U.S. Markets closed

Edited Transcript of VII.TO earnings conference call or presentation 3-May-19 3:00pm GMT

Q1 2019 Seven Generations Energy Ltd Earnings Call

Calgary May 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Seven Generations Energy Ltd earnings conference call or presentation Friday, May 3, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Brian Newmarch

Seven Generations Energy Ltd. - VP of Capital Markets

* David Holt

Seven Generations Energy Ltd. - COO

* Marty L. Proctor

Seven Generations Energy Ltd. - President, CEO & Director

* W. Derek Aylesworth

Seven Generations Energy Ltd. - CFO

================================================================================

Conference Call Participants

================================================================================

* Patrick Joseph O'Rourke

AltaCorp Capital Inc., Research Division - MD of Equity Research for Junior and Mid-Cap Exploration & Production

* Travis Wood

National Bank Financial, Inc., Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning and welcome to the Seven Generations Energy First Quarter Conference Call.

I will now hand the call over to Mr. Brian Newmarch, Vice President of Capital Markets.

Brian, please go ahead.

--------------------------------------------------------------------------------

Brian Newmarch, Seven Generations Energy Ltd. - VP of Capital Markets [2]

--------------------------------------------------------------------------------

Thank you, operator, and thank you for joining us for the Seven Generations Energy First Quarter 2019 Conference Call.

In attendance, we have the President and Chief Executive Officer, Marty Proctor; Chief Financial Officer Derek Aylesworth; Chief Operating Officer David Holt; as well as other members of our management team.

We will review our results for the quarter ended March 31, 2019, and then open the line to questions. All statements made by the company during this call are subject to the reader advisory set forth in the news release issued this morning and on the company's website in corporate -- and in the corporate presentation. All dollar amounts discussed today are in Canadian dollars unless otherwise stated. The complete financial statements and MD&A for the period ending March 31, 2019, were published this morning and are available on www.7genergy.com as well as the SEDAR website.

I will now pass the call over to you, Marty.

--------------------------------------------------------------------------------

Marty L. Proctor, Seven Generations Energy Ltd. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thanks, Brian, and thanks to everyone joining us on the line.

The first quarter of 2019 brought significant improvements to benchmark WTI pricing and local condensate differentials, which continued to be the backbone of our cash flow generating capacity. Although North American natural gas and NGL prices have been slightly softer than anticipated, we now have visibility to free cash flow in 2019, and we are taking steps to actively return capital to our shareholders. For 2019, we remain firmly committed to the $1.25 billion capital investment plan that we established at the beginning of the year, with incremental cash flow above $1.25 billion earmarked for returns of cash to our shareholders through our normal-course issuer bid and net debt reduction.

The first quarter was active both from our baseline drilling and completions front and from our key infrastructure investments. We support Nest 3 development in the second half of 2019 and beyond. These investments give us the capacity to grow Nest 3 as a major development area in the coming years, where it will also become a substantial free cash flow generator just like we are seeing from our core Nest 2 area. We included the investment in Nest 3 connectivity in our sustaining capital budget in 2019, but it should be emphasized that approximately $130 million of infrastructure investments that connect southern Nest 2 and Nest 3 to our main infrastructure will not recur in 2020.

Our business continues to get stronger. Our $150 million of discretionary capital allocation in our 2019 budget is yielding value-enhancing delineation results, particularly within our lower Montney resource. We reported another successful lower Montney result, which helps expand our economic inventory and allows us to make better use of surface infrastructure on a full-cycle return basis.

7G's previously announced Nest 1 perimeter test continues to flow at rates and pressures exceeding expectations. Initial rates during the first 60 days of production averaged about 1,900 BOE per day, of which 72% was condensate, while flowing at restricted rates during most of the second month. Longer-term flow rates in our Nest 1 perimeter tests will help fine-tune our development planning in that region.

While we continue to see some of the best results in the basin, we are also starting to see the beneficial results from our heightened focus on cost structure. We have challenged our historical assumptions to improve capital efficiencies through evolving completion, surface facilities and lease construction designs. While there is no single silver bullet to drive costs down, we are active on numerous fronts and expect to see continued improvements in our cost structure and capital efficiencies over time. Improving our cost base contributes to our sustainable free cash flow generation and improves our resiliency to commodity price cycles.

Before passing things over to Derek, I want to outline one key differentiator for 7G. That is our commitment to stakeholder service and responsible energy development. We are seeing increasing interest and inquiries from stakeholders about environment, social and governance issues across all aspects of our business.

For those that are familiar with 7G, you will know that we have a differentiated approach to our business. Stakeholder service is not just a page in a presentation or an annual report. It is inherent in everyday business. It is embedded in the behavior of our employees and those who work with us. We refer to this commitment as our guiding principle and it permeates every decision we make. We are committed to responsible development. As an example, right now we are the lowest emitter of greenhouse gas equivalents per BOE of production in all of Canada. While our relatively new project and modern infrastructure helps in this category, we have made intentional investments in processes and equipment that helps reduce our carbon footprint.

