Thank you for standing by. Welcome to the Peyto's First Quarter 2023 Financial results onference Call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 11 on your telephone. If you'd like to remove yourself from the queue, simply press star 11 again. As a reminder, today's program is being recorded. Now I'd like to introduce your host for today's program, Mr. Jean-Paul Lachance, President and CEO. Please go ahead, sir. Well, thanks, Jonathan. Good morning, folks, thanks for joining Peyto's first quarter 2023 results conference call. I'd like to remind everybody that all statements made by the company during this call are subject to the same forward-looking disclaimer and advisory set forth in the company's news release issued yesterday. In the room with me today, we have the entire management team, Kathy Turgeon, our Chief Financial Officer, Riley Frame, our VP of Engineering, Tavis Carlson, our VP of Finance, Todd Burdick, our VP of Production, Derick Czember, our VP of Land and Business Development, Lee Curran, our VP of Drilling and Completions. Before we get into the details, I'd like to acknowledge and thank the Peyto team for their efforts over the past quarter, especially our people in the field for their extraordinary commitment to Peyto. Many of these folks were evacuated from their homes and they had to get themselves and loved ones to safety during last week due to the wildfires burning near Edson, while also taking care of Peyto's assets in the field. On behalf of the entire management team and the folks here in the office, know that you're on our minds, and we appreciate what you do. We'd also like to acknowledge the brave efforts of the wildfire emergency responders and those who continue to be displaced from their homes. The recent cooler weather has provided some reprieve for those fighting the blazes, but we know the forecast contains some hot, dry weather in the future, so we're thinking of you as well during this difficult time. Despite the rapid drop in prices throughout the quarter, Peyto managed to deliver strong operating margin of 71%, coupled with a profit margin of 32% that delivered earnings of CAD 9 million. We declared CAD 58 million in dividends. Funds from operations was actually quite strong considering where prices were, thanks in large part to our disciplined hedging program. When we look back at the past 10 quarters, we've increased production by 32% from 78,000 up to 103. We paid out CAD 184 million to shareholders in the form of dividends, and we paid down CAD 300 million worth of debt too. Quite impressive. Unfortunately, we did not participate in the Milan price frenzy this winter, but we still have 40,000 MMBtu pointed at that market over the next year. You know, we'll take advantage of any future price spikes there. Operating costs were up in the quarter, which is usually the case in the winter when we use a little more methanol and power costs are higher. We also had many supplies and services that were up due to inflation. We expect these costs will come down throughout the year, and despite these increases, we still have the lowest cash costs in the industry. As far as capital activity in the quarter, we ran with four rigs through the end of March, and we drilled our longest drilling program, well program ever, using our Extended Reach Horizontal design across several formation targets. Perhaps later we'll get Riley to expand on the results of that program. We drilled more wells on the lands we acquired last year in Brazeau, we've increased production on those assets by tenfold, which has filled the new Aurora plant after we did some gathering and sales pipeline optimizations. In the first quarter, we also built a large diameter pipeline from our Swanson plant down to the Cascade Power Plant, which is under construction. We're proud to be a gas supplier of 60,000 GJs a day. That's about half the natural gas requirements for the plant. It will be the most efficient power plant, generation plant in the province when it comes on stream later this year. We can't share the confidential pricing agreement we have. If power prices are anywhere close to where they were in 2022 or even 2021, we'll be very pleased relative to what we would sell that gas at AECO. Speaking of AECO, we don't have any exposure to that market this summer or next, since we've got a broad diversification portfolio to other markets where our gas, you know, will be sold. We recently received our long-awaited Tranche five service that was part of that 2021 NGTL expansion, which was delayed over the last couple of years due to COVID and construction problems. We have ample service now to ensure our gas gets out of the province and then some, a little bit extra on top of that. We also have more than enough NGTL firm receipt service in case there are curtailments due to summer maintenance this year. This also allows us on top of that to grow our future volumes without fear of the system being full and having to wait on future expansions. We're well-positioned there too on our service. We currently have three rigs running now through breakup, although it's obviously relatively dry out there now, we're all too aware of how wet June can get. We've made sure these rigs are positioned on sites with good access to good access. We're drilling multi-well pads and minimizing the moves. After that, we'll see where prices are and where costs are at, and we'll determine how aggressive we go after the back half of the year. The short term, we need to navigate through this current wildfire situation, and as we said in the release, we've actually been able to restore essentially all of our production from the two plants that we shut down as a precaution. I think now all we're really waiting on is