Q3 2022 Baytex Energy Corp Earnings Call
Thank you for standing by this is the conference operator, welcome to the basic energy third quarter 2022 financial results.
And operating results conference call as a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation there'll be an opportunity to ask questions.
Joining the question queue you May Press Star then one on your telephone keypad should anyone need assistance during the conference call. They may signal, an operator by pressing Star then zero.
I'd now like to turn the conference over to Brian Ector, Vice President capital markets. Please go ahead.
Thank you Gayla and good morning, ladies and gentlemen, and thank you for joining us to discuss our third quarter 2022 financial and operating results.
Today's call is somewhat unique in that we are seeing goodbye to Airbus There who has led our organization for the past six years.
And we are welcoming Eric Green to her as our new President and Chief Executive Officer.
You'll hear from both Ed and Eric today.
And we're also joined by Rod Gray Executive VP, and Chief Financial Officer, and Chad Lundberg, our chief operating and sustainability officer.
While listening please keep in mind that some of our remarks will contain forward looking statements within the meaning of applicable securities laws.
We refer you to the advisories regarding forward looking statements oil and gas information and non-GAAP financial and capital management measures in yesterday's press release.
All dollar amounts referenced in our remarks are in Canadian dollars, unless otherwise specified and with that I would now like to turn the call over to Ed.
Thanks, Brian and good morning, everyone I'd like to welcome everybody to our third quarter 2022 conference call and at the same time I'm truly excited to welcome Eric <unk> throughout his career, Eric has been focused on organic development and engaging and inspiring organizations to create value key traits that I know.
<unk> will fit in well here I will remain with <unk> in an advisory capacity until the end of January at which point my retirement will officially begin.
Today is certainly a bittersweet moment for me when I joined <unk> six years ago, I remember, stating on my first quarterly earnings call. How impressed I was with the <unk> team and how committed and focused they were on driving value.
This was a strong team with high quality assets that I knew could build a great future.
Six years in 'twenty four conference calls later the team in the portfolio are stronger than ever before.
I am enormously proud of the entire <unk> team and our accomplishments.
Together, we successfully repositioned <unk> through the downturn strengthened our balance sheet and we discovered one of the most exciting new Clearwater oilfields that our industry has ever seen and.
And we are progressively increasing direct returns to shareholders something we are all immensely proud of.
I turn the call over to Rod and Eric Let me review for one last time, our quarterly results.
During the third quarter, we delivered strong operating and financial results, which has set the stage for continued momentum as we approach 2023 in.
In addition, we advanced our Clearwater play at P bond with results from our second half drilling program continuing to deliver to deliver among the best wells drilled in the play.
Production during the third quarter averaged over 83000 Boe per day, and we generated quarterly free cash flow of $112 million, which brings our year to date free cash flow to $478 million.
Capital expenditures totaled $167 million and we participated in the drilling of 86 gross or 72 net wells.
Production in October increased to over 87000 Boe per day, which puts us on track to achieve our targeted exit rate of 87 to 88000 BOE per day for 2022, we expect to average approximately 84000 Boe per day, which represents 5% annual production growth.
<unk> or 6% on a per share basis.
We are now forecasting full year, 2022 exploration and development expenditures of $515 million up 3% from our previously targeted $500 million.
Which represented the high end of our prior guidance range the incremental capital largely reflects the impact of a strengthening U S dollar relative to the Canadian dollar on our U S operations and further level loading of activity through year end to maintain the efficiency of our operations.
We remain intensely focused on capital discipline, and maximizing free cash flow taking into account our year to date results and based on the forward strip for the fourth quarter, we expect to generate approximately $650 million or $1.16 per basic share of free cash.
Cash flow this year.
Operationally the highlight of our business continues to be our Clearwater development at <unk>. This is an asset that at current commodity prices generates among the strongest economics within our portfolio and has the ability to grow organically, while enhancing our free cash flow profile.
During the third quarter, our Clearwater production averaged 8200 barrels per day and in October we produced approximately 10000 barrels per day from 24 producing wells.
The first four wells from our second half 2022 drilling program generated average 30 day initial production rates of 1100 barrels per day per well initial well performance continues to outperform type curve assumptions and we now hold 13 of the top 15 initial rate wells drilled across the play.
<unk>.
Following further detailed reservoir and economic analysis of the <unk> Clearwater, our second half wells are all drilled at 40 meter inter lateral spacing.
As our initial wells were drilled at 50 meter inter lateral spacing.
This tighter spacing enables the drilling of five wells per section versus four wells per section and creates the potential for a 20% increase in our perspective drilling inventory, yielding meaningfully improve resource recovery and value.
To date, we have Derisked 50 sections of our 80 section <unk> land base and believe the lands hold the potential for greater than 250 locations with production increasing to approximately 15000 barrels per day.
