Thank you for standing by. Welcome to Peyto's year-end 2021 financial results conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during this session, you'll need to press star one on your telephone. I would now like to hand the conference over to your speaker today, Darren Gee, Chief Executive Officer. You may begin.
Well, thank you very much, Catherine, and good morning, ladies and gentlemen. Thanks everybody for tuning in to Peyto's fourth quarter and full year 2021 results conference call. Before we get started today, I would like to remind everybody that all statements made by the company during this call are subject to the forward-looking disclaimer and advisory that was set forth in the company's news release issued yesterday. In the room with me today, we've got the entire Peyto management team. Our President and Chief Operating Officer, JP Lachance, is here to answer your questions, as is Kathy Turgeon, our Chief Financial Officer. We've got Scott Robinson, our VP, Business Development, Dave Thomas, our VP, Exploration, Todd Burdick, our VP, Production, so you can ask them all questions about the operations, how they're going.
Lee Curran, our VP of Drilling and Completions, is here to answer your questions. Derick Czember , our VP of Land, is here as well. We've got our newest VP, Riley Frame, who's our VP of Engineering. They're all here to answer your questions about the quarter and about the year and about Peyto. Before I get started with my comments about our results today, I do wanna recognize the efforts of both our office and field personnel this past quarter and for all of 2021 for that matter. We had a busy quarter of operations. We drilled some fantastic wells, and we hit all of our year-end targets for production and costs. Kudos to the team for continuing to deliver reliable energy to Albertans.
It's life-saving energy, if the truth be told, and considering we had several minus 40 degrees Celsius days in Alberta this past winter. I know I, for one, am very appreciative to be able to come back inside my nice warm house when it's like that outside, and it's something that really none of us should take for granted. The reason that we have that luxury is in no small part due to the hardworking people here at Peyto. Great job everybody. Okay, on to our fourth quarter results. Operationally, as I mentioned, it was a busy quarter. With the strengthening natural gas prices, we shifted more of our drilling to leaner gas formations in the Spirit River. The Notikewin, the Falher, the Wilrich formations made up close to 70% of the targets that we drilled in the quarter.
That, of course, brought on more gas than liquids in the quarter. And then we also had an outage at a frac plant during the quarter, so that forced us to keep some of the liquids in the gas stream. That species mix of formations has changed once again. The first quarter of 2022 is more focused now on liquids-rich Cardium. I think we've got about a 50/50 split between Cardium and Spirit River in the first quarter, so that we can take advantage of some of the high oil prices and the flush condensate that comes from the Cardium wells. We should see our liquids percentage rise again as those wells come online.
The 5 drilling rigs that we have running, they ran well through the fourth quarter, and we exited the year just above our 100,000 BOE a day target, which was really just in time for winter gas prices to take off. We were also active buying new land in the fourth quarter. That's something that we hadn't been doing for a while, particularly when land sales were shut down. We added more drilling inventory to the hopper for the future. Some 75 locations that we internally identified are on those lands. I think sometimes, you know, people forget that's a big part of the Peyto strategy to go out and find our own drilling prospects that we can develop ourselves.
That's the way we've always done it for the last 23 years, and I suspect that's how we'll keep doing it for the next 23. The other thing we do ourselves is build our own facilities, and we started construction of our 11th gas plant in the quarter down in a new area south of Brazeau called Chambers. We prepped the site and pounded piles and got ready to receive all the equipment that we were moving out of inventory. That work has continued into the first quarter, and hopefully we'll have that new plant in service by the end of the first quarter and have more processing capacity down there. I think the team, you know, did a great job controlling costs in the quarter as well, outside of royalty costs, of course, that rose with commodity prices.
All our other cash costs were down 10% year-over-year. In aggregate, we had much lower interest costs and lower G&A that offset the little higher transportation costs. Of course, that higher transport got us some higher prices, so it was worth it. All in all, our cash costs before royalties were just CAD 0.79 per Mcfe for OpEx, transport, G&A, and interest. By far the lowest in the industry, and we think we can keep those costs before royalties close to that level in 2022. A fantastic job, guys, controlling costs. Part of what's helping there, of course, is better utilization of our facilities. We have this incredible infrastructure asset that we get to fill up.
