Greenfire Resources - Q1 2024

Transcript

Operator (participant)

Good morning, ladies and gentlemen. Welcome to the Greenfire Resources first quarter 2024 results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star, then one on your telephone keypad, and should you need assistance during the conference call, you may signal an operator by pressing star, then zero. I will now turn the meeting over to Robert Loebach, Vice President of Corporate Development and Capital Markets. Please go ahead, Robert.

Robert Loebach (VP of Corporate Development and Capital Markets)

Thank you, operator. Good morning, everyone. And thank you for joining us for Greenfire's Q1 2024 earnings conference call. Please note that Greenfire's financial statements, MD&A, and press release are available on our corporate website with the associated documents filed on EDGAR and SEDAR+. Our corporate presentation has also been updated and is available on our website. As we begin our discussion of these results and details, I will remind everyone that this conference call contains forward-looking statements, references, non-GAAP and other financial measures. As such, listeners are encouraged to review the associated risks outlined on our most recent MD&A. All dollar amounts discussed today refer to Canadian dollars, unless otherwise stated. All capital expenditures and production amounts discussed today are on a working interest basis, net to the company, unless otherwise stated.

References to the Hangingstone facilities refer to the Expansion asset and Demo asset collectively. Today's call is hosted by members of the Greenfire team, including Robert Logan, President and Chief Executive Officer, Tony Kraljic, Chief Financial Officer, and myself, Robert Loebach, Vice President, Corporate Development and Capital Markets. Following the team's prepared remarks, we will be conducting a Q&A with our management team on the call and we'll open the line to questions from participants. I will now turn it over to our President and Chief Executive Officer, Robert Logan. Robert, please go ahead.

Robert Logan (President and CEO)

Thank you, Robert, and good morning to everyone joining us on this call. Given we have shared full details of our financial and operating results in the Q1 2024 press release and MD&A, this morning's call will be focused on providing additional context around Greenfire's current activities and our outlook for the future. Before we get started, I wanted to provide a brief update on the wildfire situation in Northern Alberta. Out of an abundance of caution, Greenfire temporarily evacuated all non-essential personnel from its operated facilities on May 11th. The company is actively monitoring the situation to ensure the protection and safety of our people and assets as the situation continues to evolve. Our thoughts and appreciation go out to the firefighters and other brave responders who are battling the fires.

Operationally, we are very pleased with Greenfire's continued performance through the first quarter of 2024, during which we navigated some challenges associated with extreme cold weather, regulatory delays at Demo, and five third-party downhole sensor failures at Expansion. Nonetheless, we had a responsible, safe, and successful start to the year, with consolidated bitumen production averaging 19,667 bbl per day in Q1, 13% or 2,300 bbl per day higher than Q4 of 2023. These results reflect strong production performance from the refill drilling program that began in August of 2023 and surface facility optimizations at the Expansion asset, partially offset by unplanned impacts from the five previously disclosed downhole temperature sensor failures. I'm also proud of how our team responded quickly and efficiently to changing circumstances during the quarter.

Following continued delays with the regulatory approval required to restart the disposal well at the Demo asset, Greenfire elected to reallocate the drilling rig from the Demo asset to the Expansion asset to advance redevelopment drilling activities. Once this drilling program concludes in Q3, we plan to mobilize the drilling rig back to the Demo asset to continue to drill additional extended reach refill wells. The Expansion drilling program is highly economic and is expected to have a significant positive impact on Greenfire's production growth in 2024. Production performance is anticipated to be further enhanced by continued increases in reservoir pressure at the Expansion asset, owing to sustained high rates of NCG co-injection.

In addition, we have now replaced failed downhole temperature sensors in three of the five refill wells and expect to see increases in average productivity from the affected refill wells that align with the current productivity of the remaining five refill wells that have had functional temperature sensors. Despite the challenges with the faulty third-party downhole temperature sensors, we believe the initial positive results from our refill drilling program and the ongoing facility optimizations clearly demonstrate the high quality and potential productivity of Greenfire's Tier 1 SAGD assets. Prior to moving the drilling rig over to the Expansion asset, Greenfire drilled three extended reach refill wells at the Demo asset, each having lateral lengths of approximately 2,300 meters or 700 meters longer than the refills we recently drilled at the Expansion asset.

