International Petroleum Corporation (OTCPK:IPCFF) Q3 2022 Earnings Conference Call November 1, 2022 4:00 AM ET
Company Participants
Mike Nicholson – Chief Executive Officer
Christophe Nerguararian – Chief Financial Officer
Rebecca Gordon – Vice President, Investor Relations
Conference Call Participants
Teodor Nilsen – SB1M
Lars Dollmann – Aramea
Ruben Dewa – Jefferies
Operator
Good day and thank you for standing by. Welcome to the International Petroleum Corporation Q3 Report 2022 Audio Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation there will be a question-and answer session.[Operator Instructions] Please be advised that today’s conference is being recorded.
I will now like to hand the conference over to your speaker today, Mike Nicholson, CEO. Please go ahead.
Mike Nicholson
Thank you very much operator, and a very good morning to everybody. And welcome to IPC’s third quarter results and operations update presentation. My name is Mike Nicholson, I’m the CEO. And joining me on the call this morning is Christophe Nerguararian, the CFO; and also Rebecca Gordon, who’s our VP of Investor Relations and Corporate Planning.
I’ll begin in the usual fashion by walking through the highlights of the operations for the third quarter. Then I’ll pass across to Christophe and he will run through the financial numbers. And then we’ll come back at the end of the call will, of course, be the opportunity for us to take your questions.
So without further ado to launch into the highlights from the third quarter of 2022 and on production. It’s really been a phenomenal quarter of delivery from all of our teams in Canada, in Malaysia and France and we’ve achieved a new record average quarterly production of 50,000 barrels of oil equivalent per day and that was actually above the high-end guidance that we had given at the beginning of the year for the third quarter production. And given the very solid year-to-date production, we now expect our full year average production to be in excess of 48,000 barrels of oil equivalent per day, which was previously are high in guidance.
With a really good operational delivery, we’ve seen a solid delivery also on operating costs. Our Q3 OpEx was $15.70 per BOE and slightly below our Q3 forecast on the back of that strong production. And we’re retaining our full year operating cost guidance of between US$16 and US$17 per barrel.
In terms of our capital expenditure program no changes from the second quarter that’s maintained at US$170 million for the full year. And when we look at the cash flow numbers again another very solid performance, third quarter operating cash flow was just above US$170 million and then we deduct the investment and we look at our third quarter free cash flow it amounted to US$117 million, which was a 9% free cash flow yield.
Our full year 2022 free cash flow guidance has now been tightened. We’re now looking at a range for the rest of the year on Brent prices between US$85 and US$100 per barrel. And under those price scenarios we expect full year free cash flow to be between US$425 million and US$460 million.
Obviously with a very solid cash flow generation, the liquidity position continues to strengthen and we ended the quarter in a net cash position of close to $90 million. And that’s post a shareholder return of close to $170 million since the beginning of January.
On the hedging side, no changes to the 2022 hedges. We’re still hedged 60% of our Canadian oil production. The WCS differential is hedged at $13 per barrel through Q4. And we have put in place an additional layer of hedges for 2023. We’ve hedged approximately 50% of the Canadian WCS to ARV differential at $10 per barrel. That’s the transportation component of the differential and Christophe will go into that in a bit more detail in his presentation.
No benchmark hedges on Brent oil prices on the WTI or on the gas for 2023. But we have also taken the opportunity given the strong US dollar to lock in some of our Canadian and euro exposure given the strength of the dollar hedging approximately three quarters of our operating cost exposure in Canada and in our French business. And we do also intend to hedge a similar amount of the Malaysian ringgit in the coming weeks.
On the ESG side, no material safety or environmental incidents to report. And in August, we did also publish alongside our second quarter results, our third annual sustainability report. And one of the headlines in that report is that we’re very much on track to achieving our 50% net emissions reduction target by 2025.
Also, in terms of our shareholder returns framework, we completed the substantial issuer bid in July that was a $100 million share repurchase and we bought back and canceled 8.3 million shares. And we’re back working with our NCIB, which is well progressed. And from the beginning of that program in December of last year, we bought back and canceled 9.3 million shares.
So, to turn to the next slide, a little bit more details on our production. Third quarter production as I mentioned, was a record high of 50,000 barrels of oil equivalent per day. It’s the second consecutive quarterly record for the company. And it’s really been driven by high production up times across all of our assets and also really starting to see the benefits from the recent development activity on the $170 million investment program for this year.
In Canada, strong performance across all of our assets, and we’ve seen new production records achieved at both our Ferguson property and Onion Lake Thermal. I’ll come back to those. And likewise, internationally, we’ve really seen a solid operational performance both in France and Malaysia, so really huge credit to all of our teams on the ground.
