Q2 2020 Crescent Point Energy Corp Earnings Call
Information form which may be accessed through the Crescent point see Dar Edgar website or by contracting contacting Crescent point energy.
Management also called your attention to the forward looking information and non-GAAP measures section of the press release issued earlier today.
I will now turn the call over to Craig Brixmor, President and Chief Executive Officer at Crescent Point. Please go ahead mr. break so.
Thank you operator, I'd like to welcome everyone to our second quarter 2020 conference call with me today are kinda <unk>, Chief Financial Officer, and Ryan grid felt chief operating officer.
As the operator highlighted this conference call is being webcast along with the slide deck, which can be found in our website.
Before we discuss our second quarter highlights I think it's important to provide some comments on our current macro environment and what it means for Crescent point moving forward.
During the last several months our industry as witnessed in the unprecedented series of events.
With global oil demand declining by up to 20 million barrels per day increased volatility in commodity prices.
Greater uncertainty around market access and widespread financial restructuring in some cases, including bankruptcies.
Despite these negative headlines I strongly believe that those energy companies that remain disciplined and agile such as ourselves well successfully overcome these current market headwinds over.
Over the coming month, we expect demand for crude to naturally increase as economies reopened.
To put things in context, this past quarter saw the largest drop in global oil demand in recent history history.
That demand only fell by approximately 20%.
Oil remains the leading source of energy around the world and demand is expected to fully recover to pre pandemic levels over the next year. According to the.
With respect to supply we believe future production growth will be limited as industry continues to shift towards prioritizing returns free cash flow generation and conservative balance sheet.
It's companies remain disciplined supply and demand dynamics for oil and gas should improve which will help support stronger long term commodity price.
So the longevity of the current pandemic remains unknown I'm confident that are industry will continue to adapt to prevailing conditions.
Crescent point this out that patient is nothing new.
Over the past two years, we've taken a number of steps to enhance or long term success.
Our execution across all fronts of our business. During this time has centered around our core principles of balance sheet strength.
Sustainability.
By being proactive we've been able to maintain our financial flexibility, while continuing to reduce our net debt.
We've also enhanced our sustainability by lowering both our cost structure and our sustaining capital requirements.
Earlier this year, we announced we had reduced our operating expenses in 2020 by 50 million or 7%.
I'm pleased to report that we have achieved additional cost reductions throughout the organization, resulting in expected per well capital cost savings of 10%.
With these capital cost reductions, we're on pace to spend at the lower end of our 2020 capital guidance.
I'm also pleased to report that during the second quarter, we released our second annual sustainability report.
I'm proud of the work we've accomplished to strengthen our MSG performance and I'm also proud of how effectively we have managed our operations during the quarter at 19 pandemic.
As highlighted in our sustainability report, we've built a strong safety culture.
Florida or missions and asset retirement obligations.
Adopted a technology platform that is reducing operational risk and delivering efficiencies.
Aligned our compensation program with DSG metrics and increased our commitment to inclusion and diversity.
In addition to these highlights as part of our commitment TSG. We have also set emissions targets.
We're committed to reducing our emissions intensity by 30% by 2025, which includes a reduction in our methane emissions of more than 50%.
At the same time, we have also enhanced our iasci risk management reporting under the task force on climate related financial disclosures or Tcf the framework.
With that I'll now turn the call over to can to discuss our financial results.
Thanks, Craig for the quarter ended June Thirtyth 2020, our adjusted funds flow totaled 109 million or 21 cents per share diluted despite Wi fi averaging less than us dollars 28 a per barrel.
Our second quarter development capital expenditures totaled 72 million down from $320 million in the first quarter due to normal seasonality related to spring breakup. In addition to our proactive decision to curtail spending in a low commodity price environment.
As a result, we generated excess cash flow during the corner during the quarter and reduced our net debt.
As at June Thirtyth 2020, our net debt stood at approximately 2.3 billion down over 450 million since year end 2019.
