Cavvy Energy Ltd. (CVVY) Earnings Call Transcript

Thank you. Good day and welcome to the Pieridae Energy Q2 2026 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce Vice President, Corporate Finance, Dallas McConnell.

Thanks, Andrew, and good morning to everyone. I would like to welcome you to Pieridae Energy's second quarter 2026 conference call. With me today are President and Chief Executive Officer Darcy Reding, Chief Financial Officer Adam Gray, Chief Operating Officer John Emery, and Chief Commercial Officer Paul Kunkel. Darcy and Adam will begin today with a review of our operating and financial results and certain other company developments. Following their prepared remarks, we will turn the call back to the conference coordinator for questions over the phone and then I will facilitate questions over the webcast. Before Darcy begins, I would like to remind you that our remarks today will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the reports filed by Pieridae with the Canadian securities regulators on sedarplus.ca. With that, I will now turn the call over to our President and CEO, Darcy Reding, who will provide more detail on our performance in the quarter along with recent developments.

Thank you, Dallas. We appreciate everyone's interest in Pieridae Energy. We are pleased to speak today to our second quarter financial and operating results, a quarter where we've made material progress on our corporate objectives while validating that our corporate strategy remains appropriate for delivering shareholder value. I'd like to take a moment to remind everyone of the 3 differentiating characteristics of our business. First are upstream assets. This long-life, low-decline production provides a reliable reserves base requiring relatively small amounts of capital to sustain. Although our upstream hydrocarbon production is approximately 80% natural gas weighted, our 20% stream of hydrocarbon liquids provides meaningful cash flow and has offset the low natural gas prices in Western Canada over most of the past several years. Our upstream assets come with an extensive inventory of impactful drilling upside, providing opportunities for meaningful growth under appropriate commodity price cycles and economic conditions. Second, our midstream business. With our ownership in 3 high-liquids recovery gas plants, with capacity to accommodate both sweet and sour customer production, we've grown both the volume and, more importantly, the revenue derived from processing other operators' volumes. These midstream revenues are largely protected from commodity price swings, providing a measure of cash flow certainty through volatile markets. Thirdly, and arguably most importantly through the first half of 2026, Pieridae's sulfur production, once considered a byproduct of sour natural gas processing, is significant in both volume and its lucrative impact on cash flow. Sulfur pricing continued its historic run through the second quarter, and the value of our position as a material Canadian sulfur producer is clearly visible in our results. Adam and I will elaborate on the positive impacts of our sulfur business later in this discussion. We believe Pieridae's midstream business and exposure to the sulfur market provide unique opportunities for shareholders and differentiate us from our competitors, reinforcing the benefits of our diversified revenue streams. These differentiators supplement our upstream hydrocarbon business, which in itself includes over 300 identified drilling opportunities, primarily within the conventional reservoirs of the Canadian Foothills region. Pieridae's share ownership continues to benefit from the supportive ownership of our largest institutional shareholder. AIMCo's ownership remains unchanged from the previous quarter at 44%, with another 13% owned by other known institutional shareholders and insiders, leaving 43% of our shares owned by others to provide investor liquidity. We are very pleased with our share price performance. We believe in our commitment to operational excellence, risk management, and our relentless focus on debt reduction. These efforts, along with our work to communicate and execute a clear, forward-looking strategy, have resonated well with our investors. Recognizing our excellent results over the first half of the year, we increased our 2026 guidance, which Adam will provide greater detail on later in our presentation. So far this year, we have benefited from strong sulfur pricing, recently exceeding $1,000 per metric ton, largely driven by the ongoing tensions in the Middle East. The continuing success of our midstream business means we now expect well in excess of $40 million in revenue generated from third-party processing and other services during the year. Our strong cash flow has created an opportunity to repay up to $75 million of long-term debt in 2026, already significantly bettering our original guidance and providing a runway to achieve our revised debt guidance of $75 million to $85 million by year-end. Debt reduction was and remains a key focus in 2026. We believe that by delivering on our revised debt and other guidance, we will continue to build credibility and earn additional trust from our investors. We believe this will help to expand our trading multiples to levels at least comparable with, ultimately exceeding our competitors. As I've spoken about in previous quarterly results calls, we are proud of the Pieridae team's accomplishments thus far. We've successfully repositioned the company as an important Canadian upstream and midstream energy company. We are now expanding our focus to include the transition into the second phase of our corporate strategy. Phase 2 spotlights value-accretive growth opportunities while maintaining our achievements of the past. While Phase 2 of our strategy emphasizes growth, we will not lose our focus on our core business. Low Western Canadian natural