Q1 2022 Baytex Energy Corp Earnings Call
Thank you for standing by this is the conference operator.
Welcome to the matrix Energy Corp, first quarter, 2022 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 will 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 <unk> good morning, ladies and gentlemen, and thank you for joining us to discuss our first quarter of 2020, 'twenty two financial and operating results.
Today I am joined by Ed look there are president and Chief Executive Officer, Rod Gray, our executive VP, and Chief Financial Officer, and Chad Lundberg, our chief operating and sustainability officer.
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, all dollar amounts referenced in our remarks today are in Canadian.
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 first quarter 2022 conference calls during the first quarter, we remain focused on capital discipline generating free cash flow and reducing debt, we delivered strong operating and financial results with production of almost 81000 Boe's per day.
Free cash flow of $121 million and a 10% reduction in our net debt to $1 two 8 billion.
I'm very pleased to announce that given the strength of our balance sheet and consistent with our desire to offer direct shareholder returns. The board of directors has approved the filing of our normal course issuer bid application with the Toronto stock exchange for a share buyback program of up to 56 million.
Common shares.
Representing 10% of our public float we expect to commence the buyback program in May which is consistent with the shareholder return framework, we discussed last quarter.
These are exciting times for <unk>. In addition to the share buyback announcement, we have a number of positive developments to share with you today.
First is the success of our Clearwater development at <unk> second is our increased 2022 guidance and third is the update we've made to our five year plan, let's start with our Clearwater results.
We followed up our 2021 appraisal program on our <unk> acreage with exceptional Q1 2022 drilling program.
We have now started up all 10 wells drilled during the first quarter and production has increased from zero at the beginning of 2021 to approximately 8000 barrels per day today.
During the first quarter, we successfully executed our first six extended reach horizontal wells.
Which are utilized to provide appropriate setbacks to residents in environmentally sensitive areas. These <unk> wells are among the first of their type to be drilled in western Canada and consistent of four two mile long laterals versus a more traditional well design comprised of a one mile laterals.
Our first three <unk> wells on the $4 25 pad have established average 30 day initial production rates of approximately 1100 barrels per day per well and are the strongest wells ever drilled in the Clearwater play.
Yes.
In addition, four wells on the 5% to 33 pad were brought on stream in March April and are expected to generate 30 day initial production rates of 300 to 400 barrels per day per well initial well performance continues to outperform our type curve assumptions and we now have seven of the top 10 initial rate wells drilled to date.
Across the Clearwater play.
As we continue to progress our development plan, we are committed to drill six additional clearwater wells during the fourth quarter. We now intend to run a full one rig program at <unk> through year end as a result, we expect to drill 24 net wells in 2022 up from our original budget of <unk>.
18, net wells, maintaining a consistent one rig program level loading activity in the second half of 2022 will drive further efficiencies and set the stage for continued strong operating momentum heading into 2023.
At current commodity prices to Clearwater generates among the strongest economics within our portfolio with payouts of less than three months and has the ability to grow organically, while enhancing our free cash flow profile.
To date, we have Derisked 50 sections of our 80 section <unk> land base and our updated plans include the drilling of approximately 120 net wells through 2026, when combined with our legacy acreage position in northwest, Alberta, we estimate that over 125 sections.
<unk> are highly prospective for Clearwater development with this updated view of our land base, we expect Clearwater production to increase to approximately 10000 barrels per day during our five year plan period, while generating over $400 million.
Cumulative free cash flow with.
With continued to success, we believe the play ultimately holds the potential for over 200 drilling locations that could support production increasing to over 15000 barrels per day. We are very excited with the Q1 program and what it means for our business going forward.
I will now turn to our 2022 outlook and guidance update.
With continued strong operating momentum in production growth on our Clearwater land, we are increasing our production guidance for 2020 to $2 83 to 85000 BOE per day up from 80 to 83000 BOE per day previously and we expect to exit 2022, producing.
Approximately 87 to 88000 BOE per day based on the forward strip, we now expect to generate approximately $700 million or one to $5 per basic share of free cash flow. This year as part of our previously announced return of capital framework.
We expect to allocate approximately 25% of our annual free cash flow to direct shareholder returns through the share buyback program I mentioned earlier.
The remainder of our free cash flow will continue to be allocated to debt reduction until we achieve a net debt level of $800 million.
