Ladies and gentlemen, thank you for standing by. Welcome to Peyto's Year-end 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your speaker today, Mr. Darren Gee, President and Chief Executive Officer. Thank you. Please go ahead.
Thanks, Jimmy. Good morning, ladies and gentlemen. Thanks for tuning in to Peyto's fourth quarter and year-end 2019 results conference call. Before we get started today, I do want to remind everybody that all statements made by the company during this call are subject to the forward-looking disclaimer and the advisory that we had in our company news release issued yesterday. In the room with me today, we've got the entire Peyto management team. We've got Kathy Turgeon, our Chief Financial Officer, JP Lachance, our VP of Engineering and Chief Operating Officer, Dave Thomas, our VP Exploration is here, Todd Burdick, VP Production, Lee Curran, VP of Drilling and Completions, Tim Louie, our VP of Land, and our newest and oldest member of the management team, Scott Robinson, our VP of Business Development.
Before I get started with just some general comments today, I do want to recognize the efforts of our entire Peyto team, including all our field personnel. 2019 proved to be another challenging year, with constantly changing commodity prices and changing weather and operating conditions, and of course, a very volatile business environment. Yet, throughout all that, our team remained very nimble and ready to react to whatever came our way. We called several audibles during the year, and I think this year's performance, the 20th year of solid earnings performance, is a testament to our team's ability to handle those challenges. On behalf of all Peyto shareholders, I just want to say a thank you to the entire Peyto team for that effort.
I just want to start off this morning with some general comments about the quarter and the year before we open it up to questions from those listening in. I'm going to try and keep this brief since this is a pretty busy reporting week, and I'm sure there's a lot of calls going on right now. As I mentioned in the release, we doubled our pace of investment in the fourth quarter, attempting to bring on some new production for the winter heating season on the backs of a much-anticipated reconnected AECO gas market. In addition to our Cardium play that we've been developing all year, we added some Spirit River locations to the quarter. With the higher gas price, they had better economic returns as well.
Some of those Spirit River locations were in actually a new fluvial channel that we found in Ansell that's yielded some very prolific wells. I think a couple of those even made it into the top wells in the province reports that I saw. That drilling grew production from 75,000 bbl a day in October to exit the year at a peak of around 82,000 bbl a day. More importantly, though, was the growth in liquids production that we saw since oil prices were still fairly robust in Q4. Our liquids production hit a company record, actually, of 12,350 bbl a day average in December, with two-thirds of that liquid being conde and C5+, which is, of course, the liquid that gets effectively light oil pricing. That's over 15% liquids at the end of the year or 30 B/MMCF on a liquid yield basis.
For the year, I think we had averaged around 26 B/MMCF, which is pretty close to what we had projected. We definitely hit our target for liquids for the year. Much of that liquid came from the Cardium, particularly a few of the liquid-rich sweet spots that we were targeting. One of those was in West Wildhay, which was why we had to install increased liquid stabilization equipment at the plant there and more liquid storage. We also had to loop out several pipelines in that area because all the liquid in the gathering system was increasing line pressures and then backing out older wells. That was a problem that we fought pretty much all year. Of course, to make things doubly hard for our field guides in Wildhay, that was also the area where we drilled and completed our first Montney well.
The Montney well completion was similar to what most of the industry is doing. Involved a lot more frack water than we pump in the Cardium, and so when you're flowing that back and trying to clean up the frack, you have to handle all this extra water, which at the same time we were trying to handle all the extra condensate from our Cardium wells, and that made things rather tricky for our guys in West Wildhay. Needless to say, the Cardium production obviously took priority with its condensate over the Montney well, which was producing back all this frack water, which is why we're actually still slowly cleaning up that Montney well today. It would've cleaned up faster had we had more capacity for it. We wanted to make room for the Cardium production first.
I guess that's one of the challenges if you're trying to do a little exploration right in the heart of a bunch of development work. On the flip side, I guess we were able to tie that Montney well right into our gathering system out there and conserve and sell all that gas during the entire cleanup phase, which was nice. Anyway, that was just some of the fun we were having in Wildhay last year. What else? We picked up a lot of land last year. We don't advertise it very much, but we were very successful adding land to our land base in 2019, which added, of course, to our future drilling inventory. We did it at some incredibly low land prices.
I don't think we've ever averaged CAD 37 an acre for a year of crown sales, and especially with lands like these that have locations on them right next to our infrastructure. That really speaks to the level of competition out there right now and the types of opportunities that are available. At the end of the fourth quarter and into January, we shot a big seismic program, a 98-km 3D seismic program, a bunch of those new lands, in fact, and that's going to be interpreted in the coming months and should be good for many more Cardium and Spirit River locations in the future. The other thing we did at the end of the year was install a big pipeline from our Brazeau area down to our South Brazeau lands, an area we're calling Chambers.