gas prices have kept our sweet, dry gas in Northeast British Columbia shut in due to poor economics since Q1. In addition, our West Central Alberta dry sour gas that is contractually dedicated to a third-party-owned facility until the end of 2027 has also remained shut in continuously for over 2 years due to the gas plant owner's high flow-through processing fees and poor production economics. These shut-in assets represent additional opportunities within our base business and we continue to work hard to extract shareholder value from them. While the assets in British Columbia simply need better gas pricing to justify reactivation, the run-up in sulfur pricing has enhanced the economics for producing our West Central Alberta shut-in volumes. While operational and commercial hurdles remain, Pieridae is working diligently to resolve these challenges. We are optimistic there is a path to successfully resuming production from this area, but Pieridae is unable to provide any commitments to that outcome or when it may occur. The primary objectives for Phase 2 include successfully developing our drilling and other organic opportunities, executing accretive M&A, and utilizing our significant infrastructure ownership to create partnerships for power generation, data center construction, or other industrial businesses that can bolt on to our core business. These opportunities will attract more of our attention going forward. In summary, I am confident that Pieridae has several compelling catalysts that will continue to provide value growth opportunities for our shareholders, and our team is excited to showcase them in due course. Moving now to the highlights of our second quarter financial and operating results, as previously mentioned, we are extremely pleased. Net operating income generated in the quarter was near $50 million, with the $43 million of pre-royalty sulfur revenue, which is inclusive of our 2026 sulfur hedging arrangement, substantially contributing. Our Q2 production of approximately 21,500 BOE per day and 984 metric tons per day of sulfur was inclusive of the scheduled downtime at Waterton that was factored into our original guidance, necessitated by TC Energy's scheduled maintenance activity on the sales gas pipeline system. Adam will provide additional information on our Waterton gas plant operations in a few moments. The growth in our midstream business continued in the quarter with nearly 152 million cubic feet per day of third-party raw gas volumes processed, delivering 26% revenue growth versus the same quarter in 2025. What I consider the primary highlight of many highlights in the quarter, we were successful in reducing our total debt by nearly $40 million, a new quarterly record. As a result, our total debt at the end of the second quarter is $87 million, bettering our original guidance significantly and providing the basis for our revised total debt guidance of $75 million to $85 million. As our second quarter and first half results clearly show, the unprecedented run-up in the global sulfur price has contributed materially to Pieridae's success. I'd like to spend a moment on this topic given its obvious importance to our business. As of the end of Q2, Pieridae is halfway through the 1-year sulfur pricing agreement applicable to calendar year 2026. This contract provides the company with the means to sell one-third of its sulfur production at Vancouver FOB pricing. As we've elaborated on in past communications, Pieridae entered an arrangement in 2022 whereby our sulfur marketer is entitled to the physical purchase of all of our sulfur at Vancouver FOB pricing. This arrangement is anticipated to remain in place until the end of calendar 2029, assuming the conditions for a 1-year extension are met in 2028. Revenue from sulfur sales has obviously contributed significantly to the company's success this year. In Pieridae's July 31st news release, we provided information on our new 2027 sulfur agreement with our marketer. Pieridae will sell 200,000 metric tons, or approximately 50% of our anticipated 2027 sulfur production, at a fixed price of $525 per metric ton. Any sales above 200,000 metric tons prorated monthly will remain exposed to Vancouver FOB pricing. Under this arrangement, Pieridae has locked in over $100 million of 2027 net revenue after deductions and after royalties, providing significant cash flow certainty at a time when our remaining natural gas hedges will completely roll off as of May 31, 2027. Additional revenues in 2027 will be derived from the remaining sulfur production sold at spot price, our hydrocarbon sales, and of course, midstream services business. We are pleased that the agreed upon fixed price for half of our 2027 sulfur production exceeds the trailing Vancouver FOB price at any time in recent history up until the start of the Middle East conflict in Q1 '26. The spot Vancouver FOB price has increased to above $1,000 per metric ton during the conflict. We are aware of reports of demand destruction at current spot prices from our market research. Significant restriction of sulfur movement from Middle East sources has disrupted global sulfur markets, similar to many other commodities. The 2027 agreement was negotiated over the course of several months, and although we are uncertain how long the current spike in sulfur prices will last, we are pleased with our ability to lock in a portion of our sulfur at a price that provides cash flow certainty and helps deliver our 2027 and longer-term corporate objectives. Additional sulfur volumes above the commercial commitment of this 2027 agreement remain exposed to the Vancouver FOB spot price, providing an opportunity to meaningfully participate in the market if sulfur pricing maintains its historic run. I'd like to now give the floor to Adam Gray, Chief Financial Officer, to provide details on our second quarter results and insights into our revised guidance.

