Q2 2024 Greenfire Resources Ltd Earnings Call

Participants

Robert Loebach; Vice President, Corporate Development & Capital Markets; Greenfire Resources Ltd

Robert Logan; President, Chief Executive Officer, Director; Greenfire Resources Ltd

Tony Kraljic; Chief Financial Officer; Greenfire Resources Ltd

Jason Wangler; Analyst; Imperial Capital, LLC

Presentation

Operator

Good morning, ladies and gentlemen. Welcome to the Greenfire Resources second quarter 2024 results conference call. As a reminder, all participants are in listen only mode and the conference is being recorded (Operator Instructions) I’d like to turn the meeting over to Mr. Robert Loebach, Vice President of Corporate Development and Capital Markets. Please go ahead, Robert.

Robert Loebach

Thank you, operator. Good morning, everyone, and thank you for joining us for Greenfire’s Q2 2024 earnings conference call. Please note the Greenfire’s financial statements, MD&A and press release are available on our 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, I’ll remind everyone that this conference call contains forward looking statements, references, non-GAAP and other financial measures and as such, listeners are encouraged to review the associated risks outlined in our most recent MD&A. All dollar amounts discussed today refer to Canadian dollars unless otherwise stated.
Our capital expenditures and production amounts discussed today are on a working interest basis net to the company, unless otherwise stated. References to Hangingstone facilities refer to the expansion asset and demo assets collectively.
On 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 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.

Story continues

Robert Logan

Thank you, Robert, and good morning, everyone. We are pleased to share details from Greenfire second quarter, which featured strong financial performance despite our team navigating some operational challenges, including the wildfires in Northern Alberta.
First and foremost, I want to express appreciation for our team’s swift response to the wildfires, out of an abundance of caution we temporarily evacuated all nonessential personnel from our operated facilities and halted drilling operations at the expansion assets on two separate occasions once in May and once in July, which I’ll speak to shortly.
Safety will always be a top priority at Greenfire, and we are proud of the team’s commendable job and taking prudent steps to minimize the risks to staff and contractors, while protecting the assets during this difficult time. All staff are back in place, and we have fully resumed operating and drilling activities.
Consolidated production in Q2 2024 averaged 18,993 barrels per day, above 3% lower than Q1 2024, but 5% higher than Q2 last year. The quarter over quarter delta reflects operational reductions to events when necessary replacement work associated with third party downhole temperature sensor failures at the expansion.
At the demo asset, the impact of delayed regulatory approval to recommence disposal operations, along with longer than anticipated steaming requirements at the three — recently drilled refill wells also delayed production ramp-up.
With respect to the wildfire impacts in May, the fire was closer to our facilities and in addition to delaying drilling at the expansions assets, it also resulted in production rates being reduced in preparation for the potential risk of a full evacuation.
The July wildfire impact again resulted in limiting site personnel to a central staff, reduced production rates and temporary halt of drilling and temperature sensor replacements. With these shifts in timing for the production growth that was originally expected during Q2, the company has adjusted our full year guidance with an updated 2024 outlook.
This updated outlook anticipates consolidated average production of 20,000 to 21,000 barrels per day based on fully funded capital expenditure program between $80 million and $90 million, driving year-over-year production growth of between 13% and 19%.
Post quarter end we have seen consolidated bitumen production increase to an average of approximately 19,660 barrels per day in the month of July and 21,050 barrels per day from August 1, to the 13. These increases are largely owing to initial production additions from completed downhole temperature sensor replacement capacity expansion asset.
We have successfully replaced, they’re failed third party downhole temperature sensors at three of five refill wells at the expansion assets with a net short production from these wells being in line with the average productivity rates of the five refill wells for the temporary centers did not fill.
The remaining two centers were damaged to the point where a redrill the wells was required, timing of which was impacted by the wildfires. One of these redrilled was completed successfully in June and the others currently underway.
As outlined in the press release, following these initiatives, production at expansion asset increased to 16,650 barrels per day in July and 18,150 barrels per day from August 1 through August 13. At the demo assets I am pleased to confirm receipt of regulatory approval to restart the existing disposal, which is now underway as the timing of this work had previously been delayed by the wildfires.
Further we have drilled the second disposal well at the demo asset that is awaiting regulatory approval, which is anticipated during the third quarter of 2024. Once both disposal wells are approved and have commenced operations Greenfire’s, water handling and operational flexibility will be intense, which we anticipate will support higher production rates.
Three extended reach refill wells were successfully drilled at the demo asset during Q2 2024, which have been circulating steam in anticipation of first production, which utilizes water handling afforded by the disposal wells capacity.
The initial temperatures of these rebuilds were colder than expected, which necessitated the circulation. The cooler reservoir temperatures are potentially indicative of additional recoverable oil. To accelerate production in Q3 2024, we intend to pair one of the refill wells with an injector well to form a traditional SAGD welfare.
In addition to our continued focus on optimizing our operations, we remain committed to debt reduction. In July 2024, we redeemed USD61 million of the USD300 million senior secured notes due 2028 during the inaugural semiannual redemption period, which Tony will expand on during his comments.
To further support our production growth plans, Greenfire continues to grow the bench strength of its talented team of thermal experts. I want to take this opportunity to welcome Jonathan Kanderka as our new Chief Operating Officer. Mr. Kanderka brings an extensive history with SAGD and thermal operations, most recently at MEG energy. We look forward to applying his expertise to further enhance Greenfire’s operational capability.
Our finance and accounting group has also been bolstered with the addition of Mr. Dean Custance as our new Vice President of Finance. He brings extensive expertise in oil and gas finance, accounting, planning and taxation and has a proven track record with growth companies in our sector.
I’m proud of this team’s perseverance as we overcame various unforeseen operating challenges during the second quarter, following higher production at the expansion site in August, the Greenfire team remains focused on further advancing our drilling program and increasing production at both facilities into year end to deliver on the company’s updated 2024 outlook.
I will now hand the call back to Robert.

