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Edited Transcript of VII.TO earnings conference call or presentation 8-Mar-17 4:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Seven Generations Energy Ltd Earnings Call

Calgary Mar 8, 2017 (Thomson StreetEvents) -- Edited Transcript of Seven Generations Energy Ltd earnings conference call or presentation Wednesday, March 8, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Newmarch

Seven Generations Energy Ltd. - VP, Capital Markets

* Pat Carlson

Seven Generations Energy Ltd. - CEO

* Marty Proctor

Seven Generations Energy Ltd. - President, COO

* Glen Nevokshonoff

Seven Generations Energy Ltd. - SVP, Operations

* Chris Law

Seven Generations Ltd. - CFO

* Susan Targett

Seven Generations Energy Ltd. - SVP

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Conference Call Participants

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* Amir Arif

Cormark Securities - Analyst

* Pat O'Rourke

AltaCorp Capital Inc. - Analyst

* Travis Wood

National Bank Financial - Analyst

* David Phung

Credit Suisse Securities - Analyst

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Presentation

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Operator [1]

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Good morning and welcome to Seven Generations' Q4 Earnings Conference Call. At this time I would like to turn the call over to Brian Newmarch, Vice President of Capital Markets. Mr. Newmarch, please go ahead.

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

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Thank you, everyone, for joining us for the Seven Generations' fourth quarter 2016 conference call. I am joined by CEO, Pat Carlson, President and COO, Marty Proctor, CFO, Chris Law, Senior Vice President Operations Glen Nevokshonoff, Senior Vice President, Susan Targett as well as other members of our Management Team.

We will review the Company's financial and operating results for the quarter and year-ended December 31, 2016 before opening up lines for a question-and-answer period.

Before passing things over to Pat I just want it remind everyone that all statements made by the Company during this call are subject to the forward-looking disclaimer and advisory's set forth in the Company's corporate presentation and fourth quarter news release that was issued this morning. All dollar amounts discussed today are in Canadian dollars unless otherwise stated.

The complete financial statements and management's discussion and analysis for the period ending December 31, 2016 were announced this morning and are available on www.7genergy.com and on the SEDAR website.

Over to you, Pat.

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Pat Carlson, Seven Generations Energy Ltd. - CEO [3]

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Thanks, Brian, and good morning participants.

Q4 didn't play out as we had planned. Missing our production target is not acceptable and we have taken a series of steps to ensure our performance is in line with our expectations and the estimates that we provide to the market. Nothing has changed our view of the very high quality and large size of our assets nor our ability to execute our long term growth plan. We remain highly confident in our ability to deliver in our 2017 production guidance of 180,000 to 190,000 BOEs per day. While it is still very early in the year 2017 is starting out as we had planned.

Since we began as a private company in 2008 and right up until our August 2016 acquisition we grew largely through drilling to more than 115,000 BOEs per day. We are proud of our track record and the significant value that we have created. We believe that we have a Best-in-Class asset base that was meaningfully expanded by last year's acquisition. We have a balance sheet takeaway capacity and a team that differentiates us and has positioned us for continued growth.

We grew our proved and probably reserves significantly in 2016. That growth provides a higher assurance of our ability to grow our very large liquids rich inventory for years ahead. While our assets will fuel our growth our commitment to stakeholder service and our level one policy are at the root of every decision we make. These values are core to the identity of Seven Generations and will remain the foundation of the Company as we continue along our path of profitable growth and responsible hydrocarbon development.

With that being said I will ask the team to take us through an update and pass things over to our President and Chief Operating Officer, Marty Proctor.

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Marty Proctor, Seven Generations Energy Ltd. - President, COO [4]

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Thanks, Pat. As Pat mentioned, missing our 2016 production guidance was disappointing for all of us. We pride ourselves on full, open and honest communication and that is why we released our 60 page strategic update in January.

We want to ensure that all of our stakeholders understand what happened in Q4. Why shifting to slick water completions means that we are handling increased water volumes. Why certain founders exercised options and warrants in Q4; options and warrants that were granted when we were a private company and were expiring soon. How our recent Montney acquisition is performing and how we see our Management Team progressing. We believe that the strategic update provides answers to many of the investors' questions that we routinely answer.

We remain proud of the fact that we grew 95% year-over-year. Production averaged about 60,400 BOE per day in 2015 and 117,800 BOE per day in 2016.