the non-operated production to come back on stream, which should be shortly. We've also learned some things and we've put in place some responses in case this flares up again. At this time, we feel the impact on quarterly production is minimal, providing we don't get, you know, hit again with another evacuation or something like that. We're working with our third-party liquids egress operators to ensure we have contingency plans as well. You know, ultimately, we believe that natural gas, you know, is the fuel of the future. We have a real opportunity to displace dirtier fuels around the world if we continue to build out our LNG export capacity here in Canada and in the U.S., because nobody does it better than Canadian producers when it comes to responsible low emissions development. You know, renewables have a place, but natural gas has proven to be the most reliable energy source, especially in harsher climates where, you know, solar and wind just can't meet demand when you most need it. We believe Peyto is well equipped to supply that gas as we go forward with our low cost structure, our low emissions intensity production, our price risk management, and our disciplined approach to shareholder returns. Before we turn it over to questions, I just A reminder that our annual general meeting is next Wednesday, May 17th, at 3:00 P.M. here in Calgary. You can get the details on the venue at the bottom of the press release. Before we go to the phone for questions, I think I'd just like to address, you know, a few comments or questions about the hedging loss in Q1 that came in overnight. I might ask Tavis to give me a hand with this. I think we just wanna remind folks of, you know, why we hedge and, you know, I guess another reminder of what we should expect going forward with our hedging program under the current strip. Maybe Tavis, if you could elaborate a little bit more on that and also on the fact that, you know, what other market diversification have we been able to get this quarter, and then how is our approach gonna be on hedging that as well? Yes, sir, JP. We really hedge to secure revenue. We wanna protect our balance sheet, we wanna protect project economics, and we wanna stabilize our funds from operations quarter to quarter, so we can fund on our dividend. I know we've had some significant hedging losses over the last number of quarters as gas prices were strong. Going forward, we're now modeling substantial hedging gains for the next year and a half. Our mark-to-market hedge position at the end of March was CAD 149 million, which increased from a liability of CAD 111 million at the end of last year. Really, that's about those Milan contracts rolling off and then the fall in natural gas prices created that position for us. In terms of diversification, in 2023, we've added around 90,000 MMBtu a day of basis deal on NYMEX in Chicago, and those are in Cadotte 25, 26 and 27. We're getting ahead, securing various markets. That's gonna provide exposure to good prices. We like the basis deal, and we can get basis at or below pipe costs. The other benefit is we don't have long-term commitments with those. Right. When we talk about hedging, you know, at those markets, you know, I think it's safe to say, well, we're gonna leave some of these more volatile markets open. You know, Milan being one obviously. Right now it's come back in, but it could easily spike again. It wasn't just two years ago in the winter where we had the Ventura really pay off, and we had left that exposed, and I think we made CAD 25 million over a weekend. It's safe to say that, you know, as we look forward here, we are gonna leave some of these more volatile markets exposed in case we hedge those Milan volumes two years ago. At that time, that was, you know, that was a superior price to what we could get at AECO at the time. That was why we did it. Again- That's right. What you said is important. It's about securing revenues, and we can't predict the price. A lost opportunity a value here, but again, it's the security of the revenue that's important. That's right. Maybe we'll open up to questions from the phone. Operator. Certainly. Ladies and gentlemen, if you'd like to ask a live audio question at this time, please press star one one on your telephone. One moment for our first question. Our first question comes from the line of Chris Thompson from CIBC World Markets. Your question please. Yeah. Good morning, everyone. Thanks for taking my question. This one's just regarding the CAD 100 million note that you have coming due. Just wondering, you know, at this point, if you have any plans for that or what are some of the scenarios that could play out that we should be thinking about? Sure. Okay. I might ask Kathy to address that one. You're referring to the note that comes up in October of this year, that's CAD 100 million at. 3.7. 3.7% interest rate. Yeah. Go ahead, Kathy. We are gonna be flexible on that. It's a bit too early to talk to the noteholder, the existing noteholder, but we have a strong relationship with that noteholder. It's one noteholder. We may roll that note over if we can get reasonable terms. Otherwise, we do have the ability and the capacity on our bank credit facility to just pay it down. It's really gonna be whatever interest rates we can secure. Okay. Just remind me, average interest rate on your credit facility right now? Our average interest rate right now is probably about 6.5%. Okay. That's, you know, 4% on the long-term notes, of which we have roughly CAD 400 million, a little over CAD 400 million on the long term. Fixed notes is 4% and then coupled with the revolver, right? Yeah. The revolver alone is, about CAD six and a half right now. Right. Okay. Underlying interest rate is 5%. Okay, great. On