Which represents an expected net debt to EBITDA ratio of one times at a U S $55 <unk> price.
This level of net debt will provide us with flexibility to run our business through the commodity price cycles and generate meaningful returns to our shareholders at current prices. We expect to achieve this debt level in early 2023 at which point, we will consider steps to further enhance shareholder returns.
Our operational success. The continued strong economics of our drilling program and the inflationary pressures being experienced throughout our industry caused us to review our capital program for the year. We are now forecasting 2022 exploration and development expenditures of $450 million to $500 million.
Up from $400 million to $450 million, which was set in a $65 U S pricing environment. The incremental capital reflects the additional activity on our Clearwater land and two to three net incremental wells in the Eagle Ford.
This increased activity set will result of $30 million of incremental exploration and development expenditures, which is offset by approximately $10 million of reduced light oil activity.
We also updated our 2022 plant to reflect an incremental 8% expected capital cost inflation, which increases our exploration and development expenditures by approximately $30 million. This reflects industry cost pressures related to labor logistics fuel intangible items such as steel.
Frac sand and chemicals in aggregate, we're now assuming 18% capital cost inflation in 2022 as compared to 2021.
Lastly, we have fine tuned several of our cost assumptions to reflect increased royalties due to higher commodity prices inflationary pressures and inflationary pressures on operating and transportation expenses offsetting these cost pressures to a certain extent is increased production and a reduced.
Reduction in our interest expense and our net debt is reduced.
With a strong outlook for 2022 unfolding I want to now turn it over to Rod who will provide a brief update on our five year plan and liquidity and capital structure.
Thanks, Ed and good morning, everyone. We introduced our five year plan one year ago in April 2021 to highlight our financial and operational sustainability and our ability to generate meaningful free cash flow. We continue to benchmark our results to this five year plan and intend to update as warranted based on.
The macro environment drilling results and activity across our land base.
We are now rolling R. R.
Our five year plan forward to capture the period 2022 to 2026 through this plan period, we are committed to a disciplined returns based capital allocation philosophy targeting exploration and development expenditures at less than 50% of our adjusted funds flow we expect to.
Generate annual production growth of 2% to 4% with production, reaching approximately 95000 BOE a day in 2026 year one of the five year plan is based on our 2022 guidance and the forward strip commodity prices in years, two through five 2023 to 2026.
<unk> are based on a constant U S $75 <unk> price.
Our focus on delivering free cash flow is unchanged.
Under these pricing assumptions, we expect to generate approximately $3 billion of.
Cumulative free cash flow during the plan period.
In our May Investor Relations presentation available on our website you will find more details regarding our five year plan, including free cash flow sensitivities at U S $85 and U S $95 <unk> prices.
Turning to our liquidity position at March 31, we.
We had approximately $600 million of liquidity.
At March 31 on April one we announced that we received strong support from our lending syndicate to extend and amended our bank credit facilities the revolving.
The credit facilities have been extended by two years from April 2024% to April 2026.
And have been increased modestly from the approximately U S $815 million to U S $850 million.
The revolving credit facilities are not borrowing base facilities and do not require annual or semiannual reviews, our net debt, which includes our credit facilities long term notes and working capital totaled 128 billion at March 31, 2022 down from 141 billion at December 31.
2021 at current prices, we expect to exit 2022, with net debt of less than $900 million.
We also intend to repurchase and cancelled the remaining U S $200 million principal amount of 565% long term notes due 2024 at par on June one 2022, and with that I'll turn the call back over to Ed.
Thanks, Rob we are incredibly excited to via this position today to summarize we remain focused on capital discipline generating free cash flow and reducing debt, we material advanced materially advanced our Clearwater development during the first quarter and these exceptional wells have enabled us to more than double our clearwater production to.
<unk> 8000 barrels per day as a result, we are pleased to increase our 2022 production guidance and add six new Clearwater wells late this year.
Our focus on delivering substantial free cash flow is unchanged. Our updated five year plan is expected to generate approximately $3 billion of cumulative free cash flow and once again I'm very excited that our board of directors has approved a share buyback program that is expected to commence in may.
<unk>.
Our business is strong and we look forward to executing our plans for the ongoing benefit of all stakeholders and with that I will ask the operator to please open the call for questions.
