Crescent Point Energy Corp

TSX:CPG

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, ladies and gentlemen. My name is Sylvie, and I will be your operator for Crescent Point Energy's First Quarter 2021 Conference Call. This conference call is being recorded today and will be webcast along with a slide deck, which can be found on Crescent Point's website homepage. The webcast may not be recorded or rebroadcast without the expressed 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 ended March 31, 2021, were announced this morning and are available on the Crescent Point, SEDAR and EDGAR 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 the Crescent Point, SEDAR or EDGAR websites or by contacting Crescent Point Energy. Management also calls your attention to the forward-looking information and non-GAAP measures sections of the press release issued earlier today. And I would like to turn the call over to Craig Bryksa, President and Chief Executive Officer at Crescent Point. Please go ahead, sir.

[Craig Bryksa, President, CEO & Director]

Thank you, operator. Welcome, everyone, to our Q1 2021 conference call. With me today are Ken Lamont, Chief Financial Officer; and Ryan Gritzfeldt, Chief Operating Officer. As the operator highlighted, this conference call is being webcast along with a slide deck, which can be found on our website. Before I discuss our quarterly results, I'd like to briefly speak to the improving industry sentiment and the opportunities ahead of us for this year. After a tumultuous 2020, the macro environment became more constructive in the first quarter of 2021. Although the world continues to face significant COVID-related challenges, the vaccination rollout has broadened and economies are beginning to open with global oil demand returning to closer to pre-pandemic levels. On the supply front, we believe the industry continues to show renewed discipline focusing on returns over large-scale growth. Additionally, OPEC and other oil producing nations have remained successful in managing the delicate supply-demand balance as global economic recovery finds its footing. These factors have all helped stabilize commodity prices with WTI hovering around USD 60 per barrel mark for much of the first quarter. Although the timing of the full global recovery remains uncertain, our commitment to our guiding principles of balance sheet strength and sustainability have remained unchanged. By maintaining this commitment, we have delivered strong first quarter results. During the first quarter, we generated significant excess cash flow of approximately $130 million, further enhancing our balance sheet strength, increased our emissions intensity reduction target to 50% by 2025 and remain on track with our annual capital spending and production guidance. As a result of our initial Q1 success and further operational execution, we anticipate generating excess cash flow of approximately $525 million to $650 million at USD 55 to USD 65 per barrel WTI for 2021. This significant excess cash flow generation materially enhances our financial position. Based on current commodity price environment, we expect continued improvement into next year as well further enhancing our value for our shareholders. Subsequent to the quarter ending, we closed our accretive acquisition in the Kaybob Duvernay. We expect that our entry into this play will further enhance our expected free cash flow generation, accelerate our deleveraging profile, give us significant inventory and infrastructure in a low-risk play and improve our environmental performance, all at accretive per share metrics. Since closing the acquisition, our teams have moved swiftly to integrate the new assets into our portfolio and have welcomed a talented team of former Shell employees to Crescent Point. Our operations strategy continues to be holding production relatively flat at approximately 30,000 BOE per day, while making an annual capital investment of approximately $180 million. This produces annual net operating income of approximately $365 million to $435 million at USD 55 to USD 65 per barrel WTI pricing. We are confident that we will identify further opportunities to enhance returns in this play by realizing efficiencies through our expertise in multi-well pad development and by identifying new drilling locations over time. Furthermore, by acquiring direct ownership of key infrastructure in the area, we should be able to develop the assets with lower capital requirements while also gaining strategic control of our future development plans. We look forward to sharing more news about our operational progress in the Kaybob Duvernay over the coming months as we continue to integrate these assets into our operations. While we anticipate our Kaybob Duvernay entry to improve our environmental performance, I also want to highlight additional ESG progress we made at a corporate level. Last year, we set an ambitious emissions reduction target to drop our GHG intensity by 30% and our methane emissions by 50% by the year 2025. We've worked hard to make progress on these emissions reduction fronts and have achieved significant early success. As a result, we are increasing our targets to achieve reductions of 50% in GHG intensity and 70% in methane emissions by the year 2025 from the same 2017 baseline as our original target. We continue to receive recognition for our ESG progress from sustainability raising agencies. We are in the progress of compiling this year's sustainability report, which will highlight our continued commitment to ESG practices, including the announcement of additional environmental targets and new performance disclosures. Look for the report to be released later this year. I'll now turn it over to Ken to discuss our financial results. Ken?