my next one, just with respect to dividend sustainability, a lot of investors are have been asking the question, how should we be thinking about the way you look at your dividend, you know, stress testing it down to certain commodity prices? What are your thoughts around that? Yeah, I think, you know, Tavis mentioned it earlier, the reason, and I did too, the reason why we do the hedging program is to help secure those revenues so that we can be comfortable with the level of dividend we set. When we look back at November when we set this, you know, when we set this dividend level, we were cognizant of the fact that prices could fall, and we looked at the sensitivity around that. You know, I think, you know, as long as prices, the strip plays out, everything was gonna be just fine. I think we look at that from two perspectives. One is not only the dividend sustainability, but also, you know, the capital program that we're drilling. We wanna make sure that the decisions we're making on deploying capital is giving us a return. We're cognizant of the fact of where the prices are, and we continue to hedge the future. I think that's the thing to remind everybody. Our hedges don't roll off. We're continuing to hedge. Our hedge level now for 2024 is already up to- 32% on gas. 32% on gas. You know, we are securing those revenues 'cause prices are in contango, and we can take that off the table, so it gives us confidence to continue to sustain the dividend. Okay, great. One other question from me, just with respect to inflation. I noticed in your note you talked a bit about drilling costs per meter coming down a bit, completion costs per meter up a little bit. In terms of line of sight to, you know, a bit of relaxation in inflationary pressures going forward, I think we've seen a bit of an improvement, but it's still there. Can you give us a bit more color on your outlook for the next three quarters? You know, I think we feel that inflation has tapered off here and that we're not gonna see significant increases like we did last year. You know, prices, you know, we'd like to see them come down, but I don't think that in the short term is realistic. We'll see what happens with activity levels here come post breakup if that changes. You know, I think, I think, you know, on the operating cost side, we've seen some inflation that it was a bit of a lag to seeing those costs go up. I think on drilling and completion side, we saw costs, you know, go up quite quickly earlier on, and then operating costs seemed to lag a little bit, and we saw more inflation here this quarter. you know, our our outlook for inflation is, it's... we're not planning to have it, to see it increase. I guess it'll depend on the activity levels we see going forward. Okay. All right. Thank you very much. I'll hand it back. Thank you. One moment for our next question. Our next question comes from the line of Jeremy McCrea from Self Employed. Your question, please. Hi, JP. Thanks for all the hard work this quarter. You know, in the monthly letter as well as in all the disclosure, the topic of the influence of commodity prices, hedges, inflation, and costs, I think has been well aired, and thank you very much for that. The area that I find a little bit harder to understand is there was a target year-end production level of 110,000 barrels a day, and CAD 500 million has been spent in the last year, and yet we've been down every month since the beginning of the year. Spending continues, we're actually not at 110, we're at 102, and that is a year that we're actually below the year-ago level as per what I saw in the last letter. I'm a little less clear. I'm very clear on the diversification program, the cost, the escalations, all of these things. I'm very unclear on capital expenditures and the issue with production. I do understand that decline rates were a bit higher, is the way it seemed last time this was aired. It does seem that there's a problem here that is deeper. My first question is, are you gradually discovering a deeper problem, you know? Maybe the easiest way is to just talk about what targets you would be comfortable with on production for the second, third, and fourth quarter or whatever you want in terms of looking forward. There, there's 425 if you succeed in being at the low end, 425 million, and production is lower than it was a year ago. That's my question. Where are we, where are we going, and what has happened? Well, thanks, Jerry. Yeah. So we talked a bit about this in the last call, but I'll just elaborate some more on some of the things that we're, you know. I think inflation's a big part of this. We're just not drilling as much to really substantially grow production in the short term. Certainly three rigs isn't gonna do that. We are gonna be somewhat flattish to down slightly over the next little while, I suspect. Then it's the back half of the year that we'll wrap up and continue and then grow. So inflation's a big part of this with the cost structure and just we don't have enough activity. We don't feel that it's a good time to be getting aggressive on that considering where prices are at. I think it's prudent for us to be cautious on how much we're spending. The activity levels just aren't there for us to be able to substantially move the needle. If we look back at our trailing 12-month, I didn't put it in the release, but the trailing 12-month Capital Efficiency, we're probably about CAD 14,000 when we look at, you know, the last three quarters, when we look backwards at what we spent and what we've gained in production. That's when I remove some of the bigger hitter, big hit items like, for example, the plants and the acquisitions that we've done. When we remove those costs from the equation, which