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Edited Transcript of PGF.TO earnings conference call or presentation 3-May-17 12:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Pengrowth Energy Corp Earnings Call

CALGARY May 7, 2017 (Thomson StreetEvents) -- Edited Transcript of Pengrowth Energy Corp earnings conference call or presentation Wednesday, May 3, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher G. Webster

Pengrowth Energy Corporation - CFO

* Derek W. Evans

Pengrowth Energy Corporation - CEO, President and Non-Independent Director

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Conference Call Participants

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* Josef Schachter

* Shailender Randhawa

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the Pengrowth Energy Corporation 2017 First 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.

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Derek W. Evans, Pengrowth Energy Corporation - CEO, President and Non-Independent Director [2]

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Thank you, Chelsey. Good morning, ladies and gentlemen, and thank you for joining us for 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.

Since late 2016, we've made substantial progress on our goal of reducing our debt and improving our financial strength, while retaining our key growth assets. With the announcement of the sale of the company's Swan Hills assets in north central, Alberta and the announcement in the completion of the sale of our non-producing Bernadet lands in northeastern British Columbia, along with the cash on hand, the company's total debt reduction by the end of the second quarter is expected to be approximately $1 billion or 60% since December 31, 2016, while only reducing our reserve base by approximately 11% on our a proved plus probable basis at December 31, 2016.

In the first quarter, we delivered funds flow from operations of $26.9 million or $0.05 per share compared to funds flow of a $106.2 million or $0.20 per share for the same period in 2016. The decrease in funds flow year-over-year was primarily due to the absence of significant hedging gains realized in the first quarter of 2016, coupled with lower production volumes year-over-year and a realized hedging loss in the first quarter of 2017. Offsetting this were higher realized prices during the first quarter of 2017 compared to the same period in 2016 due to material improvements in both crude oil and natural gas benchmark prices. The result of which led to a 256% increase in operating netbacks before the impact of commodity risk management to $17.18 per BOE in the first quarter of 2017 compared to $4.82 per BOE in the first quarter of 2016.

At the end of the quarter, we elected to close out our 2017 oil risk management contracts at a cost of $12.7 million. And at this time, we have no oil risk management contracts in place.

In addition, we also entered into new natural gas risk management contracts in the quarter to provide downside protection against potential declines in natural gas prices. A complete summary of Pengrowth's commodity risk management contracts in place as at March 31, 2017 for the remainder of 2017 can be found in the financial notes accompanying our first quarter report.

We continue to realize further improvements in our cost structures and achieved additional expense reductions in the quarter with operating and general administrative expenses down $9.5 million and $3.1 million respectively from the first quarter of 2016. (technical difficulty) cost savings are expected to be sustainable going forward.

We have been very active and successful with our asset-divestment program having announced a number of transactions since late 2016, including the recent agreement to sell our Swan Hills assets in north central Alberta and our non-producing Bernadet lands -- non-producing Montney lands at Bernadet in northeast British Columbia, which will add, (inaudible) , an incremental $457 million of proceeds. When factoring in all the proceeds from the announced transactions, we've been able to generate approximately $707 million of cash proceeds, which have been and will be used towards debt reductions. Combined with the $287 million of cash on hand that the company had at December 31, 2016, our total debt will be reduced by approximately $1 billion or 60% since year-end 2016.

Not only is this a material reduction in our total debt, but it'll also translate into material savings in our interest expense. We are anticipating our interest expense on an annualized basis to be reduced by more than $65 million per year following the planned debt repayments.

Following the debt repayments made during the first quarter, our ratio of trailing 12-month senior debt to adjusted EBITDA decreased to 2.5x from 3.1x at December 31, 2016. At this time, we anticipate remaining on side our financial covenants through 2017 and 2018 using certain assumptions. The key assumptions used in this projection, include an improvement in West Texas crude oil price to USD 60 per barrel by third quarter 2017; closing of the 2 announced Swan Hills dispositions by May 31, 2017; and using the tax proceeds to prepay the 2017 and 2018 unsecured notes. To provide additional financial flexibility, we are considering accessing the Capital Markets before the end of the third quarter of 2017 to replace existing debt with less restrictive high-yield debt or renegotiating the terms of the remaining existing debt. This financial flexibility together with the proceeds from any additional asset dispositions could be used towards the funding of the Lindbergh expansion and other capital projects.

Turning briefly to the operating results, we achieved first quarter average daily production at 52,957 BOEs per day compared to average daily production of 62,056 BOEs per day in the first quarter of 2016. The decrease in production year-over-year results from the absence of volumes primarily attributed to property divestments, additional shut-in gas volumes and natural declines as well as the absence of a condensate shipment from the Sable Offshore Energy Project in the quarter.