This week, we published on our website Generations 2019, our stakeholder and sustainability report. It gives voice to our stakeholders about how we engage with communities and the stakeholders that contribute to our Kakwa River Project. You will also find expanded sustainable development reporting with robust quantitative data and metrics. Along with costs, revenues and other metrics of economic performance, we constantly seek new ways of measuring our ESG performance. Our ability to develop Alberta's resources responsibly is tied to the need for us to create value and generate compelling returns for our shareholders. At Seven Generations, environmental responsibility and profitable development go hand in hand.

I will now pass the call over to our Chief Financial Officer, Derek Aylesworth.

--------------------------------------------------------------------------------

W. Derek Aylesworth, Seven Generations Energy Ltd. - CFO [4]

--------------------------------------------------------------------------------

Thanks, Marty.

As we mature 7G from a high-growth outspend cash flow business model to a self-funded free cash flow generating entity, we believe that a return of capital is an important component of total shareholder returns. At our current stage, a share buyback is the most appropriate method to return capital to our shareholders, which is why we are continuing with our NCIB. We see buybacks, coupled with net debt reduction, as the primary use of this year's cash flow beyond our $1.25 billion capital investment plan. Ultimately, we see our asset base generating very strong returns that in a $55 to $65 WTI price environment will consistently drive a combination of fully funded growth coupled with the return-of-capital components to our shareholders.

We've continued to be active in our regular hedging program, recently having added approximately 5,000 barrels per day of additional oil volumes at a $65-plus per barrel of WTI for the balance of the year. This contributes to our confidence in our capacity to generate free cash flow and comfortably fund an NCIB. We've also added an additional 55 million cubic feet per day of capacity on the NGPL line during the first quarter that gives us the option to take additional natural gas production directly to the Gulf Coast of the United States. This transaction provides 7G with additional optionality and market diversity that we expect will improve future natural gas netbacks. With gas egress capacity in excess of our own production

(technical difficulty)

--------------------------------------------------------------------------------

Operator [5]

--------------------------------------------------------------------------------

Ladies and gentlemen, please stand by. We're experiencing some technical difficulties. Thank you for your patience.

--------------------------------------------------------------------------------

Brian Newmarch, Seven Generations Energy Ltd. - VP of Capital Markets [6]

--------------------------------------------------------------------------------

Operator, are you there?

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Yes. You're now active.

--------------------------------------------------------------------------------

David Holt, Seven Generations Energy Ltd. - COO [8]

--------------------------------------------------------------------------------

Okay. This quarter, we invested a significant wedge of upfront capital in our key Nest 3 supporting infrastructure, including initial preparations for river [crossings] and nearly $60 million of pipeline work over 4 segments.

The second quarter of 2019 will see construction of our first Nest 3 super pad in support of future development. The second half of the year will see less infrastructure and a larger proportion of capital investment in drilling and completions. As we progress development of Nest 3 into 2020 and beyond, we anticipate the region's strong capital efficiencies, lower decline rates and optimization of surface infrastructure should require a reduced level of sustaining capital.

Operating expenses this quarter were 11% below our 2018 average and almost 2% below the low end of our 2019 guidance. Investments in water handling have contributed to the strong showing in addition to across-the-board efforts by our team to get the best value for our investments. Looking forward to the balance of 2019. Several planned turnaround events in the second quarter are likely to drive modestly higher operating cost per BOE than we experienced in the first quarter, so we continue to anticipate quarterly operating cost to remain within the guided range of $5 to $5.50 per BOE for the rest of 2019.

I also wanted to highlight a few key points about our latest lower Montney location test result. This was our second partial triple stack, meaning that we placed a single horizontal well in the lower Montney, beneath several upper and middle Montney horizontals. Our operations team brought this lower well on stream faster than initially anticipating, allowing us to disclose an IP30 rate of approximately 1,250 BOE/D at 63% condensate. The location of this well is a township west of our prior location, helping calibrate our geologic model expectations for the lower Montney over a wider area. We had anticipated that the lower Montney here could be of 2 -- Tier 2 rock quality. However, we are quite happy with initial flow rates; and notably the pressure, which over the first 30 days has averaged about 40% higher than our earlier lower Montney result this fall.

Elsewhere within our delineation program, we are currently prepping for the tie-in of our first full triple-stack location consisting of 3 lower Montney horizontals beneath a layer of both upper and middle Montney wells. We anticipate providing results on this pad during our Q2 release this summer. Combined, these lower Montney results are continuing to demonstrate additional resource potential that can expand our economic drilling inventory and make better full-cycle use of infrastructure over time.

I'll now pass the call back to Marty for a few closing remarks.

--------------------------------------------------------------------------------

Marty L. Proctor, Seven Generations Energy Ltd. - President, CEO & Director [9]

--------------------------------------------------------------------------------

Thanks, David.

