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Edited Transcript of PIPE.V earnings conference call or presentation 12-Mar-20 3:00pm GMT

Q4 2019 Pipestone Energy Corp Earnings Call

Mar 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Pipestone Energy Corp earnings conference call or presentation Thursday, March 12, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Craig Frederick Nieboer

Pipestone Energy Corp. - CFO

* Dan van Kessel

Pipestone Energy Corp. - VP of Corporate Development

* Dustin Hoffman

Pipestone Energy Corp. - COO

* Paul Wanklyn

Pipestone Energy Corp. - President, CEO & Director

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Conference Call Participants

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* Amir Arif

Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research

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Presentation

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Operator [1]

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Good morning, and welcome to the Pipestone Energy Corp. 2020 Guidance and Operations Update Conference call. (Operator Instructions) As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Dan van Kessel, Vice President, Corporate Development. You may begin.

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Dan van Kessel, Pipestone Energy Corp. - VP of Corporate Development [2]

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Good morning, everyone, and thank you very much for joining the call. With me, I have Paul Wanklyn, President and Chief Executive Officer; Dustin Hoffman, Chief Operating Officer; and Craig Nieboer, Chief Financial Officer. On today's call, Paul will start by providing a summary of changes to our 2020 capital and production guidance, Craig will follow with an overview of our financial position and available liquidity, Dustin will provide an overview of our current operations and achieve capital efficiencies, and I will provide an update of our risk management program. I will now hand the call over to Craig Nieboer, Chief Financial Officer for Pipestone Energy to provide the disclaimer and some comments relating to upcoming financial disclosure.

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Craig Frederick Nieboer, Pipestone Energy Corp. - CFO [3]

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Thanks, Dan, and listeners should be advised that some of our remarks today will contain forward-looking statements within the meaning of applicable securities laws. I refer you to our advisories regarding forward-looking statements, non-GAAP financial measures and capital management measures in today's press release as well as in our Q3 released earlier this year, or last year. All dollar amounts referenced in our remarks today are in Canadian dollars unless otherwise specified. With that, I would like to pass it over to Paul Wanklyn, President and Chief Executive Officer, who will provide a summary of changes we are making to our 2020 guidance.

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Paul Wanklyn, Pipestone Energy Corp. - President, CEO & Director [4]

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Thanks, Craig, and good morning, everyone. I am pleased to provide an update on the Pipestone Energy's development activities. As a company, we are responding decisively to the dramatic decline in crude oil pricing experienced over the past 2 weeks. The combined impact of COVID-19 and the lack of cooperation, between OPEC and Russia is causing tremendous uncertainty on future commodity prices.

Thankfully, Pipestone Energy is well positioned to navigate this downturn as a result of our capital flexibility and our financial liquidity. As noted in our press release this morning, we are revising our 2020 capital expenditure guidance down 60% from a midpoint of $150 million to our forecast midpoint of $60 million. As a result of 1 fewer 6-well pad being brought on production this year, originally scheduled for Q4, our 2020 production guidance is being revised to between 17,000 and 18,000 BOEs a day from 18,000 to 20,000 previously, a decrease of approximately 8%. The drilling of 16 wells and the completion of 6 wells are being deferred under this revised capital plan. For the full year, WTI had a full year WTI price of USD 40. We expect this capital budget to be cash flow neutral which helps preserve our available liquidity. To the extent commodity prices recover over the coming months, Pipestone Energy can respond as rapidly as it has this week and resumed drilling operations. By using 2 drilling rigs in the future and 2 completion rigs per pad, we can achieve cycle times of 100 days from spud to on production for a six well pad.

The combination of high condensate productivity and our continued improvement in total well costs underpinned Pipestone Energy's ability to take this defensive position through this turbulent market and emerging -- emerge well positioned to add future value for shareholders. Craig is now going to give us some highlights on our financial plan.

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Craig Frederick Nieboer, Pipestone Energy Corp. - CFO [5]

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Thanks, Paul. And as many listeners on the call will know, we had originally intended on filing our year-end audited financial statements and accompanying MD&A today. However, as detailed in our press release, we are still working through the analysis and implementation of the noncash-related IFRS 16 leases standard with our auditors and expect to have that resolved in the coming days. We will then file our audited financial statements and accompanying MD&A and AIF, hopefully as early as next week, but no later than March 31.

