Crescent Point Energy Corp

TSX:CPG

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen. My name is Selvi, and I will be your conference call operator for Crescent Point Energy's Q1 2019 Conference Call. This conference is being recorded today, and will be broadcast along with the slide deck, which can be found on Crescent Point's website home page. The webcast may not be recorded or rebroadcast without the consent -- express consent of Crescent Point Energy. All amounts discussed today are in Canadian dollars, unless otherwise stated. The complete financial statements and management's discussion and analysis for the period ending March 31, 2019, were announced this morning and are available on Crescent Point's SEDAR's and EDGAR's websites. [Operator Instructions] 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 Crescent Point's SEDAR's or EDGAR's website 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. And I would like to turn the call over to Brad Borggard, Senior Vice President, Corporate Planning and Capital Markets. Please go ahead, sir.

[Brad Borggard]

Thank you, operator. And I'd like to welcome everyone to our first quarter 2019 conference call. With me are Craig Bryksa, President and Chief Executive Officer; Ken Lamont, Chief Financial Officer; and Ryan Gritzfeldt, Chief Operating Officer. Other members of our senior leadership team are also present to provide additional insight during the question-and-answer period at the end of the call. As the operator highlighted, the conference call is being webcast along with the slide deck, which can be found on Crescent Point's website. I'll now pass things over to Craig for an overview of Crescent Point's Q1 2019 activities and results.

[Craig Bryksa, President, CEO & Director]

Thanks, Brad, and thank you, everyone, for joining us today. Our strong first quarter results continue to demonstrate the changes within our organization. New management is focusing on capital discipline, increased free cash flow generation and improved shareholder returns. We've had a great start to the year, including net debt reduction of over $100 million during the first quarter. Share repurchases totaling more than $5.6 million since the launch of our normal course issuer bid. Ongoing cost improvements and increased hedging activity to protect our financial flexibility. We remain on track for an annual guidance with unchanged capital expenditures further highlighting our focus on capital discipline.We now expect to generate approximately $600 million of excess cash flow in 2019 based on guidance at current strip prices. We plan to allocate these excess funds to additional net debt reduction and accretive share repurchases. During the first quarter, we initiated a process for asset dispositions, which continues to progress. In fairness to those involved, we will not be discussing any additional details with respect to potential dispositions on this call. I do want to emphasize that we will remain disciplined and flexible as we focus our asset base and create value for our shareholders. I'll now pass the call over to Ken to discuss our financial results in greater detail.

[Kenneth R. Lamont, Chief Financial Officer]

Thank you, Craig. During the first quarter of 2019, we reported adjusted funds flow of $514 million or $0.93 per share fully diluted, based on strong operating netbacks of approximately $34 of BOE. This compares to adjusted funds flow of approximately $430 million or $0.78 per share at the same time last year despite lower WTI prices. As a part of our asset review conducted in 2018, we identified key focus areas based on returns, free cash flow generation, scalability and market access. These plays, which include Viewfield, Shaunavon and Flat Lake, generated operating netbacks of approximately 8% higher than our corporate average in the first quarter, highlighting the lower cost and premium oil pricing associated with these areas. Our Q1 adjusted funds flow was $514 million, which compares to capital expenditures of only $380 million during the quarter. By being more consistent and disciplined in our capital and drilling program, we reduced capital expenditures in Q1 by almost 50% compared to the first quarter in 2018. In the first quarter, adjusted net earnings from operations totaled approximately $160 million or $0.29 per share fully diluted, up from $63 million or $0.12 per share in Q1 of 2018. First quarter results incorporated just over $30 million of positive nonrecurring contributions, this primarily include a payment under a settlement agreement related to the successful resolution of our previously announced legal and regulatory action. As a result of management's negotiated settlement agreement, Crescent Point will also benefit from a revised pipeline tariff that is expected to increase our netback for oil production transported in the Saskatchewan pipeline system. In terms of realized pricing, our oil differential improved in the first quarter by over 60% compared to the fourth quarter of 2018 to $8.36 a barrel. Based on realized prices to date and the current forward curve, we expect our second quarter 2019 realized oil price to increase by approximately 15% relative to the first quarter of 2019. We reduced our net debt in the quarter by over $100 million, resulting in net debt-to-adjusted funds flow of approximately 2x, and unrealized credit capacity of approximately $1.7 billion as of March 31, 2019. We expect to generate approximately $600 million of excess cash flow in 2019, based on our guidance at current strip prices, which will significantly improve our leverage and financial flexibility. These funds do not include any benefit from the potential asset dispositions. On an accounting note, Crescent Point adopted International Financial Reporting Standard 16 on January 1, 2019. This new standard requires companies to recognize most operating leases as liabilities on the balance sheet and equated to approximately $224 million as at March 31, 2019. I would like to highlight that this accounting change does not impact our debt covenants or credit available under our bank credit facilities. I will now pass things over to Ryan to discuss our operating results. Ryan?