We already had a couple wells down there producing to a third party, this pipeline enabled us to bring that production up into our Brazeau plant. We also have plans in 2020 to do some more drilling down there in chambers , this pipeline was required obviously to tie in all that activity. I think we have a rig running down there right now, in fact. There are several other operators in that area that we can now offer processing to now that we've got a pipeline that takes gas from the area up to a processing facility. Overall, I think 2019 was a successful year from a financial and reserves perspective. We generated CAD 117 million in free cash flow, paid down another CAD 78 million in debt.
We only reinvested 64% of our funds from operations, but that was enough to replace almost all our production from a PDP reserves perspective. In fact, we replaced it with a more liquids-rich barrel, so it had more value. Proven reserve life, PDP RLI, grew again from 8.7 years in 2018 to 9.4 years in 2019, and the projected base decline continues to fall. That means we have a more stable producing base that requires less capital going forward to replace the decline. We added to our inventory of undeveloped locations. As I mentioned, we bought new lands and identified even more locations, booked some of those, so growing the undeveloped locations in the reserve books from about 1,200 locations to 1,280 locations at year-end. Considering we're only drilling around 90 locations a year, at that pace, we've got more than 14 years of booked inventory.
Apparently, we're going to be here a while. Lastly, we strengthened our ESG standing this past year, with a focus, again, on reducing our emissions intensity, which we continue to do. We had good improvement in our safety record this last year, and we tightened up our corporate governance even further with respect to board mandates and corporate policies and whatnot. A very busy year, but I suppose you can read most of that in the press release we sent out yesterday. Jimmy, why don't we take this opportunity, and we'll throw the call open to questions from those listening in.
Thank you. As a reminder, if you'd like to ask a question, you may hit star then one to join the queue. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Again, that is star then one if you'd like to ask a question. We have a question from Jeremy McCrea with Raymond James. Your line is now open.
Yeah. Hi, guys. I'm just trying to get a better sense just with the volatility in commodity prices. I know you guys delayed some of your CapEx from Q1 to later this year, how willing and just kind of drastic do you guys want to maybe potentially make your CapEx cuts this year? What are the signs that you guys are looking for here?
Jeremy, I think we've always demonstrated we can be extremely nimble with capital program, and we have the luxury of being able to operate effectively year-round. We get road bans for maybe six weeks in the spring when breakup hits, we don't have to do our drilling in Q1 or during the wintertime. We can do it in the summer. In fact, there's probably some cost savings, in fact, to do it in the summer. You get more daylight hours, you're not heating rigs and water and all the rest of it. That said, though, last year, for instance, we had a pretty rainy summer, sometimes the rain does impact our ability to move around as effectively in the summertime too. The nimbleness of our capital program and I think our ability to speed up and slow down has been demonstrated over the last few years.
What we're watching, obviously, is this coronavirus and its effect on the commodity prices. We're watching oil price pretty closely, as everybody is. We're watching the NYMEX gas price. It's gotten really weak, and it looks like there's going to be a supply response. Already, rig count in the U.S. on gas has been tumbling pretty steadily. I think we're anticipating, as a lot of the market is, that there will be a commodity price recovery, that there has to be a commodity price recovery. We'd like to time a lot of this capital, if we could, into that recovery. You're bringing on flush production, unhedged production into better pricing.
Okay.
We operate all our own facilities, we've got capacity in those facilities. It's not like there's a big time lag, really, between when we kick on drilling activity. There will be a little bit of time delay, but not very much at all. What are we averaging, 45 days, spud to on-stream date, which is still some of the fastest on production time in the industry. We can rapidly gear up capital, and we can rapidly increase production into that commodity price trigger.
Okay.
Like a lot of companies, we're waiting to see that commodity price trigger before we really want to ramp up hard.
Okay. Kind of the second question here, just with your new ventures team. I know going back to the Open Range deal, you guys kind of mentioned you guys would never really look at corporate acquisitions again, but would you consider that now, given where some of the valuations have fallen for other entities? Are you guys more or less looking for green pastures to maybe pick up land at Crown Land sales? Which direction are you guys leaning toward?
I don't know that we said at the time that we'd never do another acquisition other than we didn't enjoy being sued after we bought the Open Range piece by a bunch of Poseidon shareholders.
Right.