Organically we grew our pre-acquisition asset base to average 109,000 BOE per day in 2016. This legacy asset base performed at the high end of our pre-acquisition guidance of 100,000 to 110,000 BOE per day which might cause stakeholders to wonder, is the acquired asset not performing as expected? The acquired assets are performing as expected.

We deliberately slowed down field activities mid-2016 to maintain our balance sheet strength mid last year. We expected to ramp back up and meet targets but a few operational difficulties led to us not getting as many wells tied in as soon as we had planned. However, the asset we acquired is performing well. We have recently tied in a six well pad that was on the acquired land and these wells have had an average 30 day initial production rate of approximately 2,000 BOE per day with condensate yields for that same period of approximately 170 barrels per million cubic feet.

These wells are producing at rates that exceed our initial expectations. This confirms our belief extend our high-quality low supply cost resource in the upper and middle Montney.

That being said we are not the only ones with ambitious growth plans. This leads to my next point, which is that if most Montney and Deep Basin players are also growing where is all the gas going to go?

One of the corner stones of our business strategy is market access. Takeaway is absolutely critical. If you can't access the market you can't grow. We acknowledge this requirement for growth and have committed a significant amount of energy on expanding our market access options both contractually on existing infrastructure and through encouraging the growth of new infrastructure.

7G has made significant commitments for takeaway and we have the staff in place to continue to develop the market access needed to underpin our growth plans.

A related component of our business strategy that we have been focusing on is market diversification. Acknowledging that the North American gas market is grossly over supplied with large new resource plays close to some of western Canada's traditional markets, we feel that is imperative to take a portfolio approach to our gas marketing strategy.

With this in mind we feel quite comfortable with our natural gas marketing exposure and have about two thirds of our gas exposed to US Midwest pricing and the remainder split amongst AECO, Gulf Coast and other locations. Our US Gulf Coast exposure comes from our 100 million cubic feet per day commitment on the NGPL system.

You will recall that this commitment was announced with the third quarter 2016 results and allows a portion of our Chicago volumes to flow to Henry Hub in the US Gulf Coast. Creating optionality is key to our marketing strategy and we continue to seek innovative marketing solutions to what we see as an over supplied gas market.

I will now pass it over to our Senior Vice President of operations Glen Nevokshonoff, for an operational update.

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Glen Nevokshonoff, Seven Generations Energy Ltd. - SVP, Operations [5]

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Thank you, Marty. As Marty mentioned, we provided an in depth strategic update that was published in January that outlines a number of the topics that we're frequently asked about.

Production in the fourth quarter of 2016 averaged 132,300 BOEs per day. 2016 annual average production came in at 117,800 BOEs per day. It was composed of about 109,000 BOEs per day of production from our original 7G labs. The rest, about 8800 barrels per day, was from the acquired asset. We remain confident in our 2017 production guidance of 180,000 to 190,000 BOEs per day and see our quarterly growth profile being more linear then it has been in previous years when we saw significant increases in processing and transportation capacity that kicked off in the second quarter.

One thing to be mindful is that we have a planned outage on the Pembina Kakwa River plant that's expected to be a 14 day outage in early Q2. This was reflected in our annual guidance numbers and the work being done will allow for an expansion of liquid handling capacity and ensure we have ample room to carry out our growth plans for the rest of the year.

This outage should only impact about 20% of our production for about 14 days in the quarter which equates to about 5,000 BOEs per day of impact on our second quarter average volumes. We are working on mitigation strategies to flow volumes to other gas plants which will not be affected by this outage. The 5,000 BOE day estimate does not factor these potential mitigation objections. As I said, this is a planned maintenance event that sets us up for continued growth and is factored into our guidance.

One more area worth discussing this summer is our NGTL AECO scheduled outage. Given our current forecast we believe that we have enough buffer in our receipt service on the NGTL system relative to our forecast production that we do not expect to be impacted by the outage. Once again, we only sell about 20% of our natural gas into the NGTL or AECO system and the vast majority of our gas sales are delivered and priced off the US Midwest and Gulf Coast.

Turning to operations and in the context of some of our Q4 learnings we have made modifications to our artificial gas lift system. As a reminder we fit all our wells with gas lift systems to ensure we have adequate pressure to lift liquids and maintain down hold pressure.

Last year we shifted our completions towards slickwater. It meant a larger volume of water had to be lifted when wells were taken down and then restarted. We are optimizing tubular designs to ensure that we can deliver the high pressures and speed up the well restart process and mitigate delays.

