International Petroleum Corporation (OTCPK:IPCFF) Q4 2022 Earnings Conference Call February 7, 2023 3:00 AM ET
Company Participants
Mike Nicholson – Chief Executive Officer
Christophe Nerguararian – Chief Financial Officer
Rebecca Gordon – Vice President of Corporate Planning & Investor Relations
Conference Call Participants
Teodor Nilsen – SB1 Markets
Mike Nicholson
Okay. So a very good morning to everybody and welcome to IPC’s Year End Results and Financial Update Presentation. My name is Mike Nicholson. I’m the CEO. Also joining me in presenting this morning is Christophe Nerguararian, the CFO. And Rebecca Gordon, who’s our VP of Investor Relations and Corporate Planning.
I’ll begin with the highlights from the full year 2023, it will be a much shorter presentation for me this morning than usual. I’ll be just focused really on the 2023 results in terms of the operations update, and all of our forward looking and business plan we announced this morning that will all be covered in much more detail in our Capital Markets Day presentation which is due to start this afternoon at 2 O’clock. So to get started with the highlight from 2023, it was really truly an exceptional year and for IPC, a record performance across all of the business and if we start by looking at the investment year, and we originally guided through year capital investment of $170 million. We ended up spending slightly less than that, $163 million and we did have some carryover we expect, the bounds of our capital expenditure and to be concluded as part of our 2023 work program.
In terms of production, it was a record high for IPC. And in the third quarter, you’ll recall that we touched 50,000 barrels of oil equivalent per day, our original guidance was on the high side was 48,000. So to come in at 48,600 barrels of oil equivalent per day in excess of that high end guidance. Good delivery on the cost front, our operating costs were $16.60 per boe. And that combination of record production, and very, very strong commodity prices meant that the company was able to generate its highest ever cash flow. Operating cash flow for the full year was $623 million. And after the investment program, the free cash flow that the company generated $430 million, and that represents a just shy of 30% free cash flow yield extremely attractive compared with the rest of our peer group.
Turning to the balance sheet with such a strong operational and financial performance, the balance sheet has really transformed in the last 12 months, we started the year with a net debt position just below $100 million. And notwithstanding the significant share buyback program and investment program that we delivered through 2023, we’re still able to finish the year in a net cash position with US $175 million, taking into account the bond cash that we raised, the gross cash resources that the company has just under $0.5 billion. So company has never been in as good financial shape as we are today. We’ll talk a lot more on this afternoon. An absolutely huge increase in our 2P reserves, 80% increase in our 2P reserves, it means that we’ve replaced 13x or 1,300% reserves replacement, largely driven by Blackrod and supplemented by the acquisition of Cor4, which we announced yesterday. And we’ll be given a lot more details on that in our Capital Markets Day presentation.
And finally, on the sustainability side been a very good performance. And we’re still on track with our carbon net emissions intensity reduction to get down by 50% through 2025. I was very pleased that we didn’t have any material incidents to report through 2022. So just to go into a little bit more detail on the production side and put the record production into context. If you go back to 2017 when IPC started, we were producing then 10,000 barrels of oil equivalent per day. And then through a series of acquisitions, you can see that we built production to 46,000 boe per day in 2019. We took the decision to scale back some production in 2020 as a result of the pandemic and to shut in some higher marginal cost barrels, but I think what’s been impressive is the fast recovery from COVID, we push back up to pre-COVID highs 46,000 barrels a day in 2021. And in 2022, we’ve been able to reach new highs so above the 48,000 barrels a day high in guidance delivering full year production numbers just below 49,000 barrels of oil equivalent per day. And that’s a huge credit to all of the IPC teams in Canada, in France, and in Malaysia for their continued excellence in operational delivery.