As we look forward to the rest of 2019, I'm encouraged by the transition towards a truly sustainable business with free cash flow generation, a replenishment of top-tier drilling inventory in addition to our industry-leading environmental performance. We remain committed to delivering long-term value to our shareholders over the coming years through a blend of modest growth and full-cycle economic returns far above our cost of capital that will allow us to continue to return capital to our shareholders.

Operator, I will now ask you to open up the line to questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from the line of Patrick O'Rourke with AltaCorp Capital.

--------------------------------------------------------------------------------

Patrick Joseph O'Rourke, AltaCorp Capital Inc., Research Division - MD of Equity Research for Junior and Mid-Cap Exploration & Production [2]

--------------------------------------------------------------------------------

Just a few quick questions here. First question, in terms of well costs in the quarter, they were up slightly from the prior quarter at $9.4 million versus $9.1 million, but I know at the Investor Day you alluded to a budget being around $10 million per well. I'm just wondering how these well costs in the quarter kind of tie into that and where you are on that front.

--------------------------------------------------------------------------------

Marty L. Proctor, Seven Generations Energy Ltd. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Patrick, thanks for the question. Yes, there's a bit of, I guess, what -- the first thing I would say is we're not guiding to anything different than what we had first planned. It's still about $10 million for drill and complete. There's a bit of a nuance in the way we report. And typically, we're reporting the current quarter drilling -- we're reporting the completion costs for wells that were drilled in the -- were completed in the current quarter but they may have been drilled in the previous quarter. And then we're reporting drilling costs of wells that are reported in the current quarter, my whole point being that sometimes there's kind of a mismatch between the timing of the wells and how we report them in a quarter. And so you don't see a direct alignment between length of wells and cost of completions and so on. Probably a little more detail than I should have given. The thing is I guess I would say we're working extremely hard to reduce capital costs and improve operating costs in all aspects of our business. And we are still guiding towards about a $10 million drill and complete but working hard, very hard, to improve that.

--------------------------------------------------------------------------------

Patrick Joseph O'Rourke, AltaCorp Capital Inc., Research Division - MD of Equity Research for Junior and Mid-Cap Exploration & Production [4]

--------------------------------------------------------------------------------

Okay. And then in terms of the kind of cadence for the capital spend for the year. I know you guys touched on some of the infrastructure projects that you had in Q1 and then we'll have some in Q2. And Q1 is typically a heavier quarter in terms of capital. Historically, it has been at least. Just wondering how you will see that kind of capital shaping up percentage-wise by quarter through the rest of the year. With the Investor Day, you guys had kind of alluded to, through time, shifting to a more even-handed cadence. Is that still the case that you see evolving here?

--------------------------------------------------------------------------------

Marty L. Proctor, Seven Generations Energy Ltd. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Yes. To your latter question, the answer is yes. And I'll come back to it, but overall, what we're saying is that we're still guiding to a firm capital program of $1.25 billion. The amount in the first quarter was as we expected. We are moving towards and, I think, getting quite a bit closer to a more level-loaded program on the drill, complete and tie-in side. The first quarter, as we had planned, included a pretty significant infrastructure investment to connect those southern Nest 2 area and the new Nest 3 area to our entire gathering system. So we'll have complete connectivity to allow future development on a fairly large scale of Nest 3 and southern Nest 2 regions. So it was according to our plan. We expect that for the remainder of the year we'll still have a little more than kind of total budget divided by 4 in Q2, but that will be balanced slightly in Q3 and Q4. So overall, we're on that track for the $1.25 billion.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Your next question comes from the line of Travis Wood with the National Bank of Canada.

--------------------------------------------------------------------------------

Travis Wood, National Bank Financial, Inc., Research Division - Analyst [7]

--------------------------------------------------------------------------------

You talked about a -- royalty rates within that $60 world so I just wanted to get a sense of how you'd think about capital in kind of a $60 to $65 world as well just in terms of potentially bumping spending up through the latter part of the year or not.

--------------------------------------------------------------------------------

Marty L. Proctor, Seven Generations Energy Ltd. - President, CEO & Director [8]

--------------------------------------------------------------------------------

Travis, no, we're firmly committed to that capital program that we announced on January 10. That has not changed. We welcome higher commodity prices. That does mean obviously higher cash flow. It gives us the opportunity for the first time in our history to have free cash above our capital investments and it gives us the opportunity again to reinstate -- or to resume the normal-course issuer bid.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

There are no further questions at this time. I would now like to turn the call back over to Brian Newmarch for closing remarks.

--------------------------------------------------------------------------------

Brian Newmarch, Seven Generations Energy Ltd. - VP of Capital Markets [10]

--------------------------------------------------------------------------------

Thanks, operator. And thanks, everyone, for the time and for joining us on the call. We're aware that there were some technical issues so we will make sure that the transcript is available on our website. Feel free to reach out to myself or Ryan Galloway with any further questions you may have.

That concludes the call. Thanks, operator.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

This concludes the Seven Generations Energy quarterly conference call. Thank you for your participation. You may now disconnect.