Greenfire Resources Ltd. (GFR) Q3 2024 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the Greenfire Resources Third Quarter 2024 Results Conference Call. [Operator Instructions] I would now like to turn the meeting over to Mr. Robert Loebach, Vice President of Corporate Development and Capital Markets. Please go ahead, Robert.

Thank you, operator. Good morning, everyone, and thank you for joining us for Greenfire's Q3 2024 Earnings Conference Call. Please note that 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 will 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. All 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 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; Jonathan Kanderka, Chief Operating Officer; and myself, Robert Loebach, Vice President of Corporate Development and Capital Markets. Following the team's prepared remarks, we will be conducting a Q&A session, 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.

Thank you, Robert, and good morning, everyone. This quarter represents the first-year anniversary that Greenfire has reported as a public company since we listed our shares on the New York Stock Exchange. As we continue to execute our shareholder value creation strategy, I want to celebrate the significant milestone by thanking the entire Greenfire team for their hard work and dedication. In the third quarter of 2024, we delivered strong results with consolidated production increasing by 30% on a year-over-year basis. Production rose to 19,125 barrels per day, up from 14,678 barrels per day in Q3 of 2023. This growth reflects the success of the inaugural refill well drilling campaign that Greenfire launched in August of 2023. Consolidated production in Q3 2024 increased slightly over the prior quarter. At the Expansion Asset, the team successfully resolved the previously disclosed failure of 5 downhole third-party temperature sensors, including redrilling 2 refills in the third quarter, which are now in production. Higher production from these wells was offset by annual planned maintenance and an unplanned outage on a steam generator at the Expansion Asset, both of which were safely completed in the quarter. Following sustained rates of NCG co-injection, targeted reservoir pressure was achieved at the Expansion Asset in Q3 2024, which is anticipated to support higher production rates. At the Demo Asset, we received regulatory approval to operate 2 disposal wells at the facility. The first disposal well resumed operations in Q3 2024 and the second disposal well subsequently commenced operations in Q4 2024. We also completed the drilling of a new injector well to augment steam deliverability or one of the new refill wells to support, accelerate production growth. The team completed annual planned maintenance at the Demo Asset also in October of 2024. Given these delays at the Demo Asset, we anticipate the annual production for 2024 will average approximately 19,500 barrels per day, slightly below our guidance range of 20,000 to 21,000 barrels per day for the year. With the completion of the new injector well and these regulatory approvals behind us, our 3 extended reach refill wells are now operational at the Demo Asset, driving strong production growth to approximately 4,400 barrels per day and consolidated production of approximately 21,375 barrels per day for November of 2024. We expect the Demo production will continue to improve in December 2024, as recently operational refill wells increase in production, which is further supported by improved water handling capabilities with both disposal wells operational. Given the team's successful drilling track record, we plan to accelerate the drilling of an additional refill well at Expansion Asset in Q4 2024. This will increase the 2024 capital expenditure guidance to $90 million to $100 million relative to the previous range of $80 million to $90 million. In light of the company's discounted valuation versus its pure-play SAGD peers, the Board of Directors initiated a strategic review process in the third quarter of 2024 to maximize value for all Greenfire shareholders. The strategic review process is ongoing with the Board exploring a number of potential strategic alternatives that may enhance shareholder value. The company does not intend to provide further updates on strategic review process unless the Board approves a specific transaction or otherwise determines that the disclosure is necessary or appropriate. In the meantime, the Board and the management team remains committed to maximizing the potential of our assets and protecting the long-term interest of our shareholders. Management continues to make progress on its operational and financial goals with strong liquidity, solid production growth and a strategic focus on reducing debt as well as exploring additional ways to enhance our value. I will now hand the call over to our COO, Jonathan, to discuss our operational positioning and future growth plans.