We retain significant liquidity with over $2.4 billion of cash and Unutilized credit capacity. In addition to over 350 million of unrealized gains in our cross currency swaps to provide additional financial flexibility.
We have no material near term senior note maturities and our credit facilities do not mature until October 2023.
The balance of our capital program for 2020 is primarily weighted to the fourth quarter and remains flexible and discretionary.
At current strip prices, we've we expect to fully fund our capital program within funds flow.
Through our hedging program, we have built the position that provides a strong downside protection as over 65% of our oil and liquids production net of royalty interest is hedged through the remainder of the year.
During the quarter, we optimize and restructured our hedge portfolio in order to provide additional downside protection during the balance of the year.
As a result, our remaining hedges in 2020 are now primarily comprised of swaps at attractive prices at approximately $65 Canadian per barrel or an equivalent of $48 use per barrel.
We have also layered in some additional 2021 hedges into our portfolio, although at a modest rate given the current commodity prices, we will look to increase our hedged exposure in a disciplined matter overtime.
I'll now turn things over to Ryan to provide some operational highlights Ryan.
Thanks, Ken.
In the second quarter 2020, our production averaged 120842 Boe per day and was comprised of over 90% oil and liquids.
As previously announced we took decisive action during the quarter to conduct a rigorous well by well analysis and voluntarily shut in certain production.
Shut in decisions were largely based on well by well level economics.
The shut in volumes, we announced during the quarter were primarily located outside of our key focus areas and also included curtailed production by slowing down volumes in certain wells, we expect to be able to restore production in a more efficient and cost effective manner than if we had fully shut ins such production.
Although a large portion of the shut in production is economic at current strip prices, we continue to seek additional stability in commodity prices and overall market conditions before executing our measured Steve just reactivation plan.
This strategy is consistent with our disciplined approach to operations and will ensure we avoid prematurely restarting production and incurring unnecessary shut in cost in the future.
Earlier in the year, we highlighted how our new work full improvements and our adoption of digital technology have delivered approximately $50 million of sustainable operating expense savings in 2024, 7% of our original budget. We are continuing to rollout these initiatives throughout our entire operations as part of our plan to realize.
Additional efficiencies.
As a result of our ongoing efforts to further enhance our sustainability I am pleased to report that we now expect to realize per well capital cost savings of over 10% on average by year end compared to our original 2020 budget our improvement in capital costs include internal efficiencies through reduced drilling days improve.
[music] frac optimization and increased drilling efficiencies.
As part of our commitment to decline mitigation, we have continued to convert producing well to water injection wells with approximately 45 of these conversions completed year to date. The economics of these conversions are competitive within our portfolio given both the cost improvements, we have realized and the reduced opportunity associate.
Good with converting a.
Producing wells during a low price environment.
Finally, I would like to commend our employees and specifically our field staff for their dedication and commitment to ensuring we continue to operate safely. While also realizing notable cost efficiencies I.
Ill now pass it back to Craig for some closing remarks.
Thanks, Ronny in summary by continuing to be disciplined and agile we were able to preserve our strong financial position and enhance our long term sustainability during the quarter.
As a result, we're now in position to meet or exceed our current annual average production guidance of 110 to 114000 Mmbtu per day with capital expenditures trending towards the lower end of our guidance range of 650 to 700 million in 2020.
Looking ahead, we have recently initiated our formal budgeting process for 2021.
During this process, we will continue to focus on returns balance sheet strength and sustainability.
We plan to spend within fund flow and we'll remain disciplined in the event higher commodity prices.
We expect our sustaining capital requirements to decrease significantly in comparison to started the year due to our cost saving initiatives and expected moderation in our production decline rate and our current pace of activity.
Before I open the call for questions I'd also like to welcome our newest board member Myron static.
Many of you in the financial community no Myron well given his long standing tenure at arc resources prior to retiring as president and CEO earlier this year.
Modern is a proven leader that brings a wealth of knowledge and experience further complementing the strength of our current board.
We welcome Iron and look forward to his future contributions with that I'll now open the call for questions from the investment community operator, Please open the call.
