Q4 2022 Baytex Energy Corp Earnings Call
Thank you for standing by this is the conference operator, welcome to latex N O T. A yearend 2022 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 to join the question queue. You May Press Star then one on your telephone keypad should you need assistance during the conference call you may signal, an operator by pressing star and zero.
I would now like to turn the conference over to Brian Ector.
Please go ahead.
Thank you Sheila good morning, ladies and gentlemen, and thank you for joining us to discuss our fourth quarter and full year 2022 financial and operating results.
Today, I'm joined by Eric <unk>, our President and Chief Executive Officer, Chad <unk>, Our Chief Financial Officer, and Chad Lundberg, our chief operating 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.
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.
On the call today, we will also be discussing the evaluation of our reserves at year end 2022.
The evaluations have been prepared in accordance with Canadian disclosure standards, which are not comparable in all respects to United States or other foreign disclosure standards.
Our remarks regarding reserves are also forward looking statements.
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 Eric.
Thanks, Brian Good morning, everyone and welcome to our year end 2022 conference call.
I have now been with beta extra four months and during these early days I've had the opportunity to meet many of you in the investment community.
This is something I look forward to continuing as we build even stronger relationships with our investor base.
Yesterday, we returned to trading on the New York Stock Exchange and we look forward to improved trading liquidity and a better trading experience for our shareholders.
As part of our conversations with shareholders I have been asked on many occasions, what attracted you to pay tax.
The first thing I always point to is a high quality and diversified oil portfolio, we hold in Canada, and the Eagle Ford in Texas with over a decade of development opportunities across the portfolio. The <unk> business is strong.
Our objective is to deliver modest reliable annual production growth, while generating meaningful free cash flow and maintaining reasonable financial leverage.
We have a strong shareholder return framework in place and we are committed to building, an even stronger and more resilient business over time to increase shareholder value and enhanced direct shareholder returns on a per share basis.
What has impressed me even more than the quality of the asset portfolio are the people both in Calgary and across our field operations. This is a passionate team of high quality professionals, who are committed to creating value for shareholders. This really excites me.
Operationally, we have delivered volumes to market in a safe and efficient manner and executed our programs to the benefit of all stakeholders and that's not always easy, especially when the teams are facing days and weeks like we did in December with minus 40 degree temperatures and heavy snowfalls.
We are grateful to our employees and contractors for their commitment and perseverance to operating safely and reliably.
Let's now discuss our results in a little more detail.
2022 was an exciting year for <unk>, we delivered strong operating results generated record free cash flow and further strengthened our balance sheet and initiated direct shareholder returns.
We generated a 4% year over year increase in production repurchased four 3% of our shares outstanding and reduced net debt by 30% in other words latex delivered on all of the commitments we laid out at the beginning of 2022.
Production during the fourth quarter averaged approximately 87000 Boe per day.
Which brought full year production to 83500 Boe per day.
We generated free cash flow in the fourth quarter of $143 million and for the full year 2022, a record $622 million.
We maintained capital discipline, despite inflationary pressures across our portfolio that was consistent with the industry and the broader economy.
Exploration and development expenditures totaled $104 million during the fourth quarter and $522 million for the full year.
We delivered adjusted funds flow of $256 million in Q4, 2022, and $1 $2 billion in 2022.
During Q4 2022, we reversed $268 million of previously recorded impairments on our assets.
Primarily as a result of higher forecasted commodity prices.
This contributed to net income of $353 million in the fourth quarter and $856 million in 2022.
During 2022, we initiated direct shareholder returns allocating 25% of annual free cash flow to a share buyback program was 75% of free cash flow allocated to debt reduction.
We repurchased $24 3 million common shares for $159 million at an average price of $6 54 per share.
In addition, we significantly strengthened our balance sheet, reducing net debt by 30% to $987 million.
Representing a net debt to EBITDA ratio on a trailing 12 months basis of 0.8 times.
Today, our balance sheet is stronger than at any point in the last 10 years.
With respect to year end reserves, we generated a strong PDP recycle ratio of two eight times and a one P. Recycle ratio of one four times based on 2022 operating netback of $54 64 per Boe.
