Q1 2021 Baytex Energy Corp Earnings Call
Thank you for standing by this is the conference operator welcome to the basic Energy Corp, first quarter, 2021 financial and operating results conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation there'll be an opportunity to ask questions.
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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 Sherry good morning, ladies and gentlemen, and thank you for joining us today to discuss our first quarter 2021 financial and operating results.
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I am joined by Ed <unk>, President and Chief Executive Officer, Rod Gray, our executive Vice President and Chief Financial Officer, Kendall, Arthur Vice President heavy oil Jack Hellmann cough, our Vice President Finance, Chad Lundberg, Vice President of 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.
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.
All dollar amounts referenced in our remarks are in Canadian dollars, unless otherwise specified and with that I would now like to turn the call over to Ed.
Great. Thanks, Brian and good morning, everyone I'd like to welcome everybody to our first quarter 2021 conference call last year. As you know we took decisive steps to adjust our business in the face of extremely volatile crude oil markets, we moved aggressively to shift our operating and capital activities to maintain financial liquidity.
City minimized capital outlays, and we emphasized cost reductions across all facets of our business to retain long term value.
And those decisions, while not easy has served us well.
And I am very pleased that yesterday, we announced strong first quarter results and a five year outlook that demonstrates our operational and financial strength and our commitment to generating value for our shareholders.
Let's talk first about our Q1 results and then I'll provide some color on our five year outlook.
During Q1 2021, we executed our plan to maximize free cash flow and to reduce debt we.
We delivered adjusted funds flow of $157 million or <unk> 28 per basic share. This resulted in free cash flow of $70 million.
Which along with the Canadian dollar strengthening relative to the U S. Dollar contributed to an $89 million reduction in our net debt, we realized net operating netback of $29 80 per Boe.
Which is almost double the $15 19 per BOE realized in Q4 2020 production.
Production during the first quarter average 78800 Boe per day, 81% oil and Ngls and Thats up 12% as compared 70475 Boe per day in Q4 of 2020.
The increased production largely reflects the resumption of drilling activity in the Viking in Eagle Ford, which began in the fourth quarter.
Exploration and development expenditures totaled $84 million and included the drilling of 46, five net wells with 100% success rate.
One particular highlight this quarter is our successful exploration well on our peace River Clearwater play, which sets up follow up activity later, this year and I'll expand on that a few minutes.
As a result of our operational momentum and the strength in commodity prices, we have announced an increase in both our production and capital spending guidance. This will position our business for continued strong operating performance and free cash flow generation going forward, our focus on disciplined returns based cash.
Total allocation is enabling us to generate over $250 million.
A free cash flow this year.
We are now forecasting 2021 exploration and development expenditures of $285 million to $315 million up from $225 $275 million, which was set in a $40 U S to $45 U S pricing environment.
The additional activity will largely occur in the fourth quarter and will be allocated across our portfolio.
Our revised production guidance range of 77070, 9000 Boe per day up from 73 to 77000 Boe's per day, approximately 75% of our total capital program will be directed to our light oil assets in the Eagle Ford and Viking. In addition, we are very excited.
To kick off our heavy oil program in July including follow up activity on our northwest Clearwater exploration discovery.
And we plan to drill two wells from the Pembina Duvernay as we hold our acreage and advance the play.
As some of you may recall, just over one year ago, we executed a strategic agreement with the P value <unk> settlement in the Peace River area that covers 60 sections of land directly to the south of our existing seal main operations.
At the time, we identified significant potential for this exploration play targeting the Spirit River formation, a clearwater formation equivalent.
Our initial exploration well was drilled during the fourth first quarter and has shown promising results with a 30 day initial production rate of 175 barrels per day from only two laterals.
With this early success, we are planning up to six additional Clearwater multilateral wells for the second half of the year across our acreage position, we estimate that over 100 sections of our lands are perspective for Clearwater development.
And with over a decade of experience in heavy oil exploration and multilateral development display aligns very strongly with our core competencies.
So I will now turn the call over to Rob to discuss our balance sheet and risk management.
Thanks, Ed and good morning, everyone as Ed mentioned, we made great strides during the first quarter to enhance our liquidity as we reduced our net debt by $89 million.
As of March 31, 2021, we had $401 million of Undrawn capacity on our credit facilities, resulting in liquidity net of working capital of $381 million.
