Pine Cliff Energy Ltd. (PNE) Earnings Call Transcript

Good morning, and thank you for joining us on the PineCliffe Energy Third Quarter webcast. We will open with remarks from President and CEO, Phil Hodge. Today, Mr. Hodge is joined by Christopher Zack, Chief Financial Officer; Austin Neworpe, Vice President, Finance; and Dan Keenan, Vice President, Exploitation. Questions for 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 over to President and CEO, Phil Hodge.

Thanks, Chris. Good morning, everybody. Thanks for joining us or if you're listening on recording, thanks for taking the time to do that. The -- I don't think there's -- I mean, compared to some of the quarters in the past, this one would be a fairly straightforward quarter. We're going into a very busy quarter with the fourth quarter being one of our busiest quarters ever from a drilling perspective. And for those of you who've been following Frank Cliff for some time, you know that we went a period of time where we weren't active on the drilling front, but we are quite excited about taking advantage of some of the opportunities that we've seen. And for those of you again who have been following our story for a while, it might be a little while since you've heard us talk about the Kisco wells. And that is very much in the front along with our Glock wells. So you're actually going to see an updated presentation later today on our website. You go to that, you'll see updated type curves. The type curve hasn't changed on the blocks that you've seen before. But the Pisco has been a while since we've talked about why we would be drilling Pikiscos. And when you look at the -- compared to some -- especially on the liquid pricing, so the Pukiscos are oil wells versus the NGLs and gas that we get from the Glock. I'll turn it over to Dan here in a second to give you a little bit of update on where we are with the drilling that's happening this quarter. but generally, it was definitely a better quarter -- it was a better quarter than last quarter, and it was a materially better quarter than third quarter of 2025. And so primarily driven by the fact that both natural gas and oil prices are higher than they were in Q3 of last year. Natural gas is significantly higher. I mean we were looking at -- at that time, we experienced less than $1 AECO prices. And so although we still don't think AECO is at the level it's going to need to be to meet this demand surge that's going to be coming towards Western Canada in the next couple of years, it's definitely better than it was before. And so I think from the way we kind of look at it, we think that by doing the drilling in the Q4, we're going to enter into 2027 with increased production. That's -- we think sets us up very well from a cash flow standpoint. it's all about allocating capital as we often talk about. I mentioned a lot of people listening to this call or to the webcast will already have been subscribers to my quarterly e-mail that went out last night. And in it, I was talking a fair amount just kind of about what I see as kind of the catalyst going forward for our sector and especially on the natural gas side. And we're still very positive on where natural gas is going. And I face that that view just on when you look at the demand that's coming on in both Canada and in the United States. And the demand is undeniable. Like there is no doubt that having LNG facilities, and these are facilities that are under construction that are going to be brought online are going to have a significant impact on the supply-demand kind of balance in the market. What you can argue about is what's the supply response going to be? And I talked about that in my e-mail is that I don't deny that we've got a lot of natural gas under the ground in both countries, especially in Canada. What I do challenge a little bit is that at what price will you be able to justify bringing that gas out. And yes, it does depend on liquid pricing and oil pricing because in the Permian Basin, you're going to do oil-based oil drilling, and that's going to bring associated gas. In Canada, you're looking for condensate as much as you can. A lot of people don't realize that we import condensate into Canada, even though despite our active drilling programs. So there's other factors at play, but a lot of our areas don't have the liquids that people will be seeking to take advantage of. The dry gas areas are going to require higher gas prices than what we're at today. And so that's kind of how we base our thesis on why we believe going forward that natural gas prices are going to be better. Now here we are, and it's November and they're reopening of golf courses in Calgary, that's not a good thing in the short term for natural gas. I mean weather is very much still a major factor on natural gas use. And so when we look at -- if it is going to be an abnormally warm winter, we can look back. Franco has been around for 15 years. We can look back on the warm winter period and see what the impact has on natural gas storage. And all these factors we talk about, that's really the bottom line, is that where is storage at? Because if storage is -- we come out of winter and storage is higher than it traditionally has been, that's going to have a depressing impact on natural gas. And if storage has been drawn down more than people expect it to be, then that's a positive impact on natural gas on the pricing because you're going to have to justify people putting gas into storage, and that's what drives up the gas prices. So it's kind of an interesting dynamic. What the big unknown here because we've never had it happen before, is what happens if LNG Canada is operational all through the winter. If they're operational at using -- and you saw some graphs in the e-mail I sent out where when they're fully operational, they are actually using more than 2 Bcf a day for feed gas going into that facility. That's a big, big number when we only have 19 Bcf a day of natural gas. And so they have not been at full operation. The closest they got to is in June when they were kind of exporting about 1.8 Bcf a day, and they were using close to -- actually over 2.5 Bcf a day for the facility. But -- and we saw a huge impact on storage. Storage really -- there was a meaningful drop in storage at those levels. However, since then, there's been a lot of technical complications. We don't know all the details of it. They haven't been -- because they're not a public company, they haven't had to share all the information on that. But it looks like they're sorting it out. I would expect that there's every motivation for the owners of LNG Canada to get that facility up and running as soon as possible. And the reason I say that is because there's several Asian owners in that group. And right now, they're paying over $30 an Mcf in Asia for gas. And here we are with gas at CAD 2. So there is a huge arbitrage that they desperately will be wanting to close. They do not want to keep buying gas from whatever sources they're buying gas from today at those prices when they could be getting it directly from their own reserves here in Canada. So it's going to get sorted out. We'll see what happens. It will be the kind of the weather versus the LNG through the winter. The one comment I would make is when we look at some of the warmer winters that have happened, we look at it kind of being maybe 50 to 60 Bcf less natural gas gets used in a really warm winter in Western Canada. If LNG Canada is at 2 Bcf a day all through the winter, if you assume that that's 3 to 4 months, you're talking significantly more demand than there is -- that will more than make up for that lack of demand from the weather. So who knows? It's been frustrating from a stock perspective because our stock is near its 5-year low, even though things, I think, are materially better than they were a year ago with both pricing and outlook, and we're that much closer to LNG Canada getting fully operational. We're that much closer to the Woodfibre LNG project coming on next year. We're that much closer to -- since then, we've had a positive FID on LNG Canada Phase 2. So there's a lot of really positive macro trends in behind. But in the short term, it's all -- it's going to be about weather. And until LNG Canada gets up to full capacity, it's going to be on what impact do we think -- so I think the -- what we'll continue to do is, from our perspective, keep an eye, we'll dictate our drilling program based on where commodity prices are. We haven't set our budget for 2027 yet. But the -- we definitely will be very cognizant of a couple of things. We'll be cognizant of what's the pricing of commodities, both natural gas and oil, that may dictate on which from a -- do we do more Piscos or we do more block gas wells. The other thing that we'll be very cognizant of is kind of how the results of our current well drill program have gone because that may dictate. Maybe I'll pass that over to Dan then to give us a bit of an update on where we are with Q4 drilling.

