Q4 2019 Earnings Call
Welcome to there's a million energy and year end 2019 earnings results Conference call. At this time all participants are in the listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone if you acquire any.
Further assistance. Please press star Zero. Please be advised to today's conference is being recorded I would now like they had the conference over to your speaker today, It's me Marino President and CEO of Philadelphia. Thank you. Please go ahead.
Good morning, ladies and gentlemen, thank you for joining us on Tony Marino, President and CEO Vermilion energy with me today or Michael is executive Vice President and COO ours, Glimcher, Vice President and CFO, Kyle Preston Vice President Investor Relations and other members of our management.
Team, who may be called on during the Q and a session.
We will be referring to a powerpoint presentation to discuss our fourth quarter 2019 financial and operating results and year end reserves uptake.
The presentation can be found on our website <unk> under invest with us and events and presentations.
Slides two and three in the presentation refer to our advisory on forward looking statements. These advisories described the forward looking information non-GAAP measures and oil and gas terms referred to today and outlined the risk factors and assumptions relevant to this discussion.
Let me start off with our dividend.
Slide four dividend reduction.
Our board of directors approved a 50% reduction or monthly dividend to 11.5 cents per share in response to the recent weakness in commodity prices, resulting from me outbreak of the novel Corona virus also known as Cobot 19.
We didn't take this decision lightly it has been an extremely challenging environment ever since the oil price crash in the second half of 2014 throughout this period, we have maintained focus on profitability by grinding costs out of all phases of our business ranging from field operations to financing expense upgrading our capital project slate.
And adapting our capital markets model to focus even more acutely on returning capital to shareholders.
We have been unique among our traditional competitor group and maintaining our dividend, while still providing a moderate level of growth.
We have paid a monthly dividend or distribution in the trust era for the past 205 consecutive months returning over $40 per share of dividends over this period.
Despite the energy downturn, we put more production reserves and free cash flow behind each share while employing dramatically lower capital budgets.
We're proud of this record of returning capital to shareholders, while still providing per share growth. This model is kept us disciplined in a capital intensive industry and has put substantial cash back in the hands of investors.
However, the emergence of Cobot 19 is an unanticipated event that has dramatically altered individual business government behavior and has already had a substantial negative impact on global economic growth and commodity prices as we consider today's economic and commodity outlook. We believe it is unlikely.
That we would achieve fully funded status for our previous dividend at a reasonable level of capital expenditures. Therefore, we have determined that a reduction to our dividend just most prudent course at this time.
The revised dividends will be effective for the March dividend payable on April 15, 2020.
Slide five total payout ratio.
At the commodity forward strip as of March four we estimate of 2020 payout ratio of 99%, including previously declared dividends for January and February.
On a pro forma basis Annualizing, the revised dividend for 2020 total payout ratio would be approximately 94%.
Excess cash generated beyond dividend capex in a row requirements will be allocated toward towards debt reduction, while retaining the option of buying back shares through our NC IB program and an improved macroeconomic environment.
Slide six dividend funding analysis.
This slide we show a waterfall chart for fund flows from operations. The bars represent the evolution of our 2020, Epo estimates, including the major commodity price drivers or changes in forecasted FFO. The dash lines represent our combined capex dividend and Aero outflows under our previous dividend.
Under our revised dividend.
First bar on the left represents our FFO estimate the time of our budget release at the end of last October.
As you can see our 450 million dollar capital program and 23 cents monthly dividend were funded at $55 WT <unk>, which was approximately the oil price at that time.
As we started 2020 oil prices moved higher partially offset by lower gas prices and our funding status continue to improve to an overfunded position as represented by the FFO bar as of January six in that environment. We were confident in our ability to fund our capital program and payer monthly dividends.
23 cents, while still generating excess cash to reduce debt.
Today, we have a different picture following cobot 19.
Oil prices have declined by more than $20 per barrel from the peak we saw earlier in the year and natural gas prices have also further weakened since that time.
It's not our belief that cobot 19 significantly ultra is the long term prospects for the oil and gas industry and ultimately we expect to recovery and resumption of a positive trend for commodity prices. However, we do think the recovery in oil prices that we began to experience in 2020 will be pushed back.
For an unknown period.
As you can see in the last EFO bar on the right side of the slide at today's prices, we would be unable to fund our combined twentytwenty capital budget and previous dividend amount represented by the upper Dash line.
However, with the revised dividend represented by the lower dashed line, we are fully funded at the forward strip.