Turning now to the cost side, again, very good discipline on both the OpEx and capital expenditure side, and fourth quarter operating costs was just below $17 per barrel that was in line with expectation and guidance, our full year guidance that we gave to the market was as expected our operating costs to come in the range of between $16 to $17, per boe and you can see, we’re pretty much spot on the midpoint at $16.60 per boe for the full year. And as I mentioned, on the highlights, it was a very active investment year through 2022. We’re investing in all of our assets in France and in Malaysia and in Canada. Our latest guidance on our budget was we expected to invest around $170 million, we have had some carryover of that investment program into this year into 2023. So $7 million slips into to this year’s budget. So the full year capital expenditure was US $163 million. And if we go back and cast our mind back to 12 months ago, when we were standing here, and we were looking at the guidance for the operating cash flow, that our assets we generate, we had quite a wide bandwidth in terms of oil prices, on the low side, we’re looking at $55 per barrel Brent, on the high side, we were looking at up to $100 per barrel Brent, obviously, oil prices were pretty close to $100 per barrel for the full year. And the cash flow guidance that we gave to the market 12 months ago that price was US $600 million to US $635 million, when you look at the $623 million of operating cash flow that the company delivered, that was net of a windfall tax of around $11 million. So really, we would have been right at the top end of that guidance, and with the exception of the windfall tax in France, which wasn’t baked into our numbers a year ago. And when we look at the post the capital investment program, and it was by far the largest free cash flow generation that IPC has ever delivered.
The top end guidance that we gave again, 12 months ago was between US $460 million to US $480 million. What we did during the year is obviously we increased our capital expenditure budget by $33 million. And we paid the windfall tax of $11 million. So again, really delivering cash flow right at the top end of that guidance, and a 29% free cash flow yield based upon our market cap at the end of January and extremely favorable metric when you compare that with our peers in the industry. And one of the things that we’ve been able to do, which again, I think has differentiated IPC is return a huge amount of that cash flow generation back to our shareholders last year. We came out at the Capital Markets Day, and with our capital allocation framework that said provided and the balance sheet is in good shape and our leverage metrics are below 1x, then we’re going to distribute 40% of all incremental free cash flow above $55 per barrel. And based upon the estimates that you can see at $100 we said that should be around $146 million returned to shareholders, we’ve gone far in excess of that commitment. The first was through our normal course to issuer bid, which we started just over 12 months ago. And we’ve purchased 10.3 million shares under that program from December 2021 through December 2022. And we followed that up with a summer in July with the first time to do what’s called the substantial issuer bid. Essentially, it was a Dutch Auction, and where we returned $100 million back to shareholders and we bought back 8.3 million shares. So really 2022 year was a year for IPC of delivery on that capital allocation framework. We bought back in toto and cancelled 12% of the company’s shares. And that amounted to $187 million of share buybacks so well in excess of the $146 million that we originally committed to return.
And finally my last slide on the sustainability side, and we’re well into our ESG journey now and very pleased again that we had another good year on the health and safety side with no material incidents to report. In terms of our climate strategy, you can see from the chart on this slide that we’re well on our way to achieving that target, which was a net reduction on our emissions intensity by 50%, through 2025. You can see in our 2021 report, we’re already down to 28 kilograms, per boe. And I feel very confident that we’re going to be able not only to achieve that, but as you’ll hear this afternoon, to go beyond that commitment that we have currently. And we have published alongside our second quarter results, our third annual sustainability report, fully GRI and compliant aligned with the TCFD climate related initiatives, and so continuing to improve on our non- financial disclosures. So all-in-all, a very good year. I’ll pass across to Christophe now to walk you through some pretty nice financial numbers. So Christophe, over to you.