[Kenneth R. Lamont, Chief Financial Officer]

Great. Thanks, Craig. For the quarter ended March 31, 2021, adjusted funds flow totaled over $260 million or $0.49 per share fully diluted, driven by a strong operating netback of over $35 per BOE. Our first quarter development capital expenditures totaled $119 million. We remain on track to spend $575 million to $625 million in 2021, which is in line with our previously stated guidance. Net debt as of March 31, 2021, was approximately $2 billion, which reflects over $135 million of net debt reduction in the quarter and over $750 million since the beginning of 2020. Our overall net debt does not include the Kaybob Duvernay acquisition, which closed on April 1. As a part of the Kaybob Duvernay transaction funding, our net debt increased by approximately $670 million, including normal closing adjustments. However, due to the increased expected cash flow and excess cash flow generation associated with this deal, our near-term leverage ratios have improved alongside our expected deleveraging horizon. We expect to obtain our long-term leverage targets of approximately 1x through the continued allocation of future excess cash flow to net debt repayments and through potential A&D opportunities. We continue to be disciplined with our hedging strategy to protect against commodity price volatility. Over 40% of our remaining oil and liquids production, net of royalty interest, is hedged through the remainder of 2021. The majority of our hedges are swaps with an average price of approximately CAD 65 per barrel, providing us with a solid cash flow base for the year. We will remain disciplined in our approach in layering on additional protection in the context of commodity prices and will chip away at locking in more hedges, which participate in some commodity price upside. I'll now turn things over to Ryan to provide some operational highlights. Ryan?

[Ryan Chad Raymond Gritzfeldt, Chief Operating Officer]

Thanks, Ken. Our first quarter production averaged 119,384 BOE per day comprised of over 90% oil and liquids. Our previously announced acquisition in the Kaybob Duvernay closed April 1, and we have successfully integrated these assets into our operations. During first quarter, a number of our wells were completed and brought on stream and initial rates of these wells on production for more than 30 days had IP30 rates of approximately 800 BOE per day per well weighted to approximately 85% condensate and liquids. We are pleased with these results as development continues to step out from Shell's historical drilling locations. Our first month operating in the Kaybob Duvernay has only reinforced the excitement we have for this deal as we combine our existing in-house technical knowledge with the hands-on expertise of our new employees from Shell, who have years of experience working with this asset. Crescent Point has a proven history of operational execution in 2-mile horizontal development plays with similar characteristics to the Kaybob Duvernay such as our assets in North Dakota. And we look forward to applying these learnings to our Kaybob Duvernay asset to further enhance efficiencies and full cycle returns. Our conservative 10-year development plan for these assets has a focus on free cash flow generation over growth. We are excited about the opportunity for us to enhance returns through potential cost efficiencies, to potentially identify new locations given our conservative well spacing assumptions and undeveloped land base. And therefore, grow economic reserves and net asset value, given the unbooked nature of this asset. As we integrate the Kaybob Duvernay assets, we will also remain focused on enhancing the sustainability of our entire asset base through our decline mitigation efforts. In first quarter, we successfully converted 30 waterflood injectors and planning to convert over 135 for the year. The continued success of our waterflood programs is evidenced by the low decline production they generate. Approximately 25% of our current corporate oil production is under waterflood with a base decline rate of only 5%. And as we continue to convert producers to injectors and repressurize our reservoirs, we expect to see ongoing improvement in our corporate decline rate. Moving to ESG. As Craig mentioned, we've had tremendous success reducing our emissions intensity since releasing our original 30% reduction target in last year's sustainability report. We have achieved significant reductions to date by taking a proactive approach to mitigating emissions in our day-to-day development planning and field operations. As a result of this early success, we are setting more aggressive targets to achieve reductions of 50% in greenhouse gas intensity, including a 70% reduction in methane emissions by 2025. Our success has also been driven through new workflows and the adoption of our OT platform, which has increased field automation while reducing costs and operator driving requirements, thereby further reducing emissions. Altogether, I think our progress to date has been incredible, and I'm proud of our team's success and look forward to delivering continued improvements over the coming years. ESG considerations are part of everything we do. And we're excited to announce new environmental performance targets and disclosures in our third annual sustainability report. This report, which we plan to release later this year, will include greater detail on our new targets and increased accountability. Before I turn it back over to Craig, I'd like to thank all of our field and operations staff for their tireless work over the past 3 months. Your hard work, dedication to safe operations and continued execution is pivotal to our overall success. I'd also like to welcome all of our new employees from Shell, as we're very excited to have you aboard and look forward to working alongside you as we develop the Kaybob asset. I'll now pass it back to Craig for some final remarks.