This next slide, just shows the quarterly production. As I mentioned, two quarters in succession. You can see that, we’ve actually achieved record production. And every quarter in 2022, we’ve actually produced above our top end guidance. That means, of course, with nine months under our belts and year-to-date average production sitting at 48,400 barrels of oil equivalent per day. And you can see from the production chart on a couple of slides earlier in early Q4, we’re trending above 50,000 barrels a day. We feel very confident that we’re going to be able to achieve full year numbers in excess of our original high-end guidance of 48,000 barrels of oil equivalent per day.
On the cash flow side, if we look at the year-to-date operating cash flow for the first nine months, we generated just under $510 million with an average Brent price of $106 per barrel. So, you can see, we’re well on our way to achieving the high end of our original Capital Markets Day and forecast guidance. We’ve tightened slightly the full year operating cash flow guidance. We’re looking at Brent oil prices for the remainder of 2022 of between $85 and $100 per barrel Brent. And within that range, we expect to generate somewhere between US$620 million and US$655 million of operating cash flow.
No changes to our capital expenditure program. You will recall that on our second quarter call, we increased our guidance from US$130 million to US$170 million. And we don’t see any need to revise that capital expenditure program further, still on track to spend $170 million. Malaysia is largely behind us. The majority of the Canadian investment program is behind us. And we’re really just getting started with the Villeperdue West drilling program in France with a spud over the weekend.
So, when we look at the free cash flow guidance for the company, you can see for the first nine months, we’ve generated US$365 million. So, again, we’re well on our way to getting close to the high end guidance, which is pretty impressive when you consider that we’ve added an additional US$40 million of CapEx to our investment plans in 2022. So when we now look at the new full year forecast range of $85 to $100 Brent, we’re expecting to generate between US$425 million and US$460 million and that represents a free cash flow yield of between 33% and 35% of IPC’s market capitalization, which I think you’ll find screens extremely favorably across the rest of the industry peer group.
So, one of the things that we’ve been busy deploying that significant free cash flow is on our capital allocation framework and in particular, on our share repurchase program. We’ve had two programs running through 2022. The first which was actually started in December 2021 is our normal course issuer bid.
And we restarted that program in July, following the completion of our substantial issuer bid. In total, we’ve repurchased 9.3 million shares and through the end of October, those shares have been canceled. And the cost of the NCIB program has been $76 million and the average share repurchase price under that program has been SEK 82 per share.
We announced obviously alongside our second quarter results and that we’ve successfully completed a Substantial Issuer Bid that was concluded in July. It was done under a US$ 100 million Dutch auction and the purchase price for that SIB was CAD 15.50 per share and we repurchased under that program and canceled 8.3 million shares.
So, if we reflect on the capital allocation framework that we presented back in February, in total, we’ve repurchased an aggregate of $176 million, that’s been returned to remaining shareholders through the end of October. That represents 11% of the shares of IPC that were outstanding have now been canceled and is significantly in excess of our shareholder returns framework at up to $100 per barrel said we would return up to US$ 158 million.
And when we reflect on this next slide on our history of share repurchases since the company was established back in 2017. You can see that now in aggregate, we’ve repurchased a total of 51.4 million shares and the average share repurchase price under all of those programs has been around SEK 56 per share. And at yesterday’s closing price, that means that remaining shareholders have benefited from a $240 million increase through those share repurchase programs.
And now with just 21% dilution, the company has materially transformed itself. You can see production has increased five-fold since we started. We’ve increased reserves nine times. We’ve improved the quality and extended the longevity of our reserve life by eight years and added 1.4 billion barrels of contingent resource, and more than quadrupled our operating cash flow with value-adding acquisitions in excess of $1.8 billion, and all that with only 21% dilution. So, that just goes to show the value of those multiple share repurchase programs that we have concluded.
And on this next slide, when you look at IPC through what we think is a fairly conservative value lens, the 2P value at the beginning of this year of just our 270 million barrels of 2P reserves, using $70 long-term real Brent prices, which was our reserve auditor’s price deck in January and shows the net asset value of our 2P reserves is US$ 2.4 billion. And with the share price yesterday around SEK 104 per share that represents the stock trading at about a 46% discount to just our 2P reserves with not a single dollar of value attached to our 1.4 billion barrels of contingent resources.
So, to turn now and just do a quick walk through each of the assets. Starting in Canada with our Suffield Oil property, we’ve seen stable production in the third quarter of 2022. The idea here is just to really offset the historic declines through development work and optimization.
And in the fourth quarter, we’re getting ready to finalize an investment program where we’re going to drill two production wells and two alkaline surfactant polymer injection wells on our end-to-end enhanced oil recovery project. That’s been very successful. And on the back of those results, we plan to complete that activity in the fourth quarter.