We have capacity in it and, so we're filling that up, and of course, as we fill that up, we get much higher utilization and lower per unit costs. That's just one of the benefits of owning your own processing plants. On the commodity price side, we didn't realize the full benefit of the price rise over 2021, as much of our production was previously hedged as per our mechanical hedging program. We will continue to take the future price off the table, as we always do, which secures our revenue for planning purposes. Our realized prices are expected to continue to rise. I suspect we'll probably come under some criticism for our hedging losses right now. This program has delivered over the longer term.
We've been doing it this way since 2003, and we're in this game for the long run. We truly believe in natural gas as the future, and so we need to be consistent with this program for it to pay off over the long term. We continued to lower our debt with excess cash flow. Our long-term debt was down a little over CAD 100 million in 2021, and really, that's just a start. We expect to significantly reduce our debt again in 2022, so that by the end of 2022, we should have less than 1x debt to EBITDA, which is the strongest balance sheet Peyto will have ever had in its history.
After that, I expect we should be in a position to start raising our dividend again, especially since our earnings will have also grown very significantly over that time. All in all, you know, a great fourth quarter, a very good 2021, particularly considering where we were a year ago. Cash flow is way up, earnings are way up, and our margins are much better. Our capital efficiencies, particularly on the organic side, was the lowest ever at CAD 8,000 per flowing BOE, this past year. Our finding costs, you know, PDP FD&A costs were CAD 0.97, which is again, the lowest in the last 19 years.
Efficiency-wise, we're doing a fantastic job, and we're in a, I think, a very strong and advantageous position right now, and that's only gonna get better as we go into 2022. That's probably enough of me rambling on about the quarter. Catherine, why don't we stop there and throw it open to questions from those investors listening in?
We have a question from Nathan Schwartz. He's a private investor. Your line is open.
Well, hi. Two questions. In the past, you've written in your monthly report about the potential to term out more of the debt. I wonder if you could give us an update on that, your efforts there. The second question is, with the stock where it is, I wonder whether stock buybacks are potentially in the mix.
Thanks, Nathan. Great questions. First on the term debt, we do have CAD 450 million of term debt right now out of our total debt of just a little over CAD 1 billion, so not quite 50%, but a very good portion that's termed out at various renewal dates over the next, I think, about 7 years on average. I think the interest rate is just around 4% on that, so good coupon rates. Yes, those are with a few large insurance companies, so good counterparties. They have indicated they are very supportive of Peyto and wanna continue the relationship we have with them. Specifically, we termed out or renewed, I guess, one of the notes, when was that? Last.
October.
October for another seven years. We have good support from them, and they're offering us pretty good terms. We're sort of aggressively paying off our revolving debt right now, and we'll lower that quite significantly in 2022. We really have to, I think, decide at some point, probably towards the end of 2022, just how much debt we wanna carry going forward and what that blend of debt will be in terms of whether we want long-term fixed debt or whether we want revolving debt. The easy thing obviously is just to keep paying off the revolving debt, and then we could retire the term debt as it comes due.
You know, some of that term debt is quite attractive capital at very low coupon rates, and I think if interest spreads don't blow out too badly and we can continue to access capital at that low cost, then it makes sense to take advantage of that. As I mentioned, our balance sheet is gonna be the strongest it's ever been by the end of 2022, and so, you know, I don't think we have to pay off more debt necessarily. You know, we're all aware of the sort of defund oil and gas movement that's behind the scenes that's putting pressure on the banks in particular, and we definitely don't wanna get caught up in that. We wanna make sure that we're in a strong position moving forward with respect to our debt.
The other thing is, as we're growing, you know, we're probably gonna be close to 110,000 BOEs a day by the end of this year, and we're planning a similar capital program at this point likely for 2023, so that would deliver some more growth. That would really put us in a position to look at what sort of debt rating we'd be at, and I do believe that probably sometime in 2023, we'd probably be very close to being BBB- or investment grade, which opens the door even more for very attractive pricing on longer-term debt. You know, I think that's something we definitely wanna look at. That option is for sure on the table.