Lastly, stacked on top of the final Epo bar. We also show sensitivities at 50 dollar and $55 Wi Fi for the rest of 2020, which would place us in an overfunded position with our revised dividend.
We were always clearance, stating that we would reevaluate the dividends in the event of the structural change in commodity prices that could affect our ability to self fund.
Furthermore, our philosophy is to prioritize balance sheet strength over other objectives, including either growth or dividends. This is why we made the decision to reduce our monthly dividend by 50% to ensure that we maintain a strong balance sheet and position the company for long term value creation should we experience and even more pronounced and protracted commodity down.
Turn to cope with 19 or any other costs will be attentive to all forms of cash outlays, focusing first on capital investment levels to protect the financial position at the company.
Now, we'll move onto our Q4 and full year 2019 results.
Slide seven Q4, and full year 2019 review.
During 2019, Vermillion generated record cash flow production and reserves. Despite a continued environment of challenging commodity prices, we reported FFO of $908 million in 2019 on a capital program, a $523 million, which translated to free cash flow generation 380.
$5 million the highest in our history, the resulting 2019 total payout ratio, including dividends and asset retirement obligations was 103% in Q4 2019, we generated $216 million of FFO, which was in line with the previous quarter. Despite an inventory.
In Australia due to the timing accrued liftings.
We delivered record production of 100357 BOE D. in 2019, representing year over year growth of 15% or 5% on a per share basis. We achieved these results. Despite several unexpected operational challenges during the year, including a third party refinery outage in France.
Characteristic weather driven delays in Canada.
Net debt in 2019 increased modestly to $2 billion. However, the net debt to trailing FFO ratio improved to 2.2 X compared to 2.3 X in 2018.
In addition to an improving leverage profile, we also enhance the quality of our balance sheet over the past year. We recently received commitments to renew our covenant based credit facility for four years with a new maturity date of May 31, 2024. In addition in June 2019, we executed a cross currency interest rate swap.
On our 2025 Usthree hundred million dollar long term senior notes converting our 5.6% to 5% interest cost on these notes for 3.275% for the remainder of their term as a result of these initiatives our pretax cost of debt today is approximately 3.2% with.
Weighted average remaining term 4.4 years.
Slide eight.
Europe, and Australia Q4 highlights our most notable activity in Europe during the fourth quarter was in the Netherlands, where we successfully drilled and completed the west selling were well 4.5 net representing our first drilling activity in that country. Since 2017, well flowed at an initial gross rate of $14.7 million.
Eric fee per day and is expected to be brought on production during 2020.
Germany, Q4, 2019 production averaged 3400 BOE D., an increase of 3% from the prior quarter. The increase was primarily due to improved uptime on our operated oil and natural gas assets and partially offset by unplanned downtime on our non operated oil assets.
Following the successful drilling of the bird Morrissey five well, 46% working interest in 2019, our partner group and this license has agreed to a tie in plan, which should allow for production early next year.
CE, we tightened the MH 21.3, net and that's on your E.
We own nine.
1.0, net wells in Hungary drilled in the second and third quarters of 2019, respectively. Wells were brought on production midway through the fourth quarter of 2019 at restricted rates of approximately 600 BOE he be met for the two wells combined in Australia, we continued to benefit from strong pricing on our wandoo crude realizing that.
Average premium.
$6 per barrel over dated brands over the course of 2019, the strong relative pricing has continued in 2020 with our next cargo contracted a premium of use $24 per barrel over dated reps.
Slide nine.
North America Q4 highlights in Canada production averaged 58600 BOE D. in Q4, 2019 up slightly from the prior quarter strong results from new well completions in the quarter more than offset natural fine.
During the quarter, we drilled one of our best ever condensate rich lower Mannville wells and Drayton Valley, Alberta, achieving an IP 30 rate of approximately 1900 Boe d., 60% liquids inferior we drill the liquids rich upper mannville, well, which delivered an IP 30 rate of approximately 1800 via we'd be 15.
Percent liquids. We're currently in the midst of a very active Q1, 2020 drilling campaign, Canada with rig activity in the quarter, peaking at six rigs and sketch one and four rigs in Alberta, We plan to complete the majority of our 2020 Canadian drilling program in the first quarter of the year in order to avoid potential delays from an extended spring breakup.
Season for unseasonably wet summer weather.
And the United States Q4, 2019 production averaged 5700 Boe d., representing an increase of 15% from the prior quarter.