And we’re also going to drill a couple of additional conventional oil wells, as well as two disposal wells in the fourth quarter. And that was included in the capital increase plans that we announced alongside our fourth quarter results.
On the Suffield Gas side, it’s been another very solid quarter with strong realized prices in Canada. Our average realized sales price in Canada was CAD 5.75 per Mcf. We can see if you look at the production chart on the bottom right-hand side of this slide, we started to see a small uptick in production.
That’s largely been driven by a combination of increased capital expenditure on well completions. And we initially announced that we were going to do 110 recompletions alongside our Q2 results. That’s now been upsized to 127 gas well recompletions and we’re also running one of our most active swabbing campaigns as you can see on the chart on the bottom left-hand side of the slide, targeting in excess of 12,000 swabs. So no decline in high gas prices, really good cash flow generation from our Suffield Gas property.
Turning now to Onion Lake Thermal. And if you look at the production chart on the bottom of this slide, you can see that we’ve been reaching record production levels through the first — the third quarter of 2022. An actual fact in uncertain days, we’ve seen — it’s actually exceed for the first time ever our 14,000 barrels a day nameplate capacity at Onion Lake Thermal. And that’s on the back of — we’ve recently drilled two new infill wells and the rates that we’re seeing from those infill wells are certainly exceeding the pre-drill expectations.
Not contributing to production this year, but the new Pad L which you can see on the call out from the map on the top middle of this slide, that’s on track and on schedule and we expect to start seeing the production contribution from that new Pad L in the second half of 2023.
And alongside the CapEx increase in our Q2 presentation, we are also investing in some additional facilities optimization through the second half of this year that should give us a little bit extra production capacity Onion Lake Thermal. So really solid performance there.
Turning now to the Ferguson property. This was the granite acquisition that we acquired in early 2020. Obviously, we had to pause all development activity when we’re faced with the COVID crisis. 2022 is the first year that we’ve really ramped up the development activity on this asset since we acquired the property initially started with a 13-well development program that was upsized alongside our second quarter results to 16 new wells.
Those wells have now been drilled and completed and most of them put on to production. And you can see the ramp-up in production in excess of 2,000 barrels a day through August and September. And as we see — as we speak we’ve actually seen spot rates close to 3,000 barrels per day for the first time since IPC took over operatorship. So, again, a phenomenal job and by the team to have delivered on that Ferguson development program this year.
In terms of our Blackrod project, nothing really material to report since the second quarter and we’re still progressing our FEED studies with respect to a Phase one development of 20,000 to 30,000 barrels a day. Looking at developing just the first 220 million barrels of the 1.3 billion barrels of contingent resources that we have in place, still expecting to get the results of the FEED studies by the end of this year and that will inform any decisions on taking forward a Phase 1 development in early 2023. So that’s Canada.
Turning now to IPC’s Malaysian business. Again, you can see production — net production levels close to record high. You have to go back to 2019, so you see similar levels of net production. And that’s been driven by high facility uptime and strong base well performance. We, obviously, also saw some really strong premiums on our — some of our Brent cargo sales in Malaysia through the third quarter.
And the red bars on the bottom right-hand side of this slide, and just highlight the development activity and the production uplift from the Q1, A15 drilling program and the three ESP upgrades and that we completed in the first quarter. So solid production, adds and a strong pricing environment with really good margins through the third quarter in our Malaysian business.
Turning now to France, again, very steady performance on the production side, as you can see on the bottom left-hand side of this chart VGR113, our long-reach horizontal well still continues to outperform expectations. And I’m really pleased to report that we commenced just over the weekend our drilling campaign.
This is a three-well drilling program which aims to tap some undrain potential on the Western flank of our Villeperdue field that started in late October and we should start to see the production results from that program as we come into the first quarter of 2023.
And then on the sustainability and ESG side. We health and safety-wise no material incidents year-to-date, in terms of our climate strategy we are well on track to achieving our net 50% emissions intensity reduction through 2025.
You can see that in our 2021 sustainability report which was published in July. We’re down to 28 kilograms per BOE of net CO2 intensity. And that was published in our third annual sustainability report which was for the first time fully compliant with the GRI standards and it was fully aligned with the TCFD disclosure initiative.
So that concludes the operations part of the presentation. I’ll hand the call now across to Christophe. And he’ll walk you through the financial numbers. So, Christophe?
Christophe Nerguararian
Yeah.
Mike Nicholson
Over to you.
Christophe Nerguararian
Thank you very much, Mike. And now indeed a pleasure to report again a record quarter an all-time high in terms of average production for the quarter at 50,000 barrels of oil equivalent per day for the third quarter 2022.
