Q3 2020 Crescent Point Energy Corp Earnings Call

As the operator highlighted this conference call is being webcast along with the slide deck, which can be found in our website.

Before I touch on our third quarter highlights I would like to share some high level thoughts around the future of our industry.

Lately, we have seen uncertainty around the long term outlook for the energy industry, driven by bearing demand forecast, including the shift to a lower carbon economy.

We believe that responsibly develop fossil fuels will continue to play the most important role in meeting global energy demand.

Our view is supported by well respected bodies, including the EEI, which predicts that oil and gas will account for approximately half the total energy demand by the year 2014.

As well the reduction in capital spending we are seeing in the upstream sector is expected to result in a more favorable supply demand outlook for delivering stronger commodity prices in the future.

We believe this supply demand balance coupled with the increased disclosure and accountability by our industry around environmental initiatives will improve the sentiment and perception toward the oil and gas companies, especially the Canadian industry.

To that end I'm proud to report on our strong SG leadership, which has resulted in a significant drop in our greenhouse gas emissions, meaning we are on track to reach our goal of reducing our emissions intensity by 30% by 2025.

Continued strong safety performance throughout our operations and a dramatic reduction in kilometers driven due to the successful implementation of our optimize workflows and operational technology platform, which supports both employee safety and further emissions reductions altogether.

Altogether these initiatives in body, our purpose of bringing energy to our world. The right way. In addition, our third quarter financial results demonstrate our commitment to our core principles and balance sheet strength and sustainability during the past quarter, we generated approximately $120 million of excess cash flow we.

We continued to reduce our net debt, resulting in a year to date reduction of over $575 million.

We revised our 2020 production guidance upwards with no change to our capital expenditures and we announced a preliminary 2021 outlook that is fully funded at approximately $40 you SWT, highlighting our enhanced sustainability and cost structure.

We have achieved this success by staying disciplined and committed to our strategy by continuing to find new ways to drive efficiencies.

And by executing effectively with that I'll now turn it over to Ken to discuss our financial results.

Thanks, Craig for the quarter ended September Thirtyth 2020, adjusted funds flow totaled over $235 million or 44 cents per share fully diluted driven by a strong operating netback of over $21 per Boe, excluding hedging gains.

The third quarter development capital expenditures totaled $93 million as a result, we remain on track with our annual capital expenditures budget of 665 million, which was recently revised the lower end of the prior guidance range.

Net debt at September Thirtyth, 2020 was approximately 2.2 billion and reflects over 575 million of net debt reduction year to date.

Our net debt is primarily composed are comprised of senior notes, leaving us with over two and a half billion of cash and I'm utilized credit capacity at the end of the quarter.

The company has no material near term senior note maturities and our credit facilities do not mature until October 2023.

As a part of our risk management program to protect against commodity price volatility.

We currently have hedged 70% over fourth quarter, 2020 oil and liquids production net of royalty interest. These.

These hedges consist primarily of swaps with an average price of over $62 per barrel Canadian.

Weve used these hedges to further protect our fourth quarter capital budget, which remains allocated to high return assets, including the continued advancement of long term projects such as decline mitigation.

We were also active during the quarter to layer in additional hedge protection for 2021.

40% of our first quarter production next year is currently hedged primarily through swaps at an average price of over Canadian $62 per barrel.

We have additional hedges extending throughout the coming year, and we will continue to layer on added protection in the context of commodity prices.

Looking ahead, we plan to formalize our 2021 budget towards the end of this year or early into the new year.

Our current primary our current preliminary outlook anticipates being able to generate annual average production that is in line with or exceeds our estimated second half 2020 production of approximately 110000 BOE a day, while keeping our current development capital spend at only $500 million to $550 million.

This program, which is fully funded approximately $40 you SWT.

Continues to highlight our returns based capital allocation framework.

Our commitment to the balance sheet strength and long term sustainability.

5% lower decline rate going from 30% to 25%.

And the positive impact we have obtained through our ongoing sustainable cost improvements.

Ill now turn things over to Ryan to provide some operational highlights Brian. Thank.

Thanks, Ken in the third quarter of 2020 average production was 113383 Boe per day comprised of over 90% oil and liquids as previously announced we reactivated economic volumes during third quarter that were formerly shut in.

On the capital cost side Im proud to report that our average per well capital costs continue to trend in line with our previously announced expectation that we could deliver cost reductions of over 10% by year end 2020. These capital cost improvements reflect the positive impact from both the improved internal efficiencies we have delivered through supply.

Chain initiatives and drilling and completion optimization and the benefits we have achieved by effectively transferring knowledge throughout our asset portfolio.

Our operations team constantly strive to innovate as an example, even after 14 years of developing our most mature resource play we are still making improvements in the viewfield Bakken such as faster drilling days and ongoing completion optimization, which are expected to result in a 5% improvement to well costs in 2020, We act.

Spec these improvements to continue moving forward, especially as we apply our learnings to other less developed areas such as the Duvernay.

