Q3 2021 Baytex Energy Corp Earnings Call
Thank you for standing by this is the conference operator, welcome to the basics energy third quarter 2021 financial and operating results conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
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I would now like to turn the conference over to Brian Ector, Vice President capital markets. Please go ahead Sir.
Thank you Claudia and good morning, ladies and gentlemen, and thank you for joining us today to discuss our third quarter 2021 financial and operating operating results.
Today, I'm joined by Ed <unk>, our President and Chief Executive Officer, Rod Gray, our executive VP and Chief Financial Officer.
Lundberg, our chief operating and sustainability Officer, Kendall Kendall Arthur Vice President heavy oil Chad.
Tell me Cogs, VP finance and Scott Lovett, our VP 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 advisory 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.
Thanks, Brian and good morning, everyone I'd like to welcome everybody to our third quarter 2021 conference call I'm excited to highlight the momentum we continued to build during the third quarter, we delivered strong operating and financial results and we advanced our exciting new Clearwater play in northwest, Alberta with the two strongest initial.
Right wells in the play.
I'll expand on our Clearwater development in a few minutes.
As you will recall earlier this year, we made a commitment to maintain capital discipline and maximize our free cash flow. We also made a commitment to allocate 100% of our free cash flow to reducing our net debt and strengthening our business.
And I am very pleased to say that is exactly what we are doing.
During the third quarter, we generated $101 million of free cash flow, resulting in year to date free cash flow of $284 million.
This free cash flow has been applied against our net debt and our business today is that much stronger as a result.
At current commodity prices, we now expect to deliver over $400 million or <unk> 71 per basic share of free cash flow in 2021.
This represents a record level of free cash flow per bay tax and is accelerating our debt reduction efforts. We now have line of sight to reaching our initial $1 $2 billion net debt target during the second quarter of 2022.
We have also taken proactive steps to reduce our outstanding long term notes, which lowers our financing cost and increases our adjusted funds flow Rob will touch on this in a few minutes.
During the quarter, we delivered adjusted funds flow of $198 million or <unk> 35 per basic share and generated net income of $33 million or six cents per basic share we realized an operating netback of $39 per Boe, which is up from $34 per Boe.
We realized in the second quarter.
Production during the quarter averaged 79900, boe's per day, 82% oil and Ngls and reflect strong performance across our light and heavy oil assets in Canada with volumes up 2% over the second quarter, while our Eagle Ford volumes were lower due to the number of wells brought on stream.
Exploration and development expenditures totaled $94 million and included the drilling of 47 net wells last quarter, we highlighted our P. Vine lands in northwest, Alberta, where we are targeting the spirit River formation, a clearwater formation equivalent.
In August 2021, we executed a second strategic agreement with the Pea behind Metis settlement that covers an additional 20 sections, bringing our total tivo and acreage to 80 contiguous sections.
We currently have five producing wells on our <unk> acreage and production has increased from zero at the beginning of this year to approximately 1900 barrels per day currently.
Our three eight lateral wells continue to outperform type curve assumptions and two of these wells rank as the top initial rate wells drilled to date across the play.
At current commodity prices the Clearwater generates among the strongest economics within our portfolio with payouts of less than six months and it has the ability to grow organically, while enhancing our free cash flow profile.
We continue to progress our development plan, we are committed to drill four additional clearwater wells during the fourth quarter. We expect these wells to come on stream late 2021.
In addition, as part of our 2020 to plan. We are working with the people I may Tee settlement and are prepared to execute an expanded program of up to 18 wells to date, we have derisked 'twenty sections of land and pending further success. We believe the play holds the potential for greater than 200 locations.
In addition to our Clearwater development, our heavy oil program kicked off during the third quarter and included drilling two net blue Sky Blue Sky Wells at Peace River and 14 net wells at Lloyd Minster on.
On the light oil side, we brought 37 net Viking wells and three four net Eagle Ford Wells on stream.
In addition, we drilled two 100% working interest wells in the Duvernay and initial flow back rates are very encouraging.
Our operational execution was excellent across our entire portfolio and sepsis sets us up for strong fourth quarter results.