Performance from our Lindbergh thermal project continues to exceed nameplate capacity with production in the quarter averaging 14,865 barrels per day and average steam oil ratio of 2.5x. Production in the quarter was impacted by a Phase 1 well pairs commencing their expected natural decline after having been on production for over 24 months. Pengrowth has not drilled any new wells into the project in the last 2 years, and we are expecting production will decline over the year until the new well pairs associated with the Phase 1 Optimization program begin steaming later this year.

During the quarter, we commenced the Phase 1 Optimization program spending approximately $13.7 million of capital on infill drilling and observation wells as well as related surface and facility construction. It is anticipated that the new safety well pairs will be drilled over the next 2 quarters, with first production expected by the end of the year.

In addition to the Phase 1 Optimization expenditures and activities, ongoing engineering and design work relating to the second expansion phase was carried out in the quarter, we anticipate having 70% of the engineering and design work complete by the end of the year and to be ready to execute on Phase 2 as funds become available.

In closing, we had a very active quarter. We've achieved substantial success thus far in selling assets, reducing our debt and improving the strength of our balance sheet. The announced asset sales and associated delevering of our balance sheet should allow us to focus on renegotiating or refinancing our debt, so as to be able to fund the expansion of Lindbergh and to continue to build the required foundation for long-term production growth and increase shareholder value.

This concludes the formal part of the call, and we will now take questions from our analysts. We encourage all our shareholders with questions to follow-up with our Investor Relations team, who will be happy to address any of your questions. Chelsey, this would be a good time for us to open up the queue for questions from any of our analysts.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Shailender Randhawa with RBC Capital Markets.

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Shailender Randhawa, RBC Capital Markets, LLC, Research Division - Analyst [2]

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So just 3 questions from me. So how do you think about this risk financing plan in the third quarter? Just wondering, how you're thinking about the cost of debt, just given the credit profile of the company through a Phase 2 construction? And then second question, can you give us a sense of what project cost for Lindbergh would be in the $60 to $65 WTI world. Would that be materially different from what you see today? And then lastly, just an update on asset sales as well please?

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Derek W. Evans, Pengrowth Energy Corporation - CEO, President and Non-Independent Director [3]

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Shailender, I'm going to ask Chris Webster to take the first question, and I'll take 2 and 3.

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Christopher G. Webster, Pengrowth Energy Corporation - CFO [4]

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Okay. Thanks. The first question really relates to what would be the cost of debt. We know that the high-yield market does present higher proof lines and we're modeling that within our plans going forward. And the -- it's good to note that the 2017 and the 2018 private placement notes that we're repaying did have some of the highest coupons associated with our suite of debt. But we are anticipating our interest costs will go up if we access the high-yield market.

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Derek W. Evans, Pengrowth Energy Corporation - CEO, President and Non-Independent Director [5]

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Shailender, I think your second question really dealt with what does the Lindbergh project look like in that $60 to $65 WTI environment. Exceptional rates of return would be, my first comment, well in excess of probably 25% IRRs on the Phase 2 type development. I expect though that what you're looking for is, do we expect to see any sort of cost creep associated with a higher type price environment. And I think one of the really interesting aspects about operating inside of the thermal business is it -- we believe that we're going to be not totally immune but somewhat immune to a lot of the cost pressures that our conventional brethren are seeing. We will see some cost pressures on drilling rates. There may be some cost pressures with respect to the cost of steel, but by enlarge, we think we're going to be relatively immune. Last question really dealt with update on asset sales. We have announced in the last 3 -- I guess, since March 20, we have announced 2 Swan Hills sales and the Bernadet sale. The Bernadet sale is closed, and we are driving forward and expect to close our Swan Hills, both of the Swan Hills dispositions at the end of May.

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Shailender Randhawa, RBC Capital Markets, LLC, Research Division - Analyst [6]

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Yes. So just a follow-up, is there anything -- is Garrington and Olds, Cardium still something that you'd look to sell? And then just back to the project cost on Lindbergh, are you still comfortable with the capital intensity number that you pointed to in the past for Phase 2?

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Derek W. Evans, Pengrowth Energy Corporation - CEO, President and Non-Independent Director [7]

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On the first part of your question, on Olds/Garrington, we have and continue to have -- well, we've had the Olds/Garrington assets in market for a little over 2 years. We continue to look for expression of interest on those assets. I would say in this -- that the bar has been raised. We're not prepared in terms of what our expectation would be and what we would be prepared to take for those assets, or indeed, whether we would be prepared to sell those assets on that. We now believe we've done enough debt reduction to bring ourselves down to take advantage of either the high-yield market or meaningfully going back and putting in place a different proposal in front of our noteholders to be able to move forward on the financial side. So there is not a desire or a need to sell that at any price. On the capital intensity, on Lindbergh, the last time we did a significant -- update on the capital cost on that was towards the end of last year. As you're aware, there's -- the capital that's going into the thermal business is dropping relatively quickly as our projects like Fort Hills and some of the other bitumen projects start to fall back. We have asked Steve to go back and to look at that number. Steve De Maio, our Senior Vice President of Thermal Operations, go back and to update us, again, as to what the capital intensity or what the capital cost of that project is going to be. But we don't expect that it's going to move substantially.