So with an average Brent price which was just above $100 per barrel for the quarter and operating cost per barrel under control? We’ve posted a very, very strong EBITDA and operating cash flow again for this quarter not quite the best, but the second best with operating cash flows and EBITDA in excess of $170 million for this quarter. And that translates year-to-date into operating cash flows and EBITDA at around $510 million for the first nine months.
As Mike mentioned, we are on track to spend around $170 million CapEx which is our new CapEx guidance for the year. And so consequently in the third quarter it was a bit higher than our initial Capital Markets Day which was guiding only $130 million CapEx for the year.
Now, in terms of free cash flow it is quite remarkable that we generated in excess of $116 million for this quarter bringing the year-to-date free cash flow at $365 million. That is very clear that all these cash flows have transformed the balance sheet of IPC.
And we now stand with a cash position of $400 million and a net cash position net essentially of the $300 million bond of close to $90 million at the end of September. The realized oil prices were very strong again, but there’s been a form of — there’s a dual reality in two different markets.
Typically in Malaysia, very, very strong market with crude oil from Brent, I mean, in high, high demand which helped us generate realized prices in excess of $15 on top of the dated Brent. So, very strong dynamic there for cargoes or two cargoes in that third quarter.
France, as usual, we’re selling on parity with dated Brent. In Canada, a slightly different picture there, with still very strong realized oil prices with WCS in excess of $70. But you can notice that the WTI, WCS differential for the first time in 2.5 years has widen again. And that is really the result of two main elements, which both are going to reverse.
The first element is a situation where you have like every year planned maintenance of refineries. The difference is that you had some unplanned maintenance as well, which shut in some refining capacity in the US. And so that has weighed on the WCS demand and so widen the death.
The second element which is also going to reverse soon was the release from the United States strategic petroleum reserves. The United States government announced 180 million barrels released from the US strategic reserves back in March, and we’re coming to an end. It’s going to coincide more or less with the mid-term elections in the states, where all of the 180 million barrel release will have been released. And most of that release was heavy barrels competing directly with our WCS Canadian barrels. So that widening differential at $20 in the third quarter and actually closer to 25% or even higher, as we speak, we believe is going to reverse when those two elements of maintenance, refinery maintenance in the states and release from the year strategic reserves are going to come to an end very soon in the next few weeks. Otherwise, generally you can see that both at Suffield and Onion Lake were selling on parity with WCS.
The gas prices have been extremely strong. I mean, when you look year-to-date with a realized price of CAD 0.22 per Mcf. This is almost exactly twice as much as the gas price we used for our budget and our Capital Markets Day. So this really tells you a lot compared to where we stood almost 12 months ago, the gas prices are twice as high.
And the second element, which is absolutely critical to understand here is that we have seen some logistical issues again in Alberta with some technical challenges to inject in gas storage as much volumes as was needed. But what’s very critical to understand is that the gas we’re selling, we’re selling on the Alberta, Saskatchewan border closer to the end market, because all of the gas exported or leaving Alberta if you wish goes to the end user market, which is New York, Toronto and Chicago. And so we’re immune, or vastly immune from any of those logistical challenges Alberta is going through.
So our gas realized prices were very strong and should continue to be very strong. There is a relatively mild weather as we speak. So the gas prices are just a bit below the Q3 reported numbers, but no doubt is going to increase again in the winter season.
Looking now at the operating cash flow and EBITDA, I think, it’s worth mentioning that 2021 was not a bad year at all. But when you look at how it compares to 2022 is telling and shows how exceptional both on the operational and the financial side, the results have been and still are in 2022 with — just for the third quarter operating cash flow and EBITDA twice as much as the prior year. And year-to-date, as I mentioned, EBITDA and operating cash flow at around US$510 million.
Looking at the operating costs. Very happy to report that we are well on track to deliver operating cost per barrel for the full year in between the range we’ve guided of between US$16 and US$17 per barrel of oil equivalent. We are below this quarter on the back of a very strong operational performance.
So despite some electricity cost increase some inflation here and there. So we initially had to increase our guidance, our initial budget was in the low US$15 per BOE. We’ve re-guided between $16 and $17 and we’re on track to be there for the full year on average.
Looking at the netback, it’s always a very interesting way to look at our business and we compare extremely well against our Capital Markets Day given at the high end of the guidance. We had operating cash flow and EBITDA netback around $36 per BOE. And year-to-date for the first nine months we’re actually closer to $39 million between $38.5 per BOE for operating cash flow and close to $39 million for EBITDA. So really a strong performance.