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, we have taken proactive measures to reduce our debt levels. Our net debt, which includes our credit facility's long term notes and working capital totaled 156 billion at September 32021, which is down from 185 billion at December 32020 as of September 32021.
At $471 million of Undrawn capacity on our credit facilities, resulting in liquidity net of working capital of $454 million.
During 2021, we have repurchased and canceled U S $200 million of the 565% long term notes.
Due June 2024. This represents 50% of the original U S $400 million outstanding and includes the U S $85 million repurchased and cancelled substitute subsequent to quarter end.
These measures demonstrate our commitment to reduce leverage and drive our cost structure lower we expect to exit 2021 with net debt of approximately $1 4 billion, which represents a very healthy net debt to EBITDA ratio of one seven times at current commodity prices, we expect to reach our initial $1 2 billion.
Net debt target during the second quarter of 2022 to support our business, 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 for 2022, we have entered hedges on approximately 42%.
<unk> of our net crude oil exposure utilizing a combination of three way option structure that provides price protection at U S $58 per barrel with upside participation to approximately $67 50 per barrel. We also have a swaption at U S $53 50 per barrel.
We also have hedges in place on our Canadian light and heavy oil differential exposure full details of our hedge program can be found in our Q3 financial statements and are available on our website and with that I'll turn the call back to Ed. Thanks, Rod and let me wrap up with a review of our 2021 guidance and five year outlook as a.
<unk> of our strong operating performance through the first nine months of 2021, we are tightening our production guidance guidance to 20 to $79500 to 80000 Boe per day up from 79000 to 80000.
<unk> per day previously and as we have discussed we are intensely focused on maintaining capital discipline. The Clearwater has emerged as one of the most profitable profitable plays in North America, and our 2021 appraisal program has delivered exceptional results as a result, we will drill four additional clearwater wells during.
The fourth quarter. This includes two wells on the same path as our highest rate well drilled to date and one appraisal well on the recently acquired 20 sections of land to the north.
Accordingly, we are tightening our forecast exploration and development expenditures range for 2021% to $300 million to $315 million as compared to $285 to $315 million previously.
We are also fine tuned several of our cost assumptions, including our interest expense guidance, which is 3% lower due to the early repayment of long term notes and our lower net debt.
Our 2022 capital budget is expected to be released in early December following approval by our board of directors, we will update our five year plan at that time to include drilling opportunities on our Clearwater labs are.
Our five year outlook from 2021 to 2025 highlights our financial and operating sustainability and meaningful free cash flow generation through this plan period, we remain committed to a disciplined returns based capital allocation philosophy under constant U S $65 per barrel and U S.
$75 per barrel wty pricing scenarios, we expect to generate cumulative free cash flow of approximately $2 billion and $2 6 billion respectively.
Our business is strong and we have a robust plan in place to deliver meaningful free cash flow throughout the planned period, we will 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.
<unk> reinvestment for growth.
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 join the question queue. You May Press Star then one on your telephone keypad.
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Oh.
Our first question is Trump feel this call Mika with eight capital. Please go ahead.
Yeah. Thanks, good morning.
Yeah, a few questions just on your last comment with respect to returns to shareholders.
Hello.
How are the discussions going your thoughts around dividends versus buyback, but also.
In terms of growth because you are having this accelerated debt reduction and yeah. You are a company that can add more volumes and not really impact.
The overall macro environment, which is.
Obviously, so kind of you know what are your thoughts on all that.
Yeah, Phil I think.
We've been very clear on our framework at least verbally and we haven't come out with an update to our five year plan with maybe some more specifics, but what we've said is 100% of our free cash flow in the at least in 2021 is moving to the balance sheet, we're paying down debt that will take us to $1 $4 billion of.
Net debt by year end and then early 2022 will drive our net debt to $1 2 billion.
Which is important to us we think we can do that by two Q.
And then at that point between $1 $2 billion and $1 billion. We've said that that is the place we need to be on our absolute debt levels, which is well within our one five times debt to EBITDA that would allow us to consider share buybacks dividends and our growth and what I've been saying and I.
Would continue to say that even today is if the market continues to trade as it is.
And we're trading at a four times enterprise value to debt adjusted cash flow our free cash yield is high it's still 20 plus percent.
