Q2 2021 Crescent Point Energy Corp Earnings Call

[music].

Good morning, ladies and gentlemen.

My name is Michelle and I will be your operator for Crescent point Energy's second quarter 2021 conference call.

This conference call is being recorded today and will be webcast along side with a slide deck, which can be found on crescent point's website homepage.

H the.

The webcast may not be recorded or rebroadcast without the express consent of Crescent point energy.

All amounts discussed today are in Canadian dollars, unless otherwise stated.

For complete financial statements and management's discussion and analysis for the peer.

At June 30th 2021 were announced this morning and are available on the Crescent point SEDAR and Edgar websites.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session for.

<unk> errors of the investment community if.

If you would like to ask a question. During this time simply press Star then number 1 on your telephone keypad. If you would like to withdraw your question Press Star 2.

During the call management may make projections or other forward looking statements regarding.

For my mature events or future financial performance.

Actual performance events or results may differ materially.

Additional information or factors that could affect crescent point's operations or financial results are included in Crescent Point's most recent annual.

Information for them, which may be accessed through the crescent point, SEDAR or Edgar websites or by contacting Crescent point energy.

Management also calls your attention to the forward looking information and non-GAAP measures sections of the press release issued earlier today.

I will now turn the call over to Craig <unk>, President and Chief Executive Officer at Crescent Point. Please go ahead, Mr breaks out.

Thank you operator, I'd like to welcome everyone to our Q2.2021 conference call with me today are Ken Lamont, Chief Financial Officer, and Ryan <unk>.

Total operating officer.

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

Before I jump into our Q2 results I'd like to rewind a bit and set the table for today's call.

3 years ago, we set in motion an ambitious plan to transform the company with a focus on strengthening the balance sheet.

And enhancing sustainability.

Since then we have successfully implemented a disciplined capital allocation framework to guide our decision, making process and provide transparency to our investors stream.

Streamlined our asset base to build a portfolio of high return long life assets and reduce our cost structure and decline rate to enhance our excess cash flow.

Phil.

Because we made these transformative improvements we successfully met the challenges other pandemic and capitalize on opportunities as commodity prices improve we.

We believe that adhering to these principles will be equally important in times of more bullish outlooks like we've seen recently.

We remain committed to our principles during this.

Generate rising commodity prices, which has resulted in significant excess cash flow generation.

Our capital allocation framework, we have set clear priorities for how we intend to use the excess cash flow to enhance our balance sheet strength, while also looking to increase shareholder value.

At the beginning of the quarter, we closed our cable Kebob acquisition, which included.

Period of a cash purchase price of approximately $670 million.

Since the closing of this acquisition, we successfully reduced our net debt by approximately $360 million and plan to continue to prioritize debt reduction to achieve our optimum leverage targets.

Assuming wty prices of U S 65 to $75.

<unk> for the remainder of the year, we expect to generate approximately $675 million to $775 million of excess cash flow in 2021.

As we gain line of sight towards our leverage target of 1 times debt to cash flow, we plan to gradually increase our focus on returning additional capital to shareholders.

We see great value in being transparent with the market.

Markets about our capital allocation priorities and our overall framework, which we've laid out in detail in our corporate materials found on our website.

We believe sharing this level of insight provides greater clarity and predictability to investors.

<unk>, we're also providing greater transparency into how we manage the risk and opportunities we face including through.

Through the disclosures in our recently released sustainability and Tcf day reports are strong governance practices progressive social initiatives and ambitious environmental stewardship targets demonstrate our commitment to ESG performance.

In fact, our progress has been noted externally with a recent improvement in MFS Ci ratings shifting.

Shifting from a triple B, 2 and 8 I'd also note that this improvement was issued prior to the release of our sustainability report, which included enhanced targets compensation framework and capital allocation processes all centered around ESG.

Before I pass the call over to Ken I'd like to make a quick comparison of how the business has significantly.

Improved since 2018, which is the most recent period when WTO last averaged approximately $65 U S per barrel.