Okay.
At year end, our PDP reserves totaled 124 million Boe.
Proved reserves totaled 264 million Boe.
And proved plus probable reserves totaled 438 million Boe.
And we maintain a strong reserve life index of 13 eight years based on proved plus probable reserves.
The present value of our reserves discounted at 10% before tax is estimated to be $5 $9 billion up from $5 $1 billion at year end 2021.
The increase is largely attributable to a higher commodity price forecast being utilized by our reserves evaluate or <unk>.
Using the consultant average of approximately $81 per barrel <unk> in U S dollars.
Our net asset value at year end 2022 discounted at 10% before tax of $9 28 per share. This is based on the estimated reserves value plus a value for undeveloped acreage net of long term debt and working capital.
At a.
Ansible energy producer, we are committed to monitoring greenhouse gas emissions from our operations setting targets to reduce our emissions intensity and pursuing cost effective strategies to produce energy for society with a lower carbon intensity.
In 2022, we reduced our greenhouse gas emissions intensity by 15% from 2021 levels.
This is a 59% reduction from our 2018 baseline and represents an annual reduction of 1.1 dollars 7 million tonnes of Cotwo heavily.
Which is the equivalent of taking 340000 cars off the road annually.
Operationally the highlight continues to be our Clearwater development at <unk>.
This is an asset that at current commodity prices generates our strongest economics within our portfolio and has the ability to grow organically, while enhancing our free cash flow profile.
During the fourth quarter, our Clearwater production averaged 11000 barrels per day and for the full year 2022 averaged 7400 barrels per day.
During 2022, we drilled 22 net wells at <unk> with initial well performance continuing to outperform type curve assumptions and we now hold the top 15 initial rate wells drilled across the play.
We expect to bring approximately 31 net wells on stream at <unk> in 2023.
Looking forward, we expect another strong year in 2023, as we advanced development across our high quality oil weighted portfolio further delineate our P line Clearwater acreage and progress our Duvernay light oil resource play.
We are committed to allocating capital efficiently to generate meaningful free cash flow and increasing direct shareholder returns.
Our 2023 guidance remains unchanged as we target production of 86 to 89000 Boe per day with exploration and development expenditures of $575 million to $650 million.
Based on the forward strip, we expect to generate approximately $450 million of free cash flow in 2023 and.
And expect to reach a net debt level of $800 million.
During Q3, 2023 at which time, we anticipate increasing direct shareholder returns to a 50% allocation of our free cash flow and accelerating our share buyback program.
I am excited I'm excited to continue helping move this business forward.
And now operator, we are 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 will hear a tone acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any Keith <unk>.
<unk> you have questions. Please press Star then two.
I will pause a moment as callers join the queue.
The first question comes from Middle Horse Shah from TD Securities. Please go ahead.
Thanks, Dan.
Good morning, everyone I'll start with the the Clearwater It sounds like the Angola still fits.
15000 barrels a day at which point it largely becomes a free cash flow generator, but.
With the November production, having averaged 12000 barrels per day in <unk>.
<unk> just around the corner, let's say sometime in the first half.
2024, how committed are you to 15000 barrels per day as a peak rate.
And why did you settle on that number.
Hey, good morning, Menno, it's Eric here, Thanks for the question.
We're always working closely with the communities in which we operate and I think you and I have spoken about this kind of one on one overcomes a coffee really that is.
The governing constraint, we want to be respectful.
And just to be sure that we don't set expectations.
That put us in a position of pressing too hard.
So.
We've reached this this band of 12000 15000 barrels per day.
It feels very comfortable to us operationally, it's not it's not terribly challenging other than when there are heavy snowfalls in minus 40 degree days.
They're challenging for pretty much any any situation in life.
If we could move it a little bit faster certainly the resource can do that operationally, we could handle that we just don't want to set expectations that are out of line.
And want to be really responsible with regard to.
The impacts we have within the communities in which we operate so I guess the short answer is we're committed to 12% to 15000 barrels a day.
And we will continue to do everything we can from a surface cultural perspective and using the relationships.
