Q3 2019 Earnings Call

Thank you for standing by this is the conference operator, welcome to the Baytex Energy Corp. third quarter 2019 conference call and webcast.

As a reminder, all participants are in listen only mode and the conference is being recorded after the presentation. There will be an opportunity to ask questions to join the question Q you May Press Star one on your telephone keypad should you need assistance during the conference call you may signal, an operator by pressing star zero I.

I would now like to turn the conference over to Brian Actor Vice President Capital markets. Please go ahead Sir.

Thank you saw the good morning, ladies and gentlemen, and thanks for joining us today to discuss our third quarter 2019 financial and operating result.

With me today are up affair or president and Chief Executive.

Officer Raw Gray, our executive Vice President and Chief Financial Officer, Candle, Arthur Vice President heavy oil and Chubb Lunberg Vice President light oil.

While listening please keep in mind that some of our remarks will contain forward looking statements within the meaning of applicable securities laws.

I refer you to the.

Is there is regarding forward looking statements oil and gas information and non-GAAP financial in capital management measures in today's press release.

All dollar amounts referenced in our remarks are in Canadian dollars unless otherwise specified.

And with that I would now like to turn the call over to Ed.

Thanks, Brian and good morning, everyone.

I'd like to welcome everybody to our third quarter 2019 conference call Im very pleased with our strong operating performance, which continued across our asset base during the third quarter.

And I'm excited to announce that given our year to date results. We now expect to exceed our 2019 full year annual production guidance.

Most of 97000 Boe per day with exploration and development capital expenditures of approximately $560 million.

This level of capital spending is at the low end of our original guidance range and reflects our continued commitment to driving cost and capital efficiencies.

And for the third.

Consecutive quarter, we are delivering substantial free cash flow.

In Q3, this amounted to $74 million and brings the free cash flow generated year to date to $271 million.

This strong free cash flow has contributed to a 13% reduction in our net debt this year.

Including the redemption of our US hundred 50 million dollar of long term bonds during third quarter.

Our commitment remains to generate free cash flow and further improve our balance sheet.

We maintained strong financial liquidity with our credit facilities approximately 50%.

Undrawn.

For the quarter, we generated production of 95000 Boe per day, which brings production for the first nine months of the year to 98000 Boe per day.

These results are consistent with our expectations and reflect the timing of our 2019 development program in Canada and the Eagle Ford.

And the impact of our third party facility turnaround at Peace River.

There is no change to our 2019 exit production rate forecast of 95000 to 97000 Boe per day.

We delivered adjusted funds flow of $213 million or 38 cents per basic share.

And $670 million or $1.20.

Per basic share for the first nine months of 2019 at our exploration development capital expenditures totaled $139 million, bringing aggregate spending year to date to $399 million.

Our diversified.

Hi, oil portfolio generated a corporate level operating netback, including hedging of $29 per BOE, which is among our highest since 2014.

Our Canadian operations generated an operating netback of $25 per BOE Lee, while our Eagle Ford asset generated an up.

Approximate operating netback of $28 per Boe.

During the third quarter Canadian differentials remain tight which contributes a strong price realizations.

We also published our fourth corporate sustainability report this quarter, demonstrating our commitment to transparency and accountability and.

To our progress in managing the environmental and social impact of our business over the past five years, we have reduced spill volumes by 76% and this year, we established a greenhouse gas emissions reduction target with an objective of reducing our corporate admissions intensity by.

8% by 2021.

Hi, I'm incredibly proud of the work our teams are doing on the safety and environmental front.

Let's turn our attention now to our operations beginning with our light oil Eagle Ford and Viking assets.

In the Eagle Ford production averaged 37000 Boe per day 70.

Percent liquids during Q3 2019, we commenced production from 20 wells as compared to 29 wells during the second quarter.

These wells generated an average 30 day initial production rate of approximately 2100 Boe per day per well, which represents a 20%.

Sent improvement over wells brought Onstream in 2018.

In the Viking production averaged just over 22000 Boe per day with an operating netback of $41.60 per BOE, we the highest in our company.

We maintained an active pace of development during the third quarter.

With 72.5, net wells drilled and 49.4 net wells brought on production.

We currently have three drilling rigs in two frac crews executing our program and expect to drill approximately 245 net wells this year.

As with all of our core plays inventory.

Continues to be a priority, we've completed multiple deals and swaps year to date, adding 220 net unbooked drilling opportunities.

Moving to our heavy oil assets in Canada Peace River and Lloydminster produced a combined 28500 Boe per day.

During the third quarter.

In Q3, we drilled 20 net heavy oil wells, including four net multilateral horizontal wells at Peace River.

Our 2019 development program is strongly weighted about 80% to the second half of the year as a result heavy oil production is.

Expected to increase to more than 30000 Boe per day during the fourth quarter due to the new well completions and the expansion of our core Robert thermal project.

Finally in the East do Vinay shale, we continued to advance the delineation of this early stage high netback light oil.

Resource play.

Today, we have drilled seven wells at Pembina, which confirms the prospectivity of our acreage.

Two wells brought Onstream in 2019 generated an average 30 day initial production rate of approximately 1050 Boe per day per well.

At 75% liquids.

And are in the top 15% of all wells drilled in the play.

The success of our drilling program in the Pembina area has significantly de risked are approximately 38 kilometer long acreage fairway, where we hold 250 75.

Tons of 100% working interest do Vern a lands.

Let's turn to risk management.

We continue to manage our commodity price risk through an active hedging program in the third quarter, we realized a financial derivatives gain of $21 million.

For the fourth quarter of 2019.

I mean, we have hedged approximately 53% of our net crude oil exposure at pricing in the mid $60 range for Wi Fi.