Chris was primarily due to a full quarter of contribution from the four wells we brought on production during the third quarter of 2019. These wells continue to perform in line with our type curves achieving an average IP 90 rate of approximately 450 BOE D.. We also began drilling to 1.98 wells.
In December 2019 for which drilling finished in January 2020, and are currently undergoing completion.
We have two rigs operating in our highlight filled in the powder River basin similar to our Canadian business unit, we plan to execute a front end weighted capital program, the United States, completing our 12, well 11.9 net 2020 drilling program in the first half of the year.
Yes.
Slide 10, 11 2019 reserves highlights include proved plus probable reserves increased by 3% year over year to 501.2 million barrels of oil equivalent.
A large majority of our new reserve additions were through organic activities as we continue to enhance a recovery factor on existing assets and advanced resources to reserves in a number of our operating areas. We converted 36.8 million barrels oil equivalent of previously booked resources into Tupi reserves in 2019.
Looking at some of the reserve metrics on Slide 11, we replaced 120% of Tupi reserves organically and added these new reserves at an organic FNB cost defined dollars 93 cents per Boe, including FDC, resulting in an operating recycle ratio of three X and funds flow recycle ratio of two point fivex.
RFMD costs have been below $10 per BOE, we for the past three years, three or average $79.38 per Boe, including FTC, while growing our liquids waiting driven by a capital efficient project slate and a continued focused on on cost improvements our three year organic operating recycle ratio stands at <unk>.
3.2 X.
Before we open the line questions I'll return to where we started this call our dividend has been and remains a very important feature of our company.
Our goal was to never reduce the dividend we have always predicated its level on fundamental economic sustainability and maintaining our financial strength. Despite five years of l. shaped recovery since the commodity crash in mid 2014, we were able to taken off unit cost out of our company to bring payout ratios down to approximately 100%.
While still phasing out our drip programs. However, after the pronounced decline in commodity markets in the economic uncertainty caused by front of Iris, we were no longer confident in our ability to internally the fun to internally fund the dividend at its previous level, Hence we took the bitter pill, reducing our dividend by 50%.
We believe in returning capital to the owners of Vermillion, We believe returning capital has a host of advantages and our integrated operating and capital market strategy. We will now go forward with our new monthly dividend based on the same principles as before continuing to develop efficiencies in our operations maximizing free cash flow and.
Providing a meaningful income stream to our shareholders.
That concludes my formal comments, we're happy to address questions. Operator would you. Please open the phone line.
To ask a question. Please press star one on your telephone keypad. So first question comes from Dallas, a follow up Canaccord Genuity. Please go ahead. Your line is open.
Hi, good morning, and thanks for taking my question.
I've got a couple year.
First is just in terms of a.
Your current leverage position.
I've just given the pullback I just outside of your range.
Can you kind of reiterate what on the targeted you've kind of focused on your you talk towards the abilities are the levers that you guys simple towards moving towards that.
Yes, if we understand it protracted.
Environment similar to this one.
The second thing.
Yeah, well first of all.
Our.
Projected jet to FF FFO at the end of year under the strip is two point about 2.9 times.
Cash flow and our target is 1.5 times.
Debt to cash flow rate FFO.
It's our intent to self fund.
And.
Under the strip, we ran at the end of the day on.
Wednesday, we were at that level.
Keep in mind that when we quoted the 99% number.
That includes two months of dividends in January and February at the higher level.
So under the prices that we had.
As of the end of the day on Wednesday that would give us a payout ratio on a pro forma basis with the new dividend level at 94%.
We do intend to remain self funded.
And we'll be looking closely it.
Commodity prices.
Not reacting to any single day event, we do think.
As I mentioned in the.
And the opening remarks, we do think that this.
In the short to medium term does qualify as a structural change in the market.
And.
Therefore, we we made the.
Response on the dividend because of that assessment that we had made.
We will.
We're not going to make any further changes today to the.
To our outlays.
We will be seeking to reduce cost where we can on the operating side of our business.
With respect to the $450 million capital program that we have for the year.
Yes.
We have.
Continued additional weakness as we have seen in the last couple of days in the commodity.
We we would react on the capital program side and.
Had a question about this earlier today, what the magnitude of that change could be we.
No. We haven't made any decisions I think we'll compete well complete our Q1 program.
The we've always pointed out that the growth component of our budget.
For 2020 rates comes to about 5% of our Capex. There is about another 5% that is devoted forward.