In addition, the company drilled a second disposal well at the Demo asset for additional operational flexibility, which is also awaiting regulatory approval to commence operations. With the Trans Mountain Expansion Project operational as of May, Western Canadian heavy oil producers are positioned to benefit from approximately 600,000 bbl per day of incremental export capacity, which is anticipated to result in a structural tightening of WCS differentials over time. We are seeing summer differentials in the $11-$12 per bbl range. While Greenfire does not have any volumes contracted on TMX, the company's production is 100% weighted to benchmarks linked to Canadian heavy oil pricing, providing material exposure to improvements in the WCS differential to further support the company's free adjusted cash flow generation potential.

We are pleased to reiterate our 2024 outlook, including consolidated average production of 22,000 bbl-25,000 bbl per day, assuming a fully funded capital expenditure range of between CAD 70 million and CAD 90 million, which is anticipated to result in meaningful free cash flow generation over the balance of 2024, assuming continued strong commodity pricing. This cash flow generation potential supports our ability to continue to prioritize repaying debt and evaluate implementing a return of capital strategy for our shareholders over time. I will now hand the call over to Robert Loebach, our Vice President of Corporate Development and Capital Markets.

Robert Loebach (VP of Corporate Development and Capital Markets)

Thank you, Robert. Greenfire continues to execute its WTI-focused commodity hedging strategy to support the company's ability to fund its capital program in the current volatile commodity environment. The company's hedging program for 2024 features 11,500 bbl per day of fixed WTI price swaps at a price of approximately $71 per barrel, which enables the company to fund its capital program from internal cash flows down to WTI prices as low as $35 per barrel, assuming a $15 per barrel WCS differential. For Q1 2025, the company added 8,600 bbl per day of WTI costless collars with a floor of about $58 and a ceiling of approximately $84 per barrel.

Our conference, our conference call timing announcement, issued earlier this week, included a notice that Greenfire has resolved the compliance requirement issued by the New York Stock Exchange in February of 2024. The NYSE previously indicated that the company needed to comply with one of their continued listing standards, which required all listed companies to have a minimum of 400 public stockholders on a continuous basis. Greenfire now exceeds that threshold following our TSX listing and the expiration of our six-month lock-up period related to the de-SPAC transaction. I will now hand the call over to Tony Kraljic, our Chief Financial Officer, to discuss highlights from Greenfire's financial performance.

Tony Kraljic (CFO)

Thank you, Robert, and good morning, everyone. With higher consolidated bitumen production and tighter WTI to WCS differential, Greenfire recorded strong realization for bitumen in the first quarter of 2024 compared to the same period in 2023. As such, we generated adjusted EBITDA of CAD 39.3 million in the quarter, including CAD 8.8 million of realized losses on commodity risk management contracts with an adjusted funds flow of CAD 27.6 million. Greenfire invested CAD 31.9 million in our capital program on property, plant, and equipment in the quarter, of which CAD 21.9 million was allocated to drilling refill wells at both the Demo asset and Expansion asset, and approximately CAD 10 million was directed to various facility projects.

The company had available liquidity of approximately CAD 140.2 million at quarter end, with CAD 90.2 million of cash, cash equivalents, and CAD 50 million of available credit under the company's senior reserve-based credit facilities. The outstanding principal amount on the 2028 notes is $300 million, or approximately CAD 407 million, assuming a U.S. to Canadian dollar exchange rate at the end of the Q1 2024 period. As Robert mentioned previously, we remain committed to debt reduction and securing enhanced financial flexibility, with Greenfire planning to use 70% of excess cash flow to semiannually redeem our 2028 notes until total indebtedness is less than $150 million. Our first excess cash sweep under our senior security notes is scheduled for around August 2024 of this year.