For 2020, we have hedges on approximately 33% of our net crude oil exposure largely utilizing costless three way option.

Truckers that when W.P.T.I.s between 51 and $58 per barrel, we received $58 per barrel.

And the contracts also provide upside participation to nearly $64 per barrel.

Our hedges also include WT ibase fixed price swaps for 4000 barrels.

Per day at approximately $56 per barrel.

For the first quarter.

Additionally, crude by rail is an integral part of our aggressive and marketing strategy for heavy oil.

For Q4, 19, we expected deliver 11500 barrels per day approximately 40%.

Of our heavy oil volumes to market by rail.

For 2020, our crude by rail volumes are currently contracted at 7500 barrels per day.

Full details of our hedge program can be found in our Q3 financial statements.

So now let me conclude by.

Saying, we are well positioned to execute our business plan focused on free cash flow generation as I mentioned at the outset, given our strong operating performance. We now expect to exceed our 2019 annual production guidance of 97000 Boe per day.

Based on the forward strip for the balance of 2019, we.

Forecasting adjusted funds flow of approximately $875 million and we expect to generate approximately $300 million of free cash flow, which supports our deleveraging strategy.

Over the longer term as we continue to drive debt levels down we believe we will be positioned to offer.

Earns through.

Through a combination of per share growth share buybacks and or dividends.

And lastly, I would point out that we are on the process of setting our 2020 capital budget.

The details of which are expected to be released in early December following approval by our board of directors.

And with that.

I will ask the operator, please open the call for questions.

Thank you Sir we will now begin the question and answer session to join the question Q You May Press Star one on your telephone keypad, you'll hear a tone acknowledging your request. If you are using his speakerphone. Please pick up your handset before pressing any key to withdraw your question.

Question. Please press star too, we will pause for a moment as colors join the queue.

Our first question comes from Philip Skolnick with eight capital. Please go ahead.

Yeah. Thanks, good morning.

A couple of questions first just in terms of the Alberta.

Our to governments announcement yesterday with.

Curtailment relief for rail ramp how does that.

Should we think of that impacting baytex at all and if so by how much I really think about that.

Yeah on that question Phil.

Curtailment relief has been discussed.

Quite openly with.

Ourselves in the government and then Ben signaled now for months and we believe that the.

The differential has reflected that so the differential moved from where it was in threeq Q around $13 per barrel, it's moved up steadily sitting at 16 $17 per.

Oil and now with Keystone is decembers widened out to 19 or 20, but the point here is that with the announcement in that discussion. We're now sitting at a point where heavy oil differentials are at the full cost of rail.

So while we're not expecting to participate in the government program reason being.

Being work, we continue to rail 40% of our crude.

We were doing that in Q1, all last year and throughout this year.

Dominant majority of those barrels move to the Gulf coast on advantage pricing for us. So we don't need to move more rail but.

With the differential now move to the full cost rail, we think that will incentivize quite a bit more rail and that's going to be good for the industry and good for business.

Yeah sure.

And then in terms of free cash flow.

Given how robust is for you guys.

How should we think about the priorities of that.

And.

Certain levers that you could pull in terms of.

On production side of things.

Yeah, well as you can see first half of the year was quite strong production activity was ramp down three Q our exit rate is projected.

95, 97000 barrels a day, we're pointing towards the high end.

To that so.

So these assets wants to grow on $560 million, a capital were or at least on our old capital range. So our capital efficiencies are incredibly strong will point to a budget next year, though that continues to drive free cash flow through these strong capital of.

Fission sees.

And our strong cost structure that we've we've delivered and the reason we'll do that is the number one priority in the company remains.

To de lever our balance sheet.

And get that that part done.

And then we will get to the point, where we can talk about more shareholder friendly.

Initiatives such as share buybacks at this point in time with our shares trading where they are.

But but we need to take another step on the debt first with that free cash flow.

Okay, and which share buybacks and be more desirable than a a dividend.

I think at this point with where our.

Our prices trading I would say, yes that would be behind second priority behind the deleveraging in terms of capital allocation Thats always aboard discussion, though and one that.

One that we were having every quarter now.

Okay, great. Thanks, that's it for me thanks.

Thanks, Phil.

Once again if you.

Have a question please press star one.

Our next question comes from Tom Callahan with RBC capital markets. Please go ahead.

Good morning, guys, just a follow up on Joe's question. There given debt reduction is the priority wondering if you guys could talk a little bit about your plans with respect to five funding.

Our refinancing your long term notes as they begin to come due there in 2021.

Well, let me just say something very briefly on that and pass it over to our CFO Rod Gray, but the two fundamental points that underpin our ability to de lever our number one free cash flow and.

For two having strong liquidity.

On our revolving credit facility and Fortunately both of those are very healthy and they're very healthy at $50 oil prices, so with that as a backdrop and what I said previously about deleveraging I'll leave the specifics to Rob.

Hi.

Tom.

Just to carry on with what added alluded to so that bond maturity isn't until June of 2021.

We just in September redeemed 150 million us and continue to have post that redemption over 500 million of credit capacity on our revolving credit facilities.

As Ed mentioned, we're in debt reduction mode, our intentions maintain the business and this commodity price environment maximize free cash flow, which will be directed toward debt repayment.

It might also be helpful to point out that we've managed the business.

At the end funds flow.

For the last five years.

As in a very volatile commodity price environment, and so maybe maybe to summarize I think we have time and options to kind of deal with the upcoming maturities and we're evaluating all options going forward.

Perfect. Thanks, guys.

This concludes the.

And then answer session I would like to turn the conference back over to Brian actor for any closing remarks.

Alright. Thank you saw the thanks, everyone for participating in our third quarter conference call have a great day.

This concludes today's conference call you may disconnect your lines. Thank you for participating.

And have a pleasant day.