Again, it's all competition for capital or for our cash flow, I should say. I mean, do we put the money into the capital program? Do we pay down debt with it? Do we pay out dividends with it? Or to your second question, do we buy back stock? Share buybacks, we've had an NCIB in the past. We didn't act on it, but we have had that in place in the past. You know, that's one other lever we can pull to return capital to shareholders, debt repayment, dividends, and share buybacks. It's nice to have all this competition for the capital. Quite frankly, you know, the capital program and the returns that we're generating on dollars that we're putting to work are fantastic as well.
That's great tension to have on the cash flow. I think we'll get this debt reduced in 2022, and then we'll look at does it make sense with where the share price is at to put in an NCIB.
Okay, thank you very much.
You bet. Thanks for the question.
Thank you. I'm showing no further questions. I'd like to turn the call back to Darren G. for any closing remarks.
Okay. We did have a few questions emailed in overnight, so I do wanna address those. The first one was with respect to our Big Sunny storage reservoir, was there any update on that? You know, I think for an answer there, I might just turn that over to Scott Robinson, our VP Business Development, who's been looking after our Big Sunny play. Scott, can you tell us what our thinking is?
Sure, Darren. Yeah, thanks for the question, whoever asked it out there. Big Sunny, we acquired that asset a few years ago when the gas market was in turmoil. We still look at it as being a very valuable future component. We scoped out the cost to convert it to a full storage scheme, but we haven't acted on any of that at this point in time. I think we're just reserving it for that purpose. We've spoken in the past as well about possibly deploying that pore space for carbon storage and sequestration. Since that time, we've studied a number of other reservoirs, and I don't think Big Sunny would play into that, although it is situated by one of our gas plants, so you never know.
I think our preference would be to continue to keep that reservoir on the shelf as a potential future gas market diversification asset, if we choose to invest in it. The gas market is very dynamic, has been over the last few years. I think we'll just watch it for a little bit further here before we make any commitments to a firm direction on that asset.
Okay. Thanks, Scott. Yeah, definitely the basin is growing, so likely over the longer term, we are gonna need more storage. That Big Sunny asset is a nice one to have in our back pocket. Second question that came in was with respect to the Cascade Power Project and our ability to potentially supply more than just our contracted volumes there. Todd, do you wanna talk a little bit about where we're at with hooking up to Cascade?
Yeah, sure.
Where they're at, maybe.
Sure. So they've, you know, we get monthly updates, and everything appears to be on schedule from their end as far as the information that we get. We've purchased most of the pipe for the pipeline, and we'll start putting that in the ground probably Q4 of this year. We'll have enough infrastructure to provide more than what we've contracted with Cascade now. So, you know, that will allow for some flexibility in the future depending on what things sort of play out going forward. We did get a connection to them in the summertime. I think we talked about that in our Q3 announcement.
We do have pipe to their site and sort of waiting for them to contact us when they're ready to start flowing some gas, and we'll be there when they're ready.
What's the latest status we've seen from them in terms of their project? How are they doing?
They've got all their major equipment, which was just put in, I think, in the end of December. They've got the turbines in. They were working on their heat recovery steam generator, which was in. A lot of the buildings are up. Some of the buildings can't be put on until they get that, you know, those big pieces of equipment in. All of the big equipment was in the last update that we've got.
They're not expecting any major delays or.
No, not that we've heard.
Nice.
It's quite exciting, the stage that they're at right now, the gear is in place, so there's a lot more certainty on that, 2023 startup timing.
I think they mentioned, they're at their full, peak manpower right now, probably until the summertime.
Okay. That's great to know, considering how tight manpower is out there, that these guys have already got all their people in place. Just as a reminder to those listening in, that Cascade project, we're contracted to send them 60,000 gigajoules a day, a gas purchase agreement we have with them for 15 years. Considering where power pool prices have been over the last year, we would realize some very attractive natural gas price realizations for that gas. We're quite excited about being able to supply the gas for some very clean some of the most efficiently produced electricity in Alberta. We're looking for even more opportunities to do that here at Peyto. One other question that was brought up and maybe I'll ask this of Derrick, our VP of Land.
