Looking at 2021 and Beyond
Pieridae's CEO looks back on the year that was and what is ahead
There was much to celebrate in 2021, especially on the operations side of our business. We had a pair of large turnarounds, which are planned maintenance shutdowns, at two of our gas complexes: Jumping Pound and Caroline. Both were completed very close to on budget and on time and that took a significant amount of planning effort.
The fact that we were able to continue those two turnarounds without any degree of interruption because of COVID is a testament to the efforts of the Pieridae team, led by Jason Billick, Conrad Kenney and Mark Weiss.
A big win for all!
From an overall macroeconomic perspective, the rise in energy prices, including the recovery of oil prices after the beating they took in 2020, helped to stabilize the ship somewhat and allowed us to begin the process last summer to find ways of either recapitalizing Pieridae or selling assets or the company itself.
Both these events had a very significant impact on our 2021 story and continue to have a big impact. The turnarounds have ensured the facilities are ready for the winter and that should allow us to do a significant amount of upgrading of our financial situation by the fact we have all of our assets well maintained as we get ready for the inevitable cold!
Photo: Jumping Pound Turnaround 2021
Specifically with the Strategic Review, the process was initiated to identify potential partners or other organizations that would be able to do one of two things: recapitalize the balance sheet or look for some type of a transaction that would either monetize the assets or monetize the company.
We have partnered with Peters and Co., a leader in this space, to develop and implement a very in depth and robust process. Over 400 companies received a detailed ‘teaser’ that laid out the positive aspects of the company. Twenty six companies participated in presentations and discussions with Pieridae to gain further knowledge about the firm, leading to about 10 putting in notices of interest.
One key learning out of the whole process is that our conventional natural gas assets are very specialized and suited for the Alberta Foothills. What we've seen since the unconventional boom in natural gas occurred well over 15 years ago now, really showed that conventional gas was overly risky for the risk/reward profile. Where unconventional gas tends to be much more of a manufacturing process, conventional gas still remains a bit of a hit and miss type scenario.
You go from having a very high probability of hitting a resource base to a scenario that, even with the greatest planning, could still end up resulting in no production. And because of that, I think the marketplace, right now, has no real interest in developing conventional gas fields. This was demonstrated in the results that we saw over the course of the Strategic Review where there were very limited players who came to the table. Those who did come forward tended to have very specific reasons for looking at the assets of Pieridae. We are still determining where things will ultimately land.
Concurrent with the Review, we have been looking for ways to recapitalize Pieridae’s balance sheet. We had two companies that showed a significant interest in recapitalizing Pieridae with the view of developing long term gas supply for their needs. Discussions continue to try and come to some terms that make sense for both shareholders and for Third Eye. Obviously, Third Eye plays a big role in this whole story because they are our majority lender today. And we need to find a way to significantly deal with the roughly $275 million we owe them.
That has really been the catalyst to this whole process, to find a way to ensure that not only our shareholders receive a return on the investment they made, but also that employees themselves get a good outcome out of all this and we don't end up in a scenario where the assets are acquired and no staff went with them.
We were targeting resolving these matters as quickly as possible. At the very least, we have already begun discussions with Third Eye to try and postpone the term loan deferred fee payment on the 4th of January, 2022 and to continue working with them to find the resolution that fits everybody's needs.
It seems we cannot escape any sort of a company update in the last two years or so without discussing COVID. While we have not experienced any significant production setbacks due to the pandemic, it has had quite an impact on us by essentially derailing the company’s basic business plan. That plan was to build the Goldboro LNG project, fully integrate it into the natural gas markets in Western Canada, and finance that whole process by having our long term natural gas sales agreement with German energy company Uniper.
Almost all of that business plan has now been sidelined.
COVID helped lead to the demise of the LNG Project as the cost structure just got out of hand where price inflation put the project on its heels to a point where building it was going to be very speculative, very expensive, and maybe it would end up being a white elephant. And that's what some are saying about LNG Canada’s initiative right now - these big LNG projects, perhaps, their time in the sun has come to an end.
That said, many European countries need natural gas but do not want to be seen as supporting multi-stage fracking. And so, Pieridae’s Foothills assets checked a lot of really good boxes as they produce conventional natural gas. But unfortunately, without the access to an LNG terminal, we can't access those markets that are willing to pay a premium for conventional gas.