The commodity prices are still strong we would be compelled to buy back some shares right and we want to do that.
We want to consider that strongly I think we're in the early innings of a rotation and we haven't seen we're in inning one.
Four times T.
<unk> doesn't get us real excited where historically, we've been a lot higher than that so theyre, an absolute or relative level those are still pretty attractive levels and when you look at our free cash yield it can't stay there at 20% our share price has to re rate than it has been but it's only been doing that on the basis of the commodity price rising up to 70 to 80.
So we're flexible right now in our thinking we need to watch the markets and all of those things I just mentioned and then at the time were at $1 $2 billion. We will have to look at where those considerations are and then make the call, but I would say at this point share buybacks come before dividends and then our long term.
Vision is to move to 10% to 15% returns with a combination of growth and <unk> dividend.
Okay perfect that's.
That's clear.
Finally, just with Cogs inflation could lead keep hearing more and more about it.
But given that you're both in the U S and Canada could you talk a little bit about what youre seeing on both sides of the border.
Which one maybe has more pressure.
Yeah, I think it's very germane to where we are in the cycle of starting to build out our programs and look at our cost structure and where we're going into 2022. So it's very critical to critical topic right now and we've actually made some decisions because we are seeing the early phases of.
<unk> hitting.
Hitting us I'd say the Bottomline answers, we're probably looking at 10% inflation on capital or between 5% to 10%, but having said that we've already made some decisions to level load our rig activity, which we felt was crucial.
We wanted to for example, the fourth quarter, we we've decided to drill four more wells two additional wells in the <unk>.
We're kicking off some other activity as well, we're moving to the high side of capital for 2021, but with high end of production.
And we're going to try and not only keep the rigs warm which is good for efficiencies, but importantly, keep the crews around right to Christmas and then bring them back right. After Christmas So theres not a massive gap there that's threatening not just the iron being warm, but the people and their willingness.
Just to come back into this a bit of a roller coaster industry. We've been on over the last five years. So we've done some things there as well as on the supply chain happy for Chad, Our chief operating sustainability officer to weigh in but we've been making decisions as we move towards <unk> <unk>.
Q and into next year right now to compare and contrast, with the Eagle Ford.
No. If you saw the marathon resolved but.
The efficiencies of what Theyre doing down there are so incredibly strong they announce their strongest capital efficiencies ever.
In the third quarter.
On the Eagle Ford specifically, so their efficiencies are offsetting whatever inflationary components. There are and there are certainly are with respect to fuel with respect to steel and other things, but they're more than offsetting those and still driving there do you see any cost down.
So we're seeing I would say.
Tremendous cost performance, there and we're trying to offset our cost performance our cost inflation in the same way here in Canada, it's challenging.
Ed do you want to yes, yes.
Yes, Thanks, Ed I guess, you know inflation is real and we're starting to see it and we're starting to see it as we contemplate the buildup of our 2020 to plan what did and didn't necessarily mention was just the relationship with our service providers and we believe then and want to ensure that we always have an honest fair and.
Transparent relationship with them through.
Through those relationships and in some case their law cases, theyre long term up to a decade with some of the rigs that we've had deployed to the company. The biggest thing they talk about and say that it can help is as Ed mentioned the level loading of the programs.
But the other thing is just having a long term plan in place and sticking to that plan and doing what we say with that they're able to go out and procure some of the parts and pieces that they might need the consumables that they need to be able to service us, but then most importantly is given.
Longer term forecast to the to the precious workers that are out there on a daily basis doing what they need to do to ultimately produce oil for us. So I think I would draw the conversation back to our relationships through those strong relationships really understanding the cost base and the cost drivers and then just really working with our server.
Providers to understand what that means to through 2022, and really trying to keep the efficiencies that we've gained through 'twenty one through through the capital plan.
Yes bottom line is we're prepared to hit the ground running with rigs and equipment people and we're planning for it then.
And we're ready to go fill.
Alright, Thanks, that's all for me.
Our next question is from Patrick O'rourke with ATB capital markets. Please go ahead.
Hey, guys. Good morning, I apologize I'm, calling from the car. So hopefully it doesn't sound like I'm on the Moon here, but just a couple of quick questions number one.