Thanks, Robert. What differentiates the Hangingstone facilities from other SAGD assets is a relatively low producing well count compared to the facility's current production levels. We believe this relatively high productivity per well, combined with our structural cost advantage for not having to run downhole pumps, clearly demonstrates that we have a Tier-1 SAGD reservoir. The expansion asset currently had 24 producing wells online of the 32 well pairs drilled with estimated production of approximately 22,500 barrels per day on a 100% working interest basis or 16,900 barrels per day net to Greenfire in 2024. The Demo Asset currently has 8 well pairs online of 24 well pairs drilled. Following planned annual maintenance in October, we recently begun production of 3 new refill wells at the Demo Asset, marking the first new drills at the project since 2013. Initial results are strong with the first well averaging production of 1,000 barrels a day over the first 2 weeks of production, supporting estimated November production of approximately 4,400 barrels per day. As we remain ramping up well -- as remaining ramping up wells, we expect continued improvement in December and beyond. At both the Demo and Expansion Assets, we believe the high per well production rates of recent wells, despite relatively high recovery levels is very promising. The existing paths of the facilities necessarily achieved new oil ratios or SORs in the low teens with strong per well performance and available facility capacity at both assets, we expect similar SOR performance as we advance new SAGD well pairs. This supports our future development plans to drill a new sustaining pad at the Expansion Asset and Greenfire's outlook strategy to drill -- to fill our 33,800 barrels per day of production capacity at the Hangingstone facilities to demonstrate the full potential of the asset. We recently announced Greenfire's future drilling plans at the Hangingstone facilities, including projects to spend production capacity by 74% to approximately 59,000 barrels per day, which remain under development and subject to Board approval and funding movements. These projects include a brownfield expansion and the relocation of an existing SAGD facility at the Expansion Asset as well as the reactivation of an existing facility at the Demo Asset. The company plans to lease its updated independent reserve report in the second half of November, which is expected to incorporate Greenfire's 2024 operational initiatives and expanded development area and an updated development plan. I'll now hand the call over to Robert Loebach, VP of Corporate Development and Capital Markets, to discuss our hedging strategy and exposure to Canadian heavy oil pricing.

Thank you, Jonathan. Greenfire's continued to execute on its WTI focused commodity hedging approach. As of the end of Q3 2024, Greenfire's hedging program features 11,500 barrels a day of fixed WTI price swaps, at a price of just under USD 71 a barrel for 2024. For the first 3 quarters of 2025, our program features costless collars on 8,600 barrels a day with an average floor of almost $58 per barrel of WTI and an average ceiling of over $83 per barrel. These contracts support Greenfire's ability to fund our capital program from internally generated cash flows in a volatile commodity environment. Greenfire's production is 100% weighted to benchmarks that are linked to Canadian heavy oil pricing, thereby providing material exposure to improvements in the WCS differential in order to further support Greenfire's free adjusted cash flow generation potential. The Trans Mountain Expansion pipeline was completed in May of 2024, which added 5,900 barrels a day of new export capacity from Western Canada to tidewater. This new pipeline capacity has supported Canadian heavy oil pricing, particularly in the winter, with current year-end differentials averaging $12 a barrel WTI compared to $27 a barrel last year. This improved outlook for the WCS differential is expected to support pricing for Greenfire's production. I will now hand the call over to Tony Kraljic, our Chief Financial Officer, to discuss the highlights of Greenfire's financial performance.

Thank you, Robert, and good morning, everybody. Greenfire generated $53.4 million of adjusted EBITDA in Q3 of 2024. This represents a 15% increase from the $44.4 million achieved in the same quarter last year. The company also reported $58.9 million of net income for the quarter, which is a significant improvement over the $138.7 million loss reported in the same period last year. Our capital expenditures for the quarter totaled $21.2 million or $78.6 million for the first 3 quarters of the year. For the quarter, capital is allocated at $13.6 million for drilling related activities, and $7.6 million spent on various facility projects. Adjusted funds flow was $44.1 million, while cash used in operating activities was $17.9 million in Q3 of 2024, which included the impact of a $61 million of changes to noncash working capital due to the Q2 acceleration of collection of oil sales in June, ahead of the July 2024 debt redemption. Also, our realized loss on commodity risk management contracts for the quarter was $6.1 million. We were able to generate $2.9 million in adjusted free cash flow in the quarter. While it is slightly lower than the $26.6 million generated in the same period last year, it's a solid result given the less favorable commodity pricing and our continued investments in production growth. Greenfire maintains a strong financial position with $87.7 million of available liquidity, consisting of $37.7 million of cash and cash equivalents as well as $50 million of available credit under senior credit facility, which gives us significant flexibility to continue executing on our business plan. As part of our commitment to reduce debt, we plan to continue to use 75% of our excess cash flow to redeem portions of the 2028 notes semiannually until our consolidated debt has reduced to USD 150 million. Notably, in July of 2024, we redeemed CAD 84.3 million or USD 61 million of the 2028 notes, reducing the principal balance by 20% from USD 300 million to $239 million. Greenfire is positively positioned with the current processing capacity of 33,800 barrels a day, $1.8 billion of corporate tax pools, a lower pre-payout royalty rate at the Expansion Asset associated with sizable unrecovered royalty balances and no gross overriding royalty obligations at any of our Hangingstone facilities. As Jonathan mentioned, we recently announced Greenfire's future growth plans to optimize our existing production capacity of 33,800 barrels a day at the Hangingstone facilities. With further future growth initiatives to increase production capacity by 74% to 75,000 barrels a day gross or 59,000 barrels a day net to Greenfire. If sanctioned, these growth projects are expected to allow for further cost structure improvements and increased future cash flow generation potential which, combined with relatively low sustaining capital requirements of our Tier 1 SAGD reservoir, is anticipated to support significant long-term shareholder return programs. With that, I'll turn it over to the operator to open up the line for questions.