During that year, the company's reinvestment rate exceeded 100% with no excess cash flow available to enhance shareholder value. However, through our team's execution and concerted efforts to enhance discipline.

Focus and cost structure, the business now generate significant excess cash flow at a similar price level with a reinvestment rate of just over 50%.

This improvement highlights the cost savings we have delivered the enhanced net backs we have achieved through our A&D efforts and the positive impact from other efficiencies we have realized.

We will remain disciplined.

No matter the commodity price environment, and we will continue to move the business forward to further enhance our key pillars of balance sheet strength and sustainability I'll now turn the call over to Ken to discuss our financial results.

Thanks, Craig for the quarter ended June 32021, adjusted funds flow totaled over 387 million for 60.

<unk> per share fully diluted driven by a strong operating netback of approximately $40 per Boe.

Our second quarter development capital expenditures totaled $88 million, resulting in significant excess cash flow generation net.

Net income totaled $2.1 billion for the quarter ended June 32021, primarily.

Primarily resulting from a $1.9 billion after tax reversal of a noncash impairment due to an increase in forward commodity prices in the independent engineering price forecast.

Our second quarter net income also included a gain on sale of over $70 million related to our previously announced disposition of our southeast Saskatchewan assets.

Adjusted net earnings for the quarter were $118 million or <unk> 20 per share.

Net debt as at June 32021 was approximately $2.3 billion, including approximately $670 million of cash.

Consideration paid for the acquisition of the <unk> Duvernay assets, which <unk>.

April 1.

As Craig highlighted earlier, we successfully reduced our net debt after the closing of the cable other acquisition by approximately $360 million during the quarter for over half the cash purchase price of the acquisition.

We achieved this reduction through significant excess cash flow generation.

Those on the proceeds of our previously announced disposition pace.

Based on current commodity prices, we expect to pay off the balance of the cash purchase price through the remainder of the year.

During the second quarter, we also repaid senior note maturities totaling approximately $185 million.

Our next senior note maturities totaling.

And for $125 million.

Were not due until the second quarter of 2022 with significant liquidity in place through our current hedge our current credit facilities.

We continue to be disciplined in our hedging strategy to protect against commodity price volatility over 40% of our oil and liquids production.

<unk> net of royalty interest is hedged through the second half of 2021.

We also have approximately 20% of our 2022 production currently hedged and we will remain disciplined in our approach to layering on additional protection in the context of commodity prices.

I'll now turn things over to Ryan to provide some operational highlights Brian.

Brian Thanks, Ken our second quarter production averaged 148641 Boe per day comprised of over 85% oil and liquids and due to our strong second quarter production.

<unk> 2021, reactivation volumes and some base operational outperformance, we are increasing our 2021.

Production guidance by 2000 BOE per day to 130 to 134000 Boe per day.

This is the first quarter that reflects the impact of our recently acquired cable <unk> Duvernay assets and includes production from approximately 15 wells that were recently completed in the play these wells continued to fluids.

<unk> significant initial production rates that are meeting or exceeding our internal type wells with a high liquids weighting of over 80%.

Just on Shell's capital costs, we expect these wells to generate competitive full cycle returns and we are focused on further enhancing these returns by pursuing a conservative development plan, while also leveraging our.

Non annual shall expertise to optimize overall efficiencies.

We are excited to mention that we recently commenced drilling our first 5 well pad in the <unk> Duvernay with initial production rates expected at the end of this year.

Within our southeast and southwest Saskatchewan resource plays we continue to focus on low risk high.

High return infill drilling in the <unk> and the advancement of our decline mitigation programs to further enhance long term excess cash flow and sustainability. During the first half of the year, we converted approximately 55, producing wells to water injection well and remain on track with our plan to convert a total of over 130.

All 5 wells to injection in 2021.

We are also advancing other decline mitigation programs and enhanced oil recovery techniques, including the continued development of our polymer floods in southwest Saskatchewan.

Last month, we released our third annual sustainability report outlining.

