Darren Gee - Peyto Exploration & Development Corp.

In this episode of the Canadian Equities podcast Darren Gee, President & CEO of Peyto Exploration and Development Corp., joins Robert Cooper to discuss LNG, the natural gas market and the energy transition. For the full length version of the Canadian Equities podcast connect with us at acumencapital.com/podcast.  

Transcript

Moderator 0:00

Welcome to Canadian Equities, a short biweekly podcast series, where we speak with top business leaders and hear their perspectives on the industries in which they operate for the full length version. Find our link in the podcast notes or connect with us at acumencapital.com Since its founding in 1998, Peyto has grown from a standing start to 80,000 views a day, almost exclusively via organic growth and has returned on average 28% since. Peyto is now one of Canada's largest natural gas producers, Peyto CEO, Darren G joins rubber Cooper to discuss energy companies, LNG the natural gas market and the energy transition Peyto has in large part, been a low cost story since inception, the energy business has a time has been a bit profligate in its spending. So how did Peyto do it differently and infuse that low cost element into the company's?

Darren Gee 0:58

Well, Rob, you know, I think, um, we recognize right from the get-go, um, I mean, when we built Pado, it was with some seasoned veterans from the industry and, and those guys, uh, you know, all understood that this is a commodity based business and we don't control the price of that commodity, unfortunately. So we have to focus on those elements of the business that we do control, uh, specifically. The cost side of the business, you know, that could be broken into a couple of parts, the Capital component, which is us going out and investing capital dollars into drilling and developing a new production and the cash cost side of the business, which is really. Operating costs the transportation, uh, and the GNA and interest in the corporate world. So, you know, it's those two sides of the business that we focus primarily on. We, we know that by controlling as much as we can, we can control the costs. So we want to. Operate all of the operations where we're investing capital to drill Wells and frack Wells and build pipelines and facilities. And we also want to operate the production when it's being processed through our own facilities, uh, when we're operating the individual Wells, um, we want to look after the transportation arrangements for that product to market. And obviously. We have G and an interest cost corporately that we control. So those costs, control buckets are where we focus our efforts, because those are things that we can influence. Um, we've made choices along the way to enhance, uh, the advantage of low costs. Um, the type of asset that we develop, you know, sweet, natural gas, deep and long life, no water production. Uh, And making the investment in infrastructure so that we have low processing costs. We're not paying someone else a return on their capital investment. And then I think too, part of it stems from the fact that almost everything that we own at Peyto, we went out and built ourselves. Uh, and so we understand it. Uh, we understand, uh, its inception, its Genesis and, and we built it ourselves. So we, we know exactly how it works and we know what it's all about and we don't have to relearn those things. Um, so they're easy for us to maintain those producing assets. I always liken it to. Building your own home. You know, if you were there, you cribbed the foundation, you poured the concrete, you were the one that framed the house. You ran all the electrical wires through it and all the plumbing through it and all the ducting, and then you boarded it all up and you painted it and finished it. But if you ever spring a leak or you have a short, you know, exactly where to go to fix it, and it doesn't take you very long because you were there during the. So, you know, that's a little bit how our asset works. We can maintain it with very few people. We have low G and a, and we have very efficient operating structure because we built it ourselves.

Moderator 3:55

Peyto has been in essence and natural gas company. Give the generalists out there that are listening a brief primer on the natural gas markets in Canada. And the cost structure of the business ranging from F and D costs. It costs of transport. And then ultimately where the gas goes in terms of an end market.