Projects that have impacts beyond 2020.
So our our stay flat capex for the year is about.
It is about 410 million and we would consider reductions in the capital program.
At that level or perhaps.
Into the range of 15% of the capital program.
We make that decision I think.
After completing the Q1 program and.
In time in the post break up period for us too.
Just activity in Q2 and beyond.
So Dennis did that that gets your question there yeah no for sure.
And then my second question is maybe shifting gears here too.
European natural gas pricing, obviously, there's some near term weakness there and how should we be thinking about and theres still relative strength as we look further down the curve how should we be thinking about your hedging policy longer term and how you guys trying to kind of we'll call. It more moderated the risk around 21 and 22 volumes currently.
Okay, Yes, Dennis I'm going to start off on the sensor and then ill.
I'll turn it over to in a minute to Adam unique who is our.
Risk manager and.
[music].
Marketing.
Director for the company so.
The the first comment.
Is that.
And this is the part that I want to Adam to cover in greater detail later, we do have a weak market in Europe, particularly for.
This winter and summer.
The.
Forward curve for European gas.
Is in significant contango as you go into winter Twentytwenty, one it's much higher for next summer than it is today and continues into contango as you go into.
The next winter.
The.
The forward curve in our view is.
Reasonably reflective of the fundamentals of that market, it's a European gas has a more active.
Set of both.
I'll only sellers, but also buyers who edge into that market and so you're going to a different market structure that.
Has allowed for.
Contango that does not exist in the.
In the oil markets, where the.
Really it's primarily the hedgers are primarily the sellers and that's that's a market structure feature that.
Has.
Probably restricted the longer term prices and oil so what this means is that as we hedge.
For the out years, we can't do that still at quite strong prices for European gas prices that do ensure a lot of free cash flow and and strong project economics, we're in a very strong.
Hedge position for this year on European gas.
It's a outlined in our.
In our IR deck on the website.
These.
These hedge percentages for European gas, it's a whole variety of of.
Two way freeway contracts with some swaps.
Total about.
78% of our expected production for 2020 and.
About 50% of our production for 2021, the hedge position continues on into 2022 in 2023.
With the curve that exists we are willing to further hedge into that curve and I think you will you.
You will see us doing that the European gas.
Forward curve is a hedging advantage that we have it's not available to most of the.
Other independent entities and it is something that we take advantage of to lock down a portion of the cash flows for the not only for the current here, but for the later year period I do want to turn its Adam for a minute just to discuss fundamentals in our view of the market share.
Yes.
The career price weakness in Europe is really a confluence of a few factors. We've had two consecutively warm winters in Europe, and warm winter and all the northern hemisphere.
And then LNG supply growth globally has outpaced LNG demand growth nearly.
And the Asian markets and so.
As you has been seeking a home that home as Europe.
This is not stable or a situation that continue.
Into the future. If you look at LNG economics out of the US Gulf Coast. The arbitrage is right at the variable cost right now and so.
To get more LNG into these markets prices just have to go up and this is where we see improving price conditions going out into 21 into 22 and further 23.
But as Tony said.
We have 50% hedge.
Level for 2021.
2022, or about 25, 25%.
The curves still does allow us to lock in.
Very good economics for our gas production. So we will continue to hedge.
Okay perfect.
I'll turn it back.
Your next question comes from SK Sen of Bank of America. Please go ahead. Your line is open.
Thanks, Good morning, Hey, Tony on the capital flexibility just wanted to make sure I got the two numbers right.
Sustaining Capex, you mentioned poor and 10 million daughters, and then you mentioned you could potentially trim up to 15% if commodity price we can they get those numbers right. So essentially getting back to sustaining capex would be.
What's your thinking about.
We we haven't made a decision on that producing capital we're going to look at the development of the markets and.
I don't have Iris and overall economic situation, while we complete the Q1 program but.
Your your understanding of it is correct, though.
Maybe just to elaborate a little bit on the terminology.
We estimate our stay flat capex.
Cutting.
The growth Capex and some longer term expenditures at about $410 million.
Bob.
We haven't made any decisions on a reduction in the capital program, but I think.
I think.
If we are to do that.
We would.
Think in terms of reductions.
In that five to 10% to 15% range for the annual capital program. It is possible to bring down capital further than that.
We'll have a little bit over half of our capital employed in Q1 with this strategy a front loading.
We did that.
In part to get some cost advantages on a bigger program. We did it because it's a more efficient in terms of timing to generate more production for the year and we did it to reduce risk in the capital program.