[Ryan Chad Raymond Gritzfeldt, Chief Operating Officer]

Thanks, Ken. Our average production in first quarter of 2019 was 175,955 BOE per day, of which approximately 91% was comprised of oil and liquids. As part of our focus on improved sustainability, we continue to realize additional cost savings and advance our waterflood programs in each of our key focus areas. Specifically on reducing costs, our teams have mitigated any impact from modest cost pressures resulting from higher commodity prices through continued optimization and supply chain initiatives. We are also expanding the use of technology and automation throughout our field operations to change our staff's workflow. We expect these initiatives to result in reduced downtime and work over frequency and overall increased productivity that we believe will lead to additional improvements in our operations cost structure. As for our decline mitigation program, our 2019 budget includes converting a total of 145 producing wells to injectors, of which approximately 75, or just over half, were completed in Q1. In Viewfield, we recently completed the unitization of our fourth waterflood unit. We now have 4 approved waterflood units consisting of approximately 1 billion barrels of oil in place, which will allow us to better control the pace of future waterflood development.Base decline rates in these units continue to demonstrate the success of our waterflood program and the opportunity for improved alternate reserve recovery and free cash flow generation. I'd like to thank our field teams and service partners for their dedication, hard work, operational execution and continued focus on our health and safety initiatives, especially during a much colder-than-usual first quarter. I'll now turn it over to Brad to discuss our capital allocation and recent hedging activity.

[Brad Borggard]

Thanks, Ryan. Our 2019 production and capital budget remains unchanged, notwithstanding the increase in commodity prices since releasing our annual guidance in mid-January. We continue to target annual average production of 170,000 to 174,000 BOE per day and capital expenditures of $1.2 billion to $1.3 billion. Approximately 70% to 80% of our excess cash flow in 2019 is expected to be allocated towards debt reduction with the balance going to our normal course issuer bid. We believe that share repurchases represent an attractive allocation of shareholder capital, given our current valuation. In our year-end results, we provided our net asset value of $13.38 per share price based on a conservative flat price deck of $55 WTI. This NAV includes $5.37 per share of value on a proved developed producing basis, including land, seismic and derivatives. Assuming the flat $60 WTI price, our year-end NAV would increase by over 20%, highlighting the strong underlying fundamental value of Crescent Point's assets relative to our current share price. On that note, to date, we have repurchased over 5.6 million shares or approximately 15% of the normal course issuer bid we launched in late January. We remain committed to our share repurchase program and plan to continue repurchasing additional shares as we further strengthen our financial position. Since our last update in early March, we have significantly increased our hedge position by adding new hedges to 2019 and extending through 2020, utilizing a combination of swaps and 3-Way Collars. As at May 3, approximately 45% of Crescent Point's oil and liquids production, net of royalty interest, was hedged to the remainder of 2019. With respect to 2020, we're now approximately 35% hedged for the first half of the year and 23% hedged for the second half. We will remain disciplined as we continue to look to layer on additional hedges to further protect our financial flexibility. I'll now pass things back to Craig for closing remarks.

