Pipestone Energy Corp. Q3/21 - Pivoting to Free Cash
Our view: Pipestone's operational execution remains strong with wells tracking type curve at better than expected costs. Management nudged capital higher through its three-year plan but expects limited near-term inflation given pre-contracting on key materials. The company is set to shift from outspend to free cash in Q4 with management committing to opportunistic share repurchases under the NCIB.
Key points:
Q3/21 results slightly below expectations. Q3 volumes of 24,704 boe/d (44% liquids) were slightly below RBC/Consensus estimates of 25,853/25,509 boe/d, impacted by a 10-day outage at a third-party processing facility. This drove CFPS of $0.16, slightly below RBC/Consensus expectations at $0.18/$0.17; see Exhibit 1 for key variances. Pipestone spent $54 million in Q3, in-line with our model at $55 million and slightly ahead of Consensus at $48 million.
Operations - strong setup for 2022. Pipestone drilled/completed 7/12 Montney wells in Q3/21, achieving record DCET costs of $4.9 million on the 6-13 pad. Well performance remains strong with the 15-25 pad exhibiting IP90s of 445 bbl/d of condensate (100 bbl/mmcf) and the 8-15 pad exhibiting IP180s of 510 bbl/d (142 bbl/mmcf). Management noted strong results at the 14-4 and 6-13 pads, with payouts tracking below 6 months at current strip prices. The completion of the 12" gathering pipeline and 6-30 battery in early November provides the company with 40,000 boe/d of processing capacity, which management expects to reach by late 2022.
Three-year plan incorporates slightly higher capital spend. Pipestone increased its 2021 capital program to $180 million (previously $170-$175 million) to accommodate 3 wells at the 6-30 pad; volumes were maintained at 24-26 kboe/d. 2022 capital was bumped to $190 million (+$5 million, midpoint), supporting 21/24 wells drilled/brought online; the production range was narrowed to 34-36 kboe/d. Management does not expect near- term inflationary pressure to weigh in given pre-contracting of sand and steel in 2022, though longer-term we expect some cost creep.
Balance sheet rapidly deleveraging, committed to opportunistic share buyback. Based on our updated estimates, we forecast Pipestone to carry approximately $30/($160) million in net debt (cash) at year-end 2022E/23E, compared to peers with D/CF ratios of 0.3x/0.2x. Management outlined its NCIB, which allows for the purchase of up to 10 million shares over a 12-month period; we model a moderated pace until debt falls below $100 million (Q2/22) with a ramp up to $10 million per quarter thereafter.
Maintaining Outperform. We maintain our Outperform rating, and have increased our price target to $5/share (previously $4/share) on strong operational execution. We believe Pipestone holds high-quality, liquids- weighted Montney acreage with significant room for long-term expansion. The company is currently capable of growing volumes to 40,000 boe/d, limited by contracted processing capacity.