Robert Loebach

Thank you, Robert. Aligned with our strategy, green fires continue to execute our WTI focused commodity hedging approach. Designed to reduce the volatility of adjusted funds flow and underpins the capital expenditure program. As of the end of Q2 2024, the company’s hedging program for 2024 features 11,500 barrels per day of fixed price swaps for WTI at a price of just under USD71 per barrel.
And for the first half of 2025, it features costless collars for 8,600 barrels per day with an average floor of almost USD59 per barrel and an average ceiling of over USD85 per barrel. These contracts support Greenfire ability to fund our capital program from internal cash flows in a volatile commodity price environment.
Greenfire production is 100% weighted to benchmarks linked to Canadian heavy oil pricing, providing material exposure to improvements in the WCS differentials to further support Greenfire’s adjusted free cash flow generation potential.
Building on the momentum realized over the past several months Greenfire continues to actively engage with the capital markets and enhanced corporate name recognition with investors. We participated in multiple investor conferences, one-on-one meetings as well as in-person events in New York, Calgary, Vancouver and Toronto.
An analyst for a major Canadian bank to launch coverage on the company and we have an active fall schedule planned with conferences and marketing through the balance of 2024 in both Canada and the US. We look forward to continuing to hold meetings with new investors globally and share how Greenfire is redefining oil sands expectations.
I will now hand the call over to Tony Kraljic, our Chief Financial Officer, to discuss highlights from Greenfire, financial performance.