We are making significant gains in our drilling activities. We are shifting towards and under balanced drilling process to increase the rate at which we can drill our wells. While the Q4 cost per lateral meter averaged about CAD1,400 we did see pace setter wells reach the CAD1,000 per meter mark. This is significant, especially when we look back at 2015 annual average of CAD1,800 per lateral meter. Innovation continues to pay off and we pride ourselves on being at the leading edge of drilling technology.

We continue to improve our completion activities as well. Within our upper Montney holdings we observed a lower clay content in the rock that one would see within traditional shale plays. That leads to a very efficient fracture network that when we complete our wells. These rock characteristics fuel our belief that bigger fracs lead to better results and higher returns on our capital. We have tested fractures with as many as 60 stages and 160 tonnes per stage which implies about 2,500 pounds per foot of sand.

This may be more proppant than we need so we're analyzing the results to figure out why the optimal capital efficiencies land. We're also testing our downtime assumptions and working on reducing the amount of time a producing well is taken offline when we are pumping an adjacent frac. As we optimize downtime factors we expect to see better economics and converge on producing calendar days.

I want to make a few comments on reserves. First of all, for every BOE we produced in 2016 we added 3.2 BOEs of proved develop producing, or PDP reserves that drove year over year PDP growth of 127%. If we look at reserves on a total (inaudible) basis, or reserves that have a 90% chance of being developed, we added over ten BOEs of reserves for every BOE produced. In 2016 our PDP finding and developed costs were a little under CAD10 per BOE, excluding our Montney acquisition.

Given our operating netback's in 2016 excluding hedging gains, we are about CAD20 per BOE. It means this approximate two times a cycle ratio holds from a financial perspective as well.

We continue to increase our inventory of drilling opportunities and see 800 locations within our Nest 2 area and 500 locations within our Nest 1 area. It is worth noting that these locations are just tapping the upper half of the Montney formation. On top of our nest holdings we have another thousand locations across our Wapiti and Rich Gas Montney holdings. We are also actively testing portions of our Deep Southwest Montney rates in 2017 to better understand the potential from those lines. Additionally, we are excited about the potential resources within the lower Montney.

Another under appreciated component of our portfolio lies within the Cretaceous rights. Our Canadian peers have achieved notable success in the Spirit River play which includes the [Willrich], [Flair], and [Notoquen] zones. We're undertaking an internal evaluation of our Cretaceous lands to estimate this resource potential.

We do not see these shallow targets driving competitive returns compared to our liquid-rich Montney returns today. However, these lands could present attractive long term half cycle development potential and we have already invested in the above ground infrastructure. Our upper and middle Montney, Deep Southwest Montney, lower Montney and Cretaceous lands have varying risk and economic returns associated with them. However, the sheer size of the resource that we currently own will only get more and more attractive over time as we continue our technological pursuits.

Over to you, Chris.

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Chris Law, Seven Generations Ltd. - CFO [6]

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Thanks, Glen. We continue to focus on economics and 7G's returns earned on each dollar invested. We feel pretty strongly that our business is not just about lowering costs and being a price taker for the hydrocarbons that we sell. Instead, we take holistic approach to our asset development and understand that while half cycle economics look great in a presentation the reality is that we must include all costs and returns calculations and look at things on a full cycle basis.

There are a number of ways to calculate full cycle returns. One way is to compare depletion, depreciation and amortization to funds from operations. In 2016 our DD&A, which spreads the cost of capital investments over their useful life, was CAD11.22 per BOE, while funds from operations was about CAD17 per BOE. This produced a margin of roughly CAD6 per BOE generating strong returns in allowing us to recycle significant capital back into our project.

On a per share basis we produced significant gains in all key metrics. From 2015 to 2016 production per share increased 65%. Funds flow per share increased 50%, 2P reserves per share increased 34% and PDP reserves per share increased 70%. We believe these are the leading metrics in the industry and speak to substantial value creation for shareholders.

Importantly when considering per share metrics our leverage reduced considerably throughout the year with trailing net debt to funds from operations at the close of 2016 at 2.1 times versus 3 times at the close of 2015. This speaks to the powerful way our business model has progressed. Shareholders realized significant gains per share while the Company reduced financial leverage and continued towards generating positive free cash flow.

