Q1 2020 Earnings Call
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Thank you for standing by the Symbicort stress operator.
Welcome to the Baytex energy first quarter 2020, <unk> results conference call.
As a reminder, all participants are 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 then one on your telephone keypad.
Should you need assistance during the conference call you may signal, an operator by pressing star and zero.
I would now like to turn the conference over to Brian Actor Vice President Capital markets. Please go ahead.
Thank you operator, good morning, ladies and gentlemen.
Thank you for joining us today to discuss our first quarter 2020 financial operating result.
With me today, Profero, President and Chief Executive Officer enrolled Gray executive VP and Chief Financial Officer.
We also have on the line when their work at home stations today Campbell Vice President heavy oil.
Kevin Mccarthy Vice President Finance.
Lumber Vice President of light oil and scalable or vice president of corporate development.
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 advisories regarding forward looking statements willing gas information and non-GAAP financial and capital management measures in yesterday Afternoon's press release.
Well I just referenced in my remarks from 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 first quarter 2020 conference call before we begin I would like to take a moment. It acknowledged all of the frontline healthcare workers and a central service providers across Calgary and then the communities, where we operate for all of the tremendous work they've been doing throughout the.
Cobot crisis.
Many of our employees have family members or friends on the front lines and we're very grateful for their effort on behalf of the entire Baytex family in all of our stakeholders. We thank you.
I also want to acknowledge our employees who have responded to this us unprecedented challenge our industry is facing with the poisoned commitment that we have all come to expect.
We have implemented a number of measures to foster resilience through these unpredictable times, including a work from home program and altering shifts in the field.
We are focused on protecting the health and safety of our personnel, while maintaining our operations and today. We have had no positive cases of coated 19 within the company.
The demand destruction as the global economy has shut down the resulting collapse in crude oil prices and the uncertainty over the duration of this downturn constrain any organization and I'm very proud of our team and how we have responded as market conditions have changed during the first quarter we.
We moved quickly to adjust our business plan, we curtailed exploration and development spending in March which resulted in capital spending of $177 million, 12% lower than our original expectation approximately 70% of our capital was directed toward our operated assets in Canada, where we have had.
A very active program in both the Viking in heavy oil.
We generated strong production a 98400 BOE per day, which was ahead of the top end of our guidance for the year, we delivered adjusted funds flow of $133 million or 24 cents per basic share and generated an operating netback of $16.05 per Boe week.
All of our business units executed flawlessly during the quarter and delivered exceptional results production in the Viking averaged almost 25000 Boe per day, which has the highest rate ever achieved for the asset our heavy oil business unit delivered over 31000 Boe per day, and the Eagle Ford remain can.
Assistant at over 36000 Boe per day.
When oil prices started to decline as the first quarter unfolded our priorities changed.
We moved aggressively to shift our operating capital activities to maintain financial liquidity.
Minimize capital outlays and emphasize cost reductions across all facets of our business to retain long term value.
We previously announced a 50% reduction in our capital spending for this year to $260 million to $290 million from $500 million to $575 million originally.
With this revised capital program, we suspended drilling and completions operations in Canada, and expect a moderated pace of activity in the Eagle Ford.
We're also intensely focused on driving further efficiencies in our operations, we have taken actions to achieve $135 million of cost reductions for 2020 related to operating transportation and general and administrative expenses.
We are also voluntarily shutting in approximately 25000 Boe per day of production.
This includes approximately two thirds of our heavy oil production and 15% of our light oil production.
We currently expect the heavy oil volumes were will remain offline for the balance of this year.
For the light oil assets about 5000 barrels per day of production has been shut in for April and May These volumes will be evaluated monthly and we currently anticipate production resuming in the second half of the year.
While these decisions are never easy at current commodity prices to shut in of these barrels will have a positive impact on our adjusted funds flow improve our financial liquidity and optimize the value of our resource base should.
Good operating Netbacks change, we have the ability to restart wells in short order or shut in additional volumes.
Taking into account the incremental shut in volumes, we've revised our production guidance range for 2020 to 70000 to 74000 BOE per day from 85000, 89000 Boe per day previously.
I mentioned earlier, our $135 million of cost reductions.
I commend the work of our field teams to drive further efficiencies during these challenging times.
On a per unit basis, our operating expense guidance is unchanged as we flex down all variable costs and mitigate some fixed costs associated with our field operations.
In addition, we are realizing an approximate 25% reduction and transportation expenses due to reduced volumes.