To engage at every level within the communities to ensure that we're doing that responsibly I think those relationships are one of the key assets that responsible operators.
Maintain and so.
For us it's very important so I guess as we sit here today Menno, we are committed to 12% to 15000, and we will continue doing what we can to ensure that is.
Delivered reliably and if there is an opportunity we can we can push it higher but.
Let's stick with Outback that bad for now.
Terrific.
Makes a lot of sense and then just moving over to <unk>.
W. Ti breakeven you talked about the 2023 budget being funded down to $55 <unk> back in December , but just looking at some of the assumptions they've shifted around in some cases a lot some cases a little.
Some for the better I noticed that youre using a heavy differential that's quite a bit wider than it is today and then some for the warrants like lower natural gas prices. So if you kind of roll all of that up where do you think your wty breakeven stands today.
Yes, it's a little bit lower I would say so it has improved.
And the reason I would say that is because increasingly.
What's happening with the fairly fairly dramatic.
The reduction in the strip Henry hub gas pricing is there is a release of.
Industry resources.
And those resources are moving from Gasior plays where the returns aren't as.
Interesting for the operators to more oily plays we're differentially theyre getting.
More profitable returns both the operators and also the service companies and so what that means is there is there is a flow of resources, which has taken some of the upward pressure out of inflation, which is improving the results. The other thing I would say is when we set that $55 comment it had essentially baked into it.
The second half of 2022 or the maybe the third yes third quarter fourth quarter of 2020 to inflationary pressures and as a result of what I just mentioned those have those of.
Let up a little bit and so generally speaking we set 55.
As an arithmetic number that funded.
The price at 55, but when the price dropped to 55, obviously, the inflationary pressures move down with it and we've already begun to see that happen. So differentially, we're seeing resources come just a little bit more available for us which has lowered our wty breakeven.
Okay.
Yes.
Thanks, Eric I'll pass it back.
Thank you.
The next question comes from EMEA.
ATB capital markets. Please go ahead.
Thanks. Good morning, guys. Just a couple of quick questions. Just first on the on the reserves can you just give us a little more color on the negative technical revisions that you had in the Eagle Ford.
Yeah, So I'll make a comment and then.
I'll look around the room to see if others want to sort of follow up and fill in the blanks.
These negative.
Negative technical revisions were primarily in the Eagle Ford.
The Eagle Ford as a fracture stimulated player's everyone as everyone knows and when prices move up.
It is.
Spacing and stacking to the extent that you can stack in a play.
And in the Horizon is a function of price it theres a price dependency so as prices move up.
There is some downspacing that generally takes place and we see it across all unconventional and basically all plays.
And essentially what has happened is.
Because of the puts and takes around commodity price, but also some of the cash cost structure. Most of the negative technical revisions are taken out of the longer tail of the curves. So the PV impact us is almost inconsequential, but the volume impact shows up and so this is.
One of the things that I would point to.
I would say that.
Look differentially across our asset portfolio Youll notice that Canada is incrementally.
Improving or improved in the 2022 year end reserves. It was primarily focused in the Eagle Ford and focused in the tail of the curves.
Yes, I think that's.
It's probably what I would say here, but generally speaking the year over year.
Reduction is also primarily a result of pretty simple things to understand and we took a really conservative booking approach to the Clearwater at <unk> and it's obviously outperforming our expectations in an absolutely spectacular asset.
And so there is there is a lot of.
Capacity left there as we continue to develop <unk> and Duvernay Likewise I'm very excited about the quality of the resource.
And we stepped up our pace of development, but thats not reflected in our 2022 year end reserves and so conservative booking on both duvernay as a as a fracture stimulated resource play and the <unk> and then of course, we sold.
Some reserves that.
I think just a simple refresh of that commentary was good for the business, but it does show up in the total reserve. So let me yes.
Yes, Let me park right there. Thank you Amir.
Okay.
Appreciate that Eric just to clarify that so it's basically additional locations that you've added that are causing the decline rate to be a little higher on the tailwind is that fair.
It's essentially.
Slightly higher cost on the operating side of the business causes the curves to go under an economic limit.