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Operator [8]

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And our next question comes from the line of Josef Schachter with Schachter Energy Research.

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Josef Schachter, [9]

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Questions, few of them. Number one, your debt is going to be $700 million, as you mentioned, after all the deals close. Your equity portion is $1.4 billion at the end of Q1. Are you comfortable with that ratio? Is that approximately where you want to be? And then just the mix of what debt is -- because of the covenant issue -- or do you not want to drive that down a little bit more? Where's the comfort zone going forward on the amount of debt you'd like to have on the balance sheet?

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Derek W. Evans, Pengrowth Energy Corporation - CEO, President and Non-Independent Director [10]

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My CFO is going to kick me on this. I'm comfortable with 0 debt on the balance sheet. But clearly, we're not at that stage. I'm very comfortable with where we are today, after having reduced the debt by approximately $1 billion, and being able to put ourselves in a position where we've got options and financial flexibility more than we've ever had. Ultimately, at the end of the day, we are still driving to reduce that debt. We will put in place -- we'll look opportunistically at asset sales, but any proceeds from asset sales will now be used to fund Lindbergh. I think the key Josef, for us getting to be a much lower debt organization or have much lower debt level is getting Phase 2 developed and up and running and utilize against cash flow to -- expanding cash flow to bring that debt down. And our own 5-year models would have us coming down, bringing our debt to trailing EBITDA ratio down to somewhere less than 1 in that $55 WTI environment with the successful development of Phase 2. So there is the concept of absolute debt. I'd like to have it at 0. I'm not going to get there quickly, but we are certainly driving towards that. And we think that the appropriate sort of financial structure to have for a commodity type business. The other key component here is really understanding that to get there, we've got to grow the EBITDA on a high-quality, low-decline project like Lindbergh.

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Josef Schachter, [11]

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Second question, in the balance sheet, you show that provisions and other liabilities is down $92 million. Is that mostly the abandonment liabilities and that takes into account the asset sale of the first portion of Swan Hills? And if so, does it mean that we're going to see a similar kind of number at the end of Q2 for the second portion of the Swan Hill sale?

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Derek W. Evans, Pengrowth Energy Corporation - CEO, President and Non-Independent Director [12]

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You're right on the money. The $92 million is the reduction in the abandonment liabilities associated with both of the Swan Hills transactions. So you're not going to see a additional -- an increase to that number. Both of those are accounted for in the first quarter.

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Christopher G. Webster, Pengrowth Energy Corporation - CFO [13]

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And, Josef, it's Chris. That's the discounting number from the, the way the accounting rules cause us to present it.

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Josef Schachter, [14]

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Okay. Okay. Third question, in your comments about the covenant, you mentioned that, by the third quarter $60 WTI to keep you on side or $48 today. If the same price is in place in the third quarter, what would that do to the covenant situation?

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Christopher G. Webster, Pengrowth Energy Corporation - CFO [15]

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Well, the covenant situation will get a lot tighter if we stay at a sub-$50 WTI price, there's no question about that. It's one of the reasons why we're examining the high-yield space, which has a slightly different covenant structure. We have not made any changes to our covenant structure yet. So these are the original ones that we had in place with the notes. So we'll have to take a hard look at what the combination of further asset dispositions and what the commodity prices look like when we get into the third quarter.

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Josef Schachter, [16]

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You've made a focus in terms of -- I'm understanding that you're looking for much higher oil prices going into the third quarter and thereafter. We're $48 now, where is the point where that decision becomes one where you need to take a different stance? So is it $46, $45? Where do you see the point where lower prices do start impacting your thinking on hedging?

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Derek W. Evans, Pengrowth Energy Corporation - CEO, President and Non-Independent Director [17]

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I think the -- our view on hedging really is driven by the more macro events inside of the oil space. So we had a unique hedging structure with the hedges that we collapsed where -- it wasn't working perfectly for us in terms of actually providing us the protection that we wanted and we collapsed those. I think, we're of the view that we're going to continue to see volatility in commodity prices. But at this point, we're prepared and comfortable to continue forward without any hedge protection.

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Operator [18]

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And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Derek Evans for any closing remarks.

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Derek W. Evans, Pengrowth Energy Corporation - CEO, President and Non-Independent Director [19]

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Thank you, Chelsey, and thank you, ladies and gentlemen, for joining us on the call today. This will end our call. I hope everybody has a great day. Thank you very much.

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Operator [20]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a great day.