That ultimately resolved. It didn't obviously stick. I think we've done well with those assets. They were easily integrated into our infrastructure. They were right underneath our feet in Sundance, and so we built upon them. The Swanson plant's a good example. What was it, CAD 20 million a day when we bought it, and it's CAD 135 million or CAD 140 million a day.
CAD 145 million going through at the time.
Yeah. It's way larger. We did really well by that. Which is not to say that the only thing we're looking at is stuff that's proximal to our infrastructure or perfectly complementary to our asset base. I don't know, Scott, do you want to comment on all the things that you've been looking at?
Well, you defended the Open Range acquisition appropriately. It was a very good fit for us, and I agree that we didn't look at that negatively. Should we come across any other opportunities that fit in from that perspective that align with the strategies that we've stuck to in a very disciplined manner, and those strategies are assets that can deliver low capital and low operating cost performance to us, and that are core, geographically focused. Those are things that we're looking at and considering. Would we step out into green pastures? They would have to have those same attributes. We are looking at a number of those opportunities. With this commodity price downturn, it affords us that opportunity to go shopping, perhaps, and makes a lot of sense in these times to consider buying a barrel instead of developing a new barrel at this point in time.
We've got a really strong infrastructure in the greater Sundance area, and that will be one of our key focuses, is how we can work that infrastructure into the future of the company and building upon the lands that we already have. Darren, you pointed out that we were able to successfully do this past year, more from an organic crown sale perspective. There may be property and corporate deals that emerge here that really fit well within what we're up to there. We're complementing that by looking at value chain vertical opportunities, not just developing resource in the ground, but trying to make more money out of that resource that we already have developed in terms of market exposure and other value propositions.
Okay. Perfect, guys. Thanks.
You bet.
Thanks.
Thank you. As a reminder, if you'd like to ask a question, you may press star then one on your touch-tone telephone. To withdraw your question, press the pound key. Our next question comes from Adam Gill with Eight Capital. Your line is now open.
Good morning, guys. Just with the new tie-in to the Brazeau area, how much more activity do you expect in that area that just got tied in? Is there a notable effect on corporate operating costs moving away from that third-party processing?
Certainly. We got a rig running there now. We plan to run a rig through breakup, ideally, if weather cooperates with us. We'll have a rig steady down there. There's lots of inventory in all three stratas. Dave can comment on that a little bit more, three strata that we see Spirit River, including Notikewin and Wilrich and Cardium that we can chase down there. We have a good position for that. We were paying a much higher fee to go to a third party, we will see at Brazeau a reduction in our operating costs. Todd, I don't know if we can get into the numbers specifically, certainly anytime we can get to our own facilities, it makes sense, right?
Okay. Thank you, guys.
I'd add to that's an organic growth area. We picked up lands down there, crown auction. We've done a little bit of corporate farm-in type deals down there. This is a sort of traditional Peyto development where we're constantly looking at new opportunities and organically building new inventory, finding ways to pick up the land, and then getting out drill, and then build infrastructure down to take care of it. That kind of area is just sort of our normal course of business, which we're always doing, right?
It's not that we've stopped doing this sort of normal practice of going and finding these new opportunities and then organically developing them. That's going to continue with the company for a long time, and we're particularly good at it farming this large swath within the Deep Basin. It's exciting and it's a new area, but I would say it's really the bread and butter that has made Peyto what it is today. From that perspective, it's just more of the same.
In this new area that we're talking about, too, where we're shooting the seismic, or we shot the seismic and we're evaluating that's another example of another beachhead that we're excited about, and we'll see, right?
Thank you. I'm showing no further questions in the queue at this time. I'd like to turn the call back to Darren Gee for any closing remarks.
Okay. We did have a couple of questions coming in over the email, the info@peyto.com investor site. I would like to maybe a ddress those. Maybe I'll get Kathy. One of the questions that's often asked is with respect to our balance sheet. We quoted that we paid down CAD 78 million of net debt, and yet on the balance sheet, it shows that our long-term debt went up year-over-year, and so that seems to confuse people. Kath, can you just maybe explain that quickly?
Well, in 2018, we had CAD 100 million of debt on notes payable that were in the current liability portion of the balance sheet. We replaced those notes when they became due January 2019 with seven-year 4.39% notes, moving it back down into the long-term debt section. Overall, we paid down CAD 30 million on our notes and/or credit facility. We also reduced a further CAD 48 million just on the working capital deficit. Our assets are larger, and our current liabilities are smaller.
Okay, good.
Pardon the interruption, speakers. I do have two questions that did come up on the phone queue. Would you like to take them?
Sure.