Thank you very much.
Reminder, from members of the investment community.
Good luck to ask a question. Please press Star then the number one on your telephone keypad.
I would like to withdraw your question Chris Star too.
We will Pos momentum compiled acuity roster.
Your first question.
Comes from the line of July.
Sure John.
Sorry.
Jason from TD Securities.
Are you there JJ, we can't hear yes.
Operator, maybe go to the next one there we can't hear JJ at all.
Okay. Thank you very much.
Your next question comes from Patrick over.
ATP capital. Please go ahead.
Hey, good morning, guys touch work here.
Just kind of curious you've had a lot of success, especially in the divestiture market.
Just wondering if you could give us our view on the prevailing and underlying conditions for M&A going forward, how you're thinking about that.
Our is it still predominantly on the divestiture side or.
Are you now starting to change the focus and think about opportunities and then maybe kind of what the magnitude of of things could look like either way I know theres not a ton left that non core in the portfolio.
Good morning, and thanks for the question.
As you've noted two I think over the last couple of years in particular, we've done a very good job the disposition process that we went through and really refocusing.
Our asset base in our portfolio and getting our balance sheet into that into a stronger position what I would call now is a position of strength. However to answer that I would is basically we're always looking to add value.
Whether that's a or D.
We are looking to add value. So certainly dispositions has been the focus over the last couple of years that being said.
We will take a look at things here into the future and see how that plays out but again anything that we do do or do look at.
Have to improve us around our two core pillars and that being long term sustainability.
Or balance sheet strength. So we're still focused on those and that will continue to be the focus so anything that we look at doing whether a already is going to be an improvement on on those metric.
I do see.
As you do look out just a bit more of a macro picture I do see the need for consolidation.
Within the the energy sector and I do think you'll start to see a little bit more of that here is as the year starts to play out in play into 2021.
Well when you're thinking about potential on the side is there sort of a minimum threshold where.
Things would have to be to be meaningful for you.
Or.
Just as a potential that we could see.
Something where its high inventory, but earlier earlier days.
Hi.
So anything on that front is going to be.
On an individual and Indian and whenever that metrics are around that.
Is how we look at it so whether it's larger small I can answer that.
But again, if it looks to improve us in the context of those two core pillars and we'd certainly look at it.
Okay. Thank you guys.
Thank you.
Thank you very much. Your next question comes from Ron John.
The securities.
I will try again can you give us your meal.
I didn't hear you JJ go ahead.
Okay.
Yes, really the only question I really had was on operating costs I mean every quarter. It seems like you continue to impress us from that perspective.
Pretty big beat on that front.
This quarter and I think Q1 was was in a similar situation. So congrats on that I guess my question to you is.
One how sustainable are some of these op cost reduction initiatives.
And to as follow on to that how much further room could we see on that front.
Well thanks for the question, Jay Jay and I don't want to steal Ryan Thunder on this so on the path and the to him shortly but I think when you look at what our operations team has done in the past 18 months on the operating cost structure, it's incredible really.
It's now $120 million a sustainable cost savings.
In the last two years and we're going to continue to relentlessly focused on that but again before stealing Ryan and his teams Thunder, maybe I'll pass it over to Ryan for some comments.
Yes, Hi, Jay.
Absolutely Craig said, where we continued to be very pleased with our focus on opex reduction.
From our new workflows, and our operational technology platform.
Q2, you did definitely see some some continued momentum.
From these savings and definitely the savings year to date are sustainable.
As to future quarters, I I continue to be hesitant to throw reduction targets reduction targets with this new initiative.
Until we actually achieve them, but but as I mentioned, where we're continuing to rollout.
New workflows to to all of the field operations in our area, then and hope to see continued savings by year end.
No it looks great. So we look forward. So that's the other interesting thing I noticed in your new presentation is.
A new discussion of decline rates.
2021, and if I can read that chart it looks like somewhere between 25, 26%, which is pretty good improvement over the 30, plus so we've seen in recent history. So I guess, how much of that would you say is due to just natural.