Relative to our SAGD peers, Greenfire is favorably positioned with CAD 1.8 billion of corporate tax pools, sizable and recovered royalty balances, resulting in lower prepaid royalty rates at the Expansion asset, and no gross overriding royalty obligations at the Hangingstone facilities. Collectively, these advantages support strong adjusted free cash flow generation, particularly during periods of high commodity prices. Yesterday afternoon, Greenfire hosted our first AGM as a publicly traded company, and we're pleased to report that the resolutions passed in favor, including our director nominees. We appreciate all shareholders who took the time to go through the process. At this point, I'll turn it back to the operator to open up the line for questions.

Operator (participant)

Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, press star then two. Our first question is from Michael Bone with Sona. Please go ahead.

Michael Bowen (Analyst)

Hi. I wondered if you could kind of bridge production, your production guidance from where you are today. If we start with the disposal well, clearly, that is disadvantageous to output at Demo. When do you expect to get those permits or, or that authorization cleared? And how should we think about the ramp-up of the wells drilled at Expansion? When will the remaining sensors be installed and complete? And on a monthly basis, should we start to see production increasing, subject to the fires, obviously, from here on in?

Robert Logan (President and CEO)

Hi, Michael. Robert Logan here. Yeah, it's been frustrating with the continued regulatory delays on the disposal well, particularly since we already have one disposal well that's been operating at the Expansion for years without issue. I will say that the industry as a whole has seen a bit of a slowdown in regulatory approvals, and I think the government's noticed that and taken steps to try to expedite that. I'm not sure if you saw the news, but the chairman of the board and about half the directors at the AER have been changed out now. So I think that we're going to be seeing our approvals imminently here. There's no reason why we wouldn't get the approval here, and we're highly confident that it's going to happen very soon.

We've seen an immediate 1,000 bbl per day reduction when that disposal well went off. So there's a 1,000 bbl a day right there. That brings us from the, you know, just call it to 20,000 bbl a day to 21,000 bbl per day. As the refills at Demo ramp up, you're going to be seeing production from all of those. So that's all coming on. At the Expansion, you saw that the first five refills average 1,500 bbl a day, each, gross numbers, 1,200 bbl a day, net to Greenfire with us, or 1,150, with 75% to us. There's five more where we had the temperature sensors that failed. It's just a manufacturing issue.

These sensors are used throughout the industry, including at all of the existing wells. In fact, you know, I actually installed some of the sensors at the site back in 2002 and 2003, and they're still working. So once you get through the manufacturing issue, and they're highly reliable, and they get a good long life out of them. So the way to think about how we operate the wells is similar to how you're driving down a highway.

If you're driving down and your windshield is starting to fog up, similar to how as our downhole temperature sensors start to fail, for a while, you can still drive at your normal speed, but as more and more of these sensors fail, it's like your windshield fogging up, so you have to drive slower and slower, or you could get a wreck. So the math doesn't mean that all five are going to turn on at 1,500 bbl per day because we have a combination of those that are just slowed down or turned off. But you know, it'll be quite significant on the increase because, well, with five wells down, that's not a small part of our production. Michael, does-

Michael Bowen (Analyst)

Well, I guess when should the other five temperature sensors be completed? When is the work to be completed? And I guess the other question that I asked was, you know, will we start to see production increase on a meaningful basis prior to the end of the second quarter?

Robert Logan (President and CEO)

So three of the five have now been finished, the third one just recently. We've got two more to do. I would've said absolutely, you would see a meaningful production increase before the end of the quarter. The fire potential is what gives me pause, where I can't put my hand on my heart because it's out of our control. So let's hope for some wet weather here.

Michael Bowen (Analyst)

So what do you think your run rate will... I mean, assuming everything was working, what do you think is your current run rate production - pro forma run rate production?

Robert Logan (President and CEO)

That's where our guidance is. I mean, we would be well within our guidance of 22,000 bbl-25,000 bbl per day.

Michael Bowen (Analyst)

Okay. And then the other point, I just wanted to check, the hedging loss that you took in the quarter, that was booked prior to EBITDA, yes? Obviously.