Thank you we will now begin the question answer session.
Julian the question queue, you May press Star one on your telephone keypad.
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Our first question comes from Patrick O'rourke, with ATB capital markets.
Please go ahead.
Oh, Hey, guys good morning.
Impressive results on those most recent pads in the Clearwater.
Question with respect to the scale and scope of the project here I know you've taken it up to 10000 barrels a day and you are talking about potential for that to be a 15000 barrel a day right now I'm just wondering if you can sort of.
Give us a little bit more color in terms of that 15000 barrel a day number and what percentage or number of sections with any of our acreage that encompasses.
Right now.
Alright, well good morning, Patrick.
Yes, we're very excited that this play is moving as quickly as it is and it doubled over doubled from 3000 barrels a day just in January at 8000 barrels a day now we now have the performance data we needed in the central portion of.
RP volume play.
Now tells US we have 50 sections de risked we've got some private company activity to the south of us to the west of us and to the northwest of US that we believe has de risked that along with our major activity in the central and Western portion of the play is de risked those 50 sections in the entire.
Western portion of our <unk> section land block so at four wells a section.
That's 200 wells, we placed in a conservative manner 120 wells into our five year plan and Thats what grows us now to 10000 barrels a day previously we had 80 wells in the in the play being developed to get us to 6000 barrels a day. So we've moved that to 10.
Barrels a day.
Based on what I, just told you we could hold that flat for quite some period of time given that we've got 200 locations de risked. So then the question we're going to be answering over the course of the next six months is what does it look like to the east to the southeast and to the northeast and we will be appraising.
Those areas over the next several months.
In the meantime that is our five year plan is.
It's very easy to.
To project, a higher type curve in the center of this play and get us to 15000 barrels a day, which is what we've done the question is going to be pace and timing and the derisking of the east so.
It's very easy to get to north of 15000 barrels a day here, it's very easy for us to see this which is why we announced it but on the other hand, we're only ready to commit a 10000 barrel a day program on those.
<unk> of those 50 sections to the west at this point in time.
So.
Is the gap between the 10015 thousand there then is that primarily derived from sort of a derisking.
The well results and potential sort of aerial delineation or is it more so derived from pace of capitalization and the amount of capital directed to the play.
Yes.
Well I think it's a little of both.
I said I think we can get to 15000 barrels a day, we don't know how large the full extent to the field is if it's much larger to the east into the northeast.
That will give us some optionality to grow to 15000 barrels a day or even north of that.
And considered.
Development plans, what we know now today is that we want to put a portion of those 50 50 sections to work.
In the five year plan context so.
It's going to be a matter of derisking to the east.
And also a question of how high do we want to go and how early do we want to go on blowdown versus.
Potential much larger development.
Could extend for over a decade, we need to get the derisking done on that bigger question them, but we could go to 15000 barrels a day. There is no question in my mind about that.
It's a question of how large is this field in full.
Okay. Just a final question with respect to that then.
You have a five year plan in place.
The sort of pace or timeframe for that de risking that youre, referring to there.
I think the major part of the east and northeast Derisking will be first quarter next year, we need some winter access up to the northeast.
More remote area up there.
So we'll need to get out there on some ice roads over Jeep roads essentially.
And.
We are not ready to go beyond that until we get some strapped wells down.
Okay. Thank you very much.
The next question comes from Eric <unk> with nine point partners. Please go ahead.
Hey, good morning, guys.
Accusing reaction than share price today, not everybody gets to close let's say they just drilled two wells the payback.
I don't think ive seen that much there.
I just wanted to can you turn the conversation to return of capital.
As the largest shareholder we fully support the desired slower.
Leverage an amazing accomplishment to be able to talk about share buybacks now versus two years ago.
But I wanted to focus on 2023 wells and Scott.
Achieving net cash status by the end of next year.
Got you are trading at a 38% free cash yield at $100 oil I know youre using a lower price in your deck.
With 25% of free cash flow now once you get and achieve your deleveraging status you talked about further enhancing returns.
Reasonable percentage of that as shareholders. We should expect next year like it grew 75%.
Our free cash flow reasonable because if thats. The case, we dare to dream and believe in the current oil price, that's 28% buyback dividend. Some combination thereof. So I just wanted to get your sense of what you think a reasonable return to shareholders will be next year. Once you achieve your leverage target.
