Advantage Energy Ltd. (AAV) Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the Advantage Energy Limited Third Quarter 2026 Results Conference Call. [Operator Instructions] This call is being recorded on Friday, October 30, 2026. I would now like to turn the conference over to Brian Bagnell. Please go ahead.

Thank you, Joanna, and welcome, everyone, to today's conference call to discuss Advantage's third quarter results. Before we begin, I'd like to remind listeners that our remarks today will include forward-looking information and references to specified financial measures. Advisories on those items are contained in our news release, MD&A and annual information form, which are available on our website and on SEDAR+. I'm joined today by Advantage's executive team, including John Festival, our Interim CEO; and Craig Blackwood, our CFO. And as usual, if you have any detailed questions, we ask that you follow up with us individually after the call. And with that, I'll turn it over to John.

Thank you, Brian, and thanks to everyone for joining us this morning. The third quarter was an important one for Advantage. We delivered stronger production and lower cost following the completion of our major infrastructure program. We completed the Wembley disposition. We materially reduced debt and began directing significant free cash flow to share repurchases. The Wembley transaction sharpened our asset base, significantly reduced our leverage and accelerated our shareholder return strategy. At the same time, our operations continue to perform exceptionally well. Production increased 23% from the second quarter to approximately 87,000 BOE per day as the Progress Gas Plant ramped up and the Glacier Gas Plant returned to full operations following the planned turnaround in Q2. Our cost structure also improved meaningfully. Greater utilization of owned infrastructure, a more focused asset base and lower leverage reduced our operating, transportation and G&A costs and our interest cost on a per BOE basis. With our financial position significantly strengthened and the 2026 capital program substantially complete, all free cash flow is being directed to share repurchases, while we retained substantial flexibility in advance -- to advance our liquids-rich inventory at Progress, Valhalla and in the Charlie Lake. Now Craig will walk through our quarter in more detail. Craig, over to you.

Thanks, John. Before I begin, the financial and operating results I'll discuss relate to Advantage Energy only and excludes Entropy Inc. Starting with the financial results for the quarter. Adjusted funds flow was $96.8 million or $0.58 per share. After exploration and development expenditures of $60.9 million, we generated $35.9 million of free cash flow, which was dedicated to shareholder returns through share repurchases. We ended the quarter with just $233 million of net debt, that was down 58% from the second quarter. This reduction reflects the application of the proceeds from the Wembley disposition. With the balance sheet now substantially stronger, we have the capacity to execute our share repurchase strategy while continuing to invest selectively and in high-quality liquids-rich opportunities. As John mentioned, our cost structure also improved significantly in the second quarter. Operating expense declined 16% to $4.86 per BOE. Transportation expense declined 10% to $3.71 per BOE and combined G&A and interest expense declined 41% to $1.73 per BOE. These improvements reflect the increased utilization of Advantage-owned infrastructure, more focused asset base following the Wembley sale and much lower leverage. Turning to operations. Production for the third quarter averaged approximately 87,000 BOEs a day, including 452 million cubic feet per day of natural gas and 11,623 barrels per day of liquids. Total production increased 23% from the second quarter following commissioning of the Progress Gas Plant and completion of the planned 21-day turnaround at the Glacier Gas Plant, both of which occurred in the second quarter. Liquids production declined 8%, and that was primarily due to the Wembley disposition and just natural declines. Well performance has remained strong. At Glacier, the wells brought on production this year had achieved average IP30 rates of 16 million cubic feet per day of raw natural gas. At Valhalla, a three-well Montney pad that came on-stream last quarter has now achieved an average IP90 rate of approximately 1,100 barrels of oil equivalent per day per well, including a 35% liquids. At Progress, we drilled 2 Montney wells from our 5-32 pad, offsetting a successful 16-36 well that we drilled back in 2019. These wells were completed in October with encouraging initial test results over 48 hours and 62 hours, respectively. Both wells demonstrated higher length normalized productivity than that 16-36 well. The 16-36 well had achieved an IP30 of more than 1,100 barrels per day of oil and liquids and has now produced approximately 265,000 barrels. The new wells were brought on production this week, and we expect to provide IP30 results in early December. Based on these initial results, though, we now plan to drill 2 additional Progress Montney wells in the first quarter of 2027. In the Charlie Lake, we are now preparing to drill our first open hole multilateral wells during the fourth quarter, and that will be funded by the additional proceeds we received from the Wembley disposition. Industry results using this well design have demonstrated strong productivity with lower capital costs, which could further improve our returns from this important oil-weighted asset. Turning to hedging and market diversification, which remains an important component of our strategy. For the fourth quarter of 2026, we hedged approximately 46% of forecast natural gas production and 54% of forecast liquids production. For '27, we've hedged 37% of forecast natural gas production and 34% of forecast liquids production. And we've also hedged approximately 35% of forecast natural gas production in 2028 and 15% in 2029. Together with our market diversification, this reduces our direct AECO exposure to just 16% in 2027 and 8% in 2028. Finally, as many will know, the Department of Finance recently announced the proposed productivity mega deduction, which allows most new capital investment and development expenditures deducted immediately rather than over time. Based on our current plans and commodity price assumptions, we would now expect that those measures defer Advantage becoming cash taxable from 2028 to 2031. With that, I'll turn the call back to John.

Thanks, Craig. Advantage is in a very strong position. We are entering the final quarter of 2026 with a focused asset base, a substantially stronger balance sheet, a lower cost structure and a deep inventory of liquids-rich development opportunities. Our focus is on maximizing shareholder returns. Following the Wembley disposition and the substantial completion of our 2026 capital program, all free cash flow is being dedicated to share repurchases. We expect this to allow us to repurchase up to 5% of our common shares outstanding in the second half of '26 and up to an additional 10% in 2027. We've already repurchased approximately 6 million shares in 2026, representing 3.6% of the shares outstanding as at December 31, 2025. So we're well on our way to fulfilling our buyback commitment of $300 million over 24 months. We expect to retain substantial financial flexibility after fulfilling this commitment. That flexibility allows us to balance direct shareholder returns with disciplined investment in the liquids-rich Montney at Progress and Valhalla and in the Charlie Lake, all supported by our new owned and operated Progress Gas Plant. Across these 3 areas, we've identified more than 1,000 drilling locations, including more than 300 currently identified as Tier 1 locations. Together, these assets represent approximately half our total drilling inventory and provide a strong foundation for long-term liquids growth. We expect to release our formal 2027 budget in early December, together with an updated 3-year plan focused on developing the significant liquids-rich inventory. Finally, I want to provide a short update on our CEO search process. That process is in the late innings, and we expect to have resolution on this process shortly. I continue to be very impressed with the Advantage team. Despite having no permanent CEO over the last 4 months, the team has closed an accretive disposition and rightsized the balance sheet, returned to significant share buybacks, completed a complex plant turnaround and created new optionality for liquids-rich development. In closing, I would like to thank our employees, contractors, our Board, shareholders for their continued support. With that, I'll turn the call back to Brian.

Thanks, John. And Joanna, that concludes our prepared remarks, and we'll go to the phone lines in the event there are any questions. Thank you.

[Operator Instructions] Question on the line from Jamie Kubik with CIBC.

I'm just curious a bit more on Progress. Can you talk about potential plans that, that asset might have for capital spending in the future here and how big the prospect could be in the portfolio given what you see on the recent wells?