Christophe Nerguararian
Thank you very much, Mike. And yes, indeed, it’s very pleasing to be here this morning in front of you to discuss our yearend 2022 financial highlights because this year has been for sure exceptional for IPC. In terms of production, another very strong quarter, this fourth quarter 2022 was a production in excess of 49,000 barrels of oil equivalent per day, capping a very strong performance for the whole year, where we posted an average production of 48.6 thousand boe per day, just above the high end of the range, which is a true demonstration of what all teams on the ground across all countries have been able to deliver. The average dated Brent was a bit lower, just below $90 for the quarter, but still average in excess of $100 per barrel for the full year. And so with our operating costs within the range, we guide it for the full year at US $16.6 per barrel of oil equivalents. We posted very, very strong operating cash flow again this quarter at 100, close to US $115 million. And more than $620 million for the full year. $125 million of EBITDA, just for this fourth quarter and $640 million for the full year. So for the CapEx, we spent $44 million this quarter, and $163 million for the full year. So just shy of our guided $170 million. But that is mostly due to some carryover of some work into Q1 2023. So I think if you only needed to remember two numbers, that would be the free cash flow for the overall year at $430 million for 2022. And our cash position, which at yearend was $487 million gross and $175 million of net cash at yearend. The oil prices were lower in this fourth quarter. And the WTI, WCS differential widened to $26 per barrel. But fortunately, we had over 60% of our Canadian oil production hedged and so that we posted a $20 million hedging gain in the fourth quarter, because we hedged the differential at $13 per barrel for the fourth quarter. So good hedging management. And I’ll talk about our hedging position later on for 2023.
So if you look at the full year, as I said Brent was in excess of $100. We sold on average our Malaysian barrels at $11 above Brent, the French barrels slightly below Brent and the Suffield and Onion Lake or Canadian oil barrels we sold in line with the WCS. In terms of gas price, so that’s been very, very volatile, as we all recognized, it’s been sky high during the third and some extent the fourth quarter where we realized almost CAD 6 per Mcf during the fourth quarter, and on average for the year, we realized in excess of CAD 6 per Mcf, so almost twice as much as what we had in our original budget due to the war in Ukraine, obviously, the supply disruption from Russian gas to Europe, Europe needing to fill up its storage and pushing gas prices up across the globe, including in North America. And in Canada, the situation today is that the storage levels are pretty high in Europe, the winter is mild. And so there’s less tension on the markets. In Canada as well, the gas prices have come off a bit and are closer to CAD 3 per Mcf. But I wouldn’t be surprised if that spiked again in the future. This slide speaks for itself, I mean, very, very significant operating cash flow and EBITDA in 2022, in excess of $620 million and almost $640 million respectively, almost twice as much as what we posted in the prior year.
In terms of operating costs. So on average, we delivered right within the range of what we guided for the full year between $16 and $17 per boe. And you can see that the evolution quarter-to-quarter reflects the lower production in the first quarter when we had to shut in production while we were drilling one of our wells offshore Malaysia and then with production increase in Q2, Q3, lower operating cost per barrel, in Q4 gas prices being quite high that increased some of our input costs for the Onion Lake Thermal operations and we had a bit more activity as well. So resulting in a slightly higher OpEx per barrel in the fourth quarter, but still within the range, as I said for the full year. In terms of net back, I think it’s very important. So between $25 and $28 per boe netback for the operating cash flow and the EBITDA respectively. And a very strong actually the best ever for the full year for business at $35 and $36 per boe netback for operating cash flow and EBITDA for the full year. That’s, as usual when one of my favorite slides and that’s the consequence really of our capital allocation strategy. You can see how we’ve been using and deploying capital, we generated $620 million of operating cash flow. And we spent $160 million on CapEx and really drove production up from 46,000 in 2021, to in excess of 48,000 this this year, very limited amounts on G&A and cash financial item less than $30 million, and then even more on a share buyback in excess of $180 million more than what we spent on CapEx in 2022. And despite or thanks to this capital allocation from CapEx to share buyback, we also ended the year in a very, very strong balance sheet position was by moving the balance sheet from a position of being in a net debt position of $94 million at the beginning of ‘22. And closing with a net cash position of $175 million. Like I can mention it here, if you look at our financial items, you can see that in the fourth quarter our net interest expense is almost zero, which is a bit counterintuitive when you think that we’re paying 7.25% coupon on $300 million of bonds. But given the market dynamics, we were sitting on close to US $500 million of cash, and we’re depositing that cash with our banks and we’re yielding 4.5% on those deposits. So receiving 4.5% on our cash deposits for $480 million is the exact equivalent of spending 7.25% coupon on a $300 million bond. So effectively, the cost of carry for our bonds as we speak is zero.
