Advantage Energy Ltd. (AAVVF) Q1 2024 Earnings Call Transcript

Advantage Energy Ltd. (OTCPK:AAVVF) Q1 2024 Earnings Conference Call April 26, 2024 10:00 AM ET

Company Participants

Brian Bagnell – Director of Commodities and Capital Markets at Advantage
Michael Belenkie – President and CEO of Advantage
Craig Blackwood – Chief Financial Officer
Neil Bokenfohr – Senior Vice President

Conference Call Participants

Chris Thompson – CIBC

Operator

Good morning, ladies and gentlemen and welcome to Advantage Energy First Quarter 2024 Results Conference Call.

At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instruction will be provided at that time for you to queue up for a question. [Operator Instructions] I’d now like to turn the conference over to Brian Bagnell, Director of Commodities and Capital Markets. Please go ahead.

Brian Bagnell

Thank you, Jenny, and welcome everybody to Advantage’s conference call to discuss our first quarter 2024 results.

Before we get started here, I’d like to refer you to the advisories on forward-looking statements contained in the news release as well as the advisories contained in Advantage’s annual information form and the MD&A, which are available on SEDAR and on our website. I also draw your attention to the material factors and assumptions in those advisories.

I’m here today with Mike Belenkie, President and CEO of Advantage; Craig Blackwood, our CFO, as well as the other members of our executive team. We’ll start by speaking to some of our financial and operational highlights from and once Mike and Craig have finished speaking, we’ll pass it back to the operator for questions. And I’d just like to note, while we’re happy to answer your questions, we’d ask that if you have any detailed modelling questions, maybe follow up with us individually after the call. Mike, please go ahead.

Michael Belenkie

Thank you, Brian. I am pleased to present results from the first quarter of 2024, starting with some of the high points and walk through what to expect from the company next. The first quarter of 2024 was mostly about continued strong operational performance in particular from our new wells and Glacier. Our production remained around record levels and we were also able to expand our tier one drilling inventory by drilling wells in areas that had not been developed using our updated technology. As a result of exiting [ph] 2023 with net debt that was below the bottom of our target range, we were able to enhance our shareholder returns by continuing to buy back shares counter cyclically.

Highlights from the quarter included adjusted funds flow of $67 million for Advantage, while capital expenditures were $76 million. Net debt fell into the middle of our debt range at $233 million. We repurchased 2.4 million shares during the quarter, which is 1.5% of our outstanding share counts at an average purchase price of $0.86 [ph], returning $21 million to shareholders. Operationally, our performance was very positive with first quarter production over 66,000 boe per day. This is an increase of 18% per share over the same quarter last year.

Liquids production increased to 6,452 barrels per day, which was an increase of 17% per share over the first quarter of ’23 and we officially filled the Glacier gas plant at 425 million cubic feet per day for sustained periods during the quarter. It’s particularly important to note that our owned and operated infrastructure performed very reliably during periods of extreme coldest winter, with only modest throughput reductions on the coldest days below mild sporting. We weren’t quite as fortunate with our third-party gas plants at Wembley, where there were modest impacts to production at our earliest asset due to unplanned outages.

Highlighting some drilling results; at Glacier, our two most recent wells averaged IP30s of 15 million cubic feet per day per well, which is well above type curve, perhaps 40% above type curve. This is particularly important since these wells help extend our tier one inventory bookings further south into the asset, which was acquired only a few years ago. As a result of the continued performance of the entire drilling program, we now have three wells fully drilled and completed, but shut in because production remains above plant capacity.

With gas prices in North America currently suppressed, Advantage is also excited to be in the process of drilling three well pad at Wembley, targeting two D4 wells and one D3 well, which typically have initial liquids ratios of about 65%. These wells are expected to come on stream by early in the third quarter. And although there have been reports of water shortages in Northwest Alberta, Advantage has stockpiled enough water to execute the remaining portion of our program through the third quarter, and we don’t anticipate any impacts to our ability to execute a full year program.

Looking forward, with elevated North American gas supplies in an unusually warm winter, North American gas prices remain suppressed and this is expected to continue through the summer. Part of the reason for this service supply is the necessary ramp up in production in advance of structural demand growth in North America, which includes demand growth from LNG Canada and LNG projects on the Gulf Coast. As usual, Aco [ph] was most sensitive to oversupply of diamonds, so Advantage is pleased to have minimal exposure to Aco this summer at only 8%. As LNG projects start to enter commissioning and structural demand increases later in the year, balances are expected to improve substantially, which is reflected in the forward strip currently showing strong contango.

We’re currently navigating and optimizing our program to manage near-term volatility but focus on long-term value. Advantage continuously reviews our capital program evaluating each discrete investment at the most current strip pricing possible in advance of those investments. Each investment is judged using a simple comparison, will shareholder returns be highest by growing cash flow or by allocating that same capital to our share buyback program instead? Since these decisions can be made on a well-by-well basis, significant discretion remains in our 2024 capital program.