Looking at the cash flows and how it’s impacted or that I really like this chart. And I think the scale is very important because you see how this massive operating cash flow generated during the first nine months has been used and has been deployed.
So we’ve used the US$510 million operating cash flow to spend around US$120 million on development CapEx and exploration evaluation. Between US$20 million and US$25 million on G&A and finance cost. And US$170 million on share buyback and capital return to shareholders.
And despite returning all this cash to shareholders we still improved our net cash or net debt position by $180 million moving from at the beginning of this year an opening net debt position of US$94 million moving into a net cash position at close to $90 million at the end of September.
On the finance cost, I mean, nothing special to report or capital structure has not changed much. So it’s really — we’re paying our coupon under the bonds come back to that. And worth mentioning that our G&A remain under control with our cash G&A at around US$0.7 million per BOE.
Looking at the financial results, you see that we generated revenues of close to $880 million, actually before royalties that the revenues are $960 million. So with US$356 million of production costs we generated a cash margin of $523 million gross profit of $421 million and the net profit for the first nine months of this year stand at $276.5 million for the first nine months.
On the balance sheet, I just talked about the cash position we’re in US$400.5 million of cash at the end of September. The other point which is probably worth mentioning is the higher compared to the end of last year. At the end of September, we had higher current assets, which is just the reflection of the higher cost, the higher oil and gas prices environment we’re in meaning that we’re going to cash in more revenues. So it’s a positive to see those increased current assets.
And on the flip side, we have also higher current liabilities, which means that we’re just being more active in terms of spending on both the OpEx and all of the CapEx program, Mike touched upon, which increases those current liabilities. In terms of capital structure, I just mentioned, no change.
I think it’s fair to say that it was probably a very good move to go and tap the bond market when we did almost nine months ago in anticipation of all the US base rate hike. As we see today, the base rates have increased by probably 2% to 3% already and are still expected to marginally be increased again. And so that provides us with a very, very strong balance sheet one to a lot of cash. And that’s down to us now to optimize the way it’s going to be allocated between our three strategy of three strategies or three pillars, which is the return to shareholder remaining opportunistic on the M&A front, but also funding organic growth potentially in the future with Blackrod.
In terms of hedges, I mean, if you take a step back and look at where we stand on our business we have no immediate debt maturities. Our bonds are maturing in February 2027. You have manageable levels of CapEx. And if you look at the forward curve on the oil both from the Brent or WTI, we have a very steep backwardation, and where we’re losing around US$10 over the next 12 months. So we have no pressure to hedge from a business standpoint. The forward curve with a steep backwardation is not really helping. So, we’ve decided so far to remain unhedged and leave that exposure to our shareholders. We have no benchmark hedges in terms of Brent WTI or WCS.
We have no longer gas hedges either, which means that we will continue to benefit from the strong gas prices, which we see in the market. Now, what we’ve done is, we’ve recently decided to hedge around 50% of the so-called WCS ARV. So the ARV is the other name for the WCS price in Houston. So what we’ve hedged is the transportation portion of the WTI/WCS differential. We wanted to ensure that, this transportation cost in 2023, we hedged against.
Now, there’s still a quality and demand differential which is the WTI-ARV differential which has widened recently. That’s as you can expect and as you would expect we are following that very closely. And should that differential tighten again, which we expect is going to happen as a combination of the refineries going out of the maintenance cycle and the US strategic release coming to an end, when that differential is going to tighten we will monitor it very closely to look at hedging it for next year.
As Mike mentioned as well, and that’s the results and other results of the US base rates hike the US dollar has appreciated quite a bit against, all of our operating currencies be it Canadian dollar, euro or Malaysian ringgit. So we’ve already hedged more than 50% of our euro-denominated spend for 2023. Same in Canada, and we’re actively looking at doing the same and locking in some “Cheap ringgit in Malaysia for Malaysian business.” So that’s the end of the financial section.
And Mike will nicely conclude.
Mike Nicholson
Yeah. Thank you. Thank you very much, Christophe, and amazing set of numbers. And so just to come back and recap on the highlights from a very strong third quarter production during the third quarter was above high-end guidance of 50,000 barrels of oil equivalent per day a record high for the company. And we now expect full year production to be in excess of our original high-end guidance of 48,000 barrels of oil equivalent per day.
Retaining no change to the OpEx guidance retained at US$16 to US$17 per barrel. No change to the CapEx program to your CapEx expected at US$170 million. And when we look at the free cash flow generation a very strong free cash flow generation in the third quarter $117 million, or a 9% free cash flow yield and full year free cash flow of between US$425 million and US$460 million.