When combined with our legacy acreage position in northwest, Alberta, we estimate that over 125 sections of our lands are highly perspective for Clearwater development.
I want to now turn it over to Ross, who will provide a brief update on our liquidity and capital structure.
Thanks, Ed and good morning, everyone.
Our liquidity and capital structure have never been stronger and with the established that targets. We now have in place. We are building a business that will be resilient throughout the commodity price cycles, our net debt, which includes our credit facility's long term notes and working capital totaled $1 1 billion at September 32022.
Down from $1 4 billion at December 31, 2021, we expect <unk> exit 2022, with net debt of under a $1 billion.
Our net debt was largely unchanged from the second quarter due to our active share buyback program and the impact of a strengthening U S dollar relative to the Canadian dollar on our U S. Dollar denominated debt the change in the Canadian U S exchange rate from June 30 to September 30th impacted our net debt.
In Canadian dollar terms by approximately $50 million during the quarter.
During the third quarter, we also repurchased and canceled U S $27 million of the 875% long term notes due 2027, bringing the principal amount outstanding to U S $473 million as of September 32022, we had $714 million of <unk>.
Undrawn capacity on our credit facilities, resulting in liquidity net of working capital of $699 million. This improved financial position has enabled us to implement the second phase of our enhanced shareholder return framework in May of this year. We are now allocating 25% of our annual free cash.
Cash flow to a share buyback program through September we repurchased $21 6 million common shares for $141 million, representing three 8% of our shares outstanding at an average price of $6 53 per share.
During the month of October we were subject to a special blackout, giving the given the pending announcement of Eric joining ved tax and as a result, our buybacks were limited during the months for November and December we expect to resume buying back our shares as we target 25% of our annual free cash flow for this activity.
And now I'd like to turn the call over to Eric and officially introduced him to our analysts and shareholders on the call today.
Thanks, Rob and thanks for.
In your opening remarks, as well and good morning, everyone.
I am excited to be joining pay tax I've already had the opportunity to engage with the executive team and meet many employees, including the Peace River Viking in Duvernay teams and I can't wait to get out in the field on a couple of weeks.
I have been impressed with the quality of the assets and the people here at <unk> I've also spoken with our top shareholders and I can tell you that we are well aligned on driving returns of the business.
Latex has in place a strong shareholder return framework that is focused on continued deleveraging and over time as our debt targets are achieved increasing the allocation of free cash flow to direct shareholder returns.
I'm very pleased to confirm at this time and upon hitting our ultimate target of $400 million.
We will increase direct shareholder returns to 75% of our free cash flow.
We've laid out a detailed summary of this updated shareholder return framework in our November Investor Relations presentation, which is available on our website and includes a slide showing $3 $2 billion of free cash flow generation, returning $1 8 billion to shareholders over our five year plan period.
At $80 U S. W. Ti.
I'm very excited to get started.
And thank you for your leadership and support through this transition that is greatly appreciated.
A tremendous career I know everyone at <unk>, including myself wish you all the best in retirement.
And now operator, we're ready to 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, you'll hear a tone acknowledging your request.
Using a speakerphone please pick up your handset before.
Hey, Jamie.
To withdraw your question. Please press Star then two.
Our first question is from Patrick O'rourke with <unk> capital markets. Please go ahead.
Good morning, guys.
Suddenly say congratulations to Ed on his successful tenure here hopefully in your retirement.
You enjoy your time away.
But I'm sure you'll keep very busy and then to Eric hopefully youre enjoying the weather here in Calgary This weekend.
I'll start.
Just to shift over to the Clearwater here you didn't obviously theres been a lot of configuration in terms of the wells you've got one by a two by four you have gone from 50 meters to 40 meters on the interlake spacing now.
Couple of quick questions with respect to that number one.
Is there an ideal design in terms of the one by two by floor that you are settling on where do you think you are in terms of understanding the.
The technology and what the optimal.
Sort of configuration is and then second with respect to the inner well.
Down spacing from 50 to 40 meters you talked about the potential to increase inventory, 20% is that a configuration that would be pervasive across the entire reservoir.
It does not only work in certain spots depending on the geology and then there is a potential for further.
Alan speaking.
What the signals are in terms of communication.
The allowance.
Yes, Theres a lot in that question, Patrick So I'll say, what I have on my mind, there and then pass it over to Chad Lundberg.
Our Chief operating officer. The first thing as you are aware, we've been drilling multilateral appear in this region for two decades, and we believe we're if not the best certainly one of the best and multilateral open hole.
Drilling configurations. So we've in Peace River for example, we have tested 25% to 50 meters over the.