Risks that confronted us before like whether.
Delays.
Due to kind of a shifting wet season in.
North American General and Alberta in particular so.
We have capability to.
To go deeper if we needed to than 15%.
But.
The scenarios that were modeling.
Good.
Would put us between us roughly 5% to 15% level at this point.
Great Tony that's very helpful and again.
More difficult question, but.
You are thinking through trimming Capex I know, it's it's not easy to do but.
Could you kind of speak too.
Potential areas, you could revisit first to trim the drilling program.
Yeah, we'd be looking at some of the later year drilling.
That.
As a.
That wasn't initiated in Q1.
A portion of this would be in.
North America.
And.
There are some European projects that.
Could be.
Delayed as well.
And.
We'll look for other general efficiencies in the program I mean, I feel we do have quite an efficient capital budget as it stands nonetheless.
It's been our history for ever since the oil price crash and even before that too.
To grind cost out of our system and capital has been a key part of that we're not going to.
We're not going to stop trying to find just those.
Cost efficiencies today, so it via a combination but.
Those would be the.
The main not drilling areas I would say that so.
Would be would be candidates.
I appreciate the color Tony Thank you.
Your next question comes from Joseph Chats per Shafter Energy Research. Please go ahead. Your line is open.
Good morning, and thank you very much for taking my call.
I have a few questions you mentioned that your front end loaded about 200 million for that for 50 in the first quarter.
176 wells last year growth, how many do you see drilling in 2020, if you go before it 50 budget.
Yes, Joseph Thank you for the question.
We have a little bit over 50%.
Employment of the annual Capex in Q1.
So would be.
More than the 200 million.
I think our total is 55% that we're projecting for Q1.
I can only give it to you in terms of.
In terms of net wells, but.
We project a 116 net.
For.
2020 currently.
So.
The growth that might be given compared to last year bumping it up by about 10% gets the difference between growth and that over the last year as though.
You know Joseph that sounds accurate and.
I guess that would put us in the range of 130.
Gross.
It seems like a reasonable estimate.
I apologize just don't have that one at my fingertips, no problem now going to be spend.
The money that you have for the rest of the year last year, you were able to spend and for the year 38.5 million.
Additions and 8.9, 0.2, Lindley fourth quarter in terms of drilling versus buying given the problems out there in the industry with a lot of distressed assets are you finding that the.
In terms of the areas that you operate in Canada, or Germany, where did the chance of being able to be a buyer versus direct spend.
Advantageous and are you looking at things in that in that.
<unk>.
Yes with respect to acquisitions, we discussed.
In a few different forums.
That we are actually a pretty unlikely to be an acquirer in.
In Canada, and I think that would apply.
North America as a whole we feel like we've been through the property set that would be reasonably available within our operating core areas.
We don't see the.
Particular asset sets of any meaningful size that would likely to be available the available that we think would be.
Kind of a quality addition to our portfolio and we're quite deepen our inventory already.
In general a slightly different set of reasons, perhaps the same thing applies in Wyoming, We don't think theres anything that really.
D. level at a reasonable price.
Adjacent to our core operating hearing we'd like our position.
Geologically exactly where it's out within the basin. There also with the quite large and probably expanding inventory as we work the asset more so.
No I don't think it's very likely I mean in general.
Probably even.
Quite low.
Coston and real high rate rate of return M&A, we would.
I'd say from this point forward, there's always a collection of.
Very very small.
Plant additions that could potentially be made but but I would say that even at the very low cost and high rate of return M&A, we would probably.
If we did it we probably seek to funded out of.
Out of the in the budget.
Just keeping a really strict.
Focus on on how much total capex, we would be using.
Okay, one more for me.
If we had recovery in commodity prices will take Q4, Rebecca over 60, you probably generate 200 million for the quarter. The dividends 53, you might have 50 for Capex left in your budget.
With the extra funds go only to paying down debt or if you saw a sustainable comfort.
$60 environment.
The the virus.
Resolving.
You also activate the NCS b or is that a 2021 prospect.
Yes, it with the set of numbers that you laid out.
So.
50 million of.
Excess free cash, meaning cash beyond dividends.
I'm not we'd have to check and see what what price scenario that would be ended up I would end up being tied too but.
I think that the direction of that.
Magnitude of excess free cash would be debt reduction at this point, it's our intent.
Given the uncertainty that's developed in.
Economy over the past.