[Operator Instructions] The first question is from Jason Wangler with Imperial Capital.

I know obviously, the reserve report will come out here soon, but I was just kind of curious, as you look at the success you've had with the drilling this year, is this program something kind of relatively repeatable for next year? Is that kind of how you're looking at it? Or just, I guess, what you've learned and what you're thinking as you head into next year, not necessarily a CapEx number, but just kind of an activity level, I suppose.

Thanks, Jason. Jonathan, why don't you feel free to jump in with me? I can maybe kick that off. In terms of refill targets, there's still many targets left. There's north of 15 targets between both sites. And as you said, we've had a very successful program here, including recently at the Demo. The next part for increasing production will be additional refill pairs as well as getting ready with our sustaining pad. Jonathan, do you want to maybe add a little bit more details around that in the 2025 program, please?

Yes, sure. The 2025 program, we're going to focused primarily on targets that are included in the reservoir at Demo. The potential refills or even SAGD pairs. And then the majority of the work at expansion will be the final refills that we have, and then as Robert said, the sustaining well pads. So we're really excited to get -- going on the new well pairs and prove the asset can get back to the [ SMR ] levels that we achieved earlier in its operating life.

Okay. Great. And then just, I guess, on the financial side. The cash flows continue to be pretty good. It looks like you kind of built the cash up, obviously, after the first sweep. The sweeps are obviously there. They're stated. Is there anything else you guys can do or you're thinking of doing? Or is it pretty much just as of now kind of build the cash up, sweep at every 6 months or so. And then as you get to that, I believe it's a USD 150 million threshold, then you have more flexibility? Or I just wanted to see if that's kind of the road map or if there's other thoughts you guys had there?

Tony, do you want to take that one?

Happy to. Thanks, Jason, for the question. As we continue to move forward, we continue to focus on deleveraging our debt. That's a prime directive of the company. Our debt is available for potential refinancing to the 2-year anniversary mark, which comes up next October. So that is something we're considering as we move out to that point in time. We have a strong capital program ahead of us, and we'll look to finance that through our cash flows and continue to focus on the deleveraging. Once we hit that $150 million phase, we'll be able to change the capital allocation from 75% to debt and ship that to 75% for retention of the company. And that's probably the appropriate time to start looking at shareholder returns.

The next question is from Nicolas Zakarian.

Guys, really good quarter. Just wanted to ask on the production at Expansion, you didn't seem to say that December was going to be stronger than November. And post turnaround and post steam generator breakup or downtime, the performance has lagged versus where it was early August. Can you give any color if this is related to the refill wells not working as designed? Or is it related to maybe the steam chamber needing to be heated up? And how do you look at that performance going forward?

For sure. Maybe, Jonathan, do you want to start off with what we're seeing at Demo and what the production is going to be in there? And then I can maybe hit on the Expansion, if that works.

Yes, 100%. Thanks for the question. The new refills that we did at Demo were very -- we just factored on after the October outage. Initial results are very promising. The first well has come online at 1,000 barrels a day for the first 2 weeks on average. We expected continued growth from that well. And then as the other 2 refills can start contributing more, we expect further production increases through December and beyond. The 1 -- well, the 1 refill was turning to a SAGD well pair by putting an inject over to top of it. So we're -- and the reason for that, we encounter cooler temperatures than what initially had thought, and therefore, we have more recovery in front of us. So very excited at the Demo Asset for these refills. And then 2025, we'll be doing more of the same. Robert, I'll pass over to you for Expansion.

