Q3 2021 Crescent Point Energy Corp Earnings Call

Good morning, Ladies and gentlemen, my name is Sylvie and I will be your operator for Crescent point Energy's third quarter 2021 conference call.

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

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

All amounts discussed today are in Canadian dollars with the exception of West, Texas intermediate or W. T I pricing, which is quoted in U S dollars, the complete financial statements and management's discussion and analysis for the period ending September 32021.

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 members of the investment community. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad and if you would like to withdraw your question. Please press Star then the number two.

During the call management may make projections or other forward looking statements regarding future 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 form which may be accessed through the crescent point SEDAR or.

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 Mr. Craig bricks.

And Chief Executive Officer of Crescent point. Please go ahead Sir.

Thank you operator, I'd like to welcome everyone to our Q3 2021 conference call with me today are Ken Lamont, Our Chief Financial Officer, and Ryan <unk>, Our Chief operating officer as the operator highlighted this conference call is being webcast along with a slide deck, which can be found on our website.

Since our last quarter update we've made some significant strides in a number of fronts, most notably we've increased our quarterly dividend to return additional capital to shareholders.

Achieved initial success in our K Bob.

<unk> program with strong execution on our D&C activities, including delivered delivering cost savings of approximately 20% on well completions to date and we've continued to reduce our net debt putting us on track to attain a leverage ratio of one times adjusted funds flow in early 2022.

The rate of change and the improvements we have made to our business. During the current commodity price environment are significant and shouldnt be lost on anyone.

For those that have watched our industry evolved over the past several years you can appreciate how much stronger companies are now versus past cycles balance sheets are healthy and continue to strengthen daily providing protection for shareholders during periods of commodity price volatility.

Management teams are increasingly focused on shareholder friendly capital allocation programs.

Which is also a positive for the supply demand balance and the overarching ESG performance of our sector has improved tremendously, especially within the Canadian industry.

At Crescent point, specifically, we have been able to take advantage of the current pricing environment through our industry leading that are.

Our strong market access position and our product mix comprised of both light oil and condensate.

When we look forward to the upcoming year. We are excited about the position we're in and the opportunities we see to create additional shareholder value. For example at $75 W. Ti price environment, we expect to generate $925 million of excess cash flow in 2022, which is after the dividend we recently increased.

We are in a solid position to further strengthen our balance sheet return additional capital to shareholders and evaluate projects that can enhance sustainability to create additional returns for our shareholders on a debt adjusted per share basis, I'll now turn it over to Ken to discuss our financial results Ken.

Thanks, Craig for the quarter ended September 32021, adjusted funds flow totaled 394 million or <unk> 67 per share fully diluted.

This is supported by a strong operating netback of over $44 per Boe.

The third quarter development capital expenditures, which includes drilling and development facilities and seismic costs totaled $187 million.

I am pleased to report that we generated over $180 million of excess cash flow in the quarter, which we used to further strengthen our balance sheet.

I will also note that since closing our cable up do you have any acquisition in the second quarter of 2021, we have already paid off more than 80% of the cash portion of that total purchase price.

Our net debt as of September 32021 totaled $2 1 billion or approximately one four times, our last quarter adjusted funds flow.

We're currently on track to exit the year with net debt at or below $2 billion and expect further to reduce our leverage to one times adjusted funds flow in early 2022.

As Craig mentioned earlier, we expect to generate upwards of $925 million of excess cash flow in 2022 based on our preliminary guidance at $75 W. T.

To lock in some of this excess cash flow, we continue to layer in commodity and differential protection through our disciplined hedging program.

Our hedging philosophy in this rising market is a portfolio approach whereby we layer in a mix of swaps and collars and three way instruments in order to provide a combination of true floor protection and hedges with some upside participation.

Currently we have approximately 45% of our oil and liquids production net of royalty interest hedged for 2022.

For the three months period ended September 32021, net income totaled 78 million and included approximately $44 million in nonrecurring charges, primarily related to a reevaluation of the company's tactical.

This reevaluation of tax pools, primarily relates to the estimated future usability of these schools in particular, those that were a part of past acquisitions.

Our total tax pools at the end of the quarter were significant at over $10 billion and continue to enhance our ultimate excess cash flow generation in a rising price environment.

Late in the quarter, we announced a fourth quarter dividend increased to <unk> <unk> per share payable on January four 2022 to shareholders on record at December 15, 2021.

This equates to an annualized dividend of <unk> 12 per share an increase of <unk> 11 per share from the prior level.

As you recall, our capital allocation framework, initially prioritizes discretionary excess cash flow towards the balance sheet and the base dividend.

Over the past year, we have significantly improved our business fundamentals, our excess cash flow profile and our balance sheet, which led to our decision to start returning additional capital to shareholders.

We believe that the current quarterly dividend of <unk> <unk> per share is sustainable provides flexibility within our capital allocation framework and has the ability to grow over time.

It equates to a conservative payout of approximately 5% of funds flow at $50 <unk>.