Out in life, but you've got more curves you've got higher economic returns on a per curve basis, but.
Audi in time effectively some of the volumes are below the economic limit out in time and again, because it's discounted and it's at the tail end of the curves. It has no value impact, but it has a volume impact.
And of course, this moves up and down according to commodity price.
Implied cash cost and.
Spacing and stacking assumptions, so it always moves up and down but it's a little noisier on fracture stimulated plays than it is on more conventional development okay.
Okay I appreciate that color and then just moving on to the free cash flow allocation to shareholders as you move from the 25%, 50% here in the third quarter or later.
Well for now is the preference to remain that allocation go entirely to buybacks.
Yes, yes, our plan is still as we see it today, given a reasonable view of commodity prices, we see Q3.
And.
The assumption is at this point in our plan is to continue to accelerate our share repurchase plan.
Okay and then just the final question on the Duvernay at once you've got these two three well pads drilled do you feel you have enough information to start moving this to a more of a development stage in 2024 or is it still too early to tell.
To try to move this into more of a production development phase.
Well I'm really pleased with with the way the first two wells have gone.
From a drilling and casing cementing just operationally it has been really really solid execution.
We've got two wells released.
And out out of checks or two to three well pads. So I would say, it's probably a little early too.
To declare that we have that we will have the information.
This.
Rigorous design of experiment has been structured such that we should have enough information in terms of the data collection efforts.
That are underway in terms of the modeling and regression work that has been done by the technical teams.
And the way we've structured the design of experiment on the two pads, we should have the information.
But because we've only released two wells and only on the kind of case total TV releases.
It's a little too soon to say, we will have the information, but we certainly structure. The design of experiment that we will and it'll be.
I'd say, if you think about.
All of the various levers of data collection and sensitivities, we're going to need to run a lot of it is on the production.
And reservoir.
Pressure performance side at the end and that's going to come probably in Q4, just just by virtue of.
Drilling casing, cementing and then breakup and in stimulation and then flow back with sensitivities and variability is built into the design of experiment. So it's just going to take time for that data to flow and but we should have and are structured to have the information necessary to move from what I would call demonstration phase which is.
That that part of the.
The derisking effort today to development.
Okay sounds good thanks.
Thank you.
The next question comes from Jeremy <unk> from Raymond James. Please go ahead.
Yeah, Hi, Eric Thanks.
These questions are a little bit more high level here, but.
But just kind of on the back of the other questions. What asset do you think is the most underappreciated by the market here you think like just in terms of some of the new drilling completion technology that youre seeing today.
I just look at what's happening with the Clearwater and suddenly where that came out of almost somewhat nowhere and I'm just looking at your asset base and trying to understand where the next big potential players here in your portfolio.
Yeah, Hey, Jeremy it's that's a great question.
I have this.
Foxy little saying that that oil is where oil was and it sounds a little hokey, but it's true when you think about it we.
We sit on a $1 million in the quarter net acres across our asset base.
And.
The exploration team that discovered.
The Clearwater RFP vine ring fence that asset and gave us a first mover advantage on that.
Absolutely the crown jewel of the play.
Is the same.
Oh science team that is now endeavor.
Endeavoring to poke around the balance of our of our position in.
In and around the Clearwater fairway and around the broader peace River.
And.
A company our size with a land based this size should have and we do have an ongoing organic exploration program and so.
Not a lot to talk about in terms of the results of that program. Because we are early in the year, but it's an ongoing development and it's something the teams are quite good at technically in the subsurface.
Operationally and financially. This team is just really really sharp across the board and I couldnt be happier with.
The capabilities and so oil is where oil was we said on $1 million a quarter net acres and we've got a team and a budget and a lot of capabilities to unlock it. So I think we've talked.
In smaller groups.
About the organic exploration program and what we hope to learn there let me just leave it at that but I would say there is.
I'm pretty excited about.
The potential and it's a demonstrated capability of the company.
Okay, and maybe just kind of a just a more personal question for you here. So you've been there for four months here.