This is an exciting transition as we see the Company set up to increase profitability metrics with a strong balance sheet, a fully funded 2017 capital program and a significant production in funds growth laid out ahead.

Currently there is a fair bit of scrutiny on increasing costs within the service sector. There is no doubt that we are seeing pricing pressures but I want to elaborate on how this fits in with our level one policy. Our venders and suppliers are one of our seven stakeholders.

We strive to pay quickly and deal fairly with our service providers. We work to establish fair commercial relationships. All businesses need to be financially sustainable. We look to structure our service agreements to align common interests. This logic is why we are pursuing strategic long-term agreements with key vendors within our supply chain. We manage price risk and they secure stable work. These arrangements help fix costs and term of certain inputs. While increasing service costs would not be ideal we have taken the potential for a moderate cost escalation into account in our budgeting process and believe that our continuous pursuit of innovation and in proven efficiencies could outweigh pricing pressures. The bottom line is that we continue to operation from a position of financial strength.

Our economics continue to improve through our commitment to innovation. We see our business continuing to de-lever as we progress along our path of profitable growth and we see ourselves as being well on our way to cash flow self sufficiency.

I will now ask Susan to speak about our stakeholder philosophy.

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Susan Targett, Seven Generations Energy Ltd. - SVP [7]

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Thank you, Chris. For those that have followed the Seven Generations story you will know that stakeholder service is at the root of every decision we make. This pervades throughout our capital allocation decisions, our development plans, our community relations and our environmental impact.

Last year we participated in the carbon disclosure project recognizing our stakeholder's interest in environmental performance. It also provided an opportunity to have our performance measured by an independent party with a comparison to our peers. We pride ourselves on full open and honest disclosures and think that our stakeholders have the right to know about all of our activities.

We are pleased to report that we received a grade of B for our carbon disclosure. This places, us among others, in third place and among the top ten of the 64 Canadian Energy companies named in the CDP Canada climate change report for 2016.

To help advance public understanding and education on our environment we are sponsoring a public speaker series that features academics providing expert information on climate change. We held our first event in Grand Prairie and are planning other presentations that will feature balanced and open discourse on energy and the environment. At 7G, we are committed to differentiating ourselves in the eyes of our stakeholders through transparent dialogue and the responsible development of our energy resources.

Quickly touching on staffing. As we continue to grow we are adding staff selectively to ensure we have the people, resources and intellectual capital to support our growth. Through our hiring process we are committed to ensuring that all new hires understand that our level one policy is absolutely core to Seven Generations. For all of our staff this policy defines our service to stakeholders. We believe it differentiates Seven Generations.

Back to you, Marty.

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Marty Proctor, Seven Generations Energy Ltd. - President, COO [8]

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Thank you, Susan.

There were, obviously, a number of learnings for us in Q4. However, the basic value position still holds for Seven Generations. We are a high growth rate liquids-rich natural gas producer that has a significant inventory of some of the highest quality rock in the Montney. We have some of the lowest supply cost resource in North America which combined with our commitment to stakeholders service, market access and financial strength, continues to differentiate us. We have absolute faith in our ability to profitably grow and deliver on the commitments we have made to the market.

With that, I will now ask the Operator to open up the lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Your first question comes from Amir Arif, with Cormark Securities. Your line is open.

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Amir Arif, Cormark Securities - Analyst [2]

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Thanks. Good morning guys. Just a couple of quick questions. First, on your frac intent, you've really picked that up over the last couple quarters and I think you're even above your 2017 high intensity type curve. Is the impact of that showing up in the production numbers you're providing in your presentation yet in terms of the January IP 30s? Or is that yet to come in terms of when these wells are being completed?

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Pat Carlson, Seven Generations Energy Ltd. - CEO [3]

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Good morning Amir. Thank you for the question. I'm going to ask Glen Nevokshonoff to answer that one.

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Glen Nevokshonoff, Seven Generations Energy Ltd. - SVP, Operations [4]

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Thanks, Amir. No they haven't shown up yet in our IP 30s. We started some of those completions in late Q4 and turning some of those wells on in probably late Q1. We usually like to see six months of production before we publicly send anything out, but yes, everything is looking pretty positive from that point of view.

I guess I would like to emphasize in our budgeting process that we use a 28 stage 160 tonne type curve and most of our completions this year are 40 and 60 stage, 160 tonnes. So, when we're looking at guidance we're pretty comfortable in that 180,000 to 190,000 BOE per day range.

