Q4 2020 Baytex Energy Corp Earnings Call
Thank you for standing by this is the conference operator.
Welcome to the beta ex Energy Corp, fourth quarter, and full year, 'twenty 'twenty financial and operating results conference call.
As a reminder, all participants are in listen only mode on the conference is being recorded.
After the presentation, there will be an opportunity to ask questions to join the question queue. You May Press Star then one on your telephone keypad share.
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I would now like to turn the conference over to Brian Ector, Vice President capital markets. Please go ahead.
Thank you sure east good morning, ladies and gentlemen, and thank you for joining us to discuss our fourth quarter and full year 2020 financial and operating results today.
Today I am joined by our executive team <unk>, our President and Chief Executive Officer, Rod Gray, our executive VP and Chief Financial Officer, Kendall, Arthur Vice President heavy oil Chad <unk>, Vice President Finance, Chad Lundberg, Vice President light oil and Scott Lovett, our 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 oil and gas information and non-GAAP financial and capital management measures in yesterday's press release.
On the call today, we will also be discussing the evaluation of our reserves at year end 2020. These evaluations have been prepared in accordance with Canadian disclosure standards, which are not comparable in all respects to United States or other foreign disclosure standard.
Our remarks regarding reserves are also forward looking statements.
All dollar amounts referenced in our remarks are in Canadian dollars, unless otherwise specified and.
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 year end 2020 conference call.
I'm pleased that in one of the most challenging years experienced by our industry. We delivered on our commitment to preserve financial liquidity capture cost savings exceed our <unk> emissions intensity reduction target and generate free cash flow. The COVID-19 pandemic required a dynamic response to the oil price collapse and our team did.
Levered.
In 2020, we reset our business in the face of extremely volatile crude oil markets and intensified efforts to improve all aspects of our cost structure and capital efficiencies, while protecting the health and safety of our personnel.
We are now benefiting from these actions as we are poised to generate meaningful free cash flow in 2021 and continue our deleveraging strategy based on the forward strip, we expect to generate over $250 million of free cash flow or <unk> 45 per share in 2021 and inquiry.
Our financial liquidity to over $550 million.
Before discussing our year end results I'd like to take a moment to comment on the most important asset in our organization our people not only have our field and office teams prevented the COVID-19 outbreak anywhere on our business they delivered volumes to market in a safe and efficient manner and flawlessly.
<unk> our programs.
At times this winter our teams faced unprecedented weather conditions in Alberta, and Saskatchewan with temperatures dropping to the minus 40 to minus 50 degree Celsius range.
And as operating activity has ramped up over the past couple of months, we are grateful to all of our employees for their commitment and perseverance to operating safely and reliable reliably through these challenging conditions, the health and safety of our employees and contractors has been and always will be our number one priority.
Let's now talk about our results.
In 2020, we reduced our capital budget by 50% and achieve cost savings of approximately $100 million.
We produced 80000 Boe's per day, 82% liquids with capital expenditures of $280 million in line with our annual guidance.
And we hit all of our cost targets with operating expenses, averaging $11 35 per Boe.
Transportation expenses of 97 per BOE, and general and administrative expenses coming in under a $1 20 per Boe.
We generated free cash flow of $18 million and reduced net debt by $24 million.
We also negotiated a bank credit facility extension and refinanced our long term notes both important measures undertaken to ensure our financial liquidity Rod will elaborate on this in a few minutes.
R to P reserves at year end totaled 462 million barrels of oil equivalent.
And we maintain a strong reserves life index of 17.9 years.
Our 2020 reserves report report does reflect the impact of a materially lower commodity price forecast being utilized by our reserves evaluate or which has wty down 20% from one year ago and not reflective of current spot oil prices.
Consistent with the impairment we recorded in 2020, we removed 29 million barrels of proved reserves, 65% heavy oil and bitumen and 41 million barrels of proved plus probable reserves, 80% heavy oil and bitumen.
Which were deemed on economic using the reserves evaluate our December 2020 commodity price forecast.
At the same time, our future development costs have been reduced by $464 million on a one P basis.
$709 million on a two P basis, partially due to the reserves being removed, but also due to improved capital efficiencies across our asset base with a significant improvement in the Eagle Ford.
As part of our core values, we are driven to safely and responsibly develop energy resources, while reducing our environmental impact in 2019, we established a target to reduce our corporate GHT emission intensity by 30% by 2021 relative to our 2018 Basely.