Yes, well, firstly, it's really great and very excited that that those debt targets have come up on us as quickly as they have and we will continue to under current pricing. So I wanted to just first say for all callers onboard I know youre aware of this Eric.
Talk fairly often but just for everyone else, we are absolutely committed to returning.
Significant returns to shareholders directly and in the form of 25% of our free cash flow this year.
To buybacks in the form of share buybacks and we we had unanimous board support over that were trading below our intrinsic NAV.
We have an all time low historical multiple despite the fact, our portfolio has improved pricing has improved our asset performance has improved.
And when we look at that Formula in combination with where we are relatively or an absolute level on value.
We want to buy our shares back all day, along this is a very exciting place to be now. Your question is really more about what happens when we hit the $800 million.
Target that we've announced and we expect to be there by early next year as I just said in the script.
And at that point in time, we're going to be even more committed to providing direct returns to shareholders in the form of buybacks. If we are trading as we are today.
Potentially in the form of a dividend as well we have that to debate with the board potentially in the form of.
Clearwater and generating more free cash flow through Clearwater development.
So with that I'm going to hand, it over to Rob just to add any additional flavor on this but we will have options there.
As you say being nearly debt free in early 2023 to go far beyond where we are today I just can't give you a specific number.
Maybe Rob you can offer some additional context to help.
It's more just context, Eric I see us driving the debt level lower running with less leverage in the system and that gives us optionality, but as Ed said, we are committed to providing direct shareholder returns.
And I would expect we're going to have much more flexibility with that as you've indicated into 2023.
Like I look at you guys get free low to no growth you've got a cash problem.
We've got some notice pledging a 100% of free cash flow back to shareholders.
I would assume that 75% bogey I know, it's a board decision you make anything right now, but it's just the numbers of truly.
Pumping I just don't think the average guy gets it just yet.
Thanks, Thanks for taking my questions.
And it could be a very very large numbers. So thanks for the call.
Good question. Thanks.
Okay.
The next question comes from Josh Young with Bison. Please go ahead.
Hey, guys.
Great questions already and there is a greater part thank you.
It's just fantastic results can you talk a little bit about what changed in the Clearwater in terms of yielding so obviously these are longer laterals, but there are fewer of them.
And each of these wells what is it that drove this.
Excellent kind of best in play results.
You guys, just announced and what does it mean for additional inventory in this part of the field.
While a large part of that Josh was just simply moving towards the central portion of the field and progressively moving there. So we had agreed early on with the settlement that we would start in the far west if we knew it was not in the center of the field. We then moved up structure to the 40% to 36 pad and that was offsetting a DS.
That was quite exciting and some conventional logs and so we knew we were potentially in a better location, we prove that up with the $903 900 barrel a day wells and then we knew moving south that we would move into the heart of the thicker Permian better permeability trend really in the core.
The field.
The exciting thing there is now as you say with this new technology with the four lateral same meterage is the eight lateral one mile wells. These four lateral two mile wells is giving us the ability to do some things from a social standpoint within the settlement.
To undershoot roads, little hamlets and things and really get into full development mode, but it also when youre drilling in this consistent reservoir and this strong.
This clean of a sand once you're on bottom you tend to generate some really strong efficiencies with your your rfps, while drilling. So we were able to drill these wells not only for better cost, but because we are in the heart of the trend.
And I think also we're waiting for our Super pad facilities to be completed so we've got these completed and the wells are ready to go we did this during breakup, which.
Which was a bit of a risk, but the configuration of getting the facilities done first bringing these wells on these.
These new for lateral wells on these super pads with the full facilities in place allows us to move to production mode with less hiccups. If you will in the first 30 to 60 to 90 days and Thats exactly what the team did there is quite a large amount of inventory thats just like this so for example on these.
<unk> three wells 1100 barrels a day, we're bringing on the other three on the same pad right now all of these are <unk> wells none of them came on really in Q1. So this is all Q2 and beyond impact, but we've got another three right now and I would say the core of the play is probably a good two sections of land in that area.
Which is multiply that by four and that's a lot of wells.
80, well, so we need to keep building out from the core now and we will do that but.
We are incredibly excited that we've now got a new pace setter for the entire basin on these 1100 barrel a day wells.