Darren Gee 4:14

Yeah. I mean the Western Canadian natural gas basin is principally Alberta and BC. That's where the majority of that 16 BCF a day of, uh, Canadian gas production comes from, I'd say about four to five out of BC and 10 to 11 out of Alberta. It's almost exclusively gathered by, uh, the trans Canada Nova system. That's about 12 BCF or 13 BCF is gathered on that system alone. And then the balance goes out to the either west coast system through BC, or it goes out through the Alliance pipeline down into Chicago as a direct straight shot. But the Nova system really gathers gas from lots of different areas across British Columbia and Alberta, and then redistributes it to consumers within. British Columbia and Alberta as well. So it's both a gathering and a distribution system. So we've got a lot of gas coming on to that pipe, you know, Alberta, and then going off to either the cities, the big cities or the oil sands, or the industrial regions that are consuming the natural gas. And then the excess we have obviously gets shipped out of, uh, Alberta, principally down the west coast, uh, to California and Oregon or. Uh, our Northern border system into the great lakes area, Chicago type markets, or straight down the main line to Eastern Canada. And that bit of export that we have has been drinking over the years. Um, just because we've had such good domestic demand growth within Alberta, a lot of coal to gas switching has happened to a lot of, uh, uh, oil sands. Industrial demand has grown over the years. So we have a lot of consumption alone just in Alberta and British Columbia for that. And we're starting to look at more export markets, you know, with the BC west coast, LNG looking like that's going to come to fruition, uh, middle of the decade here, and then we've got more demands coming from the U S market. Now part of that is because the us is also exporting out the Gulf, a lot of gas. And so. We're dumping into the north, uh, part of that basin and part of that, their market, uh, some, some exports, and then they're turning around and exporting a lot of the south of their whole market, but there's been a lot of dynamic over the last few years, or even over the last decade. Really we've moved from. I would say a demand driven market in north America, where we were short supply, uh, relative to the demands, uh, over to a supply-driven market where we grew a lot of the shale gas and resource basins quite rapidly. And as a result, we overwhelmed demand with too much new supply and that obviously pushed the price down. Uh, that's starting to rebalance now, particularly with exports off of the north American continent. And really those exports have grown to the point where now we've, we've almost begun to globalize natural gas, or at least north America participates in the global gas market in a more real. That has tied our pricing. I think a little bit to the demands around the world for natural gas. We're seeing that with LNG movement and we're seeing that with LNG pricing starting to trickle back into north America. So, you know, we've gone through a period of a supply-driven market where. All the producers and, uh, deliver of gas, uh, focused on cost structure. We, we, we took and lowered the supply cost of north American natural gas substantially from what was probably up in the five, $6 range down into the two to $3 range. And now we're starting to see with the, with the sort of connection to gold markets, the demand for north American natural gas. Get to the point where, uh, we've got this a great combination of low supply costs in that two 50 to $3 range and some much higher prices globally for the commodity. So there's some nice profit to be made by the industry now that we're connected to those global markets.

Moderator 8:20

We're seeing all over the world right now, the ramifications. Of the so-called energy transition, which has crashed on the shores and into the rocks of reality. Here is energy shortages and skyrocketing prices have, occurred all over the world and those are going to impact margins and other businesses and inflation among other issues. So how does the energy transition play out in your estimation?

Darren Gee 8:46

Yeah, I think what we're seeing now is. Regardless of how good a job, the producers and the people that deliver that energy to the consumers do. I mean, we can get to net zero, but it doesn't have a big enough impact if the consumers don't change the way that they consume energy. 20% is on the production of energy, uh, of the emissions 80% is on the consumption of that energy. So are consumers going to change their behavior? And you can't force it upon them. They have to make that choice themselves. Um, economics play a big role in that choice. What's affordable, what's reliable and what's economic. Um, and, and I think what we're seeing right now is that there's been such a dramatic shift to try and transition off of fossil fuels to rapidly that it's causing a huge impact economically. It's not affordable to do. And we don't have an alternative that's reliable. And so until we do have really a, an affordable and reliable alternative, it's going to be very hard to move off of fossil fuels. And, and the question is going to be, then are consumers prepared to just do without, and I think there's many that are going to decide that it's too critical to their quality of life to do with. So we're at a bit of a stalemate. Um, and we may actually, the Pentagon pendulum may have to swing back and forth a few times to find that balance in the middle. And hopefully that buys us enough time to expand the delivery systems. You know, if we're gonna electrify everything, then we've got to grow the grid. That requires a lot of new raw material to be mined and a lot of new construction to happen, to be able to get to a point where we can electrify a lot more of our energy demands daily. We've got to have a lot better storage capacity for that electricity. Um, And personally, I think that the, you know, what produces that electricity is going to have to change. Um, the renewables are, are not going to be enough. So if we're wanting to take fossil fuels out of the equation, we're going to have to replace it with something that's just as reliable as the fossil fuel industry is from an energy perspective.

Moderator 11:02

Darren G CEO of Peyto exploration. Thanks for joining us on the Canadian Equities Podcast.

Darren Gee 11:08

Thanks for having me, Rob.

11:12

Note that this podcast is not making an investment recommendation on any companies discussed. We welcome your comments on today's episode or any other episode. Connect with us at Acumen Capital dot com.