We talked a lot about our Cecilia acquisition over this last year, how successful we've been with that. We just obviously closed another acquisition here, a small one tuck-in that gives us opportunities. We bought a bunch of land in a year, 44 sections we noted. We do other deals, Derrick, behind the scenes that we probably don't talk much about. Can you elaborate on any of those?
Yeah, for sure, Darren. In addition to the 54 growth sections we acquired in Cecilia and the 44 sections acquired at Crown sales, we were also active on the smaller tuck-in deal front. In total, we added an additional 24 sections through farm ins, swaps, poolings. On these lands, Peyto has currently identified 38 new drilling locations in which we were already able to drill a total of 14 wells throughout the year. While the business development team continues to pursue larger asset deals like Cecilia and Brazeau, the various teams continue to complement those efforts in 2022 with ready-to-drill inventory through farm ins, pooling swaps, land fills, and other tuck-in type acquisitions.
Oh, that's awesome. Okay. I guess the only other question I had actually came from an analyst last night. They were asking about, you know, these current commodity prices that we have, and obviously they're changing quite dramatically week by week here as geopolitical events unfold around the world. The question was, you know, payout times have shortened even more for a lot of the oil guys. You know, how are our economics in terms of our future payouts and rate of returns looking?
Maybe I'll ask our newest Vice President, Riley, if he could provide a little color on just what are the sort of most recent economics that we're running based on the strip that we see today, and what kind of results are those showing us for our type curves, Riley?
Yeah. We're seeing some really good rates of return across almost all the species, both the liquids rich and the gas rich stuff. Almost everything that we're doing is over 100% rate of return with payouts under a year here. Our program for the 2022 year here is gonna look a lot like last year as far as what we're gonna drill. Despite the new plant capital that we have in the program, as well as some inflationary pressure, we expect to see some great returns. The team's looking forward to another strong year here in 2022.
Yeah. That's awesome. All right. Well, if there's no more questions, Catherine, you know, I wanna thank all the listeners for listening in to our conference call this morning.
Pardon me. We do have one question from Michael Biel with Davenport. Your line is open.
Michael Biel. Great.
Sorry for the late entry. If you could just remind us, I'm sure it's in here somewhere, roughly what % of our 2022 output is currently hedged.
Yeah.
If you could just talk a minute about the longer term opportunities for gas from Alberta fields finding their way into the export markets. Just kinda remind us of what's going on in that world and maybe the timetable. Sorry for waiting till the last minute.
No, no problem, Mike. Good questions. Yeah, we've got about 68% of our gas hedged for this winter. Those were hedges that we started putting in place a year ago, and we sort of slowly layered in over time to protect this winter. Obviously, the price rose a lot as we went through last summer and into the fall. We've got, you know, a pretty nice, attractive price for that. The remainder that's floating, about a third of our gas that's floating through this winter, has basically diversification to three other markets. We've got a little bit exposed to the AECO spot market.
We always need to have just a bit exposed, even though it's covered through some Empress service at the border in case AECO disconnects, we do need to have a little bit of operational flexibility. We don't want to physically commit some of that volume just in case we have a plant go down or something on any given day. We do have more than enough service at the border to make sure that we don't get caught with any AECO price disconnections. About half of that unhedged volume this winter is headed down the main line halfway to Emerson, and then we compare that with other synthetic when we choose to get it to Dawn or Great Lakes or wherever we'd like to send it.
About 12%-15% of that volume that unhedged volume heads off to the Ventura market, so that's just outside of Chicago. This coming summer, we've got a little over 75% of our gas already hedged, fixed prices on that. I think the average price there is just a little close to $3. So it's less than the strip, but still a very attractive price for our economics and relative to what we've seen in the past too. We'll see what happens with this summer.