Not to take that excess cash really in just use the too.
To retire debt.
You know in different macro environments.
We'd have the option to employ the intensity Ivy.
We're not going to do that at this time because of the focus on that we have on the balance sheet.
[music].
And really the great degree of economic uncertainty that the but the virus has created.
So yes for the time being it's a it's all earmarked.
Two debt reduction it would.
The lowest.
Prior to use of additional cash flow on the.
On the totem pole would be for capital increases I don't think we're going to do that.
Okay. Thanks, very much covered it for me. Thank you.
Thank you Joseph.
Your next question comes from Jeremy Mcrae Raymond James. Please go ahead. Your line is open.
Hi, guys.
Given the volatility and all the discussion questions here, so far and where are you want your leverage ratio has to be.
I just want to kind of gets more insight into the board discussion on why the dividend wasn't a bigger cod.
Wouldn't take the opportunity to.
Do more a pay down more debt, maybe even cut the capex just to get ahead of.
This volatility that we all kind of fees coming here.
Okay well.
Well.
Yeah, Jeremy yet on the question of.
Take the first one on the question of.
Why not an earlier reduction in the dividend maybe I could use the.
The slides that we have in the deck.
To.
To run through maybe longer term view of this first and then a shorter term view.
Second so I'll start with slide five the kind of total uses chart that we have this.
Incorporates.
Dividends.
Split historically into drip and.
Cash and Capex, but also includes or.
<unk> expenses for Aero.
Retirement so.
The full.
Uses of cash.
For those for those three purposes, if you look at the first half of the decade.
The the payout ratios were in excess of 100%.
You know the.
C change any of the first sea change I would say in the industry occurred in 2014 with the reduction in commodity prices.
We.
Reacted and it took a bit of time.
Two.
Pull down further pull down the cost structure of the company a lot of this work has been going on even prior to the oil price crash cinema. The work was to move up the learning.
Programs that we had to reduce cost and improve the.
Productivity of the completions that was a big change over in the project slate certainly post.
Mid 14 in especially.
Once we got into 2015, we were assisted by oil.
Oil service cost reductions, which.
You don't have persisted throughout this period through doing all those things and.
Trying to enhance as well the cash flow profile of the company.
Over the second half a decade, we were able to get the payout ratio down very close to 100% we didn't quite get there in 19 were at 103%.
We were determined to.
Bring it down further.
And.
As we're going to get to in a second we'll show you. The projections that we had four for 2020, but to create white space on that plot versus or uses and use it to first and foremost bring down debt.
Levels so.
The.
The company made a tremendous shift to the overall change in the sector.
Getting those.
Ratios down just about 100 not quite.
And.
Another thing that we had to execute during this period really.
Just to another change in the market and something we thought was justified as the stock price got lower toward the end of this period was the elimination of the drip wanting to make sure that we got to a pay as you go basis or better.
With the.
For the total uses for dividends and Capex.
So we.
I believe that we were well on that path to doing this and.
At a dividend that was sustainable in that kind of macro environment that we thought would occur.
This is where I want to shift to the next slide to look at the shorter term.
Thought process that we had and this is shown on slide six so at the time, we release that budget, we're about balanced at the at the commodity prices that existed.
We I would say, we generally had a moderately constructed view.
Oil prices.
[music].
There's a whole range of positives and negatives that we try to take into account that may occur.
The were that might have occurred at the oil market generally tended toward the positive side and we did.
Develop FFO that was over the line that we had at the time of the budget with the with the prior dividend.
We had a forecast.
We put out when we came back at the beginning of the new year in 2020 representative the middle of the chart for January six we have that white space developing and.
We.
Continue to think but that was a reasonable oil price and have the potential.
As well over time to to improve.
And.
What we had said.
Throughout this period really going back a number of years was that we would continue to pay the dividend as long as.
We assessed it to be economically sustainable we said if there was a structural change in commodity conditions that.
We didn't feel we could.
Compensate for with.
Higher level of cost reduction and the company.
Such that we could not self fund the capital program in dividends as one we would.
The reduction to it.
As a as krona virus.
You know began to have its impact in the economy and especially in the oil market, we actually watched it very very closely from a technical standpoint.
And in January when we first heard about it and.
Into full month of February.
No we're not so overall adjusts and we're not epidemiologists, but we made an assessment that.
The.
You know that the virus was.
At higher lethality, then the flu, but not as contagious less legal and Sars, but more contagious and we.