Thank you, Darcy. I'll begin this morning with some specifics on our quarterly operational and financial results, then get into debt retirement, our 2026 refinancing plans and finish with commentary on our guidance revisions. Turning now to our operating results for the quarter, as Darcy mentioned, we produced just under 21,500 BOE per day with production weighted approximately 80% to natural gas and 20% to liquids and produced 984 tons per day of sulfur. The quarter was impacted as we expected by 24 days of downtime at Waterton. The Waterton team utilized this downtime to complete several projects which we anticipate will defer the next major turnaround from 2028 to 2029 and shorten its duration. Unfortunately, after a successful restart on July 1, a low-pressure acid gas knockout vessel critical to sulfur recovery developed a crack which obligated us to immediately take the Waterton gas plant back down for a secondary repair. While not a complex vessel, our obligation to obtain regulator approval for the repair means this outage is expected to last approximately 4 weeks. While not a particularly expensive fix, the unexpected outage will have a modest impact on our expected Q3 results. On the midstream side, third-party processing continued to perform very well during Q2. We grew third-party volumes by 27% and revenues by 26% compared to Q2 of last year. And in total, we processed 152 million cubic feet a day of raw gas during the quarter. This is down approximately 3% from Q1 of this year due to maintenance work we conducted at the Moose Mountain Compressor Station, which feeds gas into our Jumping Pound facility, and also due to some Caroline reliability issues as we approached the turnaround. We were pleased to sign a gas handling agreement extension with 1 of our key customers during the quarter who flows into both Caroline and Jumping Pound through to mid-year 2027, adding over 10% to our annualized processing fee revenue. Operating costs were stable during the quarter at $43.7 million or $22.32 per Pieridae-owned BOE, with some impact from higher non-operated processing fees, carbon costs, and maintenance costs during the quarter. Despite the Waterton downtime, the quarter again demonstrated the value of Pieridae's diversified operating model with the combination of strong sulfur pricing and disciplined balance sheet management resulting in another quarter of substantial cash flow. Net operating income totaled just under $50 million, up 87% from the second quarter of 2025, while funds flow from operations came in at just under $42 million, up 189% year over year. Operating netback, which is the per BOE metric which is most important to our business because it encompasses all our revenue streams, was a record $25.38 per BOE, more than double the level achieved last year. Realized hedge-adjusted pricing for the quarter came in at $2.81 per GJ for gas versus an average market price of $1.52 per GJ. We realized CAD 102.86 per barrel for condensate versus an average market price of CAD 129.70 per barrel and CAD 478 per ton for sulfur versus an average market price of CAD 877 per ton. A quick note on these quoted sulfur prices. They reflect the net price we received after transportation and handling deductions. They also reflect a 1-month pricing lag because under the terms of our agreement, we are paid based on the prior month average Vancouver FOB price. So in periods of rapid price escalation, there is a delay in our realized price results. This reverses in periods of price decline. As expected, royalty expense was substantially higher during the quarter at $88.2 million or $4.18 per BOE, primarily due to higher sulfur and liquids pricing. I'll remind investors that we pay Crown sulfur royalties on the basis of actual realized Pieridae sulfur price at a rate of 16.67%. I'll make a brief comment here on our tax pools, which we haven't discussed much historically, but as our strategy becomes established and cash flows continue to strengthen, will become more important. At the end of the quarter, we held approximately $542 million of aggregate tax pools, which translate to a future tax asset on our balance sheet of just under $80 million. These pools are expected to provide meaningful multi-year tax shelter as cash flows continue to strengthen. Turning now to debt reduction, as Darcy mentioned, we are very pleased that we were able to repay over $39 million of senior debt during Q2, exceeding our previous quarterly record repayment established in Q1. The total amount of debt repaid so far in the year is $76.5 million, leaving our remaining principal at $86.8 million. We have achieved more debt reduction now than contemplated in our original full-year guidance on both strong business results and the receipt of our second half sulfur prepayment on June 29th, allowing us to make a substantial payment on June 30th. The prepayment structure built into our 2026 and 2027 sulfur price agreements is a valuable balance sheet management tool, allowing us to retire debt earlier and save debt service costs. I'll speak further on our debt retirement guidance on the next slide, but wanted to discuss debt maturities because I expect this will be an area of investor interest. Our current outlook suggests we have a realistic path