The G&A remain under control and in line with the previous quarters at below $1 per barrel actually $0.8 per boe. So when you summarize the year was in excess of $1.1 billion of revenues and production costs in line with the guidance at $16.6 per boe will generate the cash margin in excess of $650 million, gross margin of in excess of $500 million and the highest net profit ever for the company, just shy of $340 million. The balance sheet is in very, very strong position as you can see here showing a cash of $487 million, you can see our bonds on the liability side at $300 million and the equity increasing as a result of our net profit. Capital structure of the company has not as much changed over the last quarter. So the bulk of it is the $300 million bonds at 7.5% coupon with interest payable twice a year and maturing in February 2027. We have this small French loan which we are amortizing every quarter. And in Canada, we have a liquidity revolving facility which we are not using at all for CAD 75 million. And as I just mentioned, our current cash deposits receive 4.5% interest, resulting in a zero cost of carry for current loans, putting the balance sheet in a very strong position, allowing us as Mike mentioned, for instance, to be very quick in seizing market opportunities, M&A opportunities like Cor4 acquisition, we released yesterday and will give you more information this afternoon.
So to conclude this presentation on the hedging side, we mentioned that we’ve hedged roughly 60% or 12,000 barrels a day for Canadian oil production, we’ve hedged the transportation effectively costs so from Hardisty in Canada to the US Gulf Coast that WCS to ARV we had that $10, it’s not speculative, it’s really just to protect us against any issues or problems on pipeline transportation. And for instance, in December, there was an issue on one of the pipelines transporting Canadian oil to the US. And the result was a widening of that transportation costs in January. And so we were, because we were protected with that hedges that paid out quite significantly in the first months of this year.
On the gas side, we were prudent in hedging some of our gas production. So in excess of 30 million Scf a day of gas for Q1 in excess of CAD 6 per Mcf and for the winter part of our Q1 and for the so call summer street from April to October this year, we’ve had as well the in excess of 33 million Scf a day at just above CAD 4 per Mcf. So, that compares very, very well to the current forward curve obviously, those hedges position well in the money as we speak. We have no specific covenants from our bank facilities or any of our financial arrangements. So we have no hedges in place for WTI or WCS or Brent other than what I just mentioned, for the transportation parts We did put when the US Dollar was extremely strong towards the end of last year, we brought forward some euro to cover some of for OpEx in France and some CAD to cover some of our OpEx and CapEx in Canada, those trades are well within the money as well because the dollar or those currency reappreciated a bit against the dollar. So that was quite timely as well in terms of hedges so you can find all of those details in our financials which have been released and are available on our website. Thank you very much.
Mike Nicholson
Okay, thank you very much, Christophe and amazing set of numbers. I think you can all agree so really just the final slide to conclude again, and to remind everyone of the highlights for 2022, a record exceptional year for IPC. And a huge congratulations to all of our teams for delivering such an amazing performance and investment, $163 million of targeted growth and all of our producing assets in France, in Malaysia and in Canada. And record levels of production above the high end of guidance at 48,600 barrels of oil equivalent per day, in line operating cost right in the middle of guidance at $16.60 per boe. And that combination of record production and the strong commodity price environment that Christoph talked about, delivered $623 million of operating cash flow, $430 million of free cash flow, or close to 30% of the entire market value of the company in just one year. And obviously, that financial performance meant that we have the strongest ever balance sheet and Christophe showed you that we’re sitting on a net cash of $170 million. But more importantly, with the financial arrangements that we have in place, we’ve got close to $0.5 billion war chest to continue to fund the growth in our business and create value for our shareholders. The reserve increase is quite unheard of in our industry, 80% increase in one year, 1,300% reserve replacement, and up to 487 million barrels of oil equivalent. We’ll be talking a lot more about that in our Capital Markets Day presentation this afternoon. And again, a very good performance on the ESG side where we continue to meet our climate and net emissions intensity reduction objectives. So that rounds out a phenomenal year. And as I said that at the beginning of the presentation, we can of course take questions, but we’ll ask those please just to relate to last year’s results. We’ve got a lot of material to get through at the Capital Markets Day. And we’ll be given a full business update and operations update and long-term business plan update at 2 O’clock this afternoon at our Capital Markets Day. So I hope you can tune in to that presentation. But for now we’ll pass across and see if there are any questions. You can ask questions via the website. Or we can also take questions from the telephone line, yes.