We're also reducing our DNA expense by 11% to $40 million.
While this might get overlooked in today's environment inventory enhancement continues to be a priority for our teams.
And we're also committed to building and maintaining respectful relationships with indigenous communities in creating opportunities for meaningful economic participation.
During the first quarter, we executed a strategic agreement with the P. volume Macy settlement in the Peace River area that cover 60 sections of land directly to the south of our steel operations.
We have identified significant potential for this early stage exploratory play targeting the Spirit River formation, a Clearwater formation equivalent with first activity planned on the lands for 2021.
I will now turn the call over to rod to discuss our balance sheet and risk management.
Thanks, Ed and good morning, everyone as Ed mentioned, the demand destruction caused from shutting down the economy to prevent the spread of the Corona virus combined with an increasing supply of crude oil from Russian Saudi Arabia's caused an unprecedented drop in crude oil prices. This decline in prices combined with the economic uncertainty let us to.
Recording an impairment during the first quarter of $2.7 billion as the carrying value of our oil and gas at properties exceeded their recoverable amount. These impairments may be reversed in the future should commodity price forecast increase or there will be indications of a change in value.
We had strong liquidity at the end of the first quarter with $417 million of Undrawn capacity on our credit facilities, resulting in approximately $315 million of liquidity net of working capital requirements. We discussed this on our last quarterly conference call, but it's important to reiterate during the first.
This quarter, we enhanced our long term note maturity schedule, which provides us with improved flexibility and liquidity on February 5th we issued Usfive hundred million dollar principal amount of 8.75% senior unsecured notes maturing April 1st 2027, We also redeemed two series of notes during the quarter on.
February Twentyth, we redeemed us $400 million due June 21, and on March six we redeemed Canadian $300 million. Due July 19th 2022. Following needs redemptions are first long term note maturity of US 400 million dollar is not until June 2024.
Yeah.
We also extended the maturities on our credit facilities to April 2nd 2024, the credit facilities are not boring based facilities and do not require annual or semi annual reviews.
We also continue to manage our commodity price risk through an active hedging program, we realized the financial derivatives gain of $27 million in Q1 2020.
For the remainder of 2020, we have entered into hedges on the majority of our crude oil exposure. This is comprised of Wi Fi based fixed price swaps on 2000 barrels a day at $58 use per barrel and a three way option structure on 24000 barrels a day that at current oil prices give us W.
Hi, plus seven us 760 per barrel.
We have also entered into additional financial hedges to mitigate the volatility in our adjusted funds flow for the next few months.
This includes hedging 11300 barrels a day for Q2, 2020, and 21000 barrels a day for July at weighted average prices of approximately us $25 per barrel.
For the remainder of 2020, we have also Wi Fi to MSW basis differential swaps for 6400 barrels a day on our light oil production in Canada at $6 per barrel and WCS differential hedges on 6500 barrels a day at WPS WCS differential of about $16.
Per barrel.
Crude by rail as an is also an integral part of our ingress and marketing strategy for our heavy oil production.
For 2020, we had originally contracted to deliver approximately 11500 barrels a day of our heavy oil volumes to market by rail in the current pricing environment, we expect our crude by rail volumes to be significantly reduced.
Full details of our hedge program can be found in our first quarter financial statements and with that I'll turn the call back over to add for some concluding comments. Okay. Thanks, Rob in this challenging environment. We've responded decisively to protect the health and safety of employees and to dramatically reposition operating activity to maximize our cash flow.
And minimize the drawn our liquidity.
Our operating teams continue to drive cost savings and prudently shut in production that is currently on economic as I mentioned.
And the refinancing of along of our long term notes and extension of our revolving credit facilities to 2024 were both important steps in improving our financial flexibility and liquidity you.
You can be assured we are working very hard for all stakeholders to make the necessary changes and overhauls to our plans in 2020 in this extraordinary environment and with that I will ask the operator, please open the call for questions.
Certainly we will now begin the question and answer session to join the question Q You May Press Star then one on your telephone keypad, you will share tone acknowledging your question. If you are using speakerphone. Please pick up your handset before addressing any Keith.
To withdraw your question. Please press Star then too.
Overall paused for a moment callers join the queue.
Our first question comes from Manav Gupta with Credit Suisse. Please go ahead.
Hey, guys Im just trying to understand this game right now both biking and his.
In shot you.
You have indicated that held the line most likely to remain Chuck.
At the same time the that evening bye.
Viking production.
Month.