The last decade, but actually we've run we've run a little pilots from 15 meter spacing to 150 meter spacing backup in the early Harmon Valley days. So we've also drilled a variety of geometries.
And really wild configurations to maximize the resource within whatever part of the Blue Sky play, we've been and we're learning and growing and the P volume very rapidly we've only got 24 wells on and we're at 10000 barrels a day.
And you saw us move to the four lateral extended reach drills fairly recently, we've probably got 10 of those on now certainly nine since the second half so.
That is our preferred configuration for the majority of the remaining development at least for now and the reason for that.
Is partly technical and partly social issues, we can drill these wells with the big Rfps, we get our drilling in the sand, we pull out of the hole for fewer times its a cost optimization and it's also one where we're seeing the ability to stay in reservoir longer and Geo steering.
By the way I think is one of the critical success factors and we've got 99 plus percent in zone.
Drill success here.
So these these two mile laterals are making a big difference for us technically and from a cost standpoint. They are also important from a social standpoint, and social license. There in the <unk> settlement is very very important as we move towards the hamlets in the residential areas and we're able to undershoot environmentally and socially.
<unk> sensitive areas and Thats critical to us but is there another.
The team was very creative Theyre, very tenacious were always leading kind of innovative trends on multilateral drilling so.
<unk>.
We certainly will probably go further but Chad do you want to add anything to what I said there are other SaaS, whether youre drilling one by <unk> four as Youre essentially drilling the same amount of rock there could be some operational efficiencies with as Ed described the four laterals, where you're less trips in and out of the well 50 meters to 40 meters.
Jason I think is pretty key for us, let's face it it all comes down to rock quality. So when we think about Clearwater. It comes out of mobility and the thickness of the rock and that will ultimately dictate if we are able to push this even further.
And the peace region itself for 25% to 50 meters, we use that as a bit of an analogous to get going being cautious to not overcapitalized early in the play. So we're actively modeling to help drive these decisions and then carefully calibrating our models with our production results as we continue to develop and drill.
<unk> and.
That will really dictate how we develop moving into the future from here.
Okay.
And I'm just curious how you measure that you have technology downhole that can determine sort of competitive drainage between the legs.
Yes.
Well certainly lower drilling we have technology in the lateral that helps us to decode and understand the rock.
We can deploy different levels of sophistication on the drill bit to help us to understand and then on the back end of it.
Coming down to production modeling as well as pressure.
Survey is to help understand the drainage patterns.
Okay. Thank you.
The next question is from Menno <unk> with TD Securities. Please go ahead.
Good morning, everyone and thanks for taking my questions and I would certainly echo.
<unk> comments earlier, maybe I'll just start with.
M&A you sold 600 <unk> of non core non <unk>.
In the quarter and so my question is are there other opportunities to clean up the portfolio or should we assume that that's pretty much it for the time being and then.
More generally how are you thinking about.
Portfolio composition at the moment.
Any thoughts on the market for acquisitions would be would be helpful as well.
Yeah, I'll start with that Minto and other people may want to comment. We've obviously got a new CEO has who has a lot of experience in some of these basins as well, but we're pretty well cored up we've been trying to monetize some of the non core liquids rich gas to 600 Boe.
They we just sold for $26 million, but trying to monetize that now for two or three years, when we got to a place where a co.
<unk> had picked up to the point, where we've got a fair valuation on that property. There is a little bit more in there we still have some some liquids rich gas properties that.
That don't fit as neatly as other places as I've said before but we're pretty well caught up we like our multi basin.
Diversification as I said, we like being in South Texas attracting.
Phenomenal gas prices as well as oil prices.
Down there, we're not seeing the fluctuations in pricing like the Permian does on Oahu for example on the gas side.
The other thing is that the Duvernay I've talked about as being a question Mark we need to see a little bit more derisking and value enhancement and we have in fact, we did a ton of science. This year, we only drilled three wells, but those three wells are roughly on type curve. The science is showing.
And sort of confirming that this is a 20000 barrel a day opportunity is one that has large reserve add potential and it's got.
It's got 80% to 110% IRR is I believe on an $80 <unk> price deck and it can grow within cash flow down to $70 <unk>. So I would say now the duvernay has moved more towards a strategic asset for <unk>, but it's still a go slow to go fast we need to learn as much as we can.
Can and then the term determined the right time to bring it into the plan.
It's not really in our five year plan, we've got a couple a few wells, we drill every year, but.
I would say that one so a bit more strategic now having done the work and calibrated it with new production data. We've only got 15 wells in the play so I think we're pretty well cored up mento.
<unk>.
Let the team continue to work it.
I appreciate the color and then just just moving on to the to the cost structure. Given your cross border exposure are you seeing any discernible differences between Canada.
In the U S. When it comes to capital and Opex and inflation and how could that impact your <unk>.