Robert Logan (President and CEO)

Tony, do you want to weigh in on that?

Tony Kraljic (CFO)

Yeah, we talked later. EBITDA, we do show the EBITDA before and after the hedging loss, Michael. So if you look in that detail of our breakdown, and we had it before, so the CAD 39 million includes a CAD 8.2 million loss, as we said in the script. But we do have the breakdown on that for instance.

Michael Bowen (Analyst)

And then obviously, from sort of the top down, you know, WTI was higher in April and remains reasonable. You've talked about the WTI, WCS spread. There's no reason... well, I mean, I know we're still in the second quarter, but if things stay where they are, there's no reason to think that the actual overlying economics shouldn't improve for you guys going through Q2 versus Q1.

Robert Logan (President and CEO)

I think those are-

Michael Bowen (Analyst)

With the exception of output.

Robert Logan (President and CEO)

Ex-exactly.

Michael Bowen (Analyst)

Fine. Thank you very much.

Robert Logan (President and CEO)

Appreciate the call, the questions, Michael.

Operator (participant)

The next question is from Christopher Lembo with Brigade Capital. Please go ahead.

Christopher Lembo (Credit Research Analyst)

Hey, guys. I know the company can't do share buybacks until later this year, but has management been buying shares? And if so, could you share details on the quantum or just more detail in general and maybe your view on the public equity valuation today? Thanks.

Robert Logan (President and CEO)

Tony, is that for you or for me to answer?

Tony Kraljic (CFO)

I'll answer the first part, Robert. You're probably best to answer the second part about management buying. So, you know, you're correct. Until we get to our first cash flow, we cannot look at shareholder returns. It is something we're actually discussing with our board right now, what our plan is going forward as we look to deleverage the debt, in a longer-term basis. We do see ourselves significantly undervalued to our peers.

If you look at our corporate presentation, we do show EV to Flowing Barrel comparison to our top two peers in the Athabasca region, and we're at a 60%-ish discount to our peers on that flowing barrel metric basis. That's what we believe, our shares are significantly undervalued, especially as we look to ramp up production for the remainder of the year. Robert, let me pass it over to you, and you can talk a bit about management buying shares.

Robert Logan (President and CEO)

I agree. I believe we're significantly undervalued. That's why I bought CAD 1 million worth of shares.

Christopher Lembo (Credit Research Analyst)

Great. Thank you.

Operator (participant)

The next question is from Jason Wangler with Imperial Capital. Please go ahead.

Jason Wangler (Managing Director and Senior Equity Research Analyst)

Good morning. Wanted to just ask on the capital spending side, I think you spent a little over CAD 30 million in the first quarter. Just kinda how you see kind of the breakdown the next few quarters to your budget, as well as kinda what's the breakdown of that CAD 30 million in terms of drilling versus facilities and infrastructure?

Robert Logan (President and CEO)

For sure, Jason. So on the call, Tony actually gave the breakdown. So, CAD 31.9 million on that capital program, CAD 21.9 million was allocated to drilling the refill wells, and CAD 10 million was on the facility projects. If you look at that breakdown, that includes a significant amount of long lead items. Obviously, with a year-long drilling program and facilities, you had to buy some significant long lead equipment, and a lot of that was bought in Q1. A couple other things that contribute to higher Q1 costs versus other months. When we do what's called a winter drilling program, so a delineation program to look for where the best places to put our sustaining wells, you can only do that in the wintertime because the ground is frozen.

So we actually brought in a second rig to help us with that. And then additionally, during the wintertime, it's a much higher burn rate than what you have during the non-winter time. Obviously, when it gets to -40 and -50, we need to spend a lot of money on keeping things warm, especially on the drilling rig. So you bring in boilers and hot oilers. We go through a lot more diesel fuel. So, you know, and if you look at other companies there, you'll see usually a higher Q1 than what you do on your Q2 and Q3 numbers. So we expect Q2 and Q3 to be down from there and still within our CAD 70 million-CAD 90 million capital target for the year.