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Amir Arif, Cormark Securities - Analyst [5]

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Okay. Sounds good. Then just wanted to clarify the production outlook for the year. Did I hear you correctly in terms of the production is going to be fairly linear? So, could I take the 150,000 for the first quarter and just step it up in equal quarterly sequentially growth outside of the 5,000 bump in Q2 to get to the average? Is that fair.

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Pat Carlson, Seven Generations Energy Ltd. - CEO [6]

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Amir, as you know, we don't provide guidance that is that specific, but I think you are -- given last quarter owed an explanation of how we look at that. We deploy rigs and there's a response time of six months to a year from when we deploy the rigs to when we actually see the production bump from them. And mid last year we shut down several of our rigs. I think we got down to about five and we will be up to 13 by the end of the week. So we have been ramping up since mid Q4 and so we expect to see a response sort of six months later. So we should see fairly flat production with a climb in the latter two quarters of the year.

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Amir Arif, Cormark Securities - Analyst [7]

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Okay. So fairly flat through the first half or -- I know you talked about Q1 being about 150,000. I'm just trying to qualify or quantify what you mean when you talk about the production increase will be slightly moderated in Q2.

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Pat Carlson, Seven Generations Energy Ltd. - CEO [8]

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Yes. So we aren't going to have the high degree of growth in the front half of the year that we will have in the back half of the year. So there will be increasing growth towards the back half of the year. We do have a large rig fleet working now and we will start to see some of the benefits of it in Q2. But Q3 and Q4 will be more heavily weighted.

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Marty Proctor, Seven Generations Energy Ltd. - President, COO [9]

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If I can just add a comment there, too. I mean, Amir, you're kind of pushing us to provide more granular guidance than we had intended. The expectation is we're going to deliver the guidance for the year that we had originally budgeted and then reaffirmed recently with our strategic update. Our average will be 180,000 to 190,000 BOE per day for the year and will grow quarter by quarter. But just as Pat said, the delay in activity, or actually the slow down in activity, mid-2016 has impacted the first quarter here. And we have talked a little bit about the outage that we will have at the Pembina plant which is only one of several processing plants that we utilize. But that will restrain Q2 production a little but we still anticipate some significant growth for Q1. The big growth will come, though, in the second half of the year, as Pat said.

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Amir Arif, Cormark Securities - Analyst [10]

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Okay. appreciate the color. Thanks.

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Operator [11]

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Your next question comes from Patrick O'Rourke with AltaCorp Capital. Your line is open.

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Pat O'Rourke, AltaCorp Capital Inc. - Analyst [12]

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Good morning, guys. Just a couple of quick questions here. One, in terms of the reserve report saw fairly significant positive technical revisions. Assuming that's the engineers playing a bit of catch up on what you have achieved to date, just kind of curious where the engineer type curves sit relative to well, A, the type curves that you're assuming in your budgeting process and then, B, the type curves, or the well configurations, that you're actually drilling to right now. So, thus, is there still more room to go on those technical revisions next year?

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Pat Carlson, Seven Generations Energy Ltd. - CEO [13]

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Okay. Good morning. Patrick. Thank you for the question. I'm going to ask Chris Law to answer that one.

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Chris Law, Seven Generations Ltd. - CFO [14]

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Good morning, Patrick. Yes. So the type curve that they're using would be fairly consistent with our 28-160. That's the basis of the design on the reserve report for the Nest 2 type curve. And so we have capital, as we said in the budget as Glen said, for on average 36 to 40 stages in 2017. So our capital budget is significantly is, sorry Glenn?

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Glen Nevokshonoff, Seven Generations Energy Ltd. - SVP, Operations [15]

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Even up to 60.

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Chris Law, Seven Generations Ltd. - CFO [16]

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Even up to 60. On average, 36 to 40 throughout, with some 60 stages. So there's significantly more capital on our capital budget than what's been reflected in the year end reserve numbers from a design perspective.

And usually the reserve report is about a year behind of where we're actually at as far as production.

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Pat Carlson, Seven Generations Energy Ltd. - CEO [17]

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So, it's like last year. We're forecasting on the basis of a well established type curve (inaudible) where we have some history. That's the production forecast. But the capital forecast and the actual operations are a more aggressive well design. So we have -- If there are benefits from the more aggressive well design, which we hope there will be, they will show up in increments of production.