All right. I have a question from Gregory Weeding with GRW Holding. Your line is now open.
Yes, hi. I'm just curious with the NCIB that you guys initiated last year. What was the success of that, are you buying a lot of stock now that the price of the shares are so low?
Good question. We've had an NCIB in place for the last couple of years, in fact. We put it in place as a bit of an option for us. As most people, I appreciate there's sort of several ways we can return capital to shareholders. One of them is obviously to buy back stock. Another would be to pay down debt, the third way would be to pay dividends back to our shareholders. For the last couple of years, we really had all three at our disposal. Considering the lack of liquidity in the energy space, particularly, not a lot of debt capital being offered and no equity capital really, with share prices being pounded down so badly, that we felt that it was more important to actually pay down debt as a means of returning capital to shareholders.
We still paid a dividend, but we cut the dividend back over the last couple of years as well quite a bit, and so we were really focusing on bringing that debt down. There's a lot of fear, I think, in the industry with respect to leverage, and so we wanted to make sure that we were strengthening our balance sheet going forward. That gives us the most liquidity when it comes to turning around and using that balance sheet then. If commodity prices turn and all of a sudden there's opportunities to buy lands and gain future development opportunity, we felt we wanted to have that dry powder in hand.
If we bought back stock with it, then yes, we would reduce the float, but we'd have to then rely on the equity markets to be there to fund some of that opportunity, and we weren't quite sure whether or not the equity markets would be back or not. The board decided at the time that the best use of that cash was going to be focused on the balance sheet, and so that's what we did over the last couple of years.
I think the liquidity issues with respect to the industry have only gotten worse, quite frankly, over the last year. When it got to the end of 2019, we didn't renew the NCIB. We could go back to the TSX and apply to put one back in place if we want to, but we just felt that the path that we were on with respect to paying down debt was still going to be the path that we needed to be on for the next little while.
Okay. Just with the value of the stock at CAD 2.08 right now, seems like it's at its all-time low. Would this not be an ideal time to be able to buy back your stock? You'll never get it cheaper.
I don't disagree with you. I think the stock is, in my mind, very inexpensive. The question is really how do we allocate that cash flow? What do we use it to do? Do we put it back into the ground to drill wells? Do we buy back our own reserves effectively with it, or do we pay down debt with it? What's the best use of those proceeds? Like I said, the board at this point has decided that the best use of proceeds is to address the balance sheet and pay down debt with that money.
Okay. Thank you.
You bet. That's a great question. Thanks.
Thank you. Our next question comes from Alex Kason with Netrin. Your line is now open.
Thank you. My question is in the same area as the previous one. There appeared to be increased interest costs driven by external circumstances, I think, as much as your individual situation, and there is always the risk of involuntary refinancing that you may be forced with. The one area that you do control is hedging cost, which probably runs about 3%. I was wondering whether you have any policy in place that would deal with low protracted prices for a commodity as well as the stock market, which of course can go in either direction no matter how low the stock is. Could you just comment on that?
Yeah, Alex, another good question. We do have a very active marketing department, and we do have a hedging policy at Peyto. Obviously to secure future cash flows so that we can plan with confidence our capital programs, so that we can plan with confidence our dividends, and know exactly what and how strong our balance sheet will be throughout the year. Getting fixed prices on those commodities through hedging activity is important and desired here at Peyto. In the past, we've had much more of our production hedged, quite frankly. If we roll the clock back two or three years for sort of the near terms, we would've had probably 65%-75% of our natural gas production with a fixed price on it.
Unfortunately, though, with the disruption and the disconnection of the AECO market a couple of years ago, we found that we had gas prices that weren't hedgeable, to be perfectly honest. We had gas prices that went negative on us, in fact. It was very difficult then to lock in such a low price when you're dealing with such a disconnected market. We put a lot of our efforts into diversifying our markets away from AECO. We put in place a bunch of basis deals to get to NYMEX. We picked up a bunch of service to get off of the NOVA system and out of AECO and onto their mainline system to get to other places like Dawn. We put Emerson service in place to get partway down the mainline, Ventura service in place to get to that hub.
We diversified a lot of the different places where we were selling gas to rather than the AECO market, because it was so broken, the AECO market, and disconnected. Fortunately, this past summer, both the industry and the Government of Alberta came together and put together a proposal for a temporary service protocol that would be in place in the summer times when we don't have access to storage. That helped connect the AECO market back up again. It corrected the AECO market so that it's a much fairer, more transparent market, and a place where we could actually start hedging again. We've done that somewhat. We've put some more AECO hedges in place, but we're behind really on our hedging schedule, because there was a quite a long period there where the prices were just not hedgeable.