LNG facilities aside, we do still need to resolve the issue of the transfer of licenses from Shell to Pieridae for the Foothills assets we purchased in the fall of 2019. Recently, there's been a major development where the Alberta Energy Regulator or AER has put out new guidelines for companies when transferring assets. Those guidelines are significantly more stringent than what existed when we originally did the transaction with Shell. I think that had these new restrictions been in place or conditions for transfer, it's unlikely that Shell would've sold us the assets, and it's unlikely Pieridae would've accepted them. So, this becomes a difficult scenario that we're going to have to deal with. In speaking with Shell, we've been trying to come up with what makes the most sense.
One of the positive things that has come out of the last two years is that we have worked really closely with Shell to make sure the assets are maintained properly.
"The Pieridae team has done a superb job of this with the employees of all three gas processing facilities doing most of the heavy lifting to make sure these assets have been well maintained."
The Pieridae team has done a superb job of this with the employees of all three gas processing facilities doing most of the heavy lifting to make sure these assets have been well maintained. When we look at the inspections that have occurred over the last two years, the majority of the time when we have been given a thumbs down on inspections, it has been because of work that was not completed before we took over these assets. And in places where we have been inspected, where we have done all the work that Pieridae was supposed to do, we always pass. Yvonne McLeod and her team have done a really great job of making sure the assets are maintained in a spectacular manner.
When you look at our workers compensation claims history, it has been so minimal that our cost of WCB for the upcoming year is going to be almost 50% lower than industry average, all due to the hard work that's being done on the health and safety side to make sure we prove to the regulator we can operate these assets well. So, if we are able to divide these assets up into two separate groups, I feel we will be able to make a transfer work.
There is probably no clear path in how to deal with Waterton and Jumping Pound. Pieridae's balance sheet will never be big enough to deal with the reclamation work that has to occur at those two sites. We knew that going into the sale process. And that is why Shell proposed a solution and we accepted, because they were going to continue to wear that liability.
The important thing for everyone to remember is that Pieridae continues to own these assets. That has not changed. And ultimately, Shell has to find a solution that works for them.
These assets have performed well for us. Our first quarter 2021 results recorded Pieridae's highest ever quarterly natural gas production and we maintained solid production throughout 2021.
Another big win is that we are likely going to end the year with a production decline rate of less than five per cent. A lot of that has to do with the fact we have been able to do small deals that brought in new production for a low cost. When you look at unconventional players, decline rates are 30-40 per cent annually and so they have to spend $200-$300 million dollars every year just to stay flat. At a cost of less than $10 million, we managed to keep our production within a two per cent decline rate – a very large accomplishment for our geology and engineering teams. They all should be proud of that outcome.
Where low decline rates were a highlight, hedging has been a challenge. Most of our hedges did fall off before winter but due to requirements from our lender, we are still significantly hedged for next summer. Prices remain volatile but much higher than the last few years. We were looking to see how much revenue we could collect in the first quarter of next year to get us off to a really good start. Commodity prices have moved a lot and continue to do so. They always have and always will.
As we go through this process of refinancing the business, one of the things that we're looking at is removing volumetric hedging and embracing a revenue protection model of hedging. That should have a bigger impact on our ability to understand the marketplace.
One should remember hedging isn't a bad thing, it's just often very expensive because you've got to have credit to do it, you've got to ensure volumes are going to be made available when they are needed. It’s a very delicate game you have to play when it comes to understanding the impact hedges have on your overall business. And they do play a role in protecting revenue. And I think that's the lesson out of the last six months - it's very difficult to hedge in a rising market, but you need to do hedging. You need to be prepared to hedge in a falling market. And that's really what we're trying to do right now, is find a much lower cost way of protecting revenue rather than the hedging program that we had in 2020 and 2021.
Just to put it in context, if you look at what happened in 2020, when natural gas and crude oil prices collapsed significantly, more so than they'd ever had in the history before. Pieridae was hedged going into that and those hedges were well in the money. One of the reasons why we survived part of 2020 was the fact that we took advantage of our hedge position and it allowed us to take some money off the table, which helped us pay bills and helped keep us going. So, hedging is a bit of a double edged sword, but it can be used effectively to manage budgetary risk and that's really the way we're going to look at it in the future.
I mentioned LNG earlier in this piece and it is unfortunate we were not able to reach a final investment decision for our Goldboro LNG Project last summer. I do think that, ultimately, Canada has to have more than one customer. And the Americans aren't there to do us any favours. The fact we had a significant amount of support from German energy company Uniper to bring Canadian gas into the German marketplace reinforces the disappointment that we couldn't close the deal. These LNG projects are marathons and like any marathon, the most disappointing result is to fail at the very end of that long race. Having run a few of them myself, there's nothing worse than feeling you're not going to finish and that's somewhat what happened here. We were so close to the finish line, so close to realizing a new marketplace for Western Canadian gas, that for it to all fall apart in the last three or four weeks of May, early June, certainly was disappointing.