Awesome. Yes. So I mean, as you've seen, the production has been very good with only 24 wells on. We've been in that 21,000 to 22,000 barrels per day, as high as 24,000 barrels per day, averaging almost 1,000 barrels per day per well that's turned on. So what's limiting us is the produced gas handling and the produced water handling capabilities, which we've got some debottlenecks coming on here, including Q4. As we tie those in, we have to take some short outages to be able to tie into the well pads there.

Got it. And is everything, I guess, on the refill well productivity, is it still stabilizing to the levels that you guys were expecting earlier? Or has there been changes after they've come on that -- maybe that's why you have to drill more wells.

No, I think we're happy with the productivity coming out of the wells. I mean, they've been quite high. There is decline that's happening. I mean, the first refills have now been on for over a year. And while for the first 270 days, they were over 1,500 barrels per day, there is some decline that's going on, which is natural. And we have a lot more targets to bring on as well. So it's us just trying to optimize the site and produce as much oil as possible every day. And the team is doing an incredible job of that.

Okay. Appreciate it and appreciate all your hard work and looking forward to continuing executing on the growth plan.

The next question is from Ed [ Zotian ].

I'm a little bit confused by the recent discussion in terms of -- so in 2023, the wells, you put on the extended reach refills as you showed in your presentation, as you just said a minute ago, averaged 1,500 -- around 1,500 barrels a day first 9 months. But then I -- did I hear that more recently; they're coming in at more like 1,000 barrels a day for the IP 270?

Ed, Robert Logan here. No, when I was talking about the 1,000 barrels per day per well, that's the average of the 24 wells that are turned on. Obviously, the 10 refill wells are higher than that and we have other wells that are turned on that are lower than that.

Yes, the older wells. Okay. Got it.

Yes. But I guess the point is, when you look at the productivity of these wells, especially given their age and their recovery factor, these are absolutely outstanding wells within the industry, much higher than what the rest of the industry is on a per well basis, which is really exciting for us as we continue to grow the site.

Absolutely. Yes. Thank you for clarifying that, Robert. So I'm just wanting to -- just to elaborate a little bit on the previous question of -- for next year, I know you're not putting up actual guidance or anything, but how should I be thinking of where you think you can get to -- let's just leave the current constraints at $100 million a year cash flow -- I mean, CapEx. Do you think you could ultimately fill out the current production capacity by then? I think you said it was like 34,000 barrels or something.

Tony, do you want to kick off and then I can fill in.

Yes. As we look to 2025, I mean -- in the front half of the year, we're going to be focused on the refill targets to bring now -- those easier barrels on, if you will. As we move into the back half, we're going to be looking to open up a new reservoir and move to new sustaining pads, which will take a bit more time to heat up colder reservoir. So we don't expect to fill the plant in 2025. We'll move into a new sustaining pad in 2026 as well and we will target looking to hit that max capacity towards the back end of '26.

Okay, okay. That's very helpful. I guess the last question -- line of questions is -- I wonder if you help me understand figure on your balance sheet for what you're showing as short-term debt. Am I -- from a high-level point of view, can I think about that as basically what you think -- what you're projecting you're going to owe under the terms of your current note over the next 2 6-month payments?

Both under accounting requirements, the current portion of the debt is what you're expected to pay in the next 12 months. So the number you're seeing in the current portion is the estimated amount over the next 12 months, that would be repaid on the debt. That's a fair assumption, yes, but over 12 months.

Okay. So which are the -- the subsequent...

The next few suites, right.

Okay. And that -- yes, that's -- interestingly, that's going to get you just above the USD 150 million, it looks like. But I guess any -- so you can't voluntarily prepay any more -- until October '25, you can't really voluntarily prepay on anymore. Is that correct?

That is correct. Yes.

Yes. All right. Well, I mean it's -- your debt metrics are such that even now, you could probably easily -- it seems to me anyway, that you could easily refinance with the -- debt with better chance on what you have now. So it seems like as long as oil prices don't crash between now and October, you should be able to be -- get a good refinancing. So we're looking forward to that.

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

Thank you, operator. On behalf of Greenfire, we appreciate you all joining us today on our third quarter 2024 earnings conference call. Have a great day.

This brings today's conference to a close. You may disconnect your lines. Thank you for participating, and have a pleasant day.