On the operating cost side during the quarter, we expanded the implementation of our operational technology or Ot platform to cover our entire sketch one asset base.

Adopting this technology in conjunction with optimizing workflows and other cost reduction initiatives, we have now removed approximately $60 million or 9% of our budgeted operating expenses in 2020, we plan to continue to rollout this platform to other areas throughout 2021 and look forward to delivering.

Additional efficiencies as a result.

Further we used our new workflows and multi platform to augment our risk management practices improve our preventative measures in the field and reduce reduce emissions for example over the past two years, we have enhanced operator safety and reduced fleet emissions by decreasing the number of kilometers driven in our Canadian operation.

By over 20% on a per Boe basis.

Regarding our decline mitigation program, we have converted 110, producing wells to water injection wells year to date to further enhance our long term sustainability, we expect to convert a total of 135 wells in 2020.

We budget and allocate our capital through a disciplined combination of base maintenance capital longer term projects, such as decline mitigation or CFO drilling and other expenditures, including land retention and environmental initiatives. Our preliminary 2021 budget of $500 million to $550 million follows this framework in order to.

Create and sustain value over the long term.

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 and production efficiencies I will now pass it back to Craig for some closing remarks, thanks, Ryan in closing I'd like to reinforce our commitment to our core principle.

Sales of balance sheet strength and overall sustainability.

Our continued operational execution and capital discipline has enabled us to increase our 2020 production guidance without changing our capital expenditures.

For the year ahead, we have established a conservative program that is expected to be fully funded and approximately $40 you SWT.

And we will continue to manage commodity price risk through our disciplined hedging strategy.

Assuming oil prices of US 45 to $50 W. tie our current program will generate approximately $175 million to $350 million of excess cash flow.

In a lower price environment, we will remain flexible to protect our financial position and in a higher price environment, we will prioritize excess cash flow and sustaining production.

We will also evaluate the potential return additional capital to shareholders in the context of our balance sheet and overall market conditions.

Since last quarter, we have witnessed several mergers or any announcements within the north American energy industry. We firmly believe that consolidation is necessary for industry to enhance efficiency and returns as well as long term sustainability and relevance among investors.

Over the past two years Crescent point has been active on the disposition side, having sold approximately $1.5 billion of assets at accretive metrics.

We will continue to be patient and disciplined when considering the opportunities to further enhance our long term shareholder value through improved sustainability for balance sheet strength.

At this time I would like to thank our shareholders for their continued support and confidence in our business I'd also like to thank our employees for their willingness to adapt and remain highly engaged during the current COVID-19 pandemic.

Our organization will remain flexible in its operations and business practices to continue to protect the health and safety of all our stakeholders with that I will now open the call for questions from the investment community operator.

Thank you.

As a reminder for members of the investment community. If you would like to ask a question. Please press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press star followed by two we will now pause for a moment to compile the culinary roster.

Okay. So your first question comes from Quanta Haar from TD Securities. One. Please go ahead.

Hey, guys. Good morning, and thanks for taking my question.

I wanted to follow up a little bit on your closing remarks, there Craig that's for the first time in your presentation I see you've got a couple of slides it slides four and five we talk about capital allocation your framework.

Just wondering what the thought process was there and how that plays into 2021.

Good morning, Jay Jay Thanks for the question I think I think it's probably best of Ken and I Tag team. This one.

So as you know we've talked in the past that every decision we make really revolves around the fundamental pillars of our strategy one being balance sheet strength, the second being long term sustainability and we spoke to that over the last two years and that continues to be the focus as we move forward.

If you look at balance sheet strength to think we've made a number of initiatives on that and really strengthen it here over the last couple of years and when we're talking sustainability we're talking.

Our decline rate our cost structure, but then at the same time, there's another part that goes into that and that's your capital allocation and your framework around that of your process around that.

We thought that'd be very helpful. If we laid this out to the market and give us a little bit more transparency around the process that we go through internally is we're making these budgeting decisions and maybe before I speak to 2021, and how that plays out into that I mean, it can to walk you through the framework.

Sure so.

I guess JJ.

Where this framework starts is we've got to optimize our current cash flow generation, our PDP asset base. So the.

The way, we maximize our cash flow generation and that's really the result of obviously previous year's capital investments is our relentless focus on costs and efficient production techniques and a recent example of that that cost focus as what Ryan mentioned is that OTI platform initiative that he spoke to in his operations update.

So obviously this cash flow now in turn funds our maintenance budget.

This maintenance budget is comprised of three main buckets. The first bucket as you can see on the presentation is our base plan, which attracts the majority of our capital and we allocate our capital across our asset base on a on a risk basis full cycle returns both.

Both at a well on a project level.

The second main bucket is long term project. These are things like decline mitigation.

Step out drilling and the third bucket that we speak of is kind of the other expenditure bucket, which is land retention and some environmental initiatives.

The maintenance budget is allocated.