As we said last summer in our Q2 earnings news release, Pieridae is analyzing the potential for a floating LNG option. What we are looking at is a much smaller project than Goldboro LNG. Any initiative must work with our current production and we would need to get the gas to market sooner than later. The third criteria is that we absolutely need to have a partner, and we're not going to take all of the risk on our balance sheet. We tried that already. Ultimately, this approach put too much financial strain on the company and we will not repeat this under any circumstances.
Natural gas continues to be viewed as a bridge fuel as the world continues a methodical, even-paced transition to lower carbon fuels. This path and a greater focus on diversity and equity in the workplace have propelled ESG, or Environmental, Social and Governance, into the spotlight in recent years. Pieridae recognized this and we were proud to release our inaugural ESG Report in 2021.
We are on our way to being able to achieve carbon neutrality by 2050. A lot of that is centered around carbon sequestration and methane emissions reduction. We need to show the marketplace Pieridae is serious about meeting this goal, and, in fact, the marketplace itself is going to continue to demand it. That said, it is going to be challenging to meet some of the requirements government has put in the path of the industry.
Our Caroline Carbon Capture Blue Power Project announced earlier in 2021 provides a long term solution to meeting those requirements. It is quite an innovative plan where we combine large-scale carbon storage underground while producing clean power to both operate our Caroline Gas Plant and then sell the remaining clean electricity to the Alberta grid. This strategy of carbon neutrality can become a significant part of the company's forward business plan.
Emissions aside, we do know that filling up Caroline and our other two plants with natural gas is key to the long term financial success of Pieridae. We are hopeful to begin a drilling program in 2022 that would begin to do just that. The plan is focused on drilling our assets near the Caroline facility first. We have a lot of the approvals in place and less consultation needs to be done there.
Pieridae also continues to look at what kind of relationship we could build with our First Nations neighbours on the Stoney Nakoda reserve lands. They contain the largest untouched conventional resources so bringing that gas supply to our Jumping Pound facility is important and we hope to begin planning that process next year, with drilling happening in 2023. It's a way for us to work with our First Nations partners and allow them access into the gas plant and the benefits that come with it.
With our current business plan, we know that our liquidity challenge and paying all of our vendors continues to be an issue. Our number one priority is to continue to work on clearing up the stale-dated payables over time. By the end of 2021, we're going to be in a very good position to have removed a significant portion of late payments.
Derek Frechette has done an excellent job of weeding out those suppliers where Pieridae just wasn't the right fit for them. Today, we have probably over 500 vendors. We want to get that list down to under 200 over time.
As I look ahead to next year, energy continues to be an important part of the Canadian story. You look at our export numbers in the last few months of 2021, it's all been driven by energy and it continues to be a big part of our ability to finance Canadian social programs. Now that Enbridge’s Line 3 is back in service and Trans Mountain is coming towards the end of it's a construction phase, that's going to be a significant amount of pipeline capacity available to move crude oil, which will continue to bring funding into the Western Canadian Sedimentary Basin. I feel liquids and liquids prices are going to remain stable and where Canada is a significant player exporting product into the United States. On the natural gas side, the growing demand for gas south of the border to feed their LNG business is key as the US grows to potentially becoming the largest supplier of LNG to the world.
We may not participate on the LNG side directly, but indirectly we will. The biggest new source of natural gas the US has right now is to begin looking at taking more from Canada. So that bodes well for the price here. I don't think we're going to see prices going back to where they put us in financial jeopardy. We are a high cost producer and need prices above $2 to make any money. Given the current environment in North America for natural gas, we see a much strengthened marketplace, less requirements on our balance sheet, and if we can get our restructuring done, the company is in a position to grow next year.
With the challenges of 2021, not the least of which was another year under the weight of the pandemic, my hope is we are able to embrace 2022 and the promise it will hopefully bring.
Spend some time with family, with friends and loved ones over Christmas and the holidays and celebrate what you treasure most.
I’ll close by stealing some wisdom from Canadian actor and Parkinson survivor Michael J Fox:
‘Gratitude makes optimism sustainable…”
Pieridae Chief Executive Officer