Capital allocation decisions into into 2023.
Yes, well, we took a view in Q1 and increased our capital.
And we saw inflation, both in Canada, and Eagle Ford running reasonably hot and reasonably consistent since that time, what we've seen is a very big pickup in inflation in Eagle Ford and in Texas in General.
And less so in Canada, So were now showing 20% inflation in Canada from call it or begin our budget numbers for 2022.
As we look at 2023, we're seeing a 30% increase in.
And inflation in the Eagle Ford and part of that is just because of the degree of pressure pumping. We do on the Frac side of the business Chad do you want to add any further color on inflation delta as well.
You draw radius around the Permian and that is definitely being impacted in a big way in the United States, we're seeing more inflation.
In the Eagle Ford versus Canada in terms of capital allocation decisions in the Eagle Ford is still incredibly strong economics or <unk>.
Still generating good returns with the inflationary pressure.
Net net across the board in Q2, we've seen a 20% inflationary add overall and we're probably running a little hotter than that half to where we've seen a little bit more through the back half of the year.
Right now we're just trying to anticipate what we look forward to 2023 and are planning.
For budgetary purposes.
Thank you I'll turn it back.
Thanks Benno.
The next question is from Dennis Fong with CIBC World markets. Please go ahead.
Hi, good morning, and thanks for taking my question I'm going to third.
Congratulations to Ed and while carrying here in terms of.
CEO transition. My first question here is just really around feel I know theres kind of a second net or another net well that's being drilled here in the fourth quarter.
To further evaluate that asset just curious as to how youre thinking about balancing.
Are there delineation and of the <unk> asset while also balancing off development.
Obviously with NP five.
Yes, well seals that exciting area, we're going to see a big uptick in activity, partly due to the competitor activity and partly due to our own so we're going to drill.
Second well on that sealed trend that you mentioned diagonally across roughly two townships of land that we own.
We will get that done and we'll have results on that by full year.
The end of this year, but we're also going to see some of the competitors come very close to our lease lines.
And we're already seeing permitted wells that.
Juxtapose or leases very closely around seal and I'll call. It the greater Harmon Valley area as well so theres more to go there is some data collection.
<unk> is a multi zone area more so than that <unk> <unk> is the full Eric E and we've got the <unk> D through the full layer a up in.
Seal and Harmon Valley that we're looking at very carefully so we'll drill the second one by the end of the year and then I think we've got to plan in 2023 meantime were flat out in <unk> and we want to keep growing that asset. So we've got one rig operating in <unk> line and Thats going to move to two rigs in Q1.
And then we'll have a rig operating right throughout.
The area of Peace River broader peace River in 2023 as well. So you can look for potentially more activity up there from US certainly the competitors will help us learn and Derisk our properties.
Trickier areas in <unk>.
Great great. Thanks.
Shifting my focus and maybe just a question for Rod is with respect to the term debt obviously the market seems to be in a relatively favorable situation fee repurchasing that continuously.
But just curious as to how youre thinking about the current capital structure of the company.
Is the credit facility is going to be the focus here forward obviously as this.
Instead of a term notes are relatively more expensive, but I just wanted to curious as to.
How are you thinking about the entire capital structure of the company.
I think longer term Dennis I think we would point to our overall debt targets and right now having the term debt in there probably doesn't fit within it it tends to be more expensive than what we'd be paying on our bank line. Despite the increases that we've seen from the fed I think are variable.
Right that is still just over 4% so comparative to the 875% we'd be paying on the notes we are better off to take out the notes when possible I think the volatility in the market given us some opportunity to advance on some of those purchases where we've.
Stepped in and taken those out just over par.
I think we'll continue to watch the market closely and look to optimize the position as we delever.
Great Great. Thanks, and my final question here just on the capital return component.
I understand just given current valuation the focus is on buyback.
That in the past there has been a we'll call it an expression of interest around a dividend.
How should we be thinking about that especially after you potentially cross that.
Holden of achieving that net debt floor.
Well I think we're going to continue to monitor it Dennis I think our focus has been on Delevering and also recognizing that we believe our shares have been undervalued and so the buyback has been the preferred choice I think if you look at our communication, we remain open to considering all forms.
Returns to shareholders, but when we think of it we are committing to call it 75% of free cash flow going back in some form to shareholders and I think where we continued to watch for some form of market differentiation around that and we will look to optimize that when the time comes given that we're still.
We're probably lagging peers and reaching those hurdles I think we're going to have the benefit of some hindsight on that to be able to implement but ultimately we are committed to the direct shareholder returns.
Great I appreciate the color. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Brian Ector for any closing remarks.
Alright, thanks, operator, thanks, everyone for participating in our third quarter 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 day.
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