[Craig Bryksa, President, CEO & Director]

Thanks, Ryan. Our first quarter results have us well positioned for a strong fiscal 2021, especially at the rising oil price environment we've experienced so far this year persists. We are optimistic that the global economic recovery will continue in the summer months as more people receive vaccines and economies open further. However, we remain prudent in our risk management and discipline in our capital allocation to protect ourselves under any commodity price scenario. Our light oil weight and high netback asset base gives us robust free cash flow generation outlook with significant upside in the event commodity prices continue to improve. We are excited for what this means to our outlook and the opportunity it brings for our shareholders. Our capital allocation framework is centered on sustaining production and initially directing free cash flow we generate toward our balance sheet and base dividend. As market conditions continue to improve and we approach our optimal leverage targets, we will consider gradually increasing our base dividend. Following that, we will assess the allocation of any remaining free cash flow in the context of returns and our long-term development plans. I want to thank all our stakeholders for their continued support and our employees for their hard work and execution on our business strategy. We look forward to having the opportunity to engage with our shareholders at our Annual General Meeting on May 20. Similar to last year, we will be hosting the event virtually to protect the health and well-being of all our valued stakeholders. For more information on how to attend our AGM, please visit our website. I'll now open the call to the investment community for questions. Operator, please open the call.

[Operator]

[Operator Instructions] And your first question comes from the line of Cody Kwong at Stifel.

[Cody Randall Kwong, Managing Director of Institutional Research]

Got a quick question on your capital budget for this year. I see a lot of your peers have either increased their budget with rising oil prices or at least considering it right now. Where do you guys stand at that? I see there was no update to guidance here, but I mean could we possibly see something a little bit more accelerated in the back half of the year? Or are you guys stay intact at this level?

[Craig Bryksa, President, CEO & Director]

Thanks for the question. I would say our guidance is pretty much set for the year. So don't expect us to go layering in any incremental capital here in the back half of the year. So the $575 million to $625 million capital budget that we've laid out to the market, I would call that set for this year for sure. And then we were just starting the formal process here for 2022. And as we get closer to nailing that down and get that done, we'll lay that out to the market at some point in time here into the fall or winter season.

[Cody Randall Kwong, Managing Director of Institutional Research]

But in a base case level though, the number that you have in your presentation, $850 million of sustaining CapEx, that's a decent number to use for now, Craig?

[Craig Bryksa, President, CEO & Director]

For sure, it is. That's a safe assumption on the sustaining level.

[Operator]

Next question is from the line of Patrick O'Rourke at CBT Capital (sic) [ ATB Capital ].

[Patrick Joseph O'Rourke]

Just a couple of questions here, and they probably go in different directions. But first, just wondering in terms of the Duvernay and capital allocation coming up. Shell had had a fairly concentrated approach to that. I think that probably lined up with their infrastructure. The footprint is fairly wide, and I'm assuming you're pretty set in where you're going to drill in 2021. But how do you approach kind of delineation and derisking some of these other pockets that Shell hadn't been as active on as we get out into 2022 here that might have considerable value and certainly see some intriguing offsetting well results.