We are pleased to announce that we have exceeded this target one year early achieving a 46% reduction in on our G. H G emissions intensity through year end 2020. This is an annual reduction of $1 6 million tonnes of C. O two equivalent and represents taking 340000 cars off the road.
Annually.
Another key part of our culture is to continue to set the bar higher we are now announcing a new target to reduce our corporate GHT emission intensity by a further 33% from current levels by 2025. This equates to an approximate 65% reduction by 2002.
Five relative to our 2018 baseline.
The entire organization is proud of our emissions reduction strategy, which includes gas conservation and combustion reusing associated gas as fuel for activities, reducing emissions from storage tanks, along with monitoring and preventing fugitive emissions.
We look forward to publishing our fifth corporate sustainability report later this year as we remain committed to progressing the environmental and social aspects of our business 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 in 2020, we negotiated a bank credit facility extension and refinanced our long term notes, which gave us the liquidity and financial flexibility to manage the volatility experienced in 2020.
Our credit facilities totaled approximately one point on $3 billion and have a maturity date of April 2020 for these are not borrowing based facilities and do not require annual or semiannual reviews east facilities contained two financial covenants, both of which we are well within as of December 31.
Our secured debt to EBITDA ratio was one six times at year end and is allowed to be up to three five times and our interest coverage ratio, which needs to exceed two times was three nine times.
As of December 31, 2020, we held $367 million of Undrawn capacity on our credit facilities, resulting.
Resulting in liquidity net of working capital of $319 million.
At current commodity prices, we expect to increase our financial liquidity to over $550 million in 2021.
Now the refinancing completed earlier in 2020 allowed us to redeem two near term notes maturing in 2021 and 2020 to our long term notes are now comprised of two outstanding issues.
One a $400 million tranche bearing interest at 562, 5% due 2024, and a second U S $500 million tranche.
Bearing interest at 875% due 2027.
Now turning to risk management, we maintain a consistent approach to risk management and marketing utilizing various financial derivative contracts and crude by rail to reduce the volatility in our adjusted funds flow. These contracts contributed approximately $50 million to our adjusted funds flow in 2020.
For 2021, we have entered into hedges on approximately 48% of our net crude oil exposure largely utilizing a three way option structure that provides W. Ti price protection at U S $45 per barrel with upside participation to U S $52 per barrel.
We have also WTS <unk> to MSW differential hedges on approximately 50% of our expected 2021 Canadian light oil production at U S $5 per barrel and WCS differential hedges on approximately 50% of our expected 2021 heavy oil production.
At <unk> to WCS differential of approximately $13 30 U S per barrel.
We are also contracted deliver 5500 barrels a day of our heavy oil volumes to market by rail full details of our hedge program can be found in our year end financial statements and are available on our website and with that I'll turn the call back to Ed to elaborate on our plans for 2021.
Okay, great. Thanks, Rod in 'twenty and 'twenty, one we will benefit from a disciplined approach to capital allocation as I've mentioned as well as our continued drive to improve our cost structure and capital efficiencies. Our high graded capital program is focused largely on our high netback light oil assets in the Viking and in the Eagle.
Ford.
In our Q3 conference call, we talked about how activity would be resuming during the fourth quarter and I'm excited to see the operational momentum. We are building as we execute our plan with current production over 78000 Boe per day.
On the Eagle Ford activity resumed in Q4 2020 with seven one net wells drilled and two seven net wells brought on stream the remainder of the wells drilled in the fourth quarter are expected to be on stream. In Q1 2021, we expect to on stream approximately 18 net wells on the Eagle Ford in 2002.
On one.
In the Viking we had previously suspended all drilling and as such there was limited activity for March through October we resumed drilling in November with two rigs mobilized to execute a 30 well drilling program in 2021, we expect to bring approximately 120 net wells on stream, including 43 <unk>.
Net wells during the first quarter on.
On the heavy side, we have scheduled minimal development for the first half of 2021 as we come out of spring breakup, we intend to implement a drilling program in the second half of the year in which we could drill up to 30 net wells at Lloyd Minster, and six net wells at Peace River.
And we continue to prudently advance our Pembina Duvernay shale light oil play.
Our most recent two wells were completed in October the 10 of 16, well was brought on stream November 2nd and generated a 30 day initial production rate of 1300 Boe per day, 69% oil. The 11, a 16 well was brought on stream November 17th and generated a facility constrained 30 day.
Initial production rate of 900 Boe per day, 68% for oil.