As Christophe showed, the balance sheet is in great shape sitting at the end of September with close to $90 million of cash or net cash. And in terms of the sustainability strategy well on track to our carbon reduction targets and no material incidents reported through 2022. Finally, the share repurchase program under our capital allocation framework, we’ve returned more than our commitment with $100 million of SIB completed and the NCIB ongoing and we expect so far 11% of our shares outstanding have been repurchased this year.
So really the final slide, which shows I think IPC from the results that you can see with $425 million to $460 million of free cash flow forecast for just 2022 alone. Well on track to drifting towards the high end of that five-year free cash flow guidance range of $1.8 billion or between $75 million and $95 million between $1.2 billion to $1.8 billion, which gives you a range of between 18% and 28% per annum average annual free cash flow yield. And of course that continues to give the company an amazing platform to continue to target our three pillars of value creation for shareholders, which is continued stakeholder returns and continued opportunistic approach with respect to M&A and also starting to unlock the significant 1.4 billion barrels of contingent resources that we have on our books.
So that concludes the presentation for this morning. We can now take the opportunity to open up and take any questions that you have.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We will now take the first question. And it comes from the line of Teodor Nilsen from SB1M.
Teodor Nilsen
Good morning, Mike, Christophe and Rebecca and congrats with very strong quarter. I have three questions. First on Blackrod. Of course, that’s a very, very important project for you and also the growth going forward. Could you provide an update on the expected CapEx there and also maybe in light of that discuss CEO on general industry cost inflation?
Second question is of course I know we did this before, but your balance sheet is of course very strong. You have $400 million in gross cash. What should we expect you to spend the debt on, or should we expect you to run the company with a net cash? And my third and final question is on the production going into 2023. It looks like now production will be above 50,000 barrels per day by year. And then should we expect the full year 2023 production to be above 50,000 barrels per day? Thanks.
Mike Nicholson
Yeah. Thanks very much, Teodor. So to take your first question on Blackrod and the CapEx. It’s really a little bit too early I think as I mentioned in our presentation that the FEED studies are expected to be complete by the end of this year. And of course that’s going to drive the final CapEx estimate and what the team in Canada are looking at is different options with respect to how quickly we want to move the project and how many wells we want to drill pre first start. So there’ll be some choices as well about scope as to whether we want to ramp up production earlier then was in the original guidance from about 12 months ago. So we really — I’m afraid, we have to wait for the conclusion of those FEED studies and we’ll be in a position in early 2023 and to give the firm guidance on Phase 1 CapEx for Blackrod.
In terms of your cost inflation question, if we cast the mine back to the second quarter results when we increased our CapEx guidance from $130 million to $170 million. We had put in that increased guidance of provision of $10 million for inflationary uplift, which is about 6% on the original CapEx budget that we started off with at the beginning of this year. So that really gives you again, we don’t see any need to change that right now. So that gives you a kind of general estimate of certainly what we’ve seen across our business.
On the cash position you – cash of $400 million. Obviously, the company has got a very solid balance sheet. And I think really the simple answer as to how we plan to deploy the cash that we’ve got is on those three strategic pillars. I think it makes sense to continue shareholder returns. And we’ve created a lot of value from M&A. And one of the reasons that we went to the debt capital markets as Christophe mentioned is we thought it was timely to get ahead of interest rate rises. And but more so it gives us significant collateral that, when we’re talking to the majors and we’re looking at acquisitions in the $500 million to $1 billion category that we can certainly show that we’ve got the financial capability to do those types of acquisitions. And that does tend to differentiate ourselves from some of the weaker companies in our peer group.
And then you mentioned production is obviously, currently in excess of 50,000 barrels a day. It’s too early to guide on 2023 production. We still need to look at what the base investment program will be.
I think that’s perhaps a little bit on the high side. Obviously everything is running at technical potential and all the projects are just coming on stream. And we typically always add some allowance for downtime and planned turnarounds. So I think it’s too early but probably that’s a little bit on the high side for next year would be my first blush reaction.
Teodor Nilsen
Okay. Thanks, understood. Thank you.
Mike Nicholson
Thanks, Teodar.
Operator
Thank you. We will now take the next question. And it comes from the line of Lars Dollmann from Aramea. Please go ahead. Your line is open.
Lars Dollmann
Hi, team. Congratulations on the extremely strong performance operationally and also extend my best to your colleagues who are not on the phone today. I have actually two questions. One is on the operational side is we’re now about 50,000 or around 50,000 per BOE a day. We took the CapEx of $40 million increase, if I remember correctly from the summer to speed up the CapEx program this year a bit and pull it forward from next year. So on the CapEx side next year and notwithstanding Blackrod. Is it fair to say that next year the CapEx wouldn’t be higher than this year on the existing asset base?
