Pine Cliff Energy Ltd. (PNE) Earnings Call Transcript

Good morning, and thank you for joining us on the Pine Cliff Energy Third Quarter webcast. We will open with remarks from President and CEO, Phil Hodge. Today, Mr. Hodge is joined by Terry McNeill, Chief Operating Officer; Kristopher Zack, Chief Financial Officer; Austin Nieuwdorp, Vice President, Finance; and Dan Keenan, Vice President, Exploitation. Questions from the management team can be registered online during the webcast. Prior to starting, we would like to remind participants that the call may contain comments on or discussion of forward-looking information. As such, we refer participants to the cautionary statements on forward-looking information included in the presentation on our website, www.pinecliffenergy.com. With that, we'll turn the call to Mr. Phil Hodge, President and CEO.

Thanks, [ Chris ]. Thanks, everybody, for joining us today. And for those of you who sent some questions ahead of time, thank you very much. For those of you who do have some questions, please send them in, and we will be happy to deal with them during this call. The -- our practice here is not to reread the press release or even my President's message and kind of just do a quick overview and then go right to some of the questions that we've got. The -- it was -- as we indicated in my President's letter, the third quarter was a difficult quarter from a commodity price standpoint. We're fortunate that we had as much hedging in place. We're the most hedged we've ever been in the history of Pine Cliff in the last 14 years. And that helped provide some protection. And therefore, our realized price was substantially higher than the AECO price was for the quarter. But I hope that you got from both the quarterly e-mail that we send out and the President's letter that we're pretty optimistic going into the winter here, and we're pretty optimistic for 2026. We have not seen forward strip prices with a 3 across the board in a long time. And that's starting next month in December, we already have over $3 AECO an Mcf. Next year is over $3. Q1 is kind of closer to $3.50. So these are all very good prices. And for those of you that have been following Pine Cliff for some time, you know that at those levels, we generate material free cash flow. And that's kind of what we always are focusing on, is how do we generate more free cash flow? How do we -- so that we are in a position to be able to allocate that capital the best way that we see fit. And it changes over the last 14 years. There's been times when acquisitions made the most sense to us. And so we were very -- we are -- that's how we've gone from 100 barrels a day to 21,000 barrels a day. The one -- and then we had the dividend in 2022. We paid over $103 million of dividends since 2022. For a company of our size, that's a pretty incredible dollar amount. The other thing that paying down debt, that's another way of increasing equity ownership, is by the -- when you look at the enterprise value of the entire company and as you pay down debt, then obviously, there's more and more of the actual business is owned by the equity holders and not by the debt holders. And so that's something we focus on, and we're going to continue to focus on paying down debt. The one extra capital allocation piece that we have today, and we've had it for 2 years now, is going back to the drill bit. And in our view, it didn't make sense to be doing that when AECO prices were falling as quick as they were because in the one area that we're quite interested in developing, there is still -- it does come with a very material and significant amount of liquids, but it also comes with a lot of natural gas. And so we're very cognizant of the fact of the overall economics. Every company drills its best wells first. And so for us to be able to be drilling our best wells into what we perceive to be a weak commodity environment did not seem to make a lot of sense. So now we're heading into a much better environment. And so we're looking forward to getting back to the drill program that we -- it's been about 2.5 years since we drilled our last well. We think that this -- once we start this program, given the future, how it looks on the commodity prices that this will be a program that we continue to keep going every year. We're now working on kind of the optimal locations to start the program. And we now feel very comfortable that it's fully funded, and we do not have to use debt to do those -- to start that program. That kind of brings us a little bit to the disposition. I just got a couple of questions on that. And you'll see it was in the -- we announced a separate press release yesterday that we had sold some of our assets in Central Alberta. We're pretty happy with the assets we've built up over the last 15 years, 14 years. But it's -- we've now got a situation where we actually have multiple areas where drilling could make good sense for us. And there's a zone, the Basal Quartz in Central Alberta that we've been watching very closely, and it was something that we were very interested in drilling ourselves at some point. But after we did the Certus acquisition, the inventory that we picked up through there, the Glauconite, is just, in our view, fits our business model better than drilling the Basal Quartz wells. And therefore, we kind of came to the conclusion if we're not going to drill it, we knew there were some strong companies that would be willing to drill it, then why wouldn't we sell those assets, use the proceeds for our own development? And so that was the motivation. We've -- it was kind of something we've been thinking about for some time. We knew that there was strong interest in the area because there's been good results. And frankly, we wish -- we hope those assets turn out to be extremely productive because we still have assets in the area. So the more drilling results that show positive economics, then that's going to make the land in the area even more valuable. So that was kind of the motivation as to why we did that transaction. The -- going forward, as we kind of look into 2026, we're not as heavily hedged as we were. We're about 30% hedged over $3. We've got -- we'll continue to be opportunistic about hedging into the -- into a strong commodity price. We want to make sure we protect the -- our debt repayment, our dividend payments and also the drill program. So those are the kind of three things we look to why we're hedging prices. But you'll always see us leave a pretty healthy amount exposed to the upside because our view is it's quite possible that we're going to see stronger gas prices than even what the forward strip is indicating. And it's already indicating a pretty strong strip going forward. One of the questions we had was just around the data center update. And we will -- we've been very quiet after our initial announcement, and we hope to be able to provide more details as it unfolds. But we are not the ones building the data center, and so it's our partners. We're in constant communication with them, and it is definitely proceeding. But at this stage, we're really not in a position to be able to give a further update, but stay tuned. We hope to be able to give updates here sooner rather than later. But it is an area that we're very, very interested in pursuing across multiple sites that we own because the Alberta government has been extremely supportive of data center investment in the province. But it is one of the things that's key to that investment is that they want to focus on sites that are not connected to the grid. And the reason for that is the grid is already kind of maxed out. And so it's -- from our perspective, these projects that are going to be what we call behind the fence, they were -- they do not touch the grid. Our gas comes out of the ground and goes directly into reciprocating engines. It will be used on site. So from our perspective, we don't have to pay any transportation costs for the natural gas. And yet we're getting -- as you saw in the announcement back in earlier this year, we'd be getting paid NYMEX pricing on that. And so that is a significant lift from AECO pricing. So we're quite excited about it. It's just that because we're not building it, we kind of are waiting until we see further advancements on the site, and we'll then bring the market more up to date on that. I think the -- only other question that I got, and I see we've got a couple of questions here that we'll get to, was around the kind of the hedge program and going forward. Maybe, [ Chris ], you can talk a little bit about the hedging going forward and how we're set up going into '26.