Reduction in spending.
Such as the industry is going through and maybe how much that is due to the waterflood put you see working on.
So thanks for the question Jamie It's a good point. So if you remember we started this year around 30% decline rate.
Next year, we're looking to be in that call. It 25% range. So it's pretty significant change.
It is a combination of both those things that you highlighted so it is it's a combination of the company's commitment to decline mitigation and then again lowering that pace of activity has also supported that what that split is.
I don't know that up right off the top my head if it's a combination like you say of both.
But again as Ryan highlighted in the in the conference call you know that commitment is still there on converting.
Injection wells and we have executed on that in this environment, we're going to continue to do that.
And we are starting to see we're not starting where we are continuing to see the success of that in particular, when you look at viewfield than the decline rates of the offsetting injection wells.
Or the producers to injectors.
So again that 25% is supported by both that declined mitigation and a little bit of a lower pace of activity.
And long term, where do you see a crescent points decline rate like in kind of an ideal scenario without any M&A your.
Or any of that stuff like what's your personal growth goal to see that target.
Well, we want to continue to drive that down over time and and.
That's a that's a tough question to tell you or to answer and give you exactly what it will be over a few years because it does.
There's a number of variables that roll into that but as we can continue to focus on that and drive it down you know ideally we can push that into the call. It low twentys here over a few year time periods, but we'll see how how that shakes out again the focus is on a JJ and we're going to continue to.
To really drive that down as much as we can.
No. It's good it's all at the quarter. Thanks, guys.
Thanks JJ.
Thank you very much. Your next question comes from Jordan, recognizing from Tudor Pickering.
Please go ahead. Your line is now open.
Hi, guys just wanted to ask.
On the shut ins sounds like a very good server conservative approach to bringing them back.
Are you able to give us an indication of what the cash flow breakeven looks like kind of on average are in general on these assets just to kind of gauge.
The impacts we might be looking at as we think about them coming back into the market.
Yeah. So.
As far the timing of the shut in volumes I mean, what we've been saying and what we've been holding too as we were looking we're really looking for some stability in commodity prices and by stability.
We're looking for both $35 WT I'd pricing with normal differentials for a couple of months.
Before we started to bring these back on line, we just didn't want to have the.
Go ahead and bring them back on and then all the Sun commodities dip often and us incur more costs than we needed to so I think we've seen that.
So look for us to start to to finalize our plans and bring those back online.
As far as your questions around cash flow.
Those are certainly.
They would certainly be positive cash flow right now and then when you start to impressive above that call. It $30 WT prices, there certainly making money for us. It's just that we're looking for a little bit more stability. So.
As we bring those volumes back online.
Look for us to to let the market know what that looks like.
You know and in some some time period here in the future.
Okay. So I mean, it sounds like for the most part we're probably talking with $30 ish kind of breakeven I mean, it probably is.
Quick math, I mean, probably has a pretty meaningful.
I appreciate the cash on but at a mental math right points, something like 20 million for the quarter or something like that I guess.
Well I guess when you compare that to what the cost would be in the risks of bringing it back too early and having to turn around and.
Chuck I mean again or incur further cost I mean.
Yeah, I guess kind of give us an indication of what that looks like how much when I hear you would you say cost to kind of shutting en masse level like this versus potentially to economic upside.
Yes, so it.
Well first we did things are right. We made sure when we're putting them all down that we spent the time in didnt need to you'll see that we need to do so any work down hole or even on the facilities that were going down that we've shut it in properly. So we didn't have hiccups, bringing it back so that work was done.
For us to bring them back online is is not a huge dollar commitment on that so you know, whether it's a million or too it's not.
Real significant component and then again, because we spent that money. The first time shut them been if we had to do it again for US is now turn them down or shut them in.
You are looking at a similar spend so it's not a very significant amount. We just wanted to make sure that we had a stable commodity price and again I think we've seen that now here with oil being where it is.
The last couple of months were at the levels were comfortable so we're going to solidify those plans here and then.
