Mar 8, 2023
Good morning, and welcome to the Pipestone Energy Corp. Q4 2022 financial results, 2023 Guidance and Shareholder Returns Update Conference Call.
[Operator Instructions]. As a reminder, this call is being recorded.
I would now like to introduce your host for today's conference, Dan van Kessel, Vice President, Corporate Development. You may begin.
Dan van Kessel
Thanks. 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 an update to Pipestone 2023 guidance; Craig will follow with an overview of our Q4 2022 financial results; and Dustin will provide an update on Pipestone's operations.
I will provide a brief update on the Canadian condensate market. 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.
Thanks, Dan. Listeners should be advised that some of our remarks today will contain forward-looking statements within the meaning of applicable security laws.
I refer you to our advisories regarding forward-looking statements, non-GAAP financial measurements and capital management measures in today's press release and in our Q4 2022 MD&A. 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 an update on Pipestone strategic progress.
Good morning. I'm very pleased to announce our record Q4 '22 production results of 33,816 BOEs a day and record full year production results of 31,090 BOEs per day, which was in line with our previously announced 2022 production guidance of 31,000 to 33,000 BOEs per day.
When Pipestone, as a public entity was formed in January 2019, we articulated a clear business plan to investors. The plan was to organically grow the business quickly and efficiently to a meaningful production plateau, such as that the company could generate significant free cash flow.
Since January 2019, Pipestone has grown its production from 1,500 BOEs per day to 33,816 in the fourth quarter of 2022. This represents more than a twentyfold increase with an annual average production growth CAGR of -- from 2019 to 2022 of 87%.
Our 2023 production guidance of 34,000 to 36,000 BOEs per day, and capital spending guidance of $245 million to $265 million remains consistent as previously announced in November 2022. However, as a result of the reduction in commodity prices in recent months, Pipestone's 2023 guidance and 2024 outlook pricing had moderated using a USD 80 WTI and $3 AECO price deck, resulting in a reduction of the company's projected cash flow and free cash flow.
After-tax cash flow guidance for '23 has been reduced from a midpoint of $415 million in our previous guidance to a midpoint of $340 million in today's updated guidance, which results in free cash flow of $85 million at the midpoint, down from our previous guidance free cash flow midpoint of $150 million. As we approach our run rate net debt target of $100 million in 2023, we remain committed to return the majority of our free cash flow back to investors.
In that light, and as previously announced, the company's inaugural $0.03 per common share quarterly dividend will be paid on March 31, 2023. The quarterly base dividend represents approximately $32 million out of our 2023 forecasted free cash flow.
We believe our current share price does not reflect the fair value of the Pipestone asset. And as such, in addition to the base quarterly dividend, Pipestone expects to allocate a substantial portion of its future free cash flow to share buybacks.
With respect to our previously announced intention to launch a substantial issuer bid, Pipestone expects to provide an update to investors in the near term. I'll now hand it over to Craig to provide an overview of our Q4 '22 financial results.
Thanks Paul. As a result of the record production volumes achieved in 2022 and the improved commodity price environment, Pipestone achieved record annual revenue in 2022 of $723.8 million and began its transition from being a high-growth, but consumer capital to a more moderating growth profile and a generator of free cash flow.
In 2022, Pipestone realized $137.2 million of free cash flow and initiated shareholder return commitment by buying back 8,649,000 shares under its inaugural NCIB for $39.3 million. Pipestone has also significantly delevered its balance sheet in 2022 and exited '22 with net debt of $117.4 million, which represents a material 35% reduction from a September 30, '22, net debt balance of $180.2 million.
The company's net debt to annualized trailing quarter adjusted funds flow from operations ratio at December 31, '22, is 0.3x, which demonstrates the strength of Pipestone's current financial position. Specific to the fourth quarter results, Pipestone generated revenue of $185.4 million, which represents a $48.1 million or a 25% increase from Q4 '21, revenue of $137.3 million and an $11 million or 6% sequential increase from Q3 '22 revenue.
Adjusted free funds flow from operations during the fourth quarter were $99.7 million or $0.36 per share basic and diluted, representing an increase of 69% from its Q4 '21 adjusted funds flow from operations of $58.9 million and a $13.2 million or 15% sequential increase from Q3 '22 adjusted funds flow from operations of $86.5 million. After $29.6 million in capital expenditures in Q4, this results in a record quarterly free cash flow of $70.1 million or $0.25 per fully diluted common share.