Yes. So we'll continue to hedge prudently to help protect some of the portion of our cash flow that's allocated to the dividend and the capital spending and the debt repayment. For 2025, we're still -- for the fourth quarter of '25, we're still pretty well hedged. We're at about 50% of our natural gas hedged to right around $2.88 an Mcf. And then that starts to taper off going into 2026. On average, we're about 33% hedged at around $3 for 2026, but that tapers through the year. So it's a little bit heavier hedged at the beginning of the year and a little bit more lighter hedge towards the end of the year when prices continue to strengthen. And of course, we'll always look to add more right now. Summer gas prices for 2026 are pushing towards $3 an Mcf as we speak. And so we'll continue to look at potential opportunities for us to continue to lock in to help protect the portion of our cash flow is going to be allocated out to our dividend and into our capital spending program.

And then there was -- around the hedge program, you'll find that in the appendix to our presentation that there is a -- we've got a hedge kind of a slide deck in there that kind of sets out the hedging going over forward time. So you can take a look at that as well. Another question we had here come in was just about the asset sale and kind of is that going to be something that we're going to continue to see on an ongoing basis to fund the drill program? No, I don't think that I would look at it that way. It is a bit -- I wouldn't -- not fully coincidental. I mean we could see that because of Q2, Q3 natural gas prices being weaker when we had less cash flow than originally budgeted at the beginning of the year, and so for -- it was a bit fortuitous and good luck, fortunate timing for us to do the dispositions at the same time that we were starting up a development program. But these wells, when you look at the type curves and you'll see some of the information in our presentation, these wells generate significant cash flow. And so once you've started to drill the program, it's our view that the drill program should be able to self-sustain itself with its own cash flow. In other words, as cash flow comes in, then that will be the cash that enables the next well to be drilled. And so if we're not anticipating having to infuse any new capital because we haven't drilled in the last 2.5 years, the simple analogy goes back to my farm-boy days is you need to prime the pump. There had to be an initial amount that has to be put in. And then once the engine is running, then it looks after itself. I think from -- that's what we needed to do here to start the program. We need to put that money aside. That's one of the reasons that we reduced the dividend back in March, was to free up some cash to be able to do the drilling. These wells are not cheap. I mean we're kind of budgeting in around that $8 million level for these wells. These wells are significant in length and horizontal reach. And so -- but they're also very prolific. And when we can see the results from around the area that we have, we can see the other oil and gas producers in the area and kind of results they're getting. You can -- it's pretty clear why it's an active area. These are very, very economic wells. So it's not something that we anticipate going forward. Another question we had was what should shareholders expect in terms of free cash flow generation once Certus drilling gets underway? I don't know, [ Chris ], do you want to touch on that one?