Certainly initially did not.
I.
Think that we would have quite the behavioral change that has occurred at so many different levels and in society over the world. It's now awfully clear to US and this really has hit home in the last week and a half you can see it in the trading action.
In the commodities you can see it in the trading action in equities in general and you can see it in equities in the sector and you can see it in our stock.
That.
The its a.
I'm much more severe reaction than we would've expected.
In.
In January or the beginning part of February so.
We think that there's a huge amount of uncertainty associated with.
This virus.
And it's not only on a.
Kind of a scientific basis about what its health impacts will be.
But.
An enormous amount of.
Economic uncertainty that introduces.
And as a result.
We have made there were moved to cut the dividend in half and.
For me here, we're going away yet just just one more sentence on Jeremy Justice.
Jeremy just one more sentence on this.
So we're going to.
Once the prices from here and we're prepared to.
React further that's why the discussion that we had earlier about the potential for capital reductions.
Okay. I guess is why wouldn't you have kind of say 70% or.
That now as opposed to like it like just given how quickly your leverage ratios have gone up to I think you said 2.9 times at the current strip.
Like inversely your target the payout.
Down to 100%, great, but the leverage ratios seemed like they've gone up almost too much here, where you almost have to put the payout closer to say 85, or 90% just to pay down the get the balance sheet a little bit.
Sooner I guess.
Yeah, I'm going to start with that and then I'm going to turn its lars to discuss the composition of our balance sheet, but.
The.
The pricing change has been very very rapid changes a lot everyday and.
We can't.
We can't say with any certainty.
Today's prices appropriate wednesday's price was appropriate if the price we had a week ago was appropriate.
The markets very sensitive and we.
We're going to take the time to see what the.
A little more extended oil market reaction is.
Rather than.
We get rather than taking it on any single days price, we can evaluated at the strip.
On any day, but we're not necessarily going to.
Change the dividend.
Based on what it is on a on a single day so.
With that I want to.
Turning to floors to discuss the the quality of the balance sheet.
Thanks, Thanks, Tony and you know, Germany, we discussed in the past I think it's important to look at the constructed the balance sheet. So first off we do have the U.S. senior notes that are turned out to 2025, what we just announced today as well was a one year extension of the 2.1 billion dollar Covenant based credit facility to meet 30.
In 2024.
You know something that we look at as well in markets like fees is that debt to EFO. We also look at the credit metrics, we have three financial covenants on that credit facility.
In terms of senior debt not to exceed three and half times were 1.57 at year end 19, and then on total debt not to exceed four times 1.94, I would call those to the most stringent held the covenants that we have to meet.
Your end 2020 to put that 2.9 times into perspective that would translate into a boats.
One just under 1.9 times on that senior debt versus 3.5, and then about 2.3 times on the total debt relative to.
Not that before time. So you know we are looking at things on a debt to EFO as well as debt to EBITDA perspective.
I think the other important part of it is liquidity that we were able to maintain.
You are correct in terms of not a lot of incremental cash flow to pay down debt at March four strip pricing, but at the same time not a lot of absolute debt being added to the balance sheet as well. So those ratios going up to that 2.9 times is really off a fundamentally caused by the underlying cash flows depreciating.
But importantly, we are targeting that 100%, which results and very little to no absolute debt being added [noise].
Okay. Thanks.
Your next question comes from Craig Party of RBC Capital markets. Please go ahead, Sir your line is open.
Yes, Thanks, I mean, Tony just to be clear.
Smart in terms of addressing the dividend I think you kind of answered it in terms of evaluating the capital program and dividend the context of oil market condition Thats, it's kind of full stop there, but I just wanted to ask two quick ones. One is just operationally you alluded to a pretty big premium I think you're getting on Europe.
Trillion barrels right now just curious how thats looking in the context of I'm 2020, and then I just had a follow up question on cash taxes.
Yes ill.
Turning to wandoo.
Question to Adam you anything thanks, Greg.
Hi.
Did participate very strong.
I have all related low sulfur fuel oil.
Pricing.
Thats basically what our one crude is pricing of most of the fuel oil in Singapore very strong over the first quarter.
Majority of this production is tied to one year.
Sales contract through some Japanese refinery buyers. So we can actually disclose all the details the economic details of that fresh arrangement, but they are protected at a higher price level.
Okay. So significant premium to Brent continues right [noise].
Content, yes, yes.