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Amir Arif, Cormark Securities - Analyst [18]

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Okay. Excellent. And then, second question. Just in terms of the diversification portfolio strategy on the gas marketing. Obviously, you have got a little more TCPL comes into play in future years relative to where it's been before. But just, you know we recently saw Chenier talking about sourcing Montney gas for their LNG export facilities. You guys have spent a lot of time talking about LNG but mostly with a tilt of looking to projects, sending it west. Are there opportunities within the marketing of your gas that make sense to maybe be sending it down to Gulf Coast LNG facilities and export right now?

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Pat Carlson, Seven Generations Energy Ltd. - CEO [19]

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We did announce that we have a contract in, I think, believe our last quarter announcement that we are delivering gas down to the Henry Hub area. But beyond that announcement we view the details of our marketing arrangements as commercially competitive factor that we don't think we're protecting our shareholders' interest if we disclose.

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Pat O'Rourke, AltaCorp Capital Inc. - Analyst [20]

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Okay. Thanks a lot, guys.

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Operator [21]

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(Operator Instructions). Your next question comes from Travis Wood with National Bank Financial. Your line is open.

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Travis Wood, National Bank Financial - Analyst [22]

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Thanks. I wanted today ask some questions around LNG, but it doesn't sound like you want to go down that path so I will save my breath there. What about the inflation? Chris, you mentioned some inflation built into the budget. What type of inflation rates should we be thinking about better within that 1.5 to 1.6?

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Pat Carlson, Seven Generations Energy Ltd. - CEO [23]

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First let me address the LNG issue, Travis, a little better than perhaps I did. We are, as Marty pointed out, aggressively pursuing markets with LNG and petrochemicals and gas replacement for coal (inaudible) power in Alberta. So we actually do have very active initiative going on in all of those areas, we just don't want to provide details that could compromise the competitive position on behalf of our shareholders. So with that, Chris, please answer the question on completion.

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Chris Law, Seven Generations Ltd. - CFO [24]

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Sure. So, yes. Thanks, Travis. The way that we account for it is a few ways. Number one as we said and I think everybody is fairly familiar, we use a, as we just mentioned, a design basis on the type curve that has a lot more cost and a lot more stages than the production because we're using it (inaudible) statistical dataset on the production side. We use a legacy dataset. So there's some conservatism built in which could be partially used by cost pressure, if that makes sense. We have got a lot more capital in than production. The other thing is we don't use, as Glen mentioned in his comments during the script portion, we don't use our known pay setter costs. We use something that's more conservative than that.

We have a lot of planned efficiencies that we're going to be able to execute on this year. And so part of that is that we don't take those efficiencies into account at all in our budgeting. And so the efficiencies plus the known performance on our pay setters could certainly partially or wholly offset cost inflation pressures in our capital budget. So that's the two specific ways in which we incorporate it.

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Travis Wood, National Bank Financial - Analyst [25]

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And, okay. And in terms of -- So unfair to ask kind of a generic kind of year-over-year change. I know your down in Q4 in terms of total kind of drill complete tie in costs but as we look out given services are getting a little bit tighter, how many service providers are you use on the drilling and completion side, and can you talk about which providers those are? And then softening that or can we think of it in the context of kind of 5% to 10% pressure on those prices just market based prices as we look out?

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Pat Carlson, Seven Generations Energy Ltd. - CEO [26]

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It's a good question actually, Travis. The response we would have is we actually have several drilling companies working with us and at the moment we're actually not seeing much pricing pressure on our day rates for the drilling. The one area of our business where we are seeing some pricing pressure, no pun intended, happens to be on the pressure pumping. There's been a lot more demand for pressure pumping services and a limited supply of available crews, really.

There's a lot of equipment out there, but they don't have enough men or enough workforce to get all that equipment back to work. So we are seeing a little bit higher pricing on the pressure pumping. But to put that into perspective, the pressure pumping is about CAD1 million a well, which on the total well cost if you just assume ten even though it was 9.3 in the fourth quarter, but if you call it ten it's around 10% of our well cost. Inflation of 5% to 10% on 10% of our well cost isn't a big number for us. So we think we're more than covered by the answers to your question that Chris provided.

And meanwhile, we are continuing to work on trying to reduce our costs in many ways through efficiencies and other relationships with some of our key service providers.