[Craig Bryksa, President, CEO & Director]

Yes. So I can take that first, Patrick. And again, thanks for the question, then I'll pass a little bit of it to Ryan. But as you look into 2021, like you said, our program is fairly set. We're going to be moving -- iron out there and call it the later part of June, early July to really start up our drilling program here for this year. So we're excited about that. And like I said, that program is set. And then as you look out into 2022, we'll step out a little bit. But also keep in mind, Patrick, that the play is fairly well delineated and not only by Shell and what they've done over the past decade, but also by a number of the competitors in the area when you look to the north and the south and the east and the west. So It gives us a significant amount of confidence in the asset base and in the land base as we move a little bit to the east and then even a little bit to the west. As far as the timing around all of that, like I say, '21 is fairly set; 2022, we're starting to plan into. And then Ryan, I don't know if you'd have any additional comments you'd want to speak to on Kaybob.

[Ryan Chad Raymond Gritzfeldt, Chief Operating Officer]

Yes. I don't think I have too much extra. Craig, you handled that one pretty well. I mean, as you know, these are kind of bigger pads in some undeveloped areas. And so there's 12 months planning that goes into these pads. So like Craig said, our 2021 program is pretty set here, offsetting some of the current results we're getting that we're pleased with. And then 2022 as well, starting to plan that out and definitely following up to some of our results in the northeast part of the play and then more kind of in the central part offsetting Shell's historic drilling.

[Patrick Joseph O'Rourke]

Maybe shifting gears a little bit here. You guys sound fairly optimistic. Maybe that's not the right word, confident on recovery here in commodity prices. I know the back end of the curve has come up, but we're still in a fairly backwardated position, hedges are rolling off. Just wondering how you're thinking about maintaining that enthusiasm, but also managing on the risk management side here going forward with that backwardation.

[Craig Bryksa, President, CEO & Director]

Yes. So that's a good question, too. And I'll take a bit of it, Pat, and then I'll pass it over to Ken as well to speak to you -- give you a little bit of color and how we're approaching the hedge book. But obviously, commodity prices are where they are, call it, today, $65 very strong. We're obviously excited about that and what it's done here over the last year just from where we were to where we are. So it really speaks to the high netback asset base that we have when you look at the free cash flow generation for us this year, even at a $65 price deck, we're $650 million of excess free cash flow. A lot of torque there to the upside. But again, to your point, we certainly have been very active and very disciplined with our hedge book. So don't look for that to change. And I can give -- or just pass it here to Ken. He can give you a little bit of color on our thoughts on that as well. So Ken, do you want to speak to the book?

[Kenneth R. Lamont, Chief Financial Officer]

Sure. Thanks, Craig. Yes. So obviously, we do hedge and we do hedge to protect for commodity price volatility and the impact that has, obviously, in our capital programs and our dividends. So look, for us to be disciplined on that, obviously, as you pointed out, the curve is pretty backwardated. So as the front end of this spikes a bit, we obviously are just filling the book a little bit into Q3 and Q4 here, taking advantage of some of these robust oil prices. As you look towards 2022, we are layering in a little bit of hedges, but we are doing that very selectively. Obviously, if you look at, call it, USD 60 WTI and above, that's a pretty attractive level when we look at free cash into 2022. And that's kind of a nice base level where you can start chipping away a little bit of hedge protection. We are using instruments, swaps, but we're also using a combination of collars in 3 ways to do a little bit of hedging out there in 2022, just so that we have a little bit of an upside participation should oil prices continue to kind of strengthen the back end of the curve coming up. But look for us to stay disciplined, and we'll keep chipping away here a little bit, Craig?

[Patrick Joseph O'Rourke]

Yes. And I just want to -- when I'm looking at your -- the way your hedge book is constructed, it looks like those 3-way collars and colors are gaining a little bit more relevancy as we go out in the future, expect that to continue?

[Craig Bryksa, President, CEO & Director]

Yes. As you look out into 2022, we expect that to continue, Patrick. Like, when you think of it this way, basically, 2/3 of the book then has a very solid floor and 2/3 of the book lets you participate in a little bit of the upside. So again, it's staying disciplined to our process. And to Ken's point, starting to chip away at that and layer in a pretty solid foundation for us as we look out into the next year. But we'll remain disciplined towards that.

[Operator]

[Operator Instructions] And at this time, Mr. Bryksa, we have no further questions. Please proceed.

[Craig Bryksa, President, CEO & Director]

Thank you all for joining our call today. If you have any questions that were not answered, please call our Investor Relations team at your convenience. Thanks, again, everyone. You take care.

[Operator]

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