And involves sort of various technical and financial disciplines has done in a team based approach, but obviously overlaid with a strong yesterday focus.

We also sales stress test that base budget at various commodity prices to trying to develop a flexible budget, but still an eye on returns and our balance sheet.

So now we look at the excess funds after our base budget allocation and these can be really be directed towards two different things one being the balance sheet to further address or leverage targets the second being towards funding a core dividend.

After that the remaining excess cash flow after addressing the maintenance budgets the balance sheet in the core dividend will be directed to a number of different opportunities.

All which need to compete based on returns or value generation. These options include additional returns of capital to shareholders in the form of further dividend or share buybacks organic growth inorganic acquisitions further debt reduction and other long term projects. So maybe.

Maybe with that framework, what I'll do is I will turn it back to you Craig just talk about how this plays out into the 2021 plans.

Yes, so JV. So if you look at 2021.

Our base program consists of basically what Ken with sales we had the base the base program in there and then some long term initiatives as well.

We're fully funded at $40 W. T I.

And then if you start to look at the 45 to $50 Wi Fi range, that's where we we generate significant free cash flow. So we get into that $175 million to $350 million range at those commodity price environments.

So thats, a 50 dollar and as we start to creep up into that $50 level I would I would expect us to maybe spend a third to.

Slightly less than a third of that and deploy that into into a little bit more of a sustaining capital and then the rest of that be directed towards the balance sheet and then if you look at our commodity price environment like we are living today, where oil has.

Slid down here. These last few days from the 40 range into the 36 $35 range look for us to Peel back a little bit of capital and then live within a.

To live within cash flow on that front so.

Well, that's a great answer.

So the number you have on there that you can target a total reinvestment of less than 75% of funds flow I mean, that's going to be regardless of what the commodity price environment is that a fair comment.

Yeah, Youre going out we're going to try and live within that range for sure JJ. So dependent on the commodity price environment, We will we will state.

You know somewhere between I guess, if it's a.

The price environments moving the way we want it to then obviously that bell slide down into call. It 65% range and then as commodity prices fall away, we'll probably be in that 70, 580% range. So look for us to stay within that.

That's great. So just one more question and it kind of ties into that as well and it's on the decline rates.

You know substantial improvement in the decline rate from 30% to 25% I was hoping to to do.

You'd quantify what the dollar impact.

Such a drastic improvement is on your sustaining capital I mean, what order of magnitude what are we talking about in terms of how much less you have to spend as it by virtue of the slower decline rate.

Yeah. So it's a good point Jane thanks for highlighting that for us.

We have moved our decline rate down substantially here over the last you know the last 18 months in particular, we entered the year right around 31, 32% right now we're gonna be exiting the year around 25, and that's forecast to carry through into.

2021, so it's a sub matched or a substantial improvement on the decline rate, we're going to continue to focus on that.

Yes.

As far as every percent, it's probably around somewhere around I don't know I'd say, probably somewhere between 80 do a dot $100 million that we can peel out of our capital program. So it's significant improvement on that front.

So look for us to continue stay active like I mentioned 2021 has a number of long term initiatives in their ready within that budget that we've laid out. So we'll continue to drive this this down.

Looking forward to it thanks, thanks for taking my questions.

Thanks JJ.

We have one more question from Patrick overall of eight TB capital markets. Patrick. Please go ahead.

Hey, guys that was a a very comprehensive answer on the capital allocation and that was sort of where it was initially going to go on with my question, but I had a second follow up question here, maybe on the M&A front, we're seeing very very impactful M&A something that we havent seen in a while.

Think to Husky and synovus, that's quite a large transaction or even sales or the border parsley and a pioneer you guys have been in divestiture mode. When you're thinking about the scale of potential M&A opportunities that are out there that are making meaningful and worthwhile can you maybe put some some guide posts.

Around that for us.

Yeah. So thanks for that the question, Patrick and I will.

We would agree with you that the M&A thats happened here not only in Canada over the last few days, but then on the U.S. side of the sector has been well received over that timeframe. So we've certainly been paying attention to that like you've mentioned, we've been fairly active on the display side over the last couple of years as we shored up our balance sheet I think we've done a pretty good job of that especially when you look at the map.

Tricks, we are able to get those dispositions done that.

When we look at the a and D side, where sort of the acquisition side.

We will certainly look at things.

That improve us in the context of our overall sustainability or our balance sheet strength.

Oh, no that those core pillars that we have talked about over the last.

24th 30 months haven't changed so if there is something out there that makes sense for us to do regardless of the size of the scale of it and it proves us in one or both of those and we will we will look at that for sure.

Okay. Thank you.

Thanks for your question.

There are no further questions at this time. Please proceed.

Thanks, everyone for joining our call today if.

If we haven't got to any of your questions. Please call our Investor Relations line at your convenience. Thanks again, everyone.

[noise] Crescent point Investor Relations Department can be reached at one.

Right well I 576769 to three thank you and have a good day.