That's kind of a long-winded answer, but it hopefully illustrates why we don't have as much hedges in place today as we would've wanted to, and as much security on the prices we would've wanted to. Our strategy long term would be to get back to having a lot more of our products hedged with a fixed price on them, so that we do get that confidence in the planning.
Okay. My second question is on your flexibility in going back to a larger mixture of gas versus liquid if the prices diverge in the opposite direction as, I guess, they have been doing a little bit over the short term.
Peyto's principally a natural gas company. That's always been our focus. We're in the part of the deep basin that is gas-saturated. We haven't been an oil company before. The liquids we really do produce are the associated liquids with natural gas production, so natural gas liquids, the whole sort of realm of condensates and pentanes and butanes and propanes, all of those natural gas liquids that come up with the gas out of the reservoir. Obviously with the huge disconnection between gas and oil prices, they're supposed to trade at 6 : 1, and at times they've been trading at 35:1 or 4: 1. We've obviously had to focus more on the liquid side of our business and chase natural gas deposits and reservoirs that have higher natural gas liquid components to them.
We haven't gone so far as to start drilling oil wells, which maybe we'll have to do if the disconnection between gas and liquid prices persists for a long time. We may have to become a more balanced producer that has 50% gas production and 50% oil production. I think most of the gas producers in North America, in fact, have found that the current commodity price doesn't justify dry gas development, and that's become the biggest challenge. Anybody who is a gas producer has had to get a chunk of either natural gas liquids or oil in their portfolio to survive. That's pushed people into that more liquids-rich realm. Yeah, I would hope that gas prices can strengthen and take their rightful place in the commodity complex, as they should from a heat content perspective.
It's a cheap fuel today. The demand for it should continue to rise dramatically because it's a lot cheaper than all the other fuels. All that being said, we do have drier gas opportunities that we've kept on the shelf. One of the examples would be the Cadomin Formation, which is a formation we used to drill a decade ago. It's quite a bit drier. There's a huge resource sitting underneath us. I don't know, Dave, it's close to a TCF of reserves recoverable resource underneath all of our lands that we have access to, that we haven't been drilling because dry gas just doesn't capture enough net back at these low sub-CAD 2 prices to justify the development of it. It's a massive resource that we hopefully will be able to get to at some point in time when gas gets appropriately valued.
Thank you. Not only is it a fine resource, it's cleaner.
I totally agree with you, which is why we've been a gas company for 20 years.
Thank you again. Best of luck.
Thanks for that question, Alex.
Thank you. Our next question comes from Ang Ong of Private Investor. Your line is now open.
Hello. Thank you. First of all, I should apologize, I joined the call a bit late. In case the questions I'm asking have already been asked, I apologize. I think following on your earlier comment about how critical it is to manage the balance sheet, I think you have said before that hope is not a strategy, and I think Buffett says we should never depend on the kindness of strangers. In line with those comments, I think there are several things with regard to balance sheet management that I would like to raise. One is, I'm not sure whether I saw this correctly, I think I saw that you are replacing the long-term or the term debt by paying it off early with bank debt. It seems counterintuitive to me, like isn't it better to have term debt than to have bank debt, which is more easily recallable?
That's a great question, Ang. The term debt we had was with a certain note holder, in fact, that we paid off mostly to the one note holder that we have. The term debt that we have is NAIC 2 notes, or at least originally issued as NAIC 2 notes, and we had, I think, five different note holders. It was a bit lumpy. We didn't have a huge syndicate of note holders. There was just a few. Because of our share price drop, the NAIC rating on our notes dropped from NAIC 2 to NAIC 3. As a result, the note holders actually have to put up more capital against that to secure it.
We knew that that change had happened, and the notes that we did buy out, at least one of the big ones, I think CAD 120 million one, was coming due at the end of 2020 anyway. It was really moving from long-term debt to current debt, and it was going to have to be renegotiated or renewed or we were going to have to do something with that, pay it back. That one was a logical one to approach the note holder on and say, "What would you like to do with this? Do you want to refinance it or do you want us to pay you out of it?" We paid out that note a year early, but not a lot early relative to when it was due to be renewed.
We, at the same time, offered to those guys that if they wanted to clear off any of the other notes that they had with us, that that was an opportunity for them to take advantage of that. They chose to do that. Quite frankly, the interest rate that we're paying on the bank revolving debt, especially with the rate cut now, is quite a bit lower than what those long-term notes were costing us, and so we actually will save a little money on the interest. I guess the last thing would be that the capacity of the revolver, the CAD 1.3 billion that we had, even though we'd only drawn about half of it, we did have to pay standby fees for the remaining part of it.