These facilities are not borrowing base facilities and do not require annual or semiannual reviews at current commodity prices, we expect to increase our financial liquidity to over $550 million in 2021.
Our long term notes, which total U S $900 million of comprised of two outstanding issues.
One of U S $400 million tranche, due 2024, and our second U S $500 million tranche due 2027 with our continued focus on deleveraging, we expect our liquidity and leverage ratios to improve over time now.
Now turning to risk management, we maintain a consistent approach to risk management and marketing utilizing various financial derivative contracts in crude by rail to reduce the volatility in our adjusted funds flow for the remainder of 2021, we have entered hedges on approximately 47% of our net crude oil exposure.
Largely ULA utilizing a three way option structure that provides WTO price protection at U S $45 per barrel with upside participation to U S $50 per barrel.
We have also <unk>.
W 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 55% of our expected 2021 heavy oil production at <unk> to WCS.
Differential of approximately U S $13 per barrel.
For 2022, we have entered into hedges on approximately 33% of our net crude oil exposure utilizing a combination of swaption at U S $53 50 per barrel and a three way option structure that provides price protection at U S $50 to $5 per barrel with upside participation to approx.
$65 per barrel.
We also have WCS differential hedges on approximately 35% of our expected 2022 heavy oil production at a double UTI to WCS differential of approximately U S. $12 50 per barrel full details of our hedge program can be found in our Q1 financial statements and our.
<unk> on our website and with that I'll turn the call back to Ed to discuss our five year outlook. Thanks, Rob along with our Q1 results yesterday, we also announced a five year outlook, which demonstrates our operational and financial strength in the U S $55 <unk> pricing environment. This play it all starts with our disciplined and <unk>.
Turns based capital allocation philosophy and has been constructed to maximize our free cash flow improve our leverage ratios and enhance returns to shareholders, assuming a constant U S $55 per barrel <unk> price, we will target capital expenditures at less than 70% of our <unk>.
Adjusted funds flow, while optimizing our production in the 80000.
To 85000 BOE per day range, we project annual capital spending of approximately $400 million.
From 2022 to 2025 and expect to generate over $1 billion of cumulative free cash flow over the five year period.
Our leverage ratios are expected to improve materially as we target a net debt to EBITDA ratio of under one five times.
And throughout the planned period, we will continue to monitor our leverage position and assess market conditions to determine the best methods or combination thereof to enhance shareholder returns. These could include share buybacks or dividend or reinvestment for organic growth.
For additional details I would refer you to our updated Investor relations presentation available on our website. The key message that I would like to leave you with is that our business is strong and we have a robust plan in place to deliver meaningful free cash flow and enhance shareholder returns during the plan period.
We are off to a great start in 2021, and we look forward to continuing to communicate with you as we execute on our plans for value creation 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 to.
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We will pause for a moment as callers join the queue.
The first question comes from Patrick O'rourke with <unk> capital.
Please go ahead.
Hey, guys. Good morning, I'm, just curious in terms of the.
Clearwater equivalent our Spirit River I think as Youre, calling it here. Thank you Charles.
And the new slide deck, you have our presentation that shows kind of the production profile over the five year plan.
And I'm just kind of curious in terms of.
I appreciate that it's early and you only got one well, but just kind of what scale and scope youre thinking about for that particular asset.
What percentage of heavy oil in there it will make up at the end of the five years.
Yeah, well, it's early on the Clearwater discovery that we've announced but we did show a 175 barrels per day on two legs. So we are going to immediately offset that and expand the activity. This year to drill six up to six additional wells, which is part of the reason for our capital raise in our production.
<unk> raised having said that a number of those are appraisal wells further to the north three or four in the P value area, specifically and we will start to boost production. So what we've said about the scope and scale of this resource is that's it.
It's approximately 100 sections of prospective area for US we believe right now, but it's early in terms of our mapping and understanding.
So that if a half of that works at 50 sections and <unk> got four to six wells a section, but it's early on what that will look like.
Hundreds of wells.
Having said all of that there is no clear water development explicitly in our five year plan. What we've done is we've said that there is some heavy oil growth in there for sure, it's 70% Eagle Ford and Viking light oil, but with 25%, 30% in heavy oil, but thats our traditional.
