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Edited Transcript of PGF.TO earnings conference call or presentation 8-Aug-19 10:59am GMT

Q2 2019 Pengrowth Energy Corp Earnings Call (Prerecorded)

CALGARY Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Pengrowth Energy Corp earnings conference call or presentation Thursday, August 8, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher G. Webster

Pengrowth Energy Corporation - CFO

* Peter D. Sametz

Pengrowth Energy Corporation - President, CEO & Director

* Randall S. Steele

Pengrowth Energy Corporation - COO

* Tom McMillan

Pengrowth Energy Corporation - Manager of IR

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Presentation

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Tom McMillan, Pengrowth Energy Corporation - Manager of IR [1]

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Ladies and gentlemen, welcome to Pengrowth Energy Corporation's Second Quarter 2019 Financial Results Webcast. On the webcast 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, we may make forward-looking statements. These statements reflect current expectations, estimates, projections and assumptions of the company and 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, please see Pengrowth's Annual Information Form under the headings Risk Factors and Forward-looking Statements as well as this quarter's management's discussion and analysis.

We will also be discussing non-GAAP financial measures in today's call, including adjusted funds flow, which is cash flow from operating activities adjusted for interest and financing charges, expenditures on remediation and changes in noncash operating working capital. For more information about the non-GAAP measures discussed in today's call and their reconciliation to GAAP measures, please consult our management's discussion and analysis for the quarter.

Our financial statements, management's discussion and analysis and Annual Information Form can be found on our website as well as the SEDAR and EDGAR websites. 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?

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Peter D. Sametz, Pengrowth Energy Corporation - President, CEO & Director [2]

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Thanks, Tom. I want to thank our teams who continue to demonstrate operational excellence and discipline by delivering an exceptional second quarter. We have reduced operating costs, kept production steady, reduced general and administrative costs to deliver the strongest adjusted funds flow in 2 years. Our second quarter adjusted funds flow increased 188% year-over-year to $29.1 million compared with $10.1 million in the prior year. We also paid down $9 million in debt, with adjusted funds flow generated in excess of capital requirements.

The overhaul of the corporate and cultural model that started last year has yielded results, and we are performing well on the things we can control. What we cannot control is the deterioration in forecast commodity pricing for natural gas, which led to a noncash impairment of $95 million on our Groundbirch asset. Without this noncash accounting impairment, we would've reported positive net income this quarter.

This waterfall chart illustrates some major drivers of our results by comparing adjusted funds flow from the second quarter of 2018 to the second quarter of 2019. The year-over-year increase was primarily due to higher bitumen production, the impact of decreased realized losses on commodity risk management, lower adjusted operating expenses, lower cash G&A and lower transportation and other costs compared to the same period last year. These were partially offset by lower realized prices and higher interest and financing charges. Financing charges increased mainly due to higher borrowings and interest rates on the credit facility, combined with higher Canadian dollar equivalent interest expenses due to a weaker average Canadian dollar in the period.

So your company has turned over 2 excellent quarters in 2019 against a challenging backdrop for Western Canadian oil and gas producers. The capital markets have transitioned from apathy towards Western Canadian oil and gas to outright capitulation. Energy funds are closing down, energy market specialists and analysts are losing their jobs and the flow of capital into our market has slowed to a trickle. This means that Pengrowth must continue to perform and live off our cash flow until such time that investors recognize the value inherent in Western Canadian oil and gas.

I will now turn the call over to Chris to discuss guidance and liquidity. Chris?

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Christopher G. Webster, Pengrowth Energy Corporation - CFO [3]

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Thanks, Pete. Year-to-date 2019 daily production of 22,736 BOE per day was within 2019 guidance despite low capital spending and the Alberta Government's mandatory production curtailment program. Year-to-date, 2019 actual royalty expenses as a percentage of produced petroleum revenue were slightly above full year guidance. However, we anticipate royalty expenses as a percentage of produced petroleum revenue to fall within 2019 guidance by the end of the year. Adjusted operating expenses returned to our guidance range at the end of the second quarter.