The guidance really wasn't changed but where does where is your bias in terms of where you want to shift the company here now that you've kind of talked to different groups and seen everything like just in terms of M&A potential based on do you want to grow just just know that from your own personal bias here, where you where you want to take the company.
Yes, so I'm really excited.
<unk> obviously.
According to our earlier conversation.
It's going to kind of plateau here, let's say 12 to 15000 barrels a day.
Spin off a big pile of free cash flow and just really quick.
Spectacular results.
The Duvernay gives us a nice leg up I'm very encouraged about the resource quality and what I've seen in terms of just the technical capabilities of the company and the team.
To unlock that potential.
And so those are two things one is spectacular results leveling out freeing up the subsurface technical team to poke around a little bit more according to that kind of organic exploration commentary and then on the duvernay.
It's a real lag higher for us to add quality resource and development capabilities and a position we already own. So that's all on the organic side of the business I feel really good about Lloyd I feel really good about the broader peace river, including P. Vine I feel great about Viking.
This is just a really really solid company and one of the things I love about this portfolio is.
The diversification of risks when you think about.
Running assets in a single regulatory environment are exposed to a single price point or a single commodity.
As hard to create impress advantages, but when you've got exposure to heavy.
Exposure to light both at par and WCS, you get the opportunity to play things like.
Operating leverage at higher prices and exposure to <unk> and that kind of a heavy piece of business and you can press an advantage when it presents itself there.
These fabulous net backs and in Viking.
It's just it's just an engine that keeps on generating production and capabilities and it's super efficient delever lumpy level loaded and it just runs throughout the year reliably then youll look south of the border in the Eagle Ford and this is notionally a third of our production.
Half of our cash flow.
Trading at Ti plus premium pricing exposed to ship channel gas, which at the moment isn't great, but you've got Freeport LNG exposure.
And an opportunity to play different elements, what I like about this is you spread your exposure to correlated risks or another way to put it is youre not you don't have these these kind of correlated risk to concentrate themselves in your business are you able to both create and then press advantages around the business and move capital and resources.
<unk> is around.
To create a more balanced and ultimately.
We're reliable unprofitable enterprise. So that's all that's all organic on the inorganic side I would say one never wants to do M&A for the sake of doing M&A or A&D. It's all in the interest of serving.
Shareholder value creation and so.
If you think about the marginal use of accompany resource of the marginal use of of an operating free cash flow dollar you say look I can pay down debt at whatever that the return on that is you can buy back shares at whatever the return on that incremental operating cash flow dollar as you can reinvest in your business right now reinvesting in our business is.
By many multiples the best return.
But we also recognize that there is an overprint.
Of Investor.
Need and desire to get kind of a direct return and so that's why we've got this what we believe to be.
A very strong return of capital framework in place that we're committing to growing over time.
So you put all that together and you say all of that kind of speaks to okay. Those are the three uses of incremental free cash flow incremental operating cash flow.
On our returns kind of construct understanding investors want want their money back, which I certainly understand.
If you can do all of that and at the same time, you can create incremental value through accretion to your business and you can do so.
By continuing to run your business down the organic fairway will create business off to the side that is good that is good on all the metrics on a risk adjusted basis basis accretive then I think you would do that but you wouldn't want to just go do M&A for the interest of doing M&A or get bigger for the sake of getting bigger it's all about building.
Better more durable more resilient businesses over time that have access to lower cost of debt lower cost of capital and can generate reliable higher returns for shareholders over time, let me just stop there because thats kind of the two pieces.
Okay.
Okay, well thanks for your comment there.
Thank you.
This concludes the question and answer session I would like to turn the conference back over to Brian Ector for any closing remarks.
Yes. Thanks, this year and thanks, everyone for participating in our year end conference call have a great day.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating have a pleasant day.
Okay.
[music].
Yes.
Okay.
Okay.
Okay.
Okay.
Sure.
Yes.
[music].
Yes.
Sure.
Yes.
Okay.
Yes.
Yes.
Sure.
Yes.
Okay.
Okay.
Yes.
[music].
Yes.
Okay.
[music].
Yes.
[music].
Okay.
Okay.
Sure.
Hum.
Tom.
<unk>.
[music].
No.