Saying that, at this time, management would like to provide some of the key highlights for the quarter and the year. Sales production for the 3 months ended and year ended December 31, 2019, was 14,885 BOEs per day and 4,762 BOEs a day, respectively. Despite third-party processing facility challenges including curtailment and intermittent run times experienced throughout the fourth quarter. From a liquids perspective, Pipestone production for the quarter was comprised of 36% condensate and 43% total liquids. And for the year, 38% condensate to 45% total liquids. Overall, we are very pleased to have successfully exceeded our 2019 exit guidance of 14,000 to 16,000 BOE a day with average December production of approximately 17,000 BOE a day.

Always very important, but it's extremely important at times like this is our balance sheet and our liquidity position. Pipestone is well positioned from a liquidity perspective to weather the storm. As of December 31, 2019, Pipestone was drawn $163 million on its reserve-based loan or RBL and had adjusted working capital deficit of $6 million. As of this release, the company has a net draw of approximately $153 million on the RBL, and about $20 million of negative working capital. The RVO has current available capacity of $225 million, which -- and has also a $25 million accordion feature subject to mutual consent of the lenders. So once again, I just highlighted, we have significant liquidity available to us in this operational plan. I'll now hand it over to Dustin to review the quarter's operations update.

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Dustin Hoffman, Pipestone Energy Corp. - COO [6]

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Thanks, Craig. In early March 2020, Pipestone Energy began bringing on our newly completed wells on the 6-24 pad. As of this release, 3 of the 6 wells have been brought on production with the remaining wells to be brought on in the coming weeks. The average first 5 day production rates per well through permanent facilities are 1,530 barrels per day of wellhead condensate and 4.2 million cubic feet per day of raw gas, which results in a condensate gas ratio of 365 barrels per million cubic feet. The next pad to be placed on production will be the 6-30 pad. This six well pad is directly north of the 6-24 pad, and we are currently drilling the lateral section of the final well. XLE or Extreme limited entry completion operations on the 6-30 pad with proppant loading of approximately 2.5 tonnes per meter are scheduled for Q2, with production to follow in early Q3 2020. From a capital efficiency perspective, costs continue to improve with each pad as Pipestone Energy continues to optimize its drilling, completion and well site designs. The first 5 of 6 wells being drilled on the 6-30 pad pad, have an average lateral length of 2,400 meters and achieved average realized drilling costs of approximately $2 million per well, as compared to the company's $2.3 million type well cost. The fifth well at 6-30 pad was a pace setter for the company, which achieved the spud to TD time of less than 10 days and a drilling cost of $1.6 million. On the recently tied in 6-24 pad, Pipestone Energy achieved its target equipping cost of $800,000 per well, down from its previous estimate of $1.2 million.

As a result of further pad facility design improvements, the company has set an approved target of $600,000 per well on future pad sites. In aggregate, we expect the all-in drill, complete, equipped and tie-in cost on the 6-30 pad to achieve a corporate record of $6.5 million per well, which compares to Pipestone Energy's type well cost of $7.1 million. Dan will now go through an update on our risk management program.

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Dan van Kessel, Pipestone Energy Corp. - VP of Corporate Development [7]

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Thanks, Dustin. From a risk management perspective, Pipestone Energy has approximately 60% of its net after royalties condensate production hedged through Canadian dollar WTI hedges at approximately $79 per barrel. Additionally, close to 50% of our net after royalties natural gas production for the year is hedged, weighted towards the more volatile summer months. The company also engages in months ahead, physical condensate differential sales at Edmonton, where we have locked in approximately 2,000 barrels a day from March 2020 at WTI plus USD 0.50 per barrel and approximately 2,000 barrels a day for April 2020 at an average premium of $2 per barrel to WTI. With that, I'll hand it over to Paul to provide some closing remarks.

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Paul Wanklyn, Pipestone Energy Corp. - President, CEO & Director [8]

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Thanks, Dan. While we've taken decisive action to protect Pipestone's balance sheet, and we are confident we're going to emerge from these prices in a strong position, I want to thank our team, both here and in Grand Prairie for their continued hard work and dedication, and I also want to thank our Board of Directors for their continued support. With that, I think we're ready to take any questions.

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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 Amir Arif with Cormark.

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Amir Arif, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [2]

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I apologize if you've touched on this in the call, I had to step off for a minute. But of the $55 million to $65 million capital spend, how much have you spent in the first quarter or committed to already in terms of through, let's say, April, May?

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Dan van Kessel, Pipestone Energy Corp. - VP of Corporate Development [3]

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Yes. So out of the total $60 million, about half of that is going to be spent in Q1, and then the majority of the remaining capital in Q2, with minimal capital budgeted for Q3 and Q4 at this time.