And what's the thought process when could you actually looked restock the liking and then what circumstances could you actually think about bringing back heavy or light if any during the.
Yes, it's a really good question Mcnabb in a very dynamic environment. So when I say 25000 barrels a day or shut in depth today and thats, an instantaneous basis and for the month of of May having said that we're looking at opportunities to sell Pat.
In the range of of margin that gives us a five dollar access over variable costs to attend dollar access over variable cost and we're at that point right now and into June. So we've made some spot sales we've done some things.
But so having said that right now 24000 barrels a day of heavy oil or shut in and a very small amount of light oil is shut in and it's primarily due vinay its not not really Viking.
And in June we plan to bring on a vast majority of all of our light oil.
And in heavy oil, we can start bringing on barrels.
If prices not only give us that five to 10 dollar excess over variable costs, but if we see.
Some stability and the macro environment that suggests the price environment. We're in will be will be stable. So we're looking at that very closely and it's not all or none. It comes in tranches. So there's a first tranche of barrels that are coming back in June as I mentioned Theres, a second tranche that could come on later.
And it's not a cookie cutter here, it's a very dynamic and volatile situation and our marketing and asset teams are our remaining extremely nimble so the way I would.
Plan in terms of modeling is 25000 barrels a day is what we've said today and that should moderate itself down to 20000 barrels a day for second half of the year.
Shut in.
Our next question comes from Phil Collins with.
Please go ahead.
Hi, good morning.
Just.
On the cost reductions.
How much would you say.
Would come back in a more normalized environment and how much is more permanent per day.
Corporation.
Yes, really really good question and one that we're working actively right now but of the $135 million or cost savings roughly $80 million of that is off decks and another big jump to that is transportation and then a very small amount as gionee, but.
Let's focus on the Opex for a moment because some of the transportation costs will come back with volumes and some some of the opex will as well.
I would give you kind of a 50 50 blend of 50% of 135 is due to.
Volumes simply being off and 50% is truly cost savings and deferrals.
Some of that I think we'll come back and so here's some examples inside opex, we have items like.
Fuel and.
Maintenance.
I would say labor.
Some of these areas, we're working hard we've we've furloughed a lot of people and some of those people will be necessary to come back and help bring back those volumes, but not all.
Reinventing the way, we're working out there as well and repairs maintenance workovers remains to be seen what we do there, but we're definitely seeing cost reductions and deferrals, there, but I would look at it is 50 50 and up to 50% on falling cost savings some of that will come back I just don't have a number for you right now.
Just I guess then on the cost savings spot I mean is there anything.
With respect to maintenance Capex that you are looking to do that than when we look into 2021 estimate.
As environment that maybe.
Caution led to maintain production.
All right level maybe.
Well, there's a big category, we call repairs maintenance and supplies and I think all of that is being challenged and looked at to be reinvented or.
Look at.
Phasing and type of maintenance and when it's done and how to shelter more et cetera, but.
So I don't have an answer on that and I don't have an answer on how much labor will need to come back either I know all of that will come back.
And we're committed to that but.
But I would say were those are the things we're working on right now Phil.
Okay understood. Thanks.
Our next question comes from Gregory pardon with RBC capital markets. Please go ahead.
Hi, Matt.
Thank you.
Thank you.
Okay.
So we expect there are then you will see.
Okay.
A lot I'll turn that over to rod on marketing, we're not going to talk about our specific great agreements, but we were running about 12000 barrels a day in Q1, and we've ramped that down about 50%.
We've shut in almost the entirety of our peace River field, which is a majority of our rail volumes. So we're down to 2000 barrels a day in peace River and therefore, when you're talking about shutting in an entire field than that that becomes a significant conversation throughout the value chain into your markets.
Now before I pass over to Rod on anything he wants to add he did say rod did say that that railing our volumes to the Gulf Coast is a priority long term until we have enough aggressive pipelines in place. So it is part of our strategy to rail.
Volumes and we have some very important customers that we like dealing with.
But we're down to kind of minimum levels.
I would say both in peace River, and and Lloyd on our rail volumes.
Rob do you want to add to that.
I think gets at it.
We've got good working relationships with our partners around rail and we continue to view crude by rail as an integral part of getting our products to market.
And.
Thankfully, we've been able to work through this challenging time with the majority of the partners.
Thanks very much.
Sure.
This concludes the question and answer session.
I'd like to turn the conference back over to Brian appetite for any closing remarks.
Alright, Thank you operator, and thanks, everyone for participating in our first quarter conference call have agreed to.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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Yes.
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