In addition to a sustainable growing base dividend model. We will also evaluate additional forms of returning capital to shareholders over time as we have in the past all in context of our capital allocation framework and leverage targets.

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

Thanks, Ken third quarter production averaged 132186 Boe per day comprised of over 80% oil and liquids in line with our previously released guidance compared to our prior quarter. Our overall production reflects our recent disposition of noncore assets, our conservative 2021 program.

With expenditures below sustaining capital requirements and the timing effect of several high impact multi well pads that were brought on stream during the first half of the year.

In the K, Bob Duvernay, we initiated our first multi well pad drilling program during the third quarter with strong operational execution to date, we expect to complete these wells during the fourth quarter in.

In addition to focusing on generating strong full cycle returns and excess cash flow our near term strategy in the <unk> Duvernay is to improve upon already strong economics through a combination of cost efficiencies and productivity enhancements primarily through our completion design I am proud to report that we have achieved early success.

<unk> on our cost reduction initiatives in this play.

During third quarter, we entered into a farm in agreement with a K, Bob Duvernay, operator to complete certain wells in exchange for a working interest in these wells and additional land both in close proximity to our existing assets.

This arrangement provides us with the opportunity to further delineate our land position and add locations to our <unk> Duvernay inventory.

As part of this agreement we successfully completed a five well pad in late third quarter, achieving completion costs approximately 20% below those we had expected when we first entered the <unk> Duvernay play earlier this year.

I'd also note that we achieved these cost reductions despite shifting to a new higher fluid intensity Frac design that is more representative of our go forward plan production from these wells is expected to be onstream during the fourth quarter of this year.

In our other operating areas in Saskatchewan, and North Dakota, We continue to successfully execute our development plan of low risk high return wells in view field and Sean and then specifically we've had success this past year in expanding the economic boundaries of each play through our step out drilling programs.

We also received approval from the government of Saskatchewan to fully unitize and additional two units in view field, bringing our total now of six units. This provides us the opportunity to further expand our waterflood program over the coming years.

As part of our decline mitigation initiatives in 2021, we have now converted approximately 115, well producing wells to water injection wells and remain on track to convert over 135 wells this year.

Finally, I'd like to once again, thank our operations teams and in particular, our field staff, who continue to demonstrate our commitment to safe operations and operational excellence throughout the quarter I will now pass it back to Craig for some final remarks.

Thanks, Brian I'm very proud of the results and success, we've achieved over the past year and I'm excited by the initial progress we're seeing in our new <unk> Duvernay play.

As we near the end of the year, we are narrowing our 2021 average production guidance to 132% to 134000 <unk> per day, which is at the higher end of our previous range.

And our capital expenditures will be approximately $625 million.

Rather than increasing our capital budget to account for the costs associated with the additional completions on our new partner wells in the <unk> Duvernay. Our overall expenditures have remained within our prior range as we made the decision to reduce spending in other operating areas.

Demonstrates the type of capital discipline and you can expect from this team.

We recently established our preliminary 2022 guidance, which we anticipate formalizing prior to the end of the year.

Under our 2022 capital plan, we expect to generate annual average production of 131 to 135000 Boe per day within a conservative budget of $825 to $900 million and development capital expenditures.

This budget along with our recently increased dividend is fully funded at a low oil price of approximately $40 WTO and generates approximately $1 billion of excess cash flow at an $80 wty price environment.

As you can see our business density in a dramatically different position than just 18 months ago.

The current commodity price environment provides us with significant flexibility and the opportunity to enhance our value creation as we continue to strengthen our balance sheet.

Our strategy guided by our capital allocation framework, and we will continue to execute our plan to deliver value to our stakeholders.

I'd like to thank everyone for their continued support and our employees for their hard work and execution of our business strategy.

I'll now open the call for questions from the investment community operator, Please open the call.

Thank you Sir.

Ladies and gentlemen, as stated we will now take questions from the investment community.

I would like to ask a question. Please press star followed by one on your Touchtone phone and should you wish to withdraw your question. Please press star followed by two and if you're using a speaker phone. We do ask that you. Please lift the handset before pressing any Keith. Please go ahead and press Star one now if you do have a question.

And your first question will be from Patrick O'rourke at ETB capital markets. Please go ahead.

Hey, good morning, guys. Thank you for taking my question.

Just wanted to ask a few things with regards to cost structure and inflation that youre seeing out there in particular.

The duvernay the nature of those well costs are probably.

A little bit different than what <unk> historically experienced with.

Here.

From what we're hearing the high spec market for rigs is a little bit tighter and I'm just wondering.

Are you still pretty comfortable with those costs, maybe I'll add on obviously.

Peter touched on the public data that the JV partner operated these wells.

That were recently completed.

<unk>.

$1 million or I think 20% ahead of your budget, which is pretty impressive stuff are you able to apply any of those learnings or anything on the technical frontier upcoming completions.

Yeah. So thanks for that question Patrick it's good good to hear from you. So it's Craig here.