And we'll get some note to the market as as as we need to and that changes, but your number around 30 Bucks, that's a fair comment around $30 WT.
For the most part things are good the other thing I would say is you know as we bring these back online. It's were up approximately 25000 Boe per day. There is some areas. Some volumes that we will not be bringing back if you remember there's about 4000 Boe per day.
Our.
From our seat gas plant in southern Scotts run.
With that with the way ethane prices are right now don't expect us to bring that back on in the near future. So it'll be more of a measured approach as we go through that.
Yes.
Okay perfect Thats. It for me. Thanks, guys. Thanks, Thanks for the question.
Thank you very much. Your next question comes from Michael.
From RBC capital markets.
Please go ahead. Your line is now open.
Sure. Thanks, Good morning, guys. So maybe just a bit of a broader question on your operations as you're pulling together the 2021 program.
So just wondering if you plan to adjust the regional capital allocation kind of between assets from words that in 2020, and just what I mean by that is.
Deferred lots about cost reductions and a efficiencies, but are there asset specific parts of your portfolio, where those changes so were to particularly well where you tilt more capital to and 21.
We see we're finding that some of the off stuff can get a little lost in the noise. These days and just wondering if you could flags some of those regions that you're most excited about.
As we look forward to next year, that's it for me.
So thanks for the question Mike. So we have initiated our formal 2021 process right now and we are going through that right now.
Where I'm excited and why I'm excited is that those cost savings were seeing across the board. So there's been significant wins here in cost reductions.
Cross our focus areas.
So as we go through and and review our capital allocation allocation process don't look for material changes and amongst the asset base itself, we probably will be fairly consistent on that.
But again that 10% reduction on the per well unit costs are ready that we're seeing this year is across the base. So.
That's what really brings in some of the excitement and I don't know, Brian if you want to add anything to that again, Mike We've just initiated the process.
So as we go through that will paint a clear picture to the market at some point in time here.
Got it helpful. Thanks.
Thank you very much. Your next question from Amir Iris from Cormark Securities. Please go ahead. Your line is now open.
Thanks. Good morning, guys. Just just follow up question on the shut in volumes. There. So should we see ambition to common stood at about 20 at least 21000 will be coming back sometime in the second half.
In terms of ethylene those loans back on.
So again, you know I think breadth of level now we're comfortable with the W.P.I. pricing in the differentials into how things have played out that we're going to formalize our plans here and then look for us to bring that on.
I don't know if it will be exactly you know if it will be exactly the full 21000 or whether it will end up being but again approximately 4000 and that was from that ethane extraction plant.
So don't look for that to come back here in the near future and then again as we do finalize it will we'll update the market.
Okay, and then just a question on the 10% reduction in capital costs I don't understand like a flat like for example, you're getting larger reductions about 20% is there anything different about that asset that you're doing that's that's allowing you to have a larger cost savings on the wells over there versus the other areas.
I think just in general.
What I mentioned to one reduce drilling days continuing to to optimize our frocks.
Some pad drilling efficiencies, so I think one flat lake specifically.
We've made maybe a little bit more advances in that area compared to others, but in general.
Across the board it is from the reduced drilling days continue to optimize frocks.
And pad drilling efficiencies those are really the three key key reasons.
Okay and then just final question just on 21 I know it's early days you guys just starting to think about deposits, but just in terms of the strategy of how you'd like you how you're planning that out are you looking to live within cash flow or you're looking for further absolute debt reduction as you might apply relative to whatever cash flow might look like and 21.
There will be it's going to focus on on really what we focused on here. The past couple of years, so long term sustainability and balance sheet strength.
And look for us like we have we have this year, we've made very clear to the market that we will certainly live within cash flow.
So look for us to to carry that same theme into 2021. So.
We will we will be looking to live within cash flow and not build any incremental debt and ideally commodity tape as it starts to rise gives us a benefit and we're we're quite torque to the upside.
As oil prices start to to run that we have a significant amount of free cash flow.