to repay our existing facilities as they mature in 2027. That is a materially different position versus where this company stood just a couple years ago. Existing debt matures in 2 tranches. The first, totaling $39 million, matures in March 2027 and has no repayment penalty. And the second, totaling $48 million, matures in September 2027 and has full economic make-whole provisions. While repaying our existing facilities as they become due is an option, management's objective is to optimize the balance sheet. So we continue to pursue a refinancing initiative that I expect to advance during the fall. Our goal remains unchanged, which are to lower the cost of debt, increase credit flexibility, liquidity capacity all towards a capital structure that appropriately reflects the strength and diversification of Pieridae's business. The 2027 sulfur pricing agreement recently announced, which Darcy previously discussed, was an important milestone in advancing those conversations as we seek to balance de-risking 2027 cash flow with maintaining market pricing exposure for our products. Note that the timing and quantum of the 2027 sulfur prepayments are particularly impactful. Okay, I'll now turn to revised guidance. As I believe was widely expected, we've increased 2026 net operating income guidance to a revised range of $170 million to $180 million, up approximately 30% from $125 million to $140 million previously. At the same time we've reduced the upper range of our hydrocarbon and sulfur production guidance modestly to reflect the unexpected downtime in Waterton as I discussed. Two important takeaways from rising cash flow expectations with lower production expectations are that revenue diversification is increasingly impactful, and also the importance of facility reliability on all of our revenue streams. Reliability is a key performance metric for this business and is embedded in our corporate and personal performance targets. Turning to capital, we have increased our capital guidance by approximately $17 million from a range of $35 million to $40 million to a revised range of $52 million to $57 million. This increase comes from several initiatives, which I'll unpack a bit. First, we've increased our allocation of capital to our ongoing field and facility optimization program by a further $7 million. This program is in its third year and continues to fund very high IRR projects across a range of initiatives targeting increased production or third-party revenues, lower operating expense, and increased facility reliability. We have been positively surprised by the idea generation from our teams and believe opportunities of this type, which achieve IRRs north of 100%, remain plentiful. Secondly, we've increased capital maintenance guidance by $6 million, primarily to reflect an increase in the planned scope and slightly higher expected costs that are currently underway for the major Caroline turnaround, and also for the capital maintenance completed during the June Waterton outage. Finally, we've added a further $4 million in diverse expenditures across a range of other capital needs and opportunities. I want to highlight that a meaningful portion of this capital increase represents productive capital that generates attractive returns. Given our current cash flow outlook, I'm comfortable slightly taking our foot off the debt repayment gas pedal in order to fund these opportunities from internally generated cash flow. To that end, you'll note that our debt retirement guidance has also been revised with total debt now expected to end the year at $75 million to $85 million, down 32% from our original guidance. I expect debt retirement to slow meaningfully during the second half of 2026, but then aggressively reaccelerate in the first quarter of 2027. A few comments on hedging and our outlook. For the remainder of 2026, we have approximately 66.7 thousand GJ per day of natural gas hedged at an average fixed price of $3.40 per GJ, and approximately 1,480 barrels per day of condensate hedged with an average floor price of approximately $85.71 per barrel. Overall, about 53% of our midpoint hydrocarbon production guidance remains hedged. AECO is clearly not trading at the support of adding any additional hedges, but as discussed, we now have 200,000 tons of sulfur production hedged for 2027 at $525 per ton, adding material cash flow support for next year. We believe this transaction exemplifies our broader philosophy around risk management, which is to protect meaningful cash flow when opportunities exist to do so, while also maintaining exposure to the upside. Looking forward, both the Waterton repair and Caroline turnaround are currently ongoing, and the Pieridae team will be very pleased when both these activities are successfully behind us and these facilities return to production. Based on what we know today, we expect Waterton to come back online mid-next week and Caroline operations to resume on schedule in early September. Overall, we're extremely pleased with the progress made this year with record cash flow, record debt reduction, improved guidance, a strengthened balance sheet, and continuing to invest in reliability and future growth. Thank you for your time today. I'll turn the call back to Dallas for your questions.