Question-and-Answer Session
Operator
[Operator Instructions]
And our first one comes from Teodor Nilsen of SB1 Markets.
Teodor Nilsen
Good morning, Mike. And good morning, Christophe. Congrats on yet another strong quarter. I tried to limit my questions to the fourth quarter results, just first quarter question. And can you just remind us so the OpEx impact of gas prices, I would expect OpEx to decline slightly in fourth quarter compared to third quarter given the gas prices. So that’s the first and second question is on the cash balance. You now reported a very strong cash balance, almost 30% of the balance sheet is now cash. Should we expect it to be that way going forward? And then just second question cash balance. Christophe, you mentioned 4.5% interest rate. Where can I get that risk free, I am curious? Thanks. That’s all.
Christophe Nerguararian
Thank you. Yes. So in the fourth quarter, our realized gas price is slightly lower than in the third quarter. But actually, because we use AECO, AECO was higher. So it’s all about, we’re selling at a premium to AECO and that premium goes up and down. But if you look, AECO was actually higher in the fourth quarter. So that drove OpEx per barrel slightly higher in the fourth quarter. So that’s the reason. In terms of cash, I don’t think we have a policy to keep $0.5 billion of cash on the balance sheet. The flip side is we’re trying to remain very disciplined in the way we deploy capital between organic, inorganic growth or share buyback. But part of this answer I guess, will be answered this afternoon when we look at our capital allocation going forward and how the CapEx spent and Blackrod will impact our cash position in 2023 at different oil prices and yes, as for the deposit, frankly, we were very pleasantly surprised. I hope not all Canadian banks and international banks are listening but effectively with no risk with like one week deposit risk free rates, both in Canadian and US dollar are actually just in excess of 4.5% and everything being equal, we would expect that to actually even go further higher if you see further rates hike from Central Banks.
Operator
We currently have no further telephone questions.
Rebecca Gordon
Okay. We just have one questions by the web. So Christophe, another one for you here. What was the reason for the widening AECO differential in August and October? That’s from Ruben from Jefferies.
Christophe Nerguararian
Yes, thanks Reb. So the way it works as you know, Suffield is in the south east of Alberta and we are selling all gas literally on that Alberta, Saskatchewan border and what that means is at times where you have storage issues or logistic challenges withing the province of Alberta, having ourselves access to that sitting point on the border which id downstream to the logistical challenges in the province and closer to the end market which are thrown to New York, Chicago, gives us a premium which can be significant where you have typically the last summer you had some injection issues where the system as a whole had compression, faced compression challenges couldn’t inject as much gas as wanted weighing down on the AECO whereas the Empress trending significantly higher.
Mike Nicholson
And maybe just a following, Christophe, we obviously benefit from because we purchase the AECO gas for our Onion Lake Thermal property but essentially, we are selling our Suffield gas at the Empress price so we get the benefit of that arbitrage.
Christophe Nerguararian
Correct.
Rebecca Gordon
We do have one more question that on the moving parts of the increasing the Blackrod CapEx. We do have a specific slide that we will present you this afternoon on how that’s changed and what parts are contingency and cost inflation versus the plateau production coming forward. So we will present that this afternoon, Mark, hang on. And we will state that at 2 O’clock at our Capital Markets Day. So that’s all the web questions here.
Mike Nicholson
Okay, very good. Thank you very much for everyone for tuning in. And it has been an incredible year for the company. I hope you can all tune in to the Capital Markets Day presentation at 2 O’clock this afternoon. You are going to see an incredible future for IPC. So thank you very much for everybody for tuning in.
Christophe Nerguararian
Thank you.
Rebecca Gordon
Thanks everyone.
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