In addition to that agility and perhaps more importantly, we continue to benefit from the outperformance of our drilling program and as a result there’s an increasing likelihood that Advantage may need fewer wells this year to achieve our production targets. This may lead to our 2024 capital being reduced further below our current midpoint of $235 million without having to reduce our production expectations for the year at all. And this is on top of the capital reductions that we announced only a month or two ago when our midpoint of capital was reduced from $275,000 to $235,000 [ph]. So there’s a possibility of that falling further still.

Development of our Progress gas plant remains on track with commissioning anticipated by mid-year of 2025. To maximize shareholder value, we remain focused on growing cash flow per share while maintaining a net debt target of between $200 million and $250 million. Our three-year plan remains to deliver compounding cash flow per share growth via disciplined capital allocation with annual spending in each of those years ranging between $220 million and $300 million, noting that our range for this year is $220 million to $250 million currently.

Our production growth target remains capped at 10% per year. Contrary to the near-term over supply, we believe 2025 may be undersupplied and rebalancing of the markets will likely take between one year and two years after that. Based on current futures pricing, the Advantage estimated capital spending will average approximately 75% of AFF for 2024 and 2025, and all free cash flow will continue to be used for share repurchases.

With our modern low emissions intensity assets, decades and decades of top-tier inventory, and our majority ownership of entropy, which by the way continues to advance quite nicely, hopefully we’ll have more to talk about in the coming months. The Advantage continues to proudly deliver clean, reliable and affordable energy and helping to contribute to a reduction in global emissions by displacing higher carbon fuels. We’d like to thank our employees, our board and our shareholders for their ongoing support.

We’ll turn it back over to Brian for questions now.

Brian Bagnell

Thanks, Mike and Jenny, we can go to the phone lines. Thank you.

Question-and-Answer Session

Operator

[Operator instructions] Your first question is from Chris Thompson from CIBC. Please ask your question.

Chris Thompson

Good morning, guys. Thanks for taking my question here. At Glacier, you mentioned those new wells are 40% above tide curve. I’m just wondering, what did you do differently that’s driving that outperformance? Is it purely reservoir or was there something in the drilling and completion design that you changed?

Michael Belenkie

Yeah, thanks for the question. As with most things in nature there are drastic changes, it requires a combination of many different factors. So, I would summarize without being too specific about certain competitive approaches that we have. I would summarize in the way that we drill them, the location we drill them in, the rock quality itself, the way we drill them together we can be longer with a different frac design than we used to have and higher frac intensity and that’s also added to the fact that to produce at these high rates, we require a bunch of very unique surface facility design work as well and of course, lastly, pipeline and plant capacity.

So the team has been doing a great job of looking at dozens and dozens of different factors to make sure that every one of those things lines up and allows these outlier wells to continue to happen and so we do think that this will continue across the asset. This is not unique to one area. We’ve seen these types of results all around Glacier and for that matter, across our other assets as well. Hopefully that answers your question.

Chris Thompson

Okay. Thanks for that and on the wells being shut in, you’re waiting for your base production to decline at Glacier and then these wells get brought online. What is the cadence of drilling then now that Glacier is full that’s required just to keep it full at this level? And I guess once progress comes online next year, how much space will that open up for you potentially at Glacier?

Michael Belenkie

Yeah, sure. Thanks for the question. So first and foremost, it’s not just the last two wells that are overproducing versus expectations. It’s been pretty much our whole program. So many of those wells have not just come on at higher rates, but also have declined more slowly and that has created sort of a bank of production, which those three wells are essentially now surplus deposits.

So we’ll wait for the rest of the system to continue to decline naturally and as the system declines, we’ll feather those wells in to make sure that we remain essentially full. And we have to be fortunate right now in that we’re drilling just Wembley wells as we speak, and then its breakup. So spring breakup, we lay down a lot of equipment. There’ll be a gap in new wells and the only question for us is how early for us to restart the drilling of wells in the third quarter or late in breakup.

So some of the work that’s going on right now and the reason why we’re not able to actually be specific around the potential for capital reductions is because the team isn’t analysing how much, if at all, we should be slipping the reactivation of our drilling equipment after breakup and so more to come on that. It’ll take us a little while. Probably won’t have any announcements until within the next month or two on capital, but the analysis will allow us to tell you how much later we start and how many fewer wells are required to hit our targets.

Chris Thompson

Okay. Thanks. And then on the progress, just like how much capacity did that open up for you at Glacier?

Michael Belenkie

Yeah. Thanks. Sorry about the second part. So progress is a 75 million cubic feet per day gas plant, which is under construction. That’s expected to come on in roughly the middle of the year, perhaps slightly earlier next year and what progress does is it actually eliminates — it doesn’t create new capacity for the Valhalla progress asset. It simply takes the Valhalla and progress production out of where it’s currently being processed at Glacier.

So what we’re doing is instead of expanding Glacier again, we’re creating another gas plant, which takes production away from Glacier, creating that space. So we’re creating 75 million cubic feet per day, more space at Glacier and that will allow us to continue to grow, obviously, the flagship asset next year once that plant has been turned on.

Chris Thompson

Okay. Thanks, Mike. I’ll hand it back.

Operator

[Operator instructions] And there are no further questions at this time. Please proceed.

Michael Belenkie

Great. Thank you, everybody, for joining and we’ll catch up with many of you soon. Thank you.

Operator

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.