are, which I would consider more one-time, you know, opportunities that we took advantage of last year. The spend is higher than we would have expected over the last year or than we normally. We are targeting, still targeting, you know, a Capital Efficiency metric for by the end of the year of around 12,000 per flowing or somewhere in that range. We're still. If we look at our projects, if you look what we have going forward, we still expect to achieve that. That means we will be growing production on the back half. If we add that fourth rig, we'll be growing back up again, and that's the plan, Jerry. Thank you. Thank you. Once again, if you have a question at this time, please press star one one. Our next question is a follow-up from the line of Chris Thompson from CIBC. Your question please. Go ahead, Chris. Oh, yeah, sorry. Just talking on that same topic from Jerry there. With respect to the Extended Reach Horizontals that you're drilling, are you seeing an uptick in productivity per lateral meter accessed, or are we going to expect sort of the same per meter productivity but just seeing the overall well cost per meter drop? I guess what I'm asking is, do the Extended Reach Horizontals drive an improvement in Capital Efficiencies over time? How are you thinking about that? I'll maybe get Riley to elaborate on it a little bit more. One of the things with the Extended Reach Horizontals is obviously we are tapping into more resource when we extend out, so we're gonna see reserves, certainly reserves up. Productivity may not be quite as robust, and that is a factor. We're putting more CAD into the ground, but we're seeing, you know, a little bit not quite as. Riley, you can comment on that. Sorry. I would say on the Extended Reach, like, we're not necessarily seeing a per meter increase on the upfront productivity. If anything, wellbore limitations, friction and other stuff like that actually can choke that initial productivity from these wells. What we do see is a substantial increase or a relatively close to linear increase in the reserves associated with the extra meterages that we do drill. From the perspective of, say an F&D number, we definitely see that scale with how far we drill. The economic benefit of drilling these wells longer is definitely coming through. I think you can see it in, you know, in the CAD we spend as far as the efficiency is, as far as that goes, that, you know, part of the reason that our per meter numbers and our, and our per common, per horizontal meter, numbers or for Stimulated Horizontal are where they are is because we are combating, you know, rising prices with being more efficient with the CAD as we drill longer. Yeah, overall, I think, like, the economic benefit of them is definitely paying off for us, for sure. How about on the this concept of parent-child interference or maybe not even that specific, maybe just thinking tier one versus tier two inventory, like operators in the U.S. have been, kind of messaging that move into lower tier inventory. What are you seeing for Peyto from an inventory quality perspective? Like, we've almost combated the sort of step down in reservoir quality by going long. You know, if you look back at, you know, what we were drilling, you know, 2015, 2016, 2017, and you compare that from a reservoir quality perspective to what we're getting today, you know, the reservoir quality is lower today for sure, but we've actually been able to offset that by going long, which is why everybody is going that route, right? Yeah, it's a way of... From an economics perspective, it's, you know, the ERH stuff is a way of turning tier two into tier one is kind of the way we look at it, right? Right. Okay. Yeah. Yeah, it sounds like reservoir quality, kind of, the top tier stuff has been consumed, to some extent. Just, you know, trying to upscale the tier two stuff with technology. In terms of your inventory remaining, how would you break down sort of, you know, what you have left in terms of tier one opportunities, tier two, tier three? Uh- Sorry, do you wanna go? Yeah, I think the way to look at it, Chris, I mean, if you'd asked that question three, four years ago, it would be a different answer than it is today because obviously with technology changes in this center of horizontal design, for example, we moved things from tier two to tier one. We don't look at our inventories the same way. We look at this from the perspective of what we have in front of us, and, you know, what we want to drill every year. We, you know, we just continue to high grade. We don't bucket our opportunities. If any geologist is going to drill his best wells first, and that's always the way it goes. The engineer's job is to move those things, you know, up the chain, as it were, into the tier one category, with some help with respect to the design of the wellbores or the, or the, or the completion techniques. Okay. All right. Well, thank you for the follow-up. I'll hand it back again. Okay, thanks. Thank you once again. As a reminder, if you have a question, please press star one one. One moment for our next question. Our next question is a follow-up from Jeremy McCrea. Your question, please. Yeah. The, the last question, the answer to the last question, was excellent, and, but it does kind of, slide into, this follow-up. The first, the first part of the follow-up would be a top-down, question, which is, to what degree, has the balance of the industry, both in Canada and the US... You know, this is something that you may have the answer right now, or I would look forward to it in your letter or some way in the future. To what degree has the industry experienced the costs? I'm interested in that from a competitive viewpoint, how are we doing versus everybody else on