By using the revolver, rather than having the long-term notes outstanding, we do save the standby fees on that amount, and that is beneficial to us as well. There was a few reasons that it looked good to us to do that. I think the change in rating was an important trigger there too, though. All in all, I think it was a positive move for us.
Can I follow up on that? Just to clarify, do they have the option to ask Peyto to pay down the debt because of the rating change?
No, they don't.
It's a voluntary early redemption that happened?
It was voluntary redemption on our part, yes. We weren't looking for any of that transfer to cost us a lot of money. We made sure, obviously, that that wasn't going to be a negative from that perspective. The rating change was a bit of an important trigger.
Oh, okay. Thank you. I have a couple of other questions. I guess, if there are no other people in the queue, is it okay if I just continue with my question?
Yeah, no, go ahead, Ang.
There was this one, the issue with hedging, and I think you mentioned that you've done less hedging recently. I think we've seen that with the U.S. marketing the part by not hedging, I think we're kind of going to end up with some issues with that part, with the synthetic hedges. I think it don't look like they're going to work out very well. I'd like to get a sense of what the strategy is going to be going forward, because it looks like the U.S. oversupply situation is not going to get itself resolved for the next one or two years. Maybe I'm a bit too pessimistic. I'd like to get your comments, please.
Yeah. I think most of the market is anticipating more resolution more quickly on the U.S. supply situation, but I hear you. We've been dealing with an oversupplied U.S. market for quite a while. The shales just continue to grow volume regardless of the fact that they're driving their commodity price down further and further. The basis deals we put in place, you'll recall, we did about 18 months ago. It was sort of right in the middle of the worst market disconnection with respect to the AECO market. We needed to get away from AECO. It looked like the AECO market was not going to get fixed anytime soon. We needed to diversify our markets away. Unfortunately, we were doing it at the worst possible time, quite frankly.
Rather than just take the short-term basis at the time, which was extremely expensive, I think the basis between AECO and NYMEX at the time was about $1.90 a US MMBtu. We blended a three-year piece together at about $1.35 on average. Then we actually hedged the near term, with respect to the NYMEX, against that $1.35 basis. That $1.35 basis does carry out into 2020 and 2021 for the most part. It tapers down into the future. You're right, it looks pretty ugly now, relative to summer NYMEX prices that could be sub $2. It doesn't look like we realize a lot for that. There's a couple of different strategies we could do to deal with that.
To be perfectly honest, AECO looks okay today, but we could have similar things happening in the future with respect to AECO that have happened in the past, particularly the summer of 2021. We have this temporary service protocol procedure in place for the summer of 2020, which has strengthened the AECO market and reconnected the AECO market and gave everybody confidence that the market's going to work effectively. We don't have anything in place for the summer of 2021. While the current forward strip looks okay for the summer of 2021, it could be that we have just as much disconnection with respect to AECO in the summer of 2021. Our basis position that gets a lot of our gas out of the basin and into the NYMEX market for the summer of 2021 may still prove to be valuable.
Even though it's out of the money today, it may still prove to be quite valuable if we don't have a solution for the storage situation in the summer of 2021 in Alberta. That being said, the market, the forward curve, the forward strip for those basis deals starts at about, I think, CAD 0.90 and goes down to about CAD 0.85 into the future. It is quite cheap to diversify away from the AECO market and into other markets right now. We have been taking some basis deals in 2023 and 2024, and then blending those low-cost basis back into the higher-cost basis in the near term. That allows us to sort of average down over time a little bit with respect to those basis and allowed us even to hedge some of the summer of 2020.
We've got a graph on our website under the marketing section, and it's in the presentation, too. I need to update it. It's always changing constantly, and I need to get it updated again. That sort of illustrates some of that activity that we've done to try and blend away those basis prices and get a realized price, obviously, that's workable here at Peyto.
Understood.
One other comment. You asked earlier or suggested that the recovery of the U.S. market might be two, three years. The forward strip doesn't show that. It actually shows the next two winters as being quite Even this coming winter of 2020 as being quite a bit stronger than it is right now. I think that must mean the market's read is that supply will be pulled back and prices will recover back towards that $2.50 per MMBtu level. It does look promising for a correction here in a much shorter period of time than two to three years.
What are the forward strip prices?
I think for winter coming up, if you look at winter 2021, what's the NYMEX?
NYMEX on 2021 is right around CAD 240.
For early March.
Yeah.
There's definite contango in the forward curve right now, meaning it's an upward sloping pricing.