Based on early flow back results. These two wells demonstrate repeatability of our 11 30 pad completed in 2019, we have the flexibility in 2021 to drill up to four net wells for the second half of the year.
So let me conclude by saying we are executing our plan to maximize free cash flow and accelerate our debt reduction strategy. Our 2021 guidance remains unchanged as we target production of 73 to 77000 Boe per day with exploration and development expenditures.
Of 225 million to $275 million.
And as I mentioned at the outset, we are building a strong operating momentum with current production over 78000 Boe per day, and free cash flow pointing to over $250 million with financial liquidity, increasing two greater than $550 million.
And with that I will ask the operator to please open the call for questions.
Thank you.
We will now begin the question and answer session.
And the question queue you May Press Star then one on your telephone keypad.
O'hara tone acknowledging your request.
We are using a speakerphone please pick up your handset before pressing any keys.
To withdraw your question. Please press Star then two.
We will pause for a moment as callers join the queue.
Our first question comes from Greg Pardy with RBC capital markets. Please go ahead.
Thanks, Thanks very much.
And thanks for the rundown guys couple of questions.
The first is the A&D market has has definitely definitely shown signs of slowing of late I'm just curious whether there's anything in the portfolio that you might consider selling to accelerate the debt reduction.
Yeah.
We've talked about this before and I would say we are always in the market looking and trying to understand opportunities in and around our core areas. So tuck ins and bolt ons on the acquisition side and also selling.
That's debt not necessarily in our core areas. So for example, I've mentioned, our deep basin gas in the past.
Mitch on attractive position with liquids rich gas in a fairway that we drill one or two wells every couple of years.
To maximize facilities, but.
We are pretty well caught up in the three areas that we like the heavy oil coal flow.
The Viking light oil light oil in general in southern and Central Alberta, and Saskatchewan and then in the Eagle Ford. So we do three things really well and we're going to stay focused on that.
And those parts of the business.
Okay. Thanks, and then maybe just I'm wondering if you can remind me just where we're roughly your corporate decline rate would set and then what is sustaining capital look like just a bit of all of these cost improvements that you've been able to go through.
Yeah, well one of the benefits of not drilling new wells as the base becomes a higher percentage of the total production and that's not necessarily a great thing, but it is where we came out of 2020 with low activity. So our corporate decline rate moved from 34% down to around 30 per step.
Where we're seeing significant moderation of the declines are turning the decline around the decline curve in both the Eagle Ford and in the Viking and our heavy oil is typically running in the 20% to 25% range. So.
Overall, I would say our decline rates have moderated debt puts sustaining capital probably a little higher than where we are now we can sustain ourselves by high grading opportunities, bringing ducks end of the year from last year and also reducing our cost structure to it to a certain extent and we can probably hold for.
<unk> flat in this kind of $75 to 80000 barrel a day range on on our capital that we've shown this year.
But only for a couple of years, so I would say sustaining capital we need to do run the numbers for next year is probably running on the order of.
$2 75.
You'd have to add probably 50 $50 million to where we are this year, so maybe $300 million would be sustaining capital somewhere in that range.
Okay terrific, thanks very much.
Okay.
The next question comes from Patrick O'rourke with ATB capital markets. Please go ahead.
Oh, Hey, guys. Good morning, I wanted to change from a year ago, we're talking about capital allocation choices here.
Curious we heard from your operating partner in the Eagle Ford.
On their conference call. The other day, what I would call on static capital discipline.
And then I assume kind of.
Have to fall in line with that but now that youre thinking about potentially the upper end of the capital budget that 225% to $2 75, which is what it seems like you're dangling too and your updated corporate deck here.
I'm wondering how you're thinking about capital allocation throughout the rest of the portfolio you talked about being caught up on your cold flow and you're biking.
For the Duvernay falls into that and how you see the outlook for.
And call it any incremental spending versus the midpoint of the guidance for the rest of the year.
Yeah, well, we have a very phased in and I think very disciplined approach to our strategy, we're clearly maximizing.
Free cash flow has been the mantra for some time.
It starts with generating as much free cash flows we can for now and sustaining the business around that 75000 barrel a day range. So with the tailwind in oil price, we think that moves our financial liquidity of we as we've mentioned to $550 million so with that.
We that's sort of a primary goal then we get line of sight to the 2020 for bonds are not really an issue.