Jason Wangler (Managing Director and Senior Equity Research Analyst)

Okay, great. I appreciate it. Thank you.

Operator (participant)

Once again, if you have a question, please press star then one. The next question is from Nicholas Akarian, a private investor. Please go ahead.

Speaker 7

Hi, guys, congrats on the quarter. My question is on the Demo wells that you guys have drilled. How are you—It's an older reservoir than the Expansion asset, and how should you think about the productivity on a per-foot basis relative to the productivity of the Expansion asset wells? Is it comparable? Is it a little bit lighter? Like, how should you be thinking about that to forecast the production that'll come out of it?

Robert Logan (President and CEO)

Hey, Nick, Robert Logan here. No, you're-- you hit the nail on the head in terms of, it's an older reservoir. It's also a thinner reservoir than what, the Expansion is. The, the Expansion is 25 m to 30 m thick, whereas the Demo is 20 m to 25 m thick. So, you know, immediately, you're not going to get as productive, per meter length in, the horizontal. The second part of that is, the, the Demo has been producing for 25 years now. The Expansion is at seven.

So some of your recovery factors you see at, the Demo are higher than what you see at the Expansion. You know, as a result, your productivity will be a little bit less because your chambers are more mature, they've come down a little bit more, there's less of a pay column there. Now, the thing that we can do to counter that is to just drill more well length.

With Expansion, we were drilling, you know, 1,600-meter-long wells, mile-long wells. And now at Demo, we're almost 50% longer than that. We've been able to push the edges of what the industry has seen, and we're very happy that not only did we drill it, but the harder thing to do, the much harder thing to do in the oil sands, is to get your liner to bottom all the way.

Speaker 7

Mm-hmm.

Robert Logan (President and CEO)

We got our liner to bottom all the way on all of our wells. We're in warm-up process. Having a disposal well would help us warm up a little bit faster, because then we can push harder on there. But I think we're going to be quite happy with what we see on our Demo wells.

Speaker 7

Got you. And then, the other two questions I have are more capital allocation related. One is just post-debt paydown. As that process goes on, how do you guys think about your hedging?

Robert Logan (President and CEO)

Under our bond indenture, we have a twelve-month rolling hedge requirement, and that's in place until the bonds is under $150 million, so that will continue until we hit that point. And then once we are beyond that point, we'll then look at hedging as part of our risk management going forward, and depending on where the market is, we'll make that decision at that time.

Speaker 7

Got you. And then on the capital return side, how do you guys think about the different options? So whether it's a base dividend and variable dividend, special dividends, you know, an NCIB or an SIB, how do you, how do you think in ways that, especially with the liquidity, the low liquidity in the stock?

Robert Logan (President and CEO)

You know, great question. It's one of our active debates right now we're having. Clearly, our immediate, immediate focus is to delever, and that's where 75% of our cash is being allocated to for now. And as we get beyond that, see that the leverage get manageable, we'll look at all the options you mentioned. And to your point, it's a great debate here, right? You know, when we look at our share price, as we talked about, we do believe it's significantly valued, so we do see a benefit of, you know, participating in an NCIB program, so to that effect, and looking to buy back shares. But do recognize liquidity is where it's at.

One of our thoughts is, as we buy shares and create that share support, we could see the share price rise, and with that, you could see other shares come to market and see more liquidity. So that could be, could be an option, but at this point, we continue to monitor and, when we make a final decision, we'll provide that update to the market in due course.

Speaker 7

Okay, great. Thanks, guys, for taking my questions.

Tony Kraljic (CFO)

Thank you.

Operator (participant)

This concludes the question and answer session. I'd like to turn the conference back over to Robert Loebach for any closing remarks.

Robert Loebach (VP of Corporate Development and Capital Markets)

Thank you, Operator. On behalf of Greenfire, we appreciate you joining us today on our first quarter 2024 earnings conference call, and encourage you to reach out to the team should you have any additional questions or wish to engage. Have a great day.