In terms of the Clearwater, and how that sort of you're sort of viewing that in terms of the five year plan.
Are you guys approaching it from a perspective, where you're looking at keeping sort of what you've put out there on the production front static in the Clearwater withdraw capital away from other plays.
Based on being probably the most capital efficient play in the portfolio and reducing capital spend.
Or are you looking at it from a perspective, where it's just stand up on its own obviously, you've got the fast payouts, there and its incremental capital spend and production.
Yeah, we don't have a 2022 plant approved yet Patrick but I think we're leaning towards.
Clearwater is an add on some of the things that we've got going in the heavy oil areas and Lloyd Minster in Peace River proper for example believe it or not are just as competitive and very very strongly attractive economics. So.
We haven't made the call yet, but in the five year plan as it is published in our IR deck, we show $370 million of capital.
And if you add on that's with no Clearwater, if you add on $30 million for Clearwater program, which is roughly.
The number of wells, we're talking about up to 18 Wells then that takes US to 400 million then you add on the inflation that we talked about at least on the components of the program that would inflate that takes us to $400 million to $420 million and we think we can generate more free.
Cash flow with that approach than.
Then stick.
Sticking to a more harvest mode on bumping some of that other high quality activity. So it's early days, Patrick but I would say.
We pointed to $400 million in our five year plan and I think that's kind of where we're headed.
And it will drive our production very strongly as well and cash flow and free cash flow because it is largely clearwater.
Okay extending to watch for that at the start of summer and then in terms of the debt repayment and sort of liquidity management liquidity management events that you've been having here.
Obviously theres been a focus on the 2020 fours. However.
However, you know through time, you guys have been pretty thoughtful about terming out in lottery.
And I just wonder how you think about that going forward with your free cash flow at least between now and when you might start returning a little bit to shareholders is the focus going to continue to be on those 2020 force.
Sure Patrick I can answer that it's rod I think.
Historically, we've seen those bonds traded at a slight discount, but I think they along with share prices and commodity prices have all moved up.
Our focus is probably going to stay on the 2020 fours, which is the near term maturity.
Our breakeven actually buying those in paying the premium right. Now is just two months and so and they become callable at par in June of next year. So I think the focus will be there unless we see something different in terms of the trading but ultimately so that 2020 fours or that U S $400 million, we don't see that being part of our long term structure.
Sure. So it wouldn't be refinancing around that but we will monitor markets to see if there is an opportune time to.
Once we do fix the balance sheet. Our view is that we can refinance those 2027 is at a much lower rate and so we will look for an opportune time to do that in term that out as well.
Okay. Thank you very much.
Okay.
Our next question is from Jeremy Mccrea with Raymond James. Please go ahead.
Yeah, Hi, guys.
Question relates to your clean water here, a little bit more I know you guys have been active in P line, but I see you guys just spud another clearwater, while quite a bit more north here again I'm just wondering when you look at your entire Clearwater potential acreage just from a lot of that you know the old legacy C. L assets like how prolific do you think the Clearwater.
Throughout all of this land like is there more than just keep mind here as well too and I'm just I was a bit of a follow up just given where oil prices are you know whats the strategy in terms of paying down debt as opposed to.
Now kind of a thing.
Hey, whether it's Sunshine here, and just and and going to accelerate a lot more of this drilling.
Yeah, well, let me take the Clearwater question, then we'll go to your further questions but.
In the four wells that we've announced that we're adding to the <unk> program. One of those was that spirit River well that's up.
Really quite close to our seal main battery up in up in the main field.
And then the other three are on P volume and that one well has been drilled completed and is being brought on stream. It's a six legere, it's been a little bit thinner rock.
It could be probably not the same type of permeability that we see in other areas, but I think what we're seeing in that area as it has the potential to be.
On the 150 barrel a day 150100 to 150000 Boe.
EUR, so kind of the core of.
Not necessarily Marten hills, but the average Clearwater well does about that and that's what we're hoping for it is very early up there. We have said we've got 100 to 120 sections of land that are attractive or potentially attractive for clearwater.
