Q2 2020 Baytex Energy Corp Earnings Call

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Thank you for standing by the conference operator, welcome to the Baytex Energy Corp. second quarter 2020 results conference call.

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.

Joining the question Q you made press Star then one on your telephone keypad.

Should you need assistance during the conference you may signal operator by pressing star zero.

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

Thanks, Jeff Good morning, ladies and gentlemen, thank you for joining us today to discuss our second quarter 2020 financial and operating results [noise].

The cool Scoop at 19 situation, So front and center, we continue to prioritize the health and safety of our employees and the baton wine to the I am joined remotely wire executive team and look there are president and Chief Executive Officer Rock Ray Executive VP, and Chief Financial Officer Candle, Arthur Vice President heavy oil.

Chuck Jehl Mccall, our vice President Finance.

Lundberg, Vice President light oil and Scott Love, It our vice President 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 oil and gas information and non-GAAP financial in capital management measures contained in yesterday's press release.

Well our amounts referenced in her remarks on Canadian dollars, unless otherwise specified and with that I would now like to turn the call over to add.

Great. Thanks, Brian and good morning, everyone welcome to our second quarter 2020 conference call.

During the second quarter, we took decisive steps to adjust our business plan in the face of extremely volatile crude oil markets.

We moved aggressively to shift our operating and 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 shut in some production, we suspended drilling operations in Canada, and we moderated our pace of activity in the Eagle Ford.

I'm very pleased to say that we're now starting to benefit from the actions we have taken as we generated positive free cash flow during the quarter and maintained approximately $300 million of financial liquidity.

As you will recall, we previously announced voluntary production shut ins of approximately 25000 Boe per day.

These volumes remained offline for April and May.

As operating Netbacks improved in June we initiated plans to bring approximately 80% of these volumes back online.

The quarterly impact the voluntary shut ins was approximately 20000 Boe per day.

As a result production during the second quarter average 72500 Boe per day, consistent with our previously announced guidance.

Production was in Canada averaged 37000.

700 Boe per day, while production in the Eagle Ford average 34800 Boe per day.

We generated an operating netback of $6 per BOE, we during the second quarter or $8 per BOE, we inclusive of realized financial derivative gains.

We delivered an adjusted funds flow of $18 million.

And our exploration and development spending totaled a modest $10 million.

So despite this being one of the most challenging pricing environments, we have ever experienced we still delivered positive free cash flow during the quarter.

We continued to forecast annual capital spending of $260 million to $290 million, an approximate 50% reduction from our original plan of $500 million to $575 million.

Our production guidance range for 2020 is unchanged at 78000 to 82000 Boe per day.

We also remain intensely focused on driving further efficiencies to capture for sustained cost reductions identified during this downturn.

We have now identified approximately $98 million of cost reductions for 2020 relating to operating transportation in general and administrative expenses.

During the second quarter operating expense of $11 in 17 cents per BOE, we compared favorably to $11.66 per BOE, we in Q1 2020.

As we strive to mitigate the costs associated with our field operations.

In addition, we realized that approximate 35% reduction in our per BOE, we transportation expense due to reduced volumes.

General and administrative expense totaled $7.4 million in the second quarter down from $9.8 million in the first quarter as we implemented reductions to salaries.

And annual retainers and benefited from the Canadian emergency wage subsidy.

I want to take a minute and highlight our work on the E S Chief front.

We are committed to managing the environmental and social impacts of our business.

And continual improvement is an important element of this commitment.

As a reminder, in 2019 Baytex established a GHG emissions reduction target.

Objective is to reduce our corporate GHG emissions intensity by 30% by 2021.

Relative to our 2018 baseline.

We have just released our 2019 E.S.G. data, which is available on our website in 2019, we made significant improvements in our emissions profile, achieving a 15% reduction in our GHG emissions intensity as we commissioned our peace River gas plant in mid 2018.

And progressed, our Viking gas conservation project.

We remain committed to achieving our 30% target.

By the end of 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, given the unprecedented collapse in crude oil prices experienced during the second quarter, our priority quickly shifted to preserving financial liquidity.

We reduced net debt by $57 million during the quarter as the Canadian dollar strengthened relative to the U.S. dollar and we generated positive free cash flow of $6 million.

Importantly, based on the fourth strip, we expect to maintain our financial liquidity and remain on side with our financial covenants through 2021.

Our credit facility total approximately $1.1 billion.

And have a maturity date of April 2nd 2024. These are not moring based facility and do not require annual or semi annual reviews.

As of June Thirtyth, 2020, we had $363 million undrawn capacity on our credit facility, resulting in liquidity net working capital of approximately $300 million. In addition, our first long term note maturity of U.S. $400 million is not until June 2024, we all.

So continuing to manage our commodity price risk through an active hedging program, we realized financial derivative gains and $14 million in the second quarter.