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Amir Arif, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [4]

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On that. Okay, sounds good. And then I know you've got good hedges in place on the oil side here in the first half. Just curious how you're thinking about adding hedges? And I mean, given the backwardation, everyone had less hedges as you go out. So just curious, is it just too late to add hedges right now? Or is the volatility too high to add puts? Or just how are you thinking about the second half in '21?

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Dan van Kessel, Pipestone Energy Corp. - VP of Corporate Development [5]

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Yes. I mean, I think we're still developing a strategy for what hedging further into the back half of this year would look like. We're not naked. We got, call it, 15% to 20% of the back half on at similar pricing to what we have in the first half. So we'll have to make a determination of what price levels and what percentage of production levels like hedge at just on the -- in terms of swap, on the put side, with the volatility and where we're at right now. And our desire to preserve capital, it would be pretty expensive to be putting out cash to day for puts on pricing (inaudible) the future.

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Amir Arif, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [6]

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Okay. That makes sense. And then just final question. On the 6-24 pad, there's some excellent initial results that you're seeing there. How much of that is just -- or it's -- I guess, it's hard to break it out. But much of that do you feel is due to change in completions versus just the fact that you're moving further north in your acreage?

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Dustin Hoffman, Pipestone Energy Corp. - COO [7]

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Yes, I'll take that one. This is Dustin. So the 6-24 pad, if you remember, we had the original element pad on production last year, and we had reported very strong CGR rates in the 237 barrels per million mark after the first 20 days. So the CGRs that we're seeing so far, 365 barrels per million out of the gate, is pretty much what we expected.

What we are seeing, though, is the XLE completion has increased the deliverability of these wells. So the new wells are definitely stronger than the original well, which is a suboptimal completion. So we're pretty excited to report on more production as we get it through the coming months.

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Operator [8]

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(Operator Instructions) I'm not showing any further questions at this -- oh pardon me, there's another question from Arnold (inaudible), a private investor.

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Unidentified Company Representative, [9]

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Hello, hello?

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Dan van Kessel, Pipestone Energy Corp. - VP of Corporate Development [10]

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(inaudible)

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Unidentified Participant, [11]

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I'd like to address the stock prices, which has never been addressed in any of the conference calls in the past year. The company has lost 85% of its value over the year. And I know the -- what's happening right now doesn't come into account. But I'm just wondering if you could touch on what has happened over the year with regard to stock prices and what you envision for the future?

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Craig Frederick Nieboer, Pipestone Energy Corp. - CFO [12]

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Well, Arnold, this is Craig. I'm the CFO. As management, our job is to execute the business plan as effectively and efficiently as possible, and that's what we delivered in 2019. We delivered our capital plan under budget and under time. We added 9 fracs to that plant within the original guidance. Our well performance has been excellent. And so really, that's what's in our control, and what we've delivered so far for shareholders in 2019, and we've continued that pace into 2020.

Reducing our capital cost per well basis, we see really significant great results from our 6-24 pad. And again, these are the things and decisions that we have in our control. A lot of the capital markets movements on stock prices for us and others is somewhat out of our control. It's absolutely not something that we don't take seriously and feel very responsible for. But at the end of the day, those are things that we can't control directly. And all I can tell you is that we are all shareholders, too, and we're just as interested in you in setting our hard work and great results transforming into a great stock price. But that's something, especially in this current market that we're all going to have to wait for.

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Unidentified Participant, [13]

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Well, we've been waiting for quite a while, and it hasn't happened. And I -- the -- when you relate this to the peers in the industry, Pipestone is right at the bottom of the list as far as stock performance so.

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Paul Wanklyn, Pipestone Energy Corp. - President, CEO & Director [14]

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That's actually not correct, Arnold. It's Paul Wanklyn here. We do plot our performance against our Montney peer group as a larger group, and we are solidly in the middle of the pack, when we plot a number of different time frames. So I appreciate your comments today, and thank you very much.

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Operator [15]

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And I'm not showing any further questions at this time. I'll now turn the call back to your speakers.

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Paul Wanklyn, Pipestone Energy Corp. - President, CEO & Director [16]

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Thanks, everyone, for coming today. These are difficult times, and I think we've shown we're prepared to take a strong action to support the balance sheet and further the development of the company as times get stronger here in the future. Thank you.

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Dan van Kessel, Pipestone Energy Corp. - VP of Corporate Development [17]

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Thanks, everyone.

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Operator [18]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.