From a returns perspective, the company continued to generate strong returns on invested capital with Q4 '22 annualized ROCE and CROIC of 28% and 33.8%, respectively, as compared to Q4 '21 annualized ROCE and CROIC of 26.1% and 28%, respectively. I'll now hand it over to Dustin to provide an operations update.
Thanks, Craig. Operations [indiscernible] very well, as evidenced by the 34% growth in proved developed producing reserves in our recent 2022 year-end reserve release, with the associated finding and development cost at $10.16 per BOE, demonstrating our strong capital efficiency.
Production volumes have also been very good for the first two months of 2023, averaging 34,500 BOEs per day. In late February, Pipestone began drilling on its Eastern delineation path with the first of two new wells now being released and the second well .
These wells are the first wells drilled south of the Wapiti River and are the Eastern most wells drilled on the assets in 2018. The first well on this pad was drilled to a total depth in approximately 13 days with the entire 4,400-meter lateral section drilled in a single bit run.
Completions are set to begin immediately after rig release of the second well, followed by extended flow tests. Pipestone plans to build and install a new gathering pipeline this summer to tie the battery.
On the recently completed 6 well pad at , flowback operations began in late February. After 7 days of flowback, the average rate of all 6 wells is meeting type expectations at approximately 3.6 million cubic feet per day of raw gas and 480 barrels per day of condensate, equating to a condensate gas ratio of 133 barrels per million cubic feet.
Completion operations have also begun on 4 wells recently drilled at the pad with the second set of 4 wells at the pads slated to commence shortly thereafter. By April 2023, Pipestone will have increased its producing well count by 14 since the start of the year.
I'll now hand it over to Dan for an update on the Canadian condensate market over the past quarter.
Dan van Kessel
Thanks, Dustin. Over the past quarter, we have witnessed among the strongest ever pricing period for Edmonton condensate relative to WTI.
Over the course of Q1 2023, Edmonton condensate has traded between a USD 3 and USD 6 per barrel premium to WTI, with premium pricing persisting on a forward physical basis at least into April of this year. Since 2019, in situ oil sands production has grown by between 200,000 and 250,000 barrels per day, increasing the demand for condensate by more than 50,000 barrels per day.
While Western Canadian condensate production has continued to grow, the rate of growth has slowed meaningly, resulting in increased reliance on imports from the United States, which supports strong relative pricing. Pipestone has increased its condensate production from virtually nothing in 2019 to approximately 10,000 barrels per day currently, allowing us to capitalize on the improving market dynamics for condensate in Western Canada.
I'll now turn it over to Paul to conclude the call.
Thanks, Dan. Thanks, everyone, for listening today.
And with that, I'll turn it over to the operator for Q&A.
[Operator Instructions]. Our first question will be coming from Luke Davis of RBC.
I think it's pretty clear the talk reflecting fundamental value. So buybacks likely make a lot of sense in terms of just for your free cash.
And I know you'll be providing an update specific to this at a later date, but can you just speak to your current thinking on the NCIB versus an SIB? And I'm just curious what benefits in SIB would have?
And whether the thinking is just that you expect to maximize your NCIB allotment and want to do more than that? Or is there something else at play there?
Luke, it's Craig. Yes, I mean, those are good questions.
I mean our disclosures are up to date. And at this time, we still intend to launch an SIB in '23.
And we have said we're going to give an update, as you indicated in the near term. So that's our initial plan as it stands today for buying back shares.
And I think the ability to purchase a large volume in a short period of time is the main driver to that today. As you noted, we have an NCIB in place that is, at this stage, untapped, which we can also utilize in '23 as cash flow allows.
So those are both on the table. But at this stage, the substantial issuer bid is our first course.
[Operator Instructions]. Our next question will be coming from Joseph Schachter of Schachter Energy Research.
Congratulations on a good year. [indiscernible] Can you hear me?
Yes, we can hear you now, Josef.
Okay. So you guys have done a great job at the pay down debt, increased volumes, Canadian dollar helps a lot.
A number of comments that I've heard where people say, why they see it as cheap. One of them would be the technical revisions.
You had for the PDP side, a small [indiscernible], but on the proved side, 26 million barrels. And when you go to probable another 38 million, a total of 65 million barrels.