All known bankable heavy oil.
Asset set and Lloyd in Peace River proper that we can go ahead and developed now knowing what we know now so if Clearwater works and works as well as we think it could it would do one of two things it would substitute existing activity and make our returns look much much higher and better.
Because of the high rates of return are very fast paybacks on that play or it would be.
We could offer supplemental.
Growth in free cash flow without spending any more capital.
So I think I'd just leave you with that right now it's early though Patrick on Clearwater and what it all means but it's very exciting that we and other operators see potential to the northwest it's not just going to be a marten Hills Nipper C development, that's coming to the northwest and we're very excited about it.
Yes, and I agree with you Mike Hilton Embassy analog is very exciting.
And another way in terms of like infrastructure capacity, there or anything that you would have.
Going to become meaningful.
Well, that's our base of operations and that's where the company was founded in Peace River really when you look at the history of the company. So we have a lot of infrastructure our operations basis, they're both at Harmon Valley and the debates that we run with our main battery at seal.
So we have a lot of infrastructure, both human and.
And the infrastructure in place.
We will truck the oil.
We're very good at gas conservation up in that area as well as we've demonstrated that opened up in the main part of our field. So we don't have any infrastructure constraints or egress constraints.
Out of the area. It's one of the reasons, it's such a nice layer on to what we do.
No we're good on infrastructure up there.
That's great. Okay. Thanks, guys.
The next question comes from Jason Mandel with RBC capital markets. Please go ahead.
Hi, guys Nice performance I. Appreciate you taking the question as well just wanted to spend a moment on the five year plan.
Looking to spend the spend sort of step up the spending from I guess this year about 300 to kind of a base rate of 400 over the next few years do we think about that spending level as I don't know more or less flat over those four years at $400 million or is it going to be rising from the 300 over time too.
The average 400, if you follow what I'm asking yes. It is a bit of a ramp up to 400, and maybe we'll go to <unk> 10 or <unk>.
We're not sure yet, but the annual plan will be set here in September but I would say 400 is a good average number across those years, but we'll have to ramp up to it and we're starting that ramp up right now with the capital increase.
That we're talking about along with the production increase and what I'd say about that in part of the driver here is we always said that we were going to look at where we were during breakup.
And that we were also pointing to high end of current guidance at $275 million to deliver high end of production guidance of 77000 barrels a day.
What we saw from Q4 to Q1 was a nice rebound on production of 78000 barrels a day and that was with a historic.
Weather event in Texas that while people say, we benefited from pricing.
Actually we would rather not have that storm and delivered some fantastic additional barrels from from <unk>.
Eagle Ford, So, it's with that Theres, a little bit more activity coming into Eagle Ford Theres more Clearwater coming into our plan. So now we're up to 300, maybe you see next year ago to $3 50, and then we move to 400 beyond that but I think it's in the IR deck youll see the numbers that our notional.
At this point, but you will see that ramp up from the 300 to date $3 50 next year to 410, I think for the last two or three years plan, but I would say its scoping right now, but it's a good shape and thats a good outline for our future absolutely 100% committed to it.
Okay, that's great really helpful and then.
A similar question on the production getting from the high <unk> now into the low <unk> on a production basis that was sort of given for the for that that rough plan. When do you kind of think that youll be I don't know.
80, plus on a run rate basis is that by late late this year and then just the last follow up question at the higher level of production.
Can you give us a sense as to what the sort of new level of maintenance capital spending would be thanks, guys. Yeah. I think we'll see an exit rate now thanks to what we're doing at around 77000 barrels a day that compares to 70000 barrels per day last year and so I just talked about the balance of the nice rebound we had from 70 to 78, if we exited 77.
<unk> thousand barrels per day, and we typically have a strong Q1 as we always do you could very quickly see us to moving to the bottom end of the range of that 80% to 85000 barrels.
Good day at the early part of our five year plan and I believe those numbers again are outlined in the IR slide I don't have the number of the slide in front of me, but production should be very close to 80000 barrels a day. If we're exiting this year at 77 strong Q1, and if we exceed <unk> $55 plus.
There is no reason, we shouldnt get into that range much more quickly.
And then on the question around sustaining capital I think we plan to hold that 80% 85 pretty flat because this is not a growth plan here remember we came down through the pandemic. So.