That's great. Thank you that's helpful color and then could you talk about as a follow up.
What this means for your other heavy oil inventory at Pizza hut brand at <unk>, how applicable the technology and the techniques that you're using.
For these great results in the Clearwater might be for this other inventory.
Yes. Thank you, though we are the probably the lead explore developer and operator of multilateral heavy oil wells, we see ourselves that way, we certainly do it in Lloyd Minster have been doing this for decades in peace River and now we're applying this to the Clearwater, we have a second seal.
Well up in the core of our legacy Peace River lands that we'll drill at the end of this year, but it will more likely be in an appraisal loaded or more likely be a six shooter one mile leg type configuration as opposed to the two mile configuration, because you'd really need to get confidence in.
The continuity of the reservoir and structure to be going out two miles and we wouldn't get there on an appraisal well in Lloyd Mr. We do a combination of single laterals multiples of all different kinds of configurations, depending on what's needed. This has certainly opened our eyes to a new way of doing things where we.
Have the continuous reservoirs, so we'll always look at it.
And we have probably our deepest and strongest inventory in the entire company and Lloyd Minster, So long that fairway, we're going to be running a full rig year program. We will start up just after breakup and go with that one rig in Lloyd Minster, we're going to be running a full rig program.
After breakup in Peace River proper and we'll be running now with these added six wells a full rig in <unk> for the rest of the year. So we'll have three rigs going full time coming out of breakup in the heavy oil properties doing a variety of different kinds of lateral and multilateral configurations.
We're incredibly excited about this though Josh it is a real step change in the way people are going to start looking at Clearwater development.
Great. Thank you.
The next question comes from Jeremy Mccrea with Raymond James.
Please go ahead.
Just to follow up on Jonathan's question.
You can follow.
The development of the Clearwater oil too.
Every quarter.
Well number one we want to go.
Those will move on Google.
Sure.
No.
Thank you.
What are you.
Most consumers.
How conservative are you guys any numbers on what you think you will could be harmony between almost.
The technology that you want to pull on the wells and just wanted to cancel.
Just because we see this we.
We will see how big it could be just how much conservatism you guys have built into your numbers here and just on a follow up.
With some of the M&A that's going on.
Some of the land sales just kind.
A quick comment on that as well.
Well, we don't comment on land sales, but we have said, we've got 145 sections of highly prospective lands in the Clearwater. So thats A&P Vine and then another 45 up in the northwest region of the Clearwater play.
So we just offer those kind of generic numbers, but we don't comment on land sales.
<unk>.
Are we conservative yes, what we promised to market.
No we can deliver we don't Miss our quarterly earnings our quarterly.
Quarterly production development targets I don't think we ever have in five or six years. So we'd like to put things out that we can can beat.
You've already seen that we're at 8000 barrels a day today and this is partly the basis of your question.
Our exit rates in P volumes should be 8% to 10000 barrels a day and then.
We will be very close to getting to the top end of our five year plan in the Clearwater.
10000 barrels a day fairly early in the five year plan and then it's a bigger conveyor belt to hold it flat. So the question is going to be how much activity do we want to push it into the plant to the previous question to go towards that 15000 barrels a day or higher.
But yes, we do like to beat our numbers.
Particularly to the external market, we have stretch targets inside the company and we're very good about how we progress things and innovate along the way as well. So we know what the best answers are sooner, but we're learning very very quickly in this the whole Clearwater is a brand new play it's only at 80000 barrels a day at a play less.
<unk>.
Let alone so now we've got 10%.
The play level production at 80000 barrels a day and many analysts are projecting that to go to 200000 barrels a day. We think Clearwater is going to go to substantially higher than 200000 barrels a day across the regional area and we're going to be a big part of that we want to be built.
Builder, a developer and an aggregator in the area and look for more beats. If you want to call. It that on the plan as we go forward, that's what we'd like to do.
Okay perfect.
Thanks, Patrick.
Jeremy Thanks, Karen.
This concludes the question answer session I would like to turn the conference back over to Brian Ector for any closing remarks.
Thank you Sherry.
Thanks to everyone for participating in our first quarter 2000, 2022 conference call have a great day.
This concludes today's conference call you may disconnect your lines.
Thank you for participating and have a pleasant.
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