<unk>, our latest progress and ongoing commitment to strong environmental social and governance performance throughout our operations. The 2021 sustainability report highlights our increased target for emissions intensity reduction to 50% by 2025 as well as a 70% reduction in absolute methane emissions.

In each case relative to our 2017 baseline and P.

Proud to report that we remain on track to meet these targets and continue to assess and pursue new opportunities to further reduce our emissions.

We also introduced the target to reduce our inactive well inventory by 30% over the next 10 years excluding.

And the impact of the previously announced disposition, which significantly reduced our inactive well inventory and lowered our corporate asset retirement obligations by over $220 million.

To help achieve this target we anticipate the safe retirement of approximately 400 wells this year.

In addition.

Addition, we will also announce the development of new freshwater use targets, which are expected to be released later this year.

In order to support all of these initiatives, we are committed to allocate 3% to 5% of our annual capital budget to environmental stewardship moving forward.

Finally, again I would like to commend our employees.

<unk>, particularly our field staff for their continued commitment and dedication to safe operations and even more specifically to our K Bob field staff for a very safe and successful integration of the duvernay assets into our organization.

I'll now pass it back to Craig for final remarks, Craig Thanks, Ryan our second quarter results continued.

But to demonstrate our commitment to our core principles of balance sheet strength and sustainability. Our recent strategic A&D activities are expected to deliver meaningful improvements to the business.

By enhancing our excess free cash flow generation accelerating our deleveraging goals, improving our cost structure, increasing our overall scalability and.

And reducing future decommissioning liabilities.

As Ryan mentioned based on our continued operational outperformance and the reactivation of some volumes that were previously shut in during a lower price environment. We are increasing our 2021 annual average production guidance to 130 to 134000 Boe per day.

Our development capital.

<unk> expenditures remained unchanged within the range of our prior guidance, allowing us to maximize excess cash flow generation and further enhance shareholder value.

We anticipate generating approximately 675% to $775 million of excess cash flow in 2021, assuming WTS prices of U S 65 to 75.

Dollars per barrel for the remainder of the year.

Plan to continue allocating excess cash flow towards our balance sheet. While also evaluating the return of additional capital to shareholders in the context of our capital allocation framework and leverage targets.

Following that we will assess the allocation of any remaining excess cash flow to other value enhancing opportunities.

As per our capital allocation framework, including potential share buybacks organic or inorganic growth opportunities long term initiatives or additional debt reduction.

I'd like to thank all our stakeholders for their continued support and our employees for their hard work and execution of our business strategy I will now open the call for questions from the investment.

Community operator, please open the call.

As a reminder for members of the investment community. If you would like to ask a question. Please press Star then the number 1 on your telephone keypad.

If you would like to withdraw your question Press Star 2.

We will pause for a moment to compile the Q&A roster.

Okay.

Your first question comes from Travis Wood of National Bank Financial. Please go ahead.

Yes, good morning, everybody and congrats on what looks to be a good quarter.

Craig you hit it on your opening remarks.

Thank you for the execution over the last several years.

My question is around this.

Kind of the capital or for more so the free cash framework and you laid out in pretty good detail and have some some slides highlighting exactly.

Or do you want to allocate the free cash, but more specifically with debt.

Very much accelerated free cash profile with the help of the commodity.

Balance sheet compressing probably much quicker than.

And you guys had expected.

We see.

That return.

For the holders, whether it's a dividend growth back into the equation.

Or or a buyback do we see that in 2021 or do you want to play more of a wait and see approach around how that free cash gets allocated.

Patriotic Cynthia Thanks for the question so it's Craig here.

To share.

1 other things, we're really excited to get out to the market last year was our capital allocation framework and to your point, it's a very transparent view of how the management team and the board of Crescent point think of allocating capital.

So the first step that you see within that framework is our maintenance capital budget.

We go through our budgeting process.

Here, we will provide some color on what 2022 looks like later on.

Later in the year and then the next priority is down on that framework, our balance sheet strength.