When we put out our 2022 guidance, we did build in inflation into that so.

We feel very good at where we're at in that 822% to $900 million of capital spend like you say that was built in and we are seeing very good initial progress on both the drilling and completions in the K Bob Duvernay. So like we mentioned the data a $1 million under on the Fracs there on that 20% reduction that we're seeing so making good progress on that but maybe I'll pass it.

Ryan He is probably the best person to talk to you about our cost structure and what we see on this over the next little while.

Yes, Hi, Patrick Yes, I mean, obviously, we're working through all that right now as we finalize our 2022 budget, but regarding cost the cost pressures.

70, $75 World strip pricing for next year.

If you look at our total overall capital program.

We're probably expecting five ish percent increases.

Some some categories, a little bit higher than others, but overall, 5%.

But obviously with some of the unit cost.

Sure.

Wins, we've had here in <unk>, specifically on the completions like we spoke to obviously those will offset.

Some of our cost escalations so.

Overall still well within our our our preliminary capital guidance of $825 million to $900 million next year.

And then I guess in terms of those JV wells on on the technical side in terms of the completion.

How similar to those look to what you have done.

That was shell and had been planning on your own first pad here or is there anything nuance that the operator did differently.

You can take away from that or is it a very similar sort of completion design.

Okay.

Yes, so the completion design that we used on these farm and wells are very similar to what our go forward plan is on our shell and.

Obviously, when we got into the play looking at.

The previous operators completion costs, we had our eyes on that is that's where we can make significant improvements and so yes. It is real satisfying to see our team execute on that and and reduce those completion costs by $1 million.

Even with what we think will be.

A better Frac designed to increase our our EUR is in the area with a with a slightly higher.

Fluid loading.

Pumping those fracs and so one of the one of the big things, obviously, our supply chain management effort to help get that million dollars savings per well and also a lot of efficiencies on site.

Our our pumping hours per day.

Is right up there compared to previous what we saw from the previous operator so.

Combining all of that we've seen that 20% reduction on our completions, so far and expect that go forward.

Okay. Thank you very much.

Thank you you bet well.

Once again, ladies and gentlemen, if you have a question. Please press star followed by one and your next question will be from Jeremy Mccrea.

Raymond James Please go ahead Jeremy.

Hey, guys.

<unk>, it's Ben I'll see if you could expand a little bit more on the JV with the Duvernay here I know there is very little details due to the confidentiality and I think it does.

The first question is why the confidentiality.

Maybe how material this really could be in terms of the farm in terms of maybe the amount of acreage.

<unk>.

How much does this draw down some other play any other little.

Details or maybe when we would be able to find out more details on <unk>.

Some of this will kind of information will come both Tommy.

Yes, so thanks for the question Jeremy.

It is it's part of the terms of the agreement is just the confidentiality structure around that what I can tell you is that it's three pads that we're looking at completing Mastercard roughly 16 wells were done that first pad like Brian mentioned and very excited on the results that we've been seeing not only on the cost savings, but how the initial flow backs of lift on those wells. So it's exciting.

<unk> for us, especially as we start to move it forward.

So we'll continue to execute on that we're on our second pad here now things are going well on that one and then from that we'll move to our pad that we're drilling right now and we will complete that.

Fully crescent point, Pat here in call. It November but on that front things look good I can't really discuss any of the other details around the.

The Permian and the partners just due to the confidentiality around that but do you know like I say three pads executing well against that things are going well. We're excited to see the initial cost savings and how we can continue to drive that down and then when you look at how we're doing on our first pad drilling things on that front look very strong as well as far as the.

The cost structure, so starting to starting to become very exciting for us here as we as we continue to move forward on that.

Okay.

And maybe just a follow up on that.

Is this a strategy that you guys would like to employ more often going forward more farm ins or what was the reason for maybe not doing just an outright acquisition of some of this land.

Yes, I think it's like any other opportunity that's presented to you Jeremy you evaluated in the context of for us in the context of our balance sheet and sustainability and doesn't improve us in one or the other this deal we felt really good about it for a few reasons. So for us at this point it made sense. So.

All deals are are different.

We're very disciplined as we look through things and if they do improve this and we would look to act on that in this case it happened to be a fireman that allowed us to really get in and use our operating team and our operating structure and get after these fracs a little bit earlier and now apply the learnings that we've had from Utah and North Dakota into these fracs and I'll take the <unk>.

Earnings from this and apply this to our 100% Crescent point wells that we're drilling right now so that's where you start to see the momentum moving in.

Ideally you can feel some of the excitement in my voice.

As we start to get these results out to the market. So we'll look for further details to come as we continue to update the market on our 2022.

Budget, when we finalize those things and then as we start to look forward into into the new year.

Okay. That's perfect. Thank you.

Thanks.

Thank you at.

At this time, we have no further questions. Mr. <unk>. Please proceed.

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.

Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today. Once again. Thank you for attending at this time, we do ask that you. Please disconnect your lines.

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