Despite the fact that the strip today might show something better than that, you just don't know until you get through the summer what the prices will actually end up being. The 25% that isn't hedged over the summer, again, a lot of that heads down the main line to Emerson, to Ventura, and then, we've got the rest exposed there at Empress. Next winter, we're starting to lay in hedges for that period too. That price has come up, and we've been taking advantage of sort of the forward curve flattening out a little bit and rising. We've got about 60% of next winter locked away. I think the price there is CAD 3.45, CAD 3.40, something like that. Pretty good price for winter.
We'll continue to layer on top of that, so that by the time we do get to next winter, we wanna probably have about 75% locked up. The unhedged portion is dedicated down the pipe to NYMEX or Dawn market. We're not exposed to really any AECO disconnects on any of that volume. Beyond that, it falls off. Summer 2023, we are starting to lay some hedges in. Again, the curve is in pretty steep backwardation, so we're slow in sort of picking up some of those future prices. We do wanna sort of layer those in over time, as we always have.
You know, as that forward curve flattens out a little bit and starts to rise on just overall North American demand and supply, we'll continue to hedge that period out as well. We have very good diversification in until really we get out into 2024. We do wanna lay some more probably basis deals into NYMEX and Chicago markets to protect against any dislocations in the AECO market. Then really beyond 2024, we've got the LNG Canada project kicking in sometime in 2025, probably late 2025. That is going to be quite a dramatic change to the AECO market to have significant volumes heading the opposite direction. You know, the majority of the exports coming out of the Western Canadian basin go either east or south.
For us to have a completely new direction for exports going west, I think is gonna put some interesting tension on that AECO market. We may well want to have a lot more volume right back here at home selling into the local market when that tension arrives. We do have a little bit of oil hedged as well, Mike. We've got some WTI that we've been laying in as well. It's not a perfect hedge for our products. Condensate trades as a bit of an offset to oil, but you can't hedge the condensate directly, so the WTI is a slightly dirty hedge. But we do lock our butane in as a direct offset to WTI.
When we lock the WTI, then we get a direct butane price. We are starting to lay some hedges in on the oil as well. Obviously, these are some fantastic prices for oil, and the backwardation in that curve is slowly flattening out as well. Looks pretty attractive. You know, you can get $97 oil right now for 4 or 5 years now.
All right.
That's where we stand on the hedges. Sorry, you had a second question.
No, the second question dealt with the 2025 time horizon you were talking about, where you could head a different direction and ultimately, I guess, an export market, I presume.
You know, it's one of the reasons in our diversification that we've used a lot of synthetic transport because those are short-term financial ways to access other markets. We like the basis deals. They're just a fixed cost to get to a market, and then you can hedge at that market or you can float at that market. It's short term, and that's the great part about it. If you're to do physical pipe deals, typically the contracts are for much longer term, 10 years or more. You know, we need to be nimble. We need to potentially be able to redirect the gas in the opposite way depending on how the market evolves here in Western Canada.
Thank you. Just last question while I've got you. Based on where we sit today, would we expect to repay something on the order of, what, CAD 150 million-CAD 200 million in debt?
I think we have higher targets than that in mind.
Okay.
By quite a bit. Maybe double or more than double that.
All right.
Yeah, we've got I think with the free cash flow that we look like we're gonna generate in 2022, obviously, that's based on the forecasts with the strip pricing today and prices change. Yeah, we're looking for a very material debt repayment in 2022. Like I said, that would take us down under one times debt to EBITDA.
Right.
by the end of the year.
Just wanted to hear you say it. Thanks a lot.
Yeah. No, it's looking really good. It's definitely one of the goals for 2022.
Yeah. All right. Good job. Thanks so much.
Thanks, Mike, for your questions.
Thank you, and there are no other questions in the queue.
Great. Well, thanks everybody for listening in. 2022 is gonna be an exciting year. Check back in on the quarters when we have our calls, and we should have lots to talk about. You know, as steady as she goes at Peyto, we've managed to survive some of the nasty gas prices of the last few years, and it's time to really take advantage now 'cause we've got huge margins that, if we can keep our costs down and enjoy all of this price rally, they're gonna deliver some fantastic results for shareholders too. Thanks again, and we'll be back to you here in a couple of months.
This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.