And bringing back that base level of dividend.

The other thing I would say is we've been very transparent with the market.

To what our overall leverage targets are we want to be 1 times.

<unk> cash flow at $55, so that would imply at the current company size that would imply an absolute debt somewhere in that range of 1.3 to $1.4 billion.

However, travelers keep in mind that we don't absolutely need to be at that leverage target before we bring back a dividend, but we certainly need to have some sightlines into that so.

That's as far as the exact timing.

How things on that front will play out I can't comment on that but.

Look for us to stay very disciplined towards that framework and then as you look beyond like I've said before balance sheet strength and core dividend then look for us to allocate based on on other priorities again.

No. It's all returns based all competing on returns and whether that's share repurchases or inorganic or organic growth or further debt repayment. That's how we think through things. So.

I don't know, Ken or Brian if you had anything else.

Thanks for the question Travis.

Okay.

Again, it's Greg.

Okay.

Your next question comes from Jeremy Mccrea of Raymond James. Please go ahead.

Hi, guys I've got a couple of questions here.

The first 1 is just it's been a busy year with you guys with M&A and I'm wondering if.

If you're probably done for the meantime, or if you're still seeing lots of deals come through the office here versus last year.

And maybe what.

What youre looking for in terms of different M&A deals in.

And the second question is just in terms of the reactivation of some wells and bring on more production is there more reactive.

Activations to.

Possibly bring on as well, even though the prices continued to hold for you to hold at these prices.

Thanks for the questions Jeremy maybe what we'll do is I'll take the first 1 and then Ryan can give you some color on reactivation on the second 1.

As far as as A&D.

If.

On the day side I think we've got a good strategic disposition here. It made a lot of sense for us to move that often asset that really doesn't fit in what we're trying to build and at the end of the really cleaned up about 25% of our.

Aro liabilities on that.

Disposition as far as acquisitions.

Other things that come in front of us.

It makes sense within the portfolio that we're assembling and they improve us in the context of 1 of those key pillars of our strategy that we've talked to you about over the last few years, 1 being balance sheet strength for the other being sustainability if it improves us in the context of 1 or the other of those and certainly we would look at layering that in.

To our organization.

So we'll continue to evaluate those on a 1 off basis as.

They present themselves and then as far as dispositions.

I would say, we will always look to optimize the bottom end of our portfolio I think what we did here with the South East SaaS disposition was a good.

That flow that that being said don't expect this jeremy to get any smaller here than than where we are at the current 130000 Boe per day, and then as far as.

Go ahead.

So I guess just kind of as a follow up you've been talking about those 2 pillars here are you seeing.

Just.

<unk> opportunity is still in the current market.

So.

<unk> opportunity came about are you still seeing them.

Just has anything come through the door that potentially look exciting for you guys or is it still.

Just kind of 1 offs vary.

Just 1 hospital.

So Jeremy there are certainly things out there I would say there is there is.

Things out on the market now.

Well certainly.

We will look through and revisit and if it makes sense for us to do then we would act on that again, it's got improve us in the context for 1 of those so.

So we'll see how they come off.

Individually.

Yeah.

No.

As far as the second question I don't know Ryan do you want to add some color on that yes.

Hi, Jeremy.

We pretty much brought all of our shut in volumes back on.

Communicated in the past week.

Wanted to see.

<unk> higher.

Level of commodity prices, which we have here. So so we need to call. We made the call to bring back on pretty much all of our previously shut in volumes, if we see sustained higher pricing again, there might be.

<unk> more barrels to bring back on but it's very insignificant.

Compared to our total production base.

Okay perfect. Thanks, guys.

Thanks, Jeremy.

Okay.

Ladies and gentlemen at this time I will now turn the conference back over to Craig break Sir. Please go ahead Sir.

Thank you for joining our call today, if you have any questions that were not answered.

Please call our Investor relations team at your convenience thanks, everyone.

Crescent point Investor Relations Department can be reached at 18557676923.

Thank you and have a good day.