Tony Kraljic

Thank you, Robert, and good morning everyone. Greenfire benefited from stronger realized commodity pricing through Q2 2024 and a more favorable WCS differential to WTI compared to both the previous quarter and to Q2 last year. This contributed to operating netbacks of $36.68 per barrel, a 49% increase over Q1 and a 59% increase over Q2 2023.
Strong pricing and lower operating expenses in the quarter also drove adjusted EBITDA of $58 million — $58.4 million and adjusted funds flow of $47.2 million, again, higher than both the previous quarter and the same quarter of 2023, even with $13.8 million of realized losses on commodity risk management contracts.
Our capital program, a total of $23 million was invested in property, plant and equipment during the quarter, of which 90% was allocated to drilling activities at both the demo and expansion assets, with the balance directed to various facility optimization project. As such, Greenfire generated $24.2 million of adjusted free cash flow in Q2.
Liquidity at June 30 totaled approximately $210 million comprised of $106 million of cash and cash equivalents, including approximately $50 million of additional working capital, supported by the accelerated collection of oil sales for June 2024 and a $50 million of available credit under our reserve-based credit facility.
The face value of the company’s USD300 million senior secured notes due 2028 was approximately CAD410 million at quarter end, assuming the USD, Canadian dollar exchange rate at the end of Q2.
As Robert mentioned earlier, we’re pleased with our meaningful debt repayment in July by using the excess cash flow [sweep] mechanism to redeem approximately USD61 million or 20% of the outstanding 2028 senior notes.
We continue to reduce debt in the near term, using similar percent of our excess cash flow to semiannually, redeem a portion of these 2028 notes until total indebtedness is less than USD150 million. At that point, we have greater flexibility to allocate up to 70% of excess cash to future investments and potential shareholder returns and 25% of that to debt repayment.
With our $1.8 billion of corporate tax pools, lower prepaid royalty rates at the expansion assets due to sizable unrecovered royalty balances and no gross overriding royalty obligations at the Hangingstone facilities, Greenfire remains favorably positioned.
These advantages enhance our adjusted free cash flow generating potential, especially during periods of high commodity prices. Furthermore, we are seeing the benefit of the narrowing differentials following the completion of the Trans Mountain expansion, given 100% of our production is tied to crude oil benchmarks linked to WCS differentials.
With that, I’ll turn it back to the operator to open the line for questions.

Question and Answer Session

Operator

(Operator Instructions) Jason Wangler, Imperial Capital.

Jason Wangler

Thanks so much. Good morning, everybody. Wanted to just ask the production increase you guys have seen obviously July and of late, a lot of things were kind of going on during the second quarter, I know, but do you have an idea of just how much of that uplift is kind of de-bottlenecking in that facility is kind of getting back to where you want them versus kind of these new drills? Because it seems like it’s really ramping up, pay more quickly than I would have thought.

Robert Logan

Hi Jason. Robert Logan here. I would say right now the majority of what we’re seeing is due to the drilling. The reason for that is a lot of the facility debottlenecking happens during the turnaround which are scheduled for September and October for expansion and demo respectively.

Jason Wangler

Okay. And the other thing I was curious about I just noticed in the release you talked about a couple of minor acquisitions. Could you maybe just talk about what you — what was there and what you’re seeing in the market? Obviously, I know there’s some constraints, I think with your notes right now, but just how you’re seeing the M&A market of both with what you’ve already done and what you’re thinking about doing in the future?

Robert Logan

Tony, did you want to kick that one off?

Tony Kraljic

Sure, happy to have. Hi Jason, how are you today?
In terms of the question — good. So we acquired two small acquisitions here, mostly related to tuck-in acquisitions. So the first one was a small gas assets that were at a shallow reservoir over our existing oil sands acreage. So we made that acquisition to better control our land base.
So it was more related to ensuring we had full control of the reservoir and not having any competing interests with some of the small gas assets on that. So it’s pretty minor acquisitions, very small volumes of gas. It was there purely to ensure our ability to operate our reserves most effectively.
The second acquisition was acquiring (inaudible) out of receivership. So this opportunity came to us at the right time. It’s something we’ve acquired at this point for nominal consideration, and it’s something we’ll assess in the future when we look to advance that project. For now, we continue to remain focused on moving forward our field plant concept at existing expansion in demo. So this is something for the longer term.

Jason Wangler

Great. I appreciate it. Thanks so much.

Tony Kraljic

No Problem.

Operator

(Operator Instructions) Since there are no more questions. This concludes the question and answer session. I would like to turn the conference back over to Robert Loebach for any closing remarks.

Robert Loebach

Thank you, operator. On behalf of Greenfire, we appreciate you joining us today on our second quarter of 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.

Operator

This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.