Thanks, Adam and Darcy. I'm going to ask the operator, Andrew, if he has any questions on the telephone side of the conference.

Certainly. [Operator Instructions] And we do have a question. Our question comes from the line of Adam Gill with Ventum Financial.

Hey, good morning, gentlemen. Two questions for me. First off, on the Ram River facility, there's been some scuttle out there of potentially starting up. Heck, I even saw a job posting for the facility. Is there any kind of timeline that you can set for potentially the Ram River facility coming back online and you guys producing into it?

Good morning, Adam. Thanks for the call. Darcy here. The short answer is I did address that in the scripted comments that I had. There is no specific timeline or expectation around when or even if those volumes will come on stream. Obviously, we're not responsible for anything that may come out of a third party with respect to the plans there. And so while we are aware of likely many of the things that you're aware of in terms of communication that's sort of out there, that's not coming from us and we just can't comment on what another party does.

Fair enough. Second question is just on turnarounds. Obviously this year a major turnaround at Caroline, a turnaround at Waterton. As you kind of plan for 2027, what should we expect for turnaround activity?

Adam, it's Adam here. For 2027 at the moment we have a planned turnaround at our Jumping Pound facility. We expect that to happen in the third quarter. Although we haven't worked the specifics on scope or cost and exact timing of that yet. That's the only event we're aware of at this time.

Okay, thanks for taking my question. Thanks, Adam. Thanks.

I'm showing no further questions on the phone lines.

Thank you. We have several questions on the webcast. So what I'll do is I'll read the question and then direct it to 1 of my colleagues to answer each of these questions. So the first, can you expand on the type of projects that you are executing with the incremental $6.8 million of optimization capital? Facility debottleneck, production restart, field compression, etc., and the kind of returns that you anticipate from these projects?

Hi, John Emery, COO. Yes, you've actually listed a good percentage of the projects that we've got on the books. A lot of them are like facility debottlenecks and also resizing of equipment for fuel gas savings, ESG savings. The returns are typically fairly strong. I'd hate to give a number off the top of my head, but certainly well worth pursuing in light of our debt situation. They're much better than servicing debt. So, yes, we've got a number of projects on the books. Some of them are short-term returns, and some of them are bigger projects that are going to last for 2 to 3 years.

So lots of good things on the horizon for us. We have an internal hurdle rate of around 100% IRR on these. There are some projects that are a little lower if they're a longer-term project, but our average return is well north of 100% so far.

Okay, next, this has been touched on, but I think there's an additional angle here. With respect to Pieridae's optimal capital structure, do you intend to repay all debt outstanding, likely by the second half of 2027, or do you intend to refinance some of your outstanding debt and maintain a certain level of debt on the balance sheet? If so, can you please opine on the level of debt that you intend to maintain?

Yes, that's a good question. That is a very useful tool in every business, and we, of course, intend to use it in the future. What I'd like to do is see more flexibility in our debt. So moving into some kind of a revolver or similar instrument where we can draw the debt when either turnarounds or opportunities to invest present themselves and then repay it at other times. I'd like to get rid of the amortizing and subordinated debt and move into a more flexible structure, but certainly that will continue to be a tool that we use.