, probably one more on that because I am thinking I was the last one in the line anyhow, if you don’t mind. If you look at M&A opportunities, what is a reasonable size, meaning – because obviously, another Ferguson is not that substantial probably. What kind of size we should look at? What kind of target size you are looking at when you screen for M&A opportunities? Because obviously, IPC, with over €1.4 billion, and our market cap is also bigger, it’s a bigger fish than a couple of years back, and you are producing quite nicely, 47,000 a day. So, another 1,000 probably wouldn’t change the needle, or…?

Mike Nicholson

No, I think that’s a fair point, Lars. And that’s exactly the reason why we decided to access the debt capital markets and do the $300 million bond issuance back in January because there is no doubt that there is going to be more assets coming to market from the majors. So, we wanted to differentiate ourselves from some of the competition that don’t have the financial strength of IPC. So, with the $300 million bond rate issue that we did, the fact that we are going to generate at current prices close to $0.5 billion of free cash flow this year, means that we can move into the category of a $500 million to $1 billion plus and still easily finance those types of acquisitions. It would be much more transformational for the company as opposed to a small bolt-on acquisition, like you mentioned. So, that was exactly the reason that we decided to access the debt capital markets to give us the optionality.

Lars Dollmann

Okay. Thank you very much. Congratulations again on the fantastic quarter. Well done.

Mike Nicholson

Thank you very much indeed.

Christophe Nerguararian

Thanks.

Operator

And there are no further audio questions.

Rebecca Gordon

Okay. We have a few web questions. So perhaps, Christophe, if you would like to give a bit of a runway. Christophe, for Malaysia, profit increased now, the first time it’s producing 2,000 barrels a day more in Q2?

Christophe Nerguararian

I mean the size of the barrel of the cargo it’s on.

Rebecca Gordon

Size of what specifically?

Christophe Nerguararian

Yes. So actually, I think more importantly, so the size of the cargo are 300,000 to 350,000 barrels a piece. I think what’s more important to note, and I hinted on that talking about the realized prices, is that actually, in Southeast Asia, there is a high demand, high need of reliable sources of crude oil for the local refineries. And so we have seen premiums getting much, much higher for barrels. And we are currently selling those barrels at Dated Brent plus $5 to $8.

Rebecca Gordon

Okay. Thanks Christophe. Another question for you perhaps here, is management keeping capital budget effect of $127 million for 2022?

Christophe Nerguararian

Yes. For the time being, we are not changing our CapEx plan. Although we are being very active, as you heard, mostly in Malaysia in the first quarter, but really ramping up quickly on Ferguson and Suffield going forward.

Rebecca Gordon

Okay. Thank you. Mike, a few M&A questions here. That’s one that hasn’t really been answered, a few acquisition opportunities self-sustaining IPC operational areas. For example, Malaysia’s bidding round, is IPC participating actually in these processes?

Mike Nicholson

Yes. I mean we are always looking at opportunities in the areas that we operate. But I think if you look at Malaysia, there is no secret that Exxon run a process there, and that process failed because of higher-value expectations is the feedback that we received. So, I think that’s an example of kind of what I was referring to in my previous answer to Lars, that disconnect between smaller companies and the expectations of some of the bigger players.

Rebecca Gordon

Okay. Great. A couple of questions on Blackrod, actually. So, a 3-part question. I will summarize it. First of all, wouldn’t a capital that’s $100 million be better against Blackrod that we have allocated to the share buyback? Secondly, would management consider going a loan to sanction Blackrod given the cash this year? And thirdly, has there been any interest on farm-ins?

Mike Nicholson

Yes. So, I will answer the third question first. It’s a little bit premature to talk about farm-ins. We are going to get the FEED studies concluded first and then decide at the end of this year what the best way forward that would be for Blackrod. I think the first question about would it be better to redirect the $100 million of buyback to Blackrod, I think the simple answer is absolutely not. I mean if you looked at the value slide that I showed on the chart, the 2P value of our portfolio is above SEK150 a share. And if you add just the Phase 1 value of Blackrod, you are getting up to close to SEK200 a share, and that’s on a $70 per barrel valuation. So, if we can use $100 cash flow to buyback at a 50% discount to 2P plus Phase 1 Blackrod on a $70 valuation, I think that creates a huge amount of value for our long-term shareholders. I think also second part to that question is we don’t have to – I mean if you look at the 5-year business plan, all we do is develop our 2P reserves and keep our production flat at 47,000 barrels of oil equivalent per day. Between $75 a barrel and $95 a barrel would generate between $1.2 billion and $1.8 billion of free cash flow. So, when you set the $540 million of Phase 1 Blackrod development CapEx against that $1.2 billion to $1.8 billion, the $100 million buyback is a drop in the auction.

Christophe Nerguararian

Yes. The two are not mutually exclusive. We can do both, obviously.

Rebecca Gordon

And on that theme, Christophe, will management consider expansion of Onion Lake, which was an original development plan by IPC?

Christophe Nerguararian

Yes, we are looking into that as we speak. The nameplate capacity of the facility now is at 14,000 barrels a day. And so there was always the possibility to ramp that nameplate capacity slightly up. So, this is one of the constant opportunities we consider.

Rebecca Gordon

And Mike, there is a couple of questions here on expected timeline of the Dutch auction.

Mike Nicholson

Yes. So, we expect within a matter of days to come out with the press release and the prospectus. And then typically, we are looking at a four-week to five-week period after that announcement. It should be concluded by June.

Rebecca Gordon

Okay. Thanks very much. That’s pretty much all the questions we have time for today. So, thanks very much.

Christophe Nerguararian

Thanks Rebecca.

Mike Nicholson

Okay. Thanks again, everyone, for tuning in, and we look forward to present again back in early August for the Q2 results.

Christophe Nerguararian

Thank you very much.

Mike Nicholson

Thank you.