Can you walk me through what's going on there? And is there something where the tight curves aren't coming through?
And is this something that you see as problematic going forward?
Josef, this is Dustin. I'll take this one.
I think back in November, we talked about this a little bit. As we've delineated our land base to the East, we've kind of remind our type curves and that was reflected in the year-end reserve results, specifically on the 2P numbers.
So what we've done is essentially increased our future well count or undrilled well count into what we call our VRGC 1 type curve, which is in our corporate deck. Still a very robust type curve, just moderately less liquids than some of the tight curves we had booked last year.
So really, it's just a re-binning, but the overall tight curve recon in this asset is extremely robust.
Okay. And you did have $33 million from extension.
So it's not all bad, but that one is a bit of a surprise in the numbers. Going with the second issue is the preferred with all the convertible coming at you.
Is there still an overhang? Or is that suddenly a perception from the preferred conversion?
So Josef, this is Craig. I'll take that one.
So the preferred conversion was basically our two largest shareholders, held through various entities that they're associated with either directly or indirectly. So that's Riverstone, which owns 38% of our stock post conversion of our common stock.
And then of the United States through several different entities that owns another sort of 17%, 18%. So those entities hold the stock.
They're long-term holders. They're representatives.
Everyone knows on our board. They believe in the story.
So when you use the word overhang, whatever the overhang has been with that tightly float is the same one that exists. I don't think it was exasperated by the conversion of the pref shares.
So none of the holders of the pref shares are changing their position today on the long-term viability of the company.
You haven't activated NCIB. Is it because you have to wait for these results to come out, and now you can start activating it?
It's a technical issue under securities laws, Josef, that because we've announced the intention of the SIB. So either until we completed the SIB, we're actually not allowed to utilize our in-place NCIB.
So the NCIB is in-place and can be utilized later in the year, but we first have to deal with the substantial issuer bid under security laws.
Okay. Lastly, trade at 1.5x cash flow.
A lot of your peers are in the 2 to 3x cash flow. I know there's concern about the price of natural gas and a lot of the stocks have been pulled back.
Can you enlighten me if there's anything else that seems to be bothering it? Because it's almost like you want to go out there and say, this is a table currently buy, and you're just wondering what are you missing?
Yes, I think there's probably still some hangover from a modest shift in strategy in the fall where we went to a more exaggerated or elevated shareholder return strategy versus the 25% to 30% growth we've been seeing over the previous few years compounded at 87% since the start. So there's probably still some trailing, I guess, uncertainty about that, can't really offer a lot more than that.
I'm not sure if we trade at 1.5x cash flow. I think we're guiding to $300 million plus or minus...
Dan van Kessel
Yes. At current pricing, we would be trading in and around 2.7, 2.8x on our updated guidance that we posted this morning.
Yes. And if you're willing to assume these commodity prices of $3 AECO are going to be $5 and you plug in an which is what I've got, you end up with a lot more cash flow, which gets that ratio.
Oh, yes, for sure. Because lot of torque here.
And I think the other thing that we're really pleased, obviously, with is deleveraging the balance sheet puts us in a position to really capitalize on that future cash flow that could be coming at higher prices. So yes, the business is strong.
We're active in the field. Everything on our front is going according to plan.
So I wish I had...
One last for me if I can sneak it in, are there any issues with facilities where you're bringing on new gas? Is there any delays that might happen to meet your production profiles that you've got in your outlook here?
I'll take that one, Josef. I mean we've got 2 months in the bag now at 34,500 and more rigging inside the range of the guidance for full year.
So we're feeling very comfortable that 2023 should be in good shape. As I also mentioned, we're going to have 14 new wells here brought on production by the end of April.
So shouldn't be any reason you shouldn't see us meeting that guidance.
Congratulation, you can control. It's a very, very attractive situation as an investor.
And hopefully, with the SIB and the dividends and more dividend allocation going forward, the market will be more rational.
[Operator Instructions]. And at this time, there are no more questions in the queue.
Now I would like to turn the call back over to Paul Wanklyn for closing remarks. Please go ahead.
Well, again, thank you all for dialing in this morning and listening to the call and look forward to our next update in a couple of months. Thank you all.
Thank you for joining today's conference call. This is your conclusion.
Thank you all for joining, and have a great day. You may now disconnect.