I think, Travis, the important thing the dominating factor in our drilling and completion costs over the last few years and we hope continuing into this year will be the innovation. Innovation has made huge gains for that we have talked about in our report earlier this year. Our strategy report. And so I think that's something that we still haven't seen the end of that.

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Travis Wood, National Bank Financial - Analyst [27]

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Okay. And are you able to share who you're using on the completion side at the moment?

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Glen Nevokshonoff, Seven Generations Energy Ltd. - SVP, Operations [28]

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Sure. We use a number of vendors, sorry, this is Glen speaking, in the past. Right now we're using Schlumberger and [TRICAN] currently in the field.

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Travis Wood, National Bank Financial - Analyst [29]

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Okay. Two more questions. There seems to be some confusion around kind of upcoming and ongoing option warrant and expiry and kind of how you guys are going to address that as we look out through of the rest of the year. Can you provide any color in terms of how you're thinking about that and how we can think about those upcoming expires?

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Pat Carlson, Seven Generations Energy Ltd. - CEO [30]

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Sure, Travis. It's Pat. There are still a portion of my original warrants that came from the gain sharing that came from founding the Company in 2008 that have not been exercised and they will expire in May. There's provisions that we have disclosed in our agreements where if we're in a blackout period that gets extended but under normal circumstances we would expect those to expire in May. So those will have to be exercised. Before December I had more than half of that amount that was expiring in May and a large proportion of them were exercised in December. So we have some outstanding. I can't remember the number, but it's probably less than half the number going into December.

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Travis Wood, National Bank Financial - Analyst [31]

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Okay. And then will that conclude this rolling founding share expiries?

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Pat Carlson, Seven Generations Energy Ltd. - CEO [32]

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Well, we do have options and performance share units and reserve share units as well as director share units that are all part of our compensation program and have been since the IPO and they have a limited period before they expire, too. So there's kind of a profile of expiring stock based incentives that's fully disclosed in our information that will result in expiries and pressure from the holders of those equity's to liquidate on an ongoing basis, but I think it's a relatively small amount.

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Travis Wood, National Bank Financial - Analyst [33]

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Okay. Okay. That's all. Thank you, very much, guys.

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Operator [34]

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Your next question comes from David (inaudible) with Credit Suisse. Your line is open.

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David Phung, Credit Suisse Securities - Analyst [35]

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Thanks, good morning everyone. Just going back to the production profiles. You know, the first half is relatively flat. That implies a ramp-up in the second half. Can you remind us what you're takeaway capacity is moving into the second half of this year? And if the timing of your production does slip further for whatever reason into Q3, are you at risk of running out of takeaway capacity and are you willing in that scenario to take more to meet 2017 guidance? Thanks.

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Pat Carlson, Seven Generations Energy Ltd. - CEO [36]

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Great question, David. Thank you. And just to kind of clarify our first half production is not flat so our Q4 and Q3 were both around 132,000 BOE per day. We're anticipating Q1 to be about 150,000 BOE per day and Q2 will be higher than that. We're trying not to get too granular on it but we are anticipating some of these very large inventory of wells that we had in process as we announced with release this morning, we have 84 wells between drilling and tie-in plus we're drilling with 12 drilling rigs at the moment 13 within the next week. We have a lot of activity under way that will be contributing production in the second quarter and even more so in the third and fourth quarters. So we do. As I had said a built earlier we do anticipate some growth quarter to quarter.

We are firm in our resolution and our commitment to deliver the annual guidance that we have talked about 180,000 to 190,000 BOE per day. With respect to processing capacity, we have ample processing capacity. In fact with the construction of our two new gas plants late in 2015 and early in 2016, we have 510 million cubic feet per day of processing capacity at our own plants, plus we have processing agreements with Pembina at their Cut Bank complex. So, adequate processing capacity to take us well into 2018 in fact with these aggressive growth plans that we still have in front of us.

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David Phung, Credit Suisse Securities - Analyst [37]

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Okay. Thanks.

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Pat Carlson, Seven Generations Energy Ltd. - CEO [38]

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Thank you, David. Good question.

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Operator [39]

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

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Brian Newmarch, Seven Generations Energy Ltd. - VP, Capital Markets [40]

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Thank you, everyone, for taking the time to dial into our quarterly call and for your interest in our story. Please don't hesitate to reach out to any one of us if you have any further questions. Our contact information is available on our website, www.7genergy.com. Thanks.

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Operator [41]

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This concludes today's conference call. You may now disconnect.