this inflation front? Also, almost more importantly, you know, if industry CapEx levels are similar or up a bit, this inflation is actually having that real effect on activity, it would theoretically bode well for future prices. That's the first part. The second part on a bottoms-up basis is, given the new, you know, we were at CAD 10,000 per barrel of economics, and now we're at CAD 14, settling back down to CAD 12. What's the incremental CapEx that implies to hold production flat? Anyway, over to you. If you answered the first question so well, it did kinda lend itself to these follow-ups. Yeah. Okay. Jerry, I think to start with the second question first. You know, we think that around somewhere between CAD 375 million and CAD 400 million keeps us flat, to answer that question, and that would be up from... You know, I think it's up, it's basically the inflation to the, to the large part that's driven that efficiency costs up, right? Up 20%, 30% easily, right? Probably 30% more realistically. Your first question was just... I'm sorry, I lost it. I thought there- In industry-wide inflation and impact on activity. Yeah. We've seen, I mean, two things here. One is that everybody's seeing the same cost increases that we are. Everybody's trying to fight them the same way we are with being more efficient with what they do. You have to remember, we start at a spot that's lower than the rest of the industry. You know, these increases to us, we've been squeezing out every bit of cost structure we can all the time, and so that when, you know, when prices go up, they go up, and we see it all. We don't have a lot of low-hanging fruit on optimizations because we're continuing to do it all the time. I'd argue that that's what we're really good at. We might see a bigger percentage than others, We're already starting from a lower place, right? You know, I don't know, Lee, if you wanna add to that, anything about what the industry's seeing. I think, you know, rig rates have gone up. Everything's gone up. We've actually been quite... You know, we've done pretty well on a lot of these fronts, I think, managing our costs. Yeah. With the industry. We were fairly well insulated relative to industry last year. Just a lot of timing on our FP&A processes, business contracts. Protected us relative to some of those operators that kinda picked up incremental activity late in 2022 and early in 2023. We were locked in on a lot of our services, so that did insulate us relative to our peers. It looks like the battle for personnel has subsided a little bit in the industry. That was a big factor in some of these inflationary pressures. It seemed like everybody was commanding a top dollar rates just to provide personnel, hopefully qualified personnel. It seems like that issue has subsided a bit. Then pretty much everything we do is tied to fuel price, oil price. It's commodity related. As we see some stability and arguably where it goes forward, oil price, you know, some of those, some of those services we expect to come off. We haven't seen huge reprieve yet. But as J.P. mentioned, we did start, you know, We started at a lower point on the scale relative or, our data indicates we started at a lower point on the scale relative to our peers. So some of the% increases maybe, you know, look a little worse than our peers, but of course, still that, it still keeps us in a advantageous position, favorable to the rest of the industry. We really have a... You know, the equipment we use, the processes we use are very much simplified. You know, if you can drive downtown on a Civic versus an F-350, you know, that's kind of we try and keep it simple for that purpose. A lot of industry has pushed towards, you know, a lot of automation, a lot of higher tech stuff, but that comes with a big cost and a big. Those services have to command a higher price to capitalize that investment. Yeah, I don't know how else to answer that. Going forward, we do expect steel is a big part of our cost. The increases in our tubular goods have been dramatic. 2.5, you know, from lows, 2.5-fold of pricing we saw from our all-time lows. I think we're gonna see some retraction in that. When? I can't answer. Hopefully later in the year. Right. In the silver lining category, if we're kind of peaked out at where we were and we're down to 102 and we're holding for the rest of the year, and I know you didn't say that was the objective. You said that at three rigs that's how it would work out. Would it be reasonable to assume that the absent inflation, that the CapEx level would moderate because the decline level would also be moderating, given that this isn't an expansionary program anymore? That's the end of my follow-up. Yeah. Clearly, as you, as you know, you know, tight gas, you know, the first year decline is the highest. The less the size of the program we drill, the lower the declines are following, the following years. We've already seen that, like three, four years ago. Actually, more than that. Back in 2017, I think I looked at the numbers here. We had a 37% decline, right? We had built a lot of production over that time. You know, now we're somewhere closer to 29%, 30%, right? You know, that's because we've slowed down. That's, you're right in your assessment that as we moderate the growth, we're gonna see an even lower cost to add because our declines will be lower. It all depends on where inflation goes from here, right? Right. Yeah. Thanks, Jerry Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to JP for any further remarks. Okay. Well, thanks a lot, folks, and we'll see you next quarter. Actually, again, a reminder, our annual general meeting is next week on Wednesday here in Calgary. Thanks. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.