And in connection with that also – on the hedge side, probably a question for Christophe is what do you actually try to achieve with exactly with the hedge with the Houston one on the WCS? And last but not least as we see the normal course issuer bid is still ongoing and you only can buy Canadian shares and it’s very slow because obviously turnover is very low in Canada. When should we expect the next normal course issuer bid then to come out?
And if we look at the numbers now because you can only do 10% of the free float as the free float gets smaller, how do you think about the capital allocation generally? Because even if you do another 10% normal course issuer bid, we are running into the issue that that is not the same amount of dollars anymore than we had obviously. And do you think about paying out cash dividends? Thank you.
Mike Nicholson
Yes. Thanks, Lars. Let me take the first and the third questions and then Christophe can take your differential hedging question. So yes, in terms of you’re obviously right, we did increase the CapEx budget by $40 million to $170 million and accelerated some projects from last year. And in the absence of a Blackrod investment decision I think if you go back to our Capital Markets Day, five-year business plan guidance then yes, you do see a drop-off in CapEx for 2023.
Now we obviously, have to go through all the project ranking exercise and decide on the investment program for next year. But if you refer back to our existing public disclosures, then the answer would be the base business should be below the $170 million for this year.
On the share buybacks, and the shareholder returns, and not been able to perhaps repurchase as much this year as next year as this year under the NCIB, that’s right. If we’ve retired 11% of the shares and we can only repurchase 7% of the shares outstanding. So that does reduce the amount that we can repurchase under the NCIB.
But the SIB, which was successfully concluded this year with US$100 million is a very flexible mechanism. So that’s always an option for us to use that to top up any NCIB share repurchase returns. We’ve not decided to go forward with dividends at this stage. I think when the slide I showed in the presentation, on our discount to the 2P NAV and that doesn’t include anything for Blackrod. We still think that there is far more value, and can be created through share repurchases as opposed to dividends, at this point in the company’s life. And Christophe, on the hedging.
Christophe Nerguararian
Yes, on the hedge. So, what we’ve done, if you look at the WTI/WCS differential, as I was trying to explain there are two components. One, is the transportation cost from Hardisty to Houston. And the other one is, what the market dynamics are on the US Gulf Coast with regards to refining capacity and refining need. So, the locally the market is less in demand of WCS, because of the refineries maintenance and the US strategic release.
So we’ve not hedged that portion. We’ve only hedged the transportation portion of the WTI/WCS because we see very little downside. It’s trading at $10 right now and it’s flat at $10 next year. So we just wanted to protect ourselves against any issues, around the pipeline egress system. Officially the Trans Mountain, pipeline is due to come on stream next summer. We have very good reasons, to believe it will be delayed by probably another six months.
So we wanted to hedge ourselves from a pure transportation perspective. And as I mentioned, we believe that when the maintenance season is over and when the US strategic reserves stop to happen by the end of this month, as guided by the US administration, we believe that diff will tighten again at least for a portion of next year. So, we might flatten in hedging that.
Lars Dollmann
Understood. And are you looking also through the winter opportunistically, as you did last time to hedge on the gas side?
Christophe Nerguararian
Yes, yes.
Lars Dollmann
Just the for the summer something, very strong prices next summer. Would you look at that?
Christophe Nerguararian
Yes, we remain very open to that.
Lars Dollmann
Okay. Thanks, guys. Again, very good job
Christophe Nerguararian
Thanks, Lars
Operator
Thank you. We will now take the next question. And it comes from Ruben Dewa from Jefferies. Please go ahead. Your line is open.
Ruben Dewa
Good morning, everyone and great to see another strong quarter, so well done guys. I just had a quick one on Blackrod. I was just wondering, what are the parameters that go into estimating some of the numbers that you’ve got on Slide 15. So for example the $540 million CapEx number and the production for Phase 1. I was wondering do you have like a number of wells in mind or a number of web house that kind of inputs for these numbers? Thank you.
Mike Nicholson
Yes. Thanks Ruben. Yes. So that was the basis of assumption for that Phase one CapEx was to develop the first 217 million barrels of 2C resources. And it was looking at pre-drilling one full pad of wells, such that we would start to achieve first oil with a ramp-up through 2026, initially ramping to 20,000 barrels a day. And then future drilling that would see us get to 30,000 barrels a day a couple of years later in 2028. So that’s what we call our first decision gate forecast.
And as the development concept is refined and we look at optionality. of course there are some options to look at accelerating some of that drilling prior to first oil and it would give you more CapEx to first production. But likewise, it would give you a ramp to 30,000 barrels a day more quickly. So those are like the bookends of the scope of the project that we’re trying to frame before making that final decision.
Ruben Dewa
Great. Thank you very much.