[Craig Bryksa, President, CEO & Director]

Thanks, Brad. I'm very pleased with our start to the year and the changes we are implementing. In a short period of time, we have improved our overall capital efficiencies; reduced G&A, drilling and completion costs; and lowered our operating expenses; improved our capital allocation process to generate stronger corporate returns and significantly increased our free cash flow profile giving us the flexibility to reduce our net debt and make accretive share repurchases. We're also being disciplined in our disposition process, making sure we obtain appropriate value for our noncore assets. In addition to the changes made to our management team, our key value drivers and our overall strategy, Crescent Point has also recruited notable new directors with strong and diverse skill sets. Following our upcoming AGM, our board will have completed a full renewal since 2014. Before we open the call to questions, I'd like to thank our shareholders for their continued support and engagement. I'll now turn it back to the operator for the questions.

[Operator]

[Operator Instructions] And the first question comes from the line of Travis Wood at National Bank of Canada.

[Travis Wood, Analyst]

Brad, I think this question is for you. I missed the tail part of your opening remarks there. Just with respect to allocating that free cash, I mean, obviously, WTI prices are up substantially year-to-date. The NCIB is in place. Can you walk us through and remind us again that, that allocation and that strategy around that free cash wedge, please?

[Craig Bryksa, President, CEO & Director]

Travis, it's Craig here. I think Brad and I will tag-team this one. But we've messaged in the past that we're looking at 70% to 80% of that free cash flow, will be directed towards net debt reduction with a remainder, so call that 20% to 30% going towards our NCIB. You can look for us to be a little bit more active here in the second half of the year on that NCIB as we realize this free cash flow that's been coming in. I don't know, Brad, if you have anything?

[Brad Borggard]

I think that's pretty much summed it up.

[Travis Wood, Analyst]

Okay. And then, is there a scenario whether it's macro-driven on the commodity price or other, is there a scenario where that allocation changes that you're considering today, whether it's -- does the free cash wedge start to become larger and you allocate more to that NCIB, advance the NCIB or expand it?

[Craig Bryksa, President, CEO & Director]

Yes. So to that, Travis, net debt reduction is obviously a priority and a pillar of our strategy. So we remain very focused on that. If commodity prices continue to prove over and above what they are right now, then we'll look to direct -- that same sort of percentage will be directed towards the NCIB. So again, call that 20% to 30%. On the back half -- or the back end of the disposition, again, we'll look to direct most of that towards net debt reduction with some of that, again, being directed towards NCIB as well. So we're staying very disciplined around this and focused on it. And any decision we do make will be with returns in mind.

[Operator]

[Operator Instructions] And your next question will be from Thomas Matthews at AltaCorp.

[Thomas Matthews]

I just had a quick question on op costs. Just looking at your historical op costs, it tended to go up in Q2 and Q3. I'm just wondering with this new cost focus and the potential for production to decline as you get through breakup here? Are you going to see those unit costs go up this iteration? Or have you mitigated that again with your new cost focus?

[Craig Bryksa, President, CEO & Director]

Tom, this is Craig again. That's a good question. It's definitely a focus for us here as we continue to transform the company and change the company into more of a returns-based company. And I'll maybe pass that along to Ryan and he can speak to some of the initiatives that we're working on.

[Ryan Chad Raymond Gritzfeldt, Chief Operating Officer]

Yes. I think just to kind of reiterate, I think what I've previously said, like we are -- we were laser-focused on operating costs, as Craig mentioned. We are operating differently. Like I said, utilizing some new technology and automation to just change in the way we operate, try to be more proactive on reducing downhole failures and just utilizing our time more wisely. And from my perspective, it's going to be really difficult to forecast how much of reduction these initiatives will bring. But we are confident that it will lower our cost structure go forward.