Okay, Great and then just the other thing is I mean, the cash taxes were I guess a lot lower than we were expecting the fourth quarter can we still use just that rule of thumb of 6% to 8% of pre tax as a reasonable proxy for cash taxes for modeling purposes. This year.
Yes. Thanks for question Lars here, I think Thats, a fair range to use I think that as the commodity price environment, depreciates, I would be comfortable sort or referencing a range of 5% to 6%.
That 60% is when you get into a 50 plus environments. So in the world that we are in right now for 2025% to 6% is the right way to think about it on an overall corporate business.
Okay terrific. Thanks, guys.
Your next question comes from Mike Dunn people first Tennessee. Please go ahead. Your line is open.
Opex my questions have been answered Thats all for me.
Your next question comes from Chris our scope of the Calgary Herald. Please go ahead. Your line is helpful.
Hi, Tony of several my questions have been answered, but I'm just wanting to be clear what will be the trigger for you to make a decision. If you decide to cut capital spending sometime later in the air.
Okay. Yes, we are up we're going to watch this commodity price.
After the extremely high volatility we've had over the past.
Couple of weeks and I think that.
You know will out will be monitoring it through the into Q1 as we complete that.
Part of the capital program and I think.
With each of the.
Each of the upcoming quarters, we'll be making a decision about whether or not we we stick with the entire remainder of the program.
And just as we're sitting here looking at oil at $42 and obviously you talked about the instability do you view the situation similar to the price downturn of 2015 2015 or do you view. This in a different light, which requires a different kind of response.
Yes, that's a.
That's a very.
Thoughtful question that.
You know sometimes you can only do these things and in retrospect I think they are.
So very very different events.
The one that began in mid 14.
Yes.
With hindsight.
It is clear what led to it you had.
A big technological change you had an enormous amount of capital.
That was available to the industry too.
Be employed in this new technology of horizontal wells in ultra tight reservoirs using multi stage fracs.
And.
Good.
It was impossible for.
OPEC coming Saudi Arabia in particular to continue to accommodate that that increase in in us production.
By restricting their own output and.
That.
The big supply events, even in the even as we were having a increasing demand all the time.
Led to a very long term change in prices.
Nobody knows for sure we try to understand all the fundamentals. So we can but it's going to be impossible for us to be.
Exactly right about it but we we did feel that the.
Oil market was coming back into balance and that's.
After.
We had kind of a failed rallying.
That began.
Early in 16 and ended.
In the fourth quarter of 18, there was another smaller failed rally in 2019.
We were in the midst type felt a little bit more sustainable rally.
At the end of 19 in the early part of 2020.
Really.
Largely restoring balance in the market with just a little bit of.
You know.
Kind of probability of continued assistance from.
From OPEC.
Well well demand was a was continuing to grow and that was even after.
You had the.
Negative impacts from the the trade war so.
The what we've observed in 2020.
Is in a sense its a.
Even more uncertain, because it's such a rapid adjustment to.
So demand.
Probably impossible and this is what the commodity markets are indicating.
Probably impossible for.
You know.
OPEC to take enough supply or supply our fast enough.
Get to the point of having.
Even inventories so we're definitely having an inventory build and that's negative for the market, especially for the front end of the market.
Yes.
Hard to say, what the duration of it will be I would.
My own guest with would put it kind of in the medium term I think of it as setting back the oil price position to me at least a year, maybe it's two years hopefully not more than that from the improving position that we were previously yen.
I don't think it is probably going to make a permanent change.
In the likely price I mean, it may actually restrict supply development further is less capital's provided the industry.
Given the volatility of the product price.
And the impact that will have on the whole industries cash flows I don't know local have a longer term impact on demand I think if you get a at least a few years out it will beyond the previous growth trend. So it's just a very different event, it's very uncertain about it so overall economic impact there our macro risks that exist.
That could be.
That.
Would come to the for that were kind of late in the world economy that creates a greater risk, we don't even know technically or in health terms, what the real progress or.
Significance of the.
Of the disease is going to be so I think it's quite uncertain and it's really about.
How long it pushes back that's a return to what would otherwise have been the fundamentals. So in this sense. It's a it's just difference in several ways from the one that we had in the.
Began in mid 14.
There are no further questions at this time I will turn the call back over to Anthony for any closing remarks.
Okay. So.
Thank you for.
Thank you for participating in our Q4 2019 conference call as has been our previous practice. Our Q1 2020 call will be preempted by our ATM presentation on April 28, Thanks again.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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