Yeah.
Obviously we're watching that very closely because now we have a significant vested interest in the NYMEX price. We're also watching the behavior of the U.S. gas producers, the shale production growth or not in some of the basins, some of the leverage situations with respect to a lot of those U.S. gas producers. They're generally much higher levered than the Canadian counterparts, and they've got a lot of debt coming due in the next year or so. It's term debt that now becomes current debt that they're going to have to deal with and either refinance or cut their capital programs back, because if they lose that capacity, then they don't have the same capital that they had before. A lot of that observation anyway, from our perspective, is that they're going to have to slow down.
They need a better price at the end of the day. I think that we are going to see a supply response quicker than perhaps even the market is currently anticipating. As you know, the decline in the U.S. shale is very steep, it requires a lot of new production build just to hold it flat. That's going to require a lot of capital that, if they don't have access to that capital, then the backfilling of that decline can't happen.
Yeah. Excuse me. That's offset to some extent by the associated gas that's being produced in the Permian?
You're absolutely right. That's where the WTI price of CAD 47 is actually constructive to gas price recovery because it'll keep oil drillers from drilling as much in the Permian, and they won't be building as much then of the associated gas.
What about the Canadian supply situation? The supply response to low prices has been quite slow and painful and has dragged out for a while. I guess part of the reason is because you have liquids-rich producers continuing to produce, as well as some producers who had marketed their production in the U.S. being able to continue producing. With the situation now, do you see these Canadian producers now cutting back on CapEx and drilling?
You're absolutely right with those observations. I think the oil price effect on those liquid-rich producers is going to be the same as the effect on the Permian or the associated gas in the U.S. I think you're right that a lot of transportation and processing commitments were made by Canadian producers, and they're trying to keep those full as best they can. It really all comes back down to available capital to invest. When prices are soft and cash flows are falling and bank lines are tight, and perhaps there's no capital available, either through equity markets or debt markets, then that has to result in a supply response. I think in the past, when we've expected a supply response to commodity prices, we were underestimating the amount of excess capital that was available to those producers.
Today, I think that excess capital is just not there. Those producers have to respond. They can't keep drilling the way they were. We're seeing it for sure in Canada now over the last six months, even with the strengthening of the AECO market, the reconnection of the AECO market, and what was supposed to be a pretty exciting winter from a gas price perspective, we just didn't see a lot of new supply coming on. The North Montney main line came on stream early in the year, and it didn't look like it had any incremental volumes in it, hardly. Volumes that were headed down the Alliance Pipeline have drifted off and shrunk quite a bit. The Spectra system is seeing decline in volume.
People are switching from other pipes that took them out of the basin back to the NOVA system that leaves them in the basin just because the AECO price actually looks as good as anywhere else. Ultimately, I think the volumes on the NOVA system are going to continue to fall as well.
Thanks for the color. I think certainly, okay, it looks like it's not all completely doom and gloom. I just had a thought.
I was going to add another comment. Against the backdrop of this supply constraint or discipline that we expect to see both in Canada and the U.S., we can't forget that the demand is continuing to grow. It's been very impressive growth in the want and need for gas south of the border and in Canada here as we convert coal-fired power to natural gas and we institute additional petrochemical projects. Were we to have a very strong winter weather event coupled with those other dimensions of demand growth, I think it bodes very well for the future of natural gas, and we can't forget that. It's not just about cutting supply, it's about making sure that we can respond to those demands as they continue to develop in the future here.
Oh, I agree. I share the optimism over the medium term. I think it's just that in the short term it seems like we have a Murphy's Law situation where gas prices worldwide are cratering, and so that's going to affect the LNG exports. We've seen a couple of buyers refusing to take the LNG shipments from the U.S. If the LNG exporters have a problem in the U.S., it's going to come back and affect us. At the end of the day, I think what matters is how quickly we see a supply response in the U.S. and in Canada. That will determine how prices play out in the shorter term, which is quite critical from our point of view.
Yeah, we tend to agree with that thesis as well. We have tried at Peyto to be as nimble as we can possibly be to maintain as much optionality and flexibility as we can to strengthen our balance sheet, to be in a defensive position, to be able to withstand some of this short-term pain in order to get to the long-term gain that we all see. It's going to be a painful year, 2020, for many producers for sure, who aren't as nimble as we are and aren't as prepared. Ultimately, the quality of our asset base, our extremely low cost structure, and that nimbleness with respect to capital deployment, I think, are the best tools that we've got going forward.