Year-to-date, 2019 cash G&A expenses per BOE continued to track above full year 2019 guidance, but began their return to our full year range as we move past the compensation-related expenses that normally occur in the first quarter. Cash G&A expenses per BOE decreased from $3.22 per BOE in the first quarter of 2019 to $2.47 per BOE in the second quarter of 2019. Pengrowth continues to anticipate that full year 2019 cash G&A expenses to reach 2019 guidance as expenses in the second quarter of 2019 are more representative of the future cost expectations.

Draws on our credit facility decreased in the quarter compared with March 31, 2019, as a result of $9 million in repayments from cash flow from operations. On March 25, 2019, we reached arrangements for the extension of the maturity date under our secured revolving credit facility through to September 30, 2019, subject to certain terms. The extension of the credit facility provides support, while we explore and develop alternatives with a view to strengthening the company's balance sheet, addressing upcoming debt maturities and maximizing enterprise value.

I will now turn the call to Randy to provide an operational update. Randy?

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Randall S. Steele, Pengrowth Energy Corporation - COO [4]

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Thanks, Chris. Lindbergh production remained steady in the second quarter, with curtailment volumes supplemented by additional capacity we were able to purchase in the market. We averaged 18,036 barrels per day and continued to adhere to Alberta's curtailment program. That is a 14% increase compared with the same period last year. The steam oil ratio decreased this quarter to 2.80 compared with 2.83 in the prior quarter. We expect the steam oil ratio to continue to drop as curtailments ease further.

On a sequential basis, Lindbergh's second quarter operating netbacks increased 30% to $32.57 a barrel compared with $25 per barrel in the prior quarter due to a 16% increase in realized bitumen prices, an 18% decrease in energy-related adjusted operating expenses, a 6% decrease in non-energy adjusted operating expenses, offset by a 4% increase in diluent costs, a 38% increase in royalties due to higher commodity prices and a 4% increase in transportation expenses.

I will now turn the call back over to Pete to wrap up. Pete?

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Peter D. Sametz, Pengrowth Energy Corporation - President, CEO & Director [5]

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Thank you, Randy. We are not done with good news. The strong performance of Lindbergh has led to a 34% increase in Lindbergh's proved reserves and a 25% increase in proved and probable reserves, which extends Lindbergh's 2P reserve life index to 54 years. This further increases the size and value of our core asset to the benefit of all of our stakeholders. As we continue to generate positive adjusted funds flow, pay off debt and grow our reserve base, Pengrowth's capacity to generate value from our long-life, low-decline Lindbergh project at current prices should become increasingly clear to our banks, our noteholders and equity investors alike.

Our leaner cost structure allowed us to deliver the strongest quarterly adjusted funds flow in 2 years. We continue to have a lot of torque to the oil price. We have also layered in hedges for third quarter to provide greater cash flow certainty, given the volatility we've seen in WTI.

On the WCS-to-WTI price differential, we have not hedged past February of 2020. We believe that the WTI-to-WCS marker is a broken marker, and no longer reflective of future supply and demand balances for North American refiners who need Western Canadian heavy oil. There is no other feedstock that makes sense for these refineries. The demand for Canadian heavy crude is still very strong in the U.S., and this demand will continue for years. The proper differential is between Mio crude and WCS, but this is not yet a liquid hedge that we can exercise with U.S. refiners. The volatility we are seeing and have seen for the last 12 months in heavy oil pricing has made markets and bankers particularly scared of our sector. To maintain cash flow certainty and pay down debt, we must enter some hedges. Alberta's curtailment program and the increase in crude by rail will continue to stabilize oil prices, but we expect continued WTI price yo-yoing depending on fears of a U.S.-China trade war, recession, presidential tweets or the upcoming Canadian federal election.

This concludes our formal remarks. If you have any questions, please follow-up with our Investor Relations team at 1 (855) 336-8814. Thank you for listening today.