As Phil mentioned, we drilled 2 Glacuconi wells or drilling the second one right now. They're on the same pad. So we're drilling them back to back. We expect to have the well TD-ed the second well by next week, early next week, and then we'll be moving on to the completion sort of the middle of November and hope to have both wells tested and on stream just before the end of the year. Following the Glaacconi drilling, we'll move to our other area where Pisco is, and we have a single well there that we're planning to spud hopefully to finish drilling and complete and bring on early in the new year. One of the questions we've had, Dan, was if we could please discuss the anticipated average depletion rate of our new block inventory. I guess if you could talk a little bit about that. Yes. So we have some location details in our investor presentation. I understand we're going to have an updated one here soon. And as you see in those numbers, we have quite a high number of net locations for a company our size. And so if we anticipate drilling, say, 3 bloacami wells per year net, that's 3 or 10 to a little over 10 years of drilling inventory. And so that gives us a little bit of room to accelerate, plus we also could add some in time with mapping and additional drilling.

Yes. And then in addition to that, clearly, is the Pisco will be -- if oil prices stay elevated as they are currently or even anywhere close to this neighborhood, then we'll definitely be looking to do more Pkiscos going forward. And we're doing a lot of work right now on our broader area, where there's a lot of people don't appreciate the land base that PineCliff has at close to 2 million acres, many of which areas that have never had horizontal drilling ever brought into to exploit those areas. So there's -- we have a lot of hydrocarbons that are unrecovered. And so that's been a frequent point of conversation here among the management team. And this goes back to what we talked about earlier, the allocation of capital is where is the best place for us to put our increasing free cash flow. Free cash flow has been better this quarter than last quarter. Free cash flow -- sorry, I mean as we look into '27, we're seeing more free cash flow. And so the debate and discussion last night was among our Board and our management team is where is the best place to put that going forward. And one of the things we do to really protect that cash flow is we've been very successful and very active on the hedge program, and there is a question that we received about hedging. Maybe, Chris, if you want to deal with that one?

Yes. Thanks, Phil. Yes. So we've been fairly diligent with our hedge program to help protect the cash flow that's needed to fund dividend and our capital drilling program. In the third quarter, particularly on the gas side, we posted an average realized gas price of $2.44 an and that represented a 56% premium to the AECO 5A daily average price of $1.56 an Mcf. And we expect that, that approach to the hedge program will continue. We're already around 37% hedged for 2027 on our gas at $2.82 an Mcf, which is above the current strip of right around $2 today. We're also 41% hedged on our gross crude oil production at an average price of almost $80 for 2027. Given that we are drilling, we're looking to protect that upfront capital investment, but also the returns that we're going to get from the cash flow in the first year from those wells, I expect that we're going to continue to look for opportunities to layer in additional hedge contracts where it makes sense.

One of the questions -- other questions I received, this was received yesterday was kind of wanted to know why I personally have been buying stock at these levels. The -- by no means can claim to have a crystal ball as to what's going to happen with stock prices. And we know that there's a lot of volatility going in the market for a lot of different reasons. But what I can tell you is the kind of the rationale and my thinking into it is that the -- and as an investor, I always feel that there's many reasons why insiders sell stock, many reasons that have to do with their personal circumstances or their family or their need for capital at various times. So it's always a tougher thing to kind of read when you see selling. The one thing I always thought was a positive when you see is insider buying is because they've got options to spend with that cash, and they've chosen to put it into their own capital, into their own company. And the reason I get it is because when I look back at -- over the 15 years that I've been at Pinecliff, we've -- the stock price has been as high as $2. It's been as low as down into like $0.10 over that time. At the level it's at right now, I'm very comfortable that there's not as much -- I just don't see as much potential downside as I see the potential upside. And I think that when I look at what the AECO price that we've got -- if AECO goes from $2 to $3, which I do not think is an unreasonable kind of prediction, that's over $30 million of extra cash flow from a -- on a realized price basis to Pinecliff. That's almost $0.10 a share. And if we're trading at 5, 6x cash flow or whatever multiple we may be trading at that time, that's a $0.50, $0.60 on the stock price, and our stock is at $0.50-some. In the meantime, we're paying a dividend, which is close to a 3% yield right now. So that's -- to answer that question, that's why I felt quite comfortable buying more stock personally. It does not look like we have any other questions. So I won't take up any more of your Friday. Thank you very much for those attending. If you have any follow-up questions, please send them along to us. We will get back to you for sure. Really appreciate the time, though. Have a good day.