For the remainder of 2020, we have entered into hedges on the majority of our net crude oil exposure. This is comprised of WT fixed price swaps on approximately 16000 barrels a day at $38 U.S. per barrel and a three way option structure on 24500 barrels a day that occurrence.

That at current oil prices, given the Tex W T.I., but sevensixty U.S. per barrel.

We also have WT IP MSW basis differential swaps on 8000 barrels a day of our light oil production in Canada at 580 per barrel and WCS differential hedges on 8700 barrels a day added W.P.I. to WCS differential of approximately 14.

Per barrel.

We have started to layer in head protection for 2021 as foreign markets have improved today, we have protection at $45 W.T.I. on approximately 10% of our expected 2021 exposure for full details of our hedge program can be found in our second quarter financial statements.

And with that I'll turn the call back over dad for some concluding comments.

Thanks, Rob I believe our second quarter results demonstrate our commitment to succeed in a low price environment.

We have responded decisively to dramatically reposition operating activity to maximize our cash flow and minimize the draw on our liquidity.

And we remain intensely focused on driving further efficiencies to capture or sustained cost reductions identified during this downturn, while protecting the health and safety of our personnel.

And with that I'll ask the operator to please open the call for questions.

Thank you.

We will now begin the question answer session to ask a question you May Press Star then one on your telephone keypad.

Thank you are using a speakerphone, please pick up your handset before Chris and the key.

Draw. Your question. Please press Star then too.

At this time, we'll pause momentarily to assemble our roster.

And our first question will come from Phil Skolnick were eight capital. Please go ahead.

Yeah. Thanks, Good morning, HM two duvernay wells that you drilled earlier this year, what do you need to see to complete them.

Yeah really good question, we've got two wells drilled but not completed as you say in the first quarter.

They're writing the core of our play and we've got about 250 sections in the areas. So it's very important to us to move beyond where we are now what we believe we've de risked 125 sections of land.

The fully.

I guess, you'd say gaining confidence in our production rate the deliverability.

And the cost structure of the two well so we need to get the completions done for those tactical reasons, but also for strategic reasons. It really helps us position ourselves as the leading public company in the basin and perhaps the leading company in the Pembina sub base and so.

So.

What do we need the seed to get there first of all we needed to see a stable $40 WT eye on half cycle economics, where you've got the drilled cross sunk.

Yeah. It only takes about 40 to $45 W.P.T.I. to pay these wells out in a year.

And that's not necessarily on the high high case.

For the 14 at 31, well that we drilled completed and brought on production that some of the highest rates and the entire base and around 1300 Boe per day.

I think we're very very close fills the answer the question too.

To making a call on whether we spend the additional frac costs. This year to bring on those two wells by the end of the year versus holding them until around.

Just after break up next year.

We'll make that decision in August.

And if we do Frac the wells you will see him come on roughly October.

And there will be bag tactically important, but also strategically important for us as well and we're in a place where yeah. We've got free cash flow for the full year, but it's very tight on strip will be free cash positive.

And maintain our $300 million liquidity and that remains our number one priority. So we have to see the prices are stable or that we can hedge them in which we can talk further about we're pretty well hedged this year and as Rod says, we just started layer in some hedges for next year.

Yeah. Thanks effect, yet segways into my second question, then with hedging because you did and it took entering some in 2021 what is what is your your philosophy as you do approached 2021 and.

How do we think about or how are you thinking about the hedging and with respect to activity levels for 2021 and spending.

Well for 20, let's start with 2020 as we brought back on production. We wanted to ensure that production. Those positive cash flows were gonna be stable in a very volatile environment. So we did layer on the hedges in 2020, what that did as it protected our ability to.

I have confidence in that liquidity that Rob talked about and also that we wouldn't breach any covenants for this year or next year on strip pricing. So that was step one step to them is thinking about 2021 and.

And we had been targeting $45 has the place to come in and start layering in some hedges to further protect positive if not free cash flow in the following year and so what we've done as we put about 10% of our crude oil on.

Three way options 35, 45, 55, and as Rod says it gives us a floor at 45 and upside participation with the investor up to $55 and.

We think we see the markets leveling out there, but will layer in hedges now as we start to see.

Prices moving into that 45 range, but also that you can attract.

You know some very reasonable other kind of derivatives slight to weigh in three way collars, where we can participate in the upside.

So that's a kind of at a high level, Rob did you want to elaborate.

No I think it's covered it I think fill one thing when we think about 21 I think we'd like to have more protection on as the year goes here and so we'll be looking to layer in position our track record would say that we'd like to layer them in as the market moves as opposed to.

Making one big moves so our anticipation is that will be pretty active in the second half of 2020 here I'm looking to secure at decent hedge book by the end of 2024 20 to 21.

Okay, great. That's it for me thanks.

Again as a reminder, if you would like to ask a question. Please press star one.

Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Brian actor for any closing remarks.

Right. Thanks, Chad Thanks, everyone for participating in our second quarter conference call have a great day.

Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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