That will start to be generated so.
Again, one of the pluses of what we're going through right now as far as the pandemic in the commodity price crashes. It is as we you know as we talked a little bit there with JJ earlier as far as our decline rate. It certainly helped our sustaining capital. So in order for us to stay relatively flat year over year, we need to spend around 650 million.
So.
We'll see how commodity prices arc.
As we're going through the budgeting process, but look for us to live within cash flow.
Okay. Thanks for the couple of quick.
Thanks for the questions.
Thank you very much. Your next question comes from travel weight from National Bank. Please go ahead. Your line is now open.
Good morning, everybody.
In your opening remarks, you touched on sustainability report published last month.
I know that type of thing in this market with all the macro headwinds can get overlook, but I know a lot effort goes into that still comes up in conversation with certain.
Institutional clients. So could you help us understand that 30 present target.
Over the next five years kind of what what drivers will will get to that level by 2025.
Thanks, Thanks, Travis I that you know we were we were quite excited to get that sustainability report. That's our second annual sustainability report so look for us to continue to build off that.
[noise] into the future.
But one other things that we did layout in that that report. This year was that emissions reduction target of 30% and I did highlight in the opening remarks, there that not only is at 30% emissions reductions, but it's actually 50% on the methane reductions, which we all know is the most harmful to greenhouse gases. So we are taking those steps.
And weve laid it out Travis in the context of the current commodity price environment that that is something that is certainly achievable for us.
It's built into this year's budget, it's built into next years budget or will be and then we've laid it out in our five year plan.
It's a you know at the end of the day the capital come in and the capital requirements for that are I would say less than a percent of our overall sprint. So certainly achievable numbers and ideally Travis we can you know we can exceed that but we're committed to it.
So look for us to execute on that over the next few years here.
Maybe tying that back.
Shut ins in some of the volumes that may be.
Left shut in whether it.
A cost hurdle or or.
Well productivity wells will that will that play into that equation as we think about emission reduction.
And reduction.
No no no that's not I mean, that's not really it Travis those wells are you know if if it makes sense for us to bring them on regardless of what their emissions are will bring them on so it doesn't have any of that really tied into its more tied into our our capital program and our commitment overall to reduce those emissions.
So it doesn't have.
You know it wasn't built in with us shutting those volumes in.
Thanks.
Thank you very much. Your next question comes from David.
From CBC. Please go ahead your line is open.
Yeah. Thanks for taking my question guys I just wanted to ask about the Dakota access pipeline.
Okay. That's been the news lot lately. It seems like your stock has traded around a new slowing that topic. So can you provide a bit of commentary on how you see the potential shutdown of that pipeline impacting your cash flow weather just want to talk about a you know how much you would expect the differential to widen out how it would impact your realized pricing in either North Dakota, Southeast, Saskatchewan, and maybe a general comment on the LSB.
Market, if you have any opinion thank you.
Sure David I can take that its Ryan.
Yes, so so for US you know obviously, we have been opt in North Dakota. So we do have volumes. There. We don't have any direct take away commitment on dapple. So it's not like we haven't have any issues. There obviously, we have other mark.
Get access points from dapple when there is other pipelines of North Dakota in the past. We have also you know trucks to sell thesis gas when it actually.
Very reasonable trucking rates still so we do have options.
And you know obviously, Ken Ken just for you know North Dakota activity as it is a small portion of our production and capital budget, we can differ North Dakota activity to later into 2021.
And wait till we get further news on that.
All right. So all in all that you would say, it's pretty minor impact or what's your cash flow or realized pricing. However, you want to you want to put it.
Yeah, I think Thats, a fair comment David Yeah.
Right. That's it for me thanks, guys.
Thank you very much crack there no further questions at this time. Please proceed.
Thank you for taking the time to joined our call. Today. If you have any questions that were not answered. Please car investor relations team at your convenience.
Thanks, everyone.
Chris Point Investor Relations Department can be reached at.
185576769 to three.
That was 1.85576769 to three thank you and have a good day.