And what I'd say about that is just the southern area alone looks like it could grow to potentially 10000 barrels a day over time.
And then if you add some of the stuff in up north that might work. Some will work some won't I would say that's more in filling in holding flat our peace River business at around 13 to 15000 barrels a day so.
I wouldn't.
It's going to add a ton of value for sure, but it's early and we'll announce those results probably in early December we'll have an IP 30 around that time.
Okay.
And then.
The question about debt versus growth that goes back to the shareholder return framework that I just mentioned.
We think we can actually grow a little bit and generate free cash flow at the same time and that's the optimum for US right now in the cycle, where we are where the world is not quite yet clamoring for growth. It may well be by mid 2022, but it's not today nor is the market.
We have talked about a five year plan to put out a five year plan that does.
Optimize us in that 80 to 85000 barrel a day range moves us up to the top end of that range fairly quickly on pretty disciplined capital.
So I would say, we're going to stick to that plan until we updated in early December and Youll get a better feel potentially for where we are in that versus growth, but I think the two go hand in hand, and we want to to.
To deliver our five year plan and Thats the core of what we're trying to do.
Perfect. Thank you.
There are no further questions registered at this time I would like to turn the conference back over to Brian Ector for any closing remarks.
Alright, Thanks, Pardon me I'm, sorry, I'm, sorry, I'm, sorry, we actually have one more question sorry, if that's okay.
Let's take one more question. Please thank you Sir it's from Josh at younger from buys them. Please go ahead Sir.
Hey, guys.
Wanted to ask two quick things one on the Eagle Ford It sounded like there were fewer wells that came online and that drove a.
Slightly lower volumes do you guys expect that to.
There to be increased activity, there or is that kind of a lower production rate expected going forward.
Well it was a it was 30000 barrels a day roughly we expect to deliver about 30000. So it was on expectations, but we have our annual meeting Josh down in Houston.
Next week.
And that's where we set the budget on next year and look at activity going forward et cetera, but this quarter looks very much in line with <unk>.
<unk> looks in line with <unk> and then we will get together with a partner and partners and look at 2022, but I would say.
We don't expect anything any different in Eagle Ford, we expect really disciplined capital generating free cash flow off of these prices in excess of $300 million in free cash flow at an asset level on the Eagle Ford and we expect it to stay about those levels going forward I think that's what we showed in our five year plan.
Great. That's helpful and that makes sense and I did notice that you added some inventory and the presentation, which has been kind of consistent with what you guys have done and the one other question is on the Duvernay, which is maybe.
Least favorite topic, but you guys. It looks like you had some good additional early well performance on these next two wells.
What are your thoughts kind of medium to longer term on the duvernay given your success at Clearwater and elsewhere, where does that fit into the portfolio and how do you guys thinking about it from a strategic perspective longer term.
Well, it's the biggest potential growth engine in the company.
The biggest physical growth engine, we've already said that it can go to 20000 barrels a day, we have a contiguous land position of 200 sections.
We've de risked now now with these two wells all the way to the South. So these are for the southerly wells.
<unk> is in its 15th day of the flow back the others in its first end of the first week of the flowback or 10 days, possibly.
And.
It's early but this second well is producing at the highest oil rates and probably be oes that we've ever seen in the play. So we're honing the formula We're derisking the land, we're holding the land.
And we're honing our execution formula to get a breakthrough in and rate and productivity, but also in capital and cost delivery and.
And we haven't yet fully delivered on those two things, but we will we will certainly continue to hold it and derisk. It.
As I've said before there is probably a commercial opportunity for some consolidation in the basin.
But we would expect that.
As I said earlier on one of the other questions.
If the world or if the market or if the investors are looking for growth we have.
Not just in the duvernay, but across our heavy oil portfolio in the <unk>.
And the way, we do land bolt ons and tuck ins, we have ample inventory to grow this company.
But we're not ready for it now so we're derisking, we're holding land land and were honing our execution formula, but we're very excited about these wells and we will announce IP <unk> in early December on those jobs.
Great. Thank you very much.
And this concludes the question and answer session back over to you Brian.
Alright, thanks, Claudia thanks to everyone for participating in our third quarter conference call today have a great day.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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