This is not a growth plan I would look at something like $375 billion as sustaining capital to keep us in that 80 to 85000 barrel a day range.
So the 400 kind of drives us up there, but you don't need it stable, but I would look at this as a new optimized faster deleveraging.
Maximization of free cash flow plan still has our mantra has been.
But where the assets and the capital efficiencies want to take the business from an optimization standpoint.
That's great. Thanks, so much for the detail appreciate it.
The next question comes from Phil Skolnick with eight capital. Please go ahead.
Yes. Thanks.
How would we how would you think about it.
The timing you're talking about 2022 and to the end of the five year outlook that you can look at dividend.
And share buybacks and organic growth how do you think about those three buckets in terms of free cash flow.
And what kind of a payout ratio I'm sure. It's too early but yes. Your point, maybe have some kind of high level thoughts on that as well.
Yeah.
<unk> been doing a lot of thinking about that and clearly 2021 is still going to be primary focus on deleveraging.
And so I would look to all of that $250 million to $300 million of free cash flow on strip today moving to the balance sheet and we've got to stay steadfastly focused on that objective in the near term that moves us down to a pretty interesting place, though with respect to our liquidity our financial liquidity moves.
To $5 $50 million to $600 million.
And we then have.
No issues with.
We look ahead to the 2020 for bonds we.
We can.
Manage our way through that in a timely and prudent manner. So in 2022, if we see the macro environment, where we are now Phil where were substantially above $55. I think you could see us start to implement a program that up to 55.
All of that free cash flow moves to the balance sheet, but if we're in the environment. We're at today and we have surplus free cash flow to the plan and that is when you would see us if we're trading where we are right now at three times EBITDA DAC app than I would.
Think we would look strongly to share buybacks, but we're also with our board, we're being challenged quite a bit around at what point as long as we believe this future why don't we consider layering on.
Dividends starting sooner rather than later, so we will have that debate and then of course, we've got tremendous growth potential in the company. We've got tremendous tenure inventory in our core plays we've got the Duvernay, which is not really included in any of those numbers and we've got the Clearwater, which we're not including any of those <unk>.
<unk> got some other projects that are not included in any of the numbers tremendous organic growth, but the macro environment the market sentiment and we ourselves are not ready yet to contemplate real growth.
In our.
Our asset base beyond 80 to 85000 barrels a day.
But that would also be considered because the returns are so strong and as I said, we allocate to our strongest we've talked but I would look at it that way Phil.
Free cash flow to the balance sheet in the near term through 2021, if we see greater than 55, <unk> next year look for some shareholder friendly initiatives coming sooner rather than later.
And then.
Let's get to the longer term debate on whether we grow or not beyond 80 to 85 later.
Okay perfect just one last question.
I guess then.
Given the amount of.
Organic growth potential in the Duvernay and Clearwater not being included in our five year outlook.
Yes, then you don't really see a need to do any kind of acquisitions, even if tuck ins.
Yes, I would say, we're always looking at acquisitions, when we always do tuck ins, we've probably done 10.
Inorganic deals this year acreage acquisitions acreage swaps, we've added over 100 net locations.
With a substantial amount of value a lot of that from the Viking some of it's in our core areas of heavy oil, but there are still people who are positioning out of those areas. So we will always do the tuck ins and little bolt ons that are circa $5 million to $10 million of.
Of cash every year, our capital every year, we will always do that I think in terms of mergers. It would have to be something that would be substantially accretive to our cash flow. It would have to compete for capital, which is a very high bar.
When we're looking at 15 to $16000 flowing barrel capital efficiencies for the longer mid to longer term. This is a very high bar to compete with so we see a lot of it going on I've always been an advocate of consolidation we've done one ourselves with raging River and <unk> coming together and I think that was prudent from a deleveraging standpoint.
But the company in the position in our asset base is in a different place now and we would just have to see something that made a tremendous amount of.
Industrial logic and accretive to our shareholders to even contemplate going there.
Okay, great. Thanks.
Yes.
Okay.
This concludes the question and answer session.
I would like to turn the conference back over to Brian Ector for any closing remarks.
Thanks, <unk> and thanks, everyone for participating in our first quarter conference call have a great day.
Sure.
This concludes today's conference call you may disconnect your lines.
For participating and have a pleasant day.
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