Sorry, Darren, if you can just bear with me, I just have two other points to make. One is, I was thinking for your PMR, I don't mean to ask you to do additional unproductive work, but I thought it'd be quite interesting if you could do a study of what the industry, both in the U.S. and in Canada, are spending on CapEx so that we can get a sense of the supply response, if you know what I mean.
Yeah, you bet. I'll see if I can find some data on that to report to shareholders. I think as we get through the end of the year here and all the companies have reported, particularly the publicly traded ones that have to do financial reporting disclosure. A lot of the analyst community pick that data up and reproduce it out, and I get to see a lot of that. I'll try and put that into a monthly report and get that out to shareholders to try and broaden the education on just what those U.S. guys are doing.
A lot of those guys are still promoting growth, even though probably internally, they're looking at their balance sheets going, "That's not going to be possible." There is a little bit of a difference between what they want to do and would like to do and what they're going to have to do. We'll have to see that somewhat play out. That may not be clearly evident in their disclosures, but I think there should be some interesting information with respect to reinvestment ratio. When I did look last year, 2019, I think was the first year where the U.S. gas-producing community was finally approaching living within its means, just spending its cash flows. That discipline and that sort of behavior, we hadn't seen that in the past.
They've been outspending their cash flows by a lot, 120%, 125% for the past several years, and that obviously drives growth. If you're just spending within your means, it doesn't necessarily drive growth. If you're having to spend less than your means because you're trying to pay down your debt, then that's going to result in the basin shrinking and as we all know, the solution for low gas prices is usually low gas prices, and that's probably what we're going to see this year.
Yeah. My last point is on my favorite topic, dividends. I think going back to the comment about how crucial it is to manage the balance sheet, is it a time now to consider doing away with the dividend completely, at least for the next year or two until the situation clarifies? One reason for saying that is because I think dividends are, at the moment, value-destroying from a shareholder's point of view. I think shareholders have to pay taxes on dividends, and to the extent that the market values you on an enterprise basis, every dollar you pay out as dividend affects the market cap.
Those are all valid observations. I think that they're ones obviously that our board is very aware of. We debate as a board the pros and cons of the dividend constantly. We talk all the time about the dividend level and the appropriateness of having a dividend through various environments. I think we've reacted over the last couple of years by obviously cutting the dividend back a lot because of the environment we felt we were headed into. We do as a corporation and the board feels strongly that they do have the flexibility to adjust the dividend as we go and as we see the market evolve and play out. I think the dividend level that it's at today, the absolute dollar figure isn't that substantial relative to the size of the enterprise and our cash flows.
It's still there, and you're absolutely right that it's a lever that the company could pull at any point if we felt we needed to. I'll only leave you with that it's a constant topic of discussion. The board talks about it more than just once every quarter. Really, it's probably reviewed by the board more like once a month. Every month that it's offered up. I think as things change into the future, as we get some more clarity as to which direction we're headed, we will respond accordingly with the dividend level.
Yeah. I was looking at the net debt reduction last year. I think it's about CAD 80 million. If you look at the dividends in relation to that CAD 80 million, the CAD 40 million dividends also is quite significant, right?
Yeah. As I mentioned earlier, the three forms of sort of capital return to shareholders, paying down debt and paying out dividends or even buying back stock, all three of those we've had at our disposal, and we've chosen to really put the majority of the weight towards that balance sheet and the debt repayment, with a lesser focus on the dividends than it used to be, and trying to preserve as much liquidity as we can.
Thanks, Darren, a lot for the comments. I do really appreciate it. I don't want to give the wrong impression with my questions that I'm very negative about how management has done. I still think you're the best-managed oil and gas company out there. I think management has done an excellent job under the circumstances. Thanks again very much.
Well, thanks very much for your question, Ang, and appreciate that glowing endorsement. We'll continue to grind away and do the very best job we can in this volatile environment.
Speakers, I'm showing no further questions in the queue at this time.
Great. Well, thanks, Jimmy. Thanks, everyone, for listening in, and a lot of good questions today. Obviously, we've come through a volatile 2019 and had to react to all the changes. 2020 looks like it's going to be another one, so we're going to be very practiced at being nimble and reacting to what comes down the pipe, whether it's coronavirus or it's oil prices or gas prices or whatnot. We're going to keep grinding away.
As we mentioned, we slowed our capital program down and pushed a little of that capital into the back of the year so that we can hopefully react and see some better commodity prices to drive some of that capital into, and see some more excitement in the back half of the year here. We'll be back to you in a couple of months with the first quarter reporting in May, and we should have a call then to talk about that and what the outlook looks like. Thanks for tuning in, and we'll talk to you then.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program. You may now disconnect.