[Thomas Matthews]

Sounds good. And then just one question on Uinta differentials. Obviously, they're widening out here. Is there anything in the works that will change that either from your perspective, with the new contract or from the industry? And how does that have the potential to impact your capital deployment, either for the balance of the year or for next year? I know it's not a big part of your program, but yes, just wondering if you're just seeing anything on the horizon that would -- will change that either positively or negatively?

[Brad Borggard]

Thomas, it's Brad here. I'll try and handle that one. As you probably would've saw, differentials in Q1 were a little bit wider. So we did see that sort of filter through our results and cash flow for the quarter. We are working on stuff, nothing really that I could comment on publicly. It is obviously a focus for us to try and improve egress within the Uinta Basin, and as everyone knows, we pulled back on capital there, given our returns focus and some egress restraint. So we're still optimistic that we can try and get some stuff done there, but there's nothing I can really relay right at the current moment that's going to say, we're going to break that open. I don't know, any of the other members have something to add to that. But again, it's something that we're long-term focused on, nothing eminent that I could really point to that I would want to comment on the call.

[Operator]

Your next question will be from Juan Jarrah at TD.

[Juan Jarrah, Research Analyst]

Clearly, your budget was at 50 -- well, 60, obviously, that's a great place to be, made it pretty clear in the press release and your comments that there's not going to be any change to your capital budget. But I guess, my question to you is, does the allocation within your budget change now that you've got another $10 basically in your pocket that might change the rates of return that you could see from some of the different assets across your asset base?

[Craig Bryksa, President, CEO & Director]

JJ, it's Craig here. So that allocation process hasn't changed here throughout the year. So we built that budget, laid it out in January 15. We stayed pretty steady with the capital allocation. So 55% of that is being directed towards our 3 core focus areas, 15% of that is then split between the emerging areas in Uinta and East Shale with the remainder going to -- the remainder of the asset. So the capital allocation within the portfolio really hasn't changed throughout the year. We're going to stay disciplined to what we've laid out. Thanks for the question.

[Operator]

Next question is from David Popowich at CIBC.

[David Popowich, Director of Institutional Equity Research]

I just wanted to follow-up on realized pricing. I think in your commentary, you said that with marketing settlement that you guys realize in the first quarter, you're expecting a 15% increase in realized oil pricing. I guess, is that WTI-neutral, like does that reflect a improvement in the differential, like how should we be thinking about the 15% improvement in realized pricing throughout the remainder of the year?

[Brad Borggard]

David, it's Brad. I can try to handle that one. So it's based on the forward curve as of right now. So the forward curve would imply for Q2 a bit better U.S. dollar WTI and then also Canadian dollar WTI pricing. So it reflects basically sort of $61 and change U.S. dollar WTI, and about a $0.75 dollar for Q2. And then basically take your differential off of that to get that 15% improvement at the -- on the realized overall corporate price.

[David Popowich, Director of Institutional Equity Research]

Okay. So that's not a contingent on any change in like the LSP or UHC differential throughout the remainder of the year?

[Brad Borggard]

No. So the LSP, obviously, part of the diffs have been sort of traded and settled for Q2 already. So we have some confidence in where the diff is going to settle out. We have probably less confidence on WTI because obviously, that's still just trading, and that's going to be based on whatever the market does between now and the end of June. But when you look at our projection, it basically implies a little bit wider diff, and -- but it incorporates in the improvement in WTI prices to -- on a net basis, get you to that 15% corporate improvement. So just to give you a sense of Q1, WTI was $54.90. And Q2, based at the time we updated our strip model, it was like $61.50 type of range.

[Operator]

And at this time, we have no other questions. I would like to turn the call back over to Craig.

[Craig Bryksa, President, CEO & Director]

Thanks, everyone, for joining our call today. If you have any questions that weren't answered, you can reach out to our Investor Relations team at your convenience.

[Operator]

Thank you, sir. Crescent Point's Investor Relations department can be reached at 1 [phone]. Thank you and have a good day.