And we've got plenty of runway before those come due anyway, and we would have ample liquidity. So our plan is to continue to delever. We've been very consistent with that strategy. Yes. We may have a few additional choices once we get through these initial steps.
But we're very tenaciously focused I would say equally to our operating partner down South that this is going to be about disciplined capital and and maximizing free cash flow.
Certainly for the foreseeable future.
And then just safe to assume based on those comments on any free cash flow at least.
Within the near and medium term is just going to be directed to the balance sheet.
Yeah building that liquidity as I mentioned, so we don't have an issue with the 2020 for bonds.
I think thats first priority it does not mean and I think maybe in the back of your question. There is we will never be able to get things like the duvernay not not true we think two to four wells this year on the Duvernay.
Are quite possible on likely in our plan they are on our plan.
And there's no reason, we couldnt allocate more.
More of the capital that we set out to sustain the business.
In the following years to grow that production. So that's a choice will have Eagle Ford is putting on a few more wells this year than last year at least on our a M is there.
<unk> is going to hold pretty flat around this new level of.
Of the 18 19000 barrels a day, so I think we're pretty comfortable there, but theres no reason that duvernay cannot grow some within our capital framework going forward.
Okay, and then maybe just a final question here in terms of the sustaining capital you touched on with Greg There Buddy.
It correctly that we should be thinking.
A number of sustaining in that 75% to 80 range that would keep ducks neutral year over year and allow a little bit on duvernay spending at somewhere in the 325 range from an organic basis, Yeah. I think that's a real good way of thinking about it Patrick very good.
Okay perfect. Thanks, a lot.
Our next question comes from Jason Mandel with RBC capital markets. Please go ahead.
Hey, guys. Thanks for taking the question sounds like were you know a bunch of us or along the same path on the Q&A. So just a little bit further clarification, if I recall, some conversations from several months ago, and maybe even as much as a year ago that they desire wise.
Or that there was a little bit more flex upwards in the capital spending budget or hope in the event that we get on the oil.
Oil prices to continue to move higher.
Whereas in the presentation materials, it looks pretty clear that that capex is going nowhere at higher oil prices can you just kind of put that has there been a change in thinking or am I thinking about that wrong.
I don't think theres been a change in philosophy around being rigorous in our capital program I do think we've also stated debt during spring breakup, we will take a pause as we always do and look at where we are on capital production oil price the macro and look at what we want to do and we've got.
<unk>.
Trending towards $2 25, now, but we've got an additional $50 million ready to be spent and in heavy oil where the the margins look extremely attractive right now and we're well hedged on the differential on absent really good contracts coming out.
On rail now out of Peace River, which hell. So heavy oil is going to look very very attractive.
On the current set of numbers that we've pretty well got locked in visibility too and likewise as I mentioned, the duvernay is sitting out there that we do want to further de risk and further prove up our track record such that we can move into more of a full scale development mode in the future.
So those things are sitting there and that moves us to high end of guidance at $275 million level, but those decisions will be taken in around the April may timeframe for second half of the year.
Okay.
And I think Gary.
Well, yeah, I think I'll leave it at that.
We will look at for Q and exit rates and what we want to bring into 2020 to how we want to position for 2022 also starting in spring breakup, but then we kind of wrap up our strategic planning and annual planning exercise by September.
And we'll go from there.
I'll see if these macro prices hold as it seems structural to us we expected some positive tailwind is around the macro.
But this has exceeded our expectations, so we need to factor that in as well.
Great very helpful. Thank you and then just two quick follow ups cleanup there.
$250 million free cash flow expectation I don't know if maybe I missed it but did you give a.
On a price tag that is based on for oil and for Diff, Yes, we did its in the document.
Just on a couple of days ago.
Brian do you have that handy.
It's <unk>.
$58, WT eye and $12 differentials.
On the heavy side and for dollar MSW differentials. So it's kind of where we were on the spot.
A couple of three days ago.
Got it. Thank you very much and then just lastly to build on liquidity just definitely definition Lee that means using the free cash flow towards paying down revolver, and then putting yourself in a position to have the revolver capacity to deal with the 'twenty for us in the event that debt Theres a need to do that is that is that the right thought process.
That is correct.
Alright, Thank you very much okay. Thank you.
Sure.
This concludes the question and answer session I would like to turn the conference back over to Brian Ector for any closing remarks.
Thanks for east Thanks, everyone for participating in our year end conference call have a great day.
Okay.
This concludes today's conference call you may disconnect your lines. Thank you for participating.
And have a pleasant day.
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