Operator
Thank you. We will now take the next question. One moment please. And it comes from the line of David Johnson from [indiscernible]. Please go ahead. Your line is open.
Unidentified Analyst
Hi, very happy shareholder here. I have two questions. Yes. Thanks a lot. I’m very impressed most of the result as always. I have two questions and they are a bit more strategic in nature. First, I want to say that I’m very happy with the discipline you’ve shown regarding M&A it’s better doing no deal than doing a bad deal. However, since it has been so hard to find good deals for acquisitions have you considered paying shares in other attractively priced listed oil and gas companies? I’m sure you have a good understanding of peers that you respect from a capital allocation point of view that could be attractively priced in the stock market?
Second question might come a bit out of left field but I would love to hear your thoughts on this. I was just wondering whether you had looked into the possibility of issuing preferred stock to further strengthen your already strong balance sheet. I was just thinking that your debt servicing capacity is extremely high and the pricing of preferred perpetual equity capital and stock is around 7% to 9% which compares very well to your earnings yield in the most scenarios and also with the attaining that market for non-perpetual money? Thank you so much.
Mike Nicholson
Okay. Thank you, David. I’ll take the first question and then Christophe will answer the preferred stock question. So, I mean the short answer would we buy shares in other companies? The answer is, yes if we can find the right opportunity. We have done. We acquired Blackpearl resources and we acquired Brent Oil Corporation and those were company acquisitions. So I think the short answer is yes.
Of course, the challenge is can we find companies that have a similar value proposition to IPC in terms of where they trade that relative to their discount to NAV or where they trade relative to their free cash flow yield. And there are very few companies out there that trade on the same metrics that we do. So clearly it’s more tricky to do that.
I don’t see us taking minority shares in companies. I think, investors can do that themselves. I think where we can add value through acquisitions is if we have control rather than having a minority interest in the company. So that would be the qualifying statement to that point. And then, Christophe on the prep shares. Yes.
Christophe Nerguararian
Yes. On the prep shares, I mean, we’ve not looked into those precisely, David. The reality is that as you say, we have a very strong balance sheet, which is still relatively unlevered. So we could still raise debt against our existing assets. And given that when it comes to M&A, we look at producing assets arguably we would be able to also raise that on any M&A target. So that’s still a lot of money to play with before issuing any form of stock I would say. But, yes, certainly I don’t think raising and finding money for the right projects should be an issue.
Unidentified Analyst
Thank you so much. Those were my questions. Good luck.
Christophe Nerguararian
Thank you.
Mike Nicholson
Thank you.
Operator
Thank you. There are no further questions at this time on the phone lines. If we continue with the web questions.
Rebecca Gordon
Yes, we’ve got a couple of questions that have already been answered on the web. But the first couple here one from American Press. Is cost inflation driving CapEx higher? Mike, maybe you can take that?
Mike Nicholson
Yes. I think, I already took that one in one of the answers. As I said our experience this year is, clearly, we’re in a higher inflationary environment. But, I think, the teams have done a great job in terms of the OpEx we’ve been able to keep our OpEx guidance unchanged on CapEx. We did put an inflationary provision of $10 million alongside our second quarter results. So that’s about 6% of our total budget for 2022. So that’s the quantum that we experienced on our 2022 capital plans.
Rebecca Gordon
Okay. Great. Thanks, Mike. And just maybe one more question from Nick. Christophe, we haven’t achieved gas price as strong in the quarter that previously sold at parity with Empress. Could you explain a little bit about the discount that Empress was in Q3?
Christophe Nerguararian
Yes. Thanks, Nick. Very good question. The market was a bit choppy as you may have seen on our graph the ECO was low Empress was high. We had a few contracts. So we had some hedges in place where we locked in ECO. So that’s why basically, we didn’t achieve quite the Empress price because of the lingering gas hedges we had in place for Q3. But as you’ve noticed there are no longer outstanding in gas hedges for Q4 and forward. So it remained opportunistic for the future but there are nothing outstanding as we speak. So, yes, lingering gas hedges was the reason for Q3.
End of Q&A
Rebecca Gordon
Okay. Sorry, guys we’re out of time. Couple of people just come in with the last minute questions. But perhaps you can contact me separately and then we can get back to the questions. Thank you very much, everyone. Mike, you want to close that.
Mike Nicholson
Yes. Thank you very much everyone for tuning in for a very solid third quarter performance. And we look forward to presenting next in early February in our year end results and our 2023 Capital Markets Day presentation. So we’ll talk again then. Thank you, everybody.
Christophe Nerguararian
Thank you.
Rebecca Gordon
Thanks, everyone.
Operator
That does conclude our conference for today. Thank you for participating. You may all disconnect.
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