Crescent Point Energy Corp

TSX:CPG

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, ladies and gentlemen. My name is Julie, and I will be operator for Crescent Point Energy's Second Quarter 2023 Conference Call. This conference call is being recorded today, and will be webcast along with the slide deck, which can be found on Crescent Point's Web site home page. The webcast may not be recorded or rebroadcast without the express consent of Crescent Point Energy.

All amounts discussed today are in Canadian dollars with the exception of West Texas Intermediate or WTI pricing, which is quoted in U.S. dollars. The complete financial statements and management's discussions and analysis for the period ending June 30, 2023, were announced this morning and are available on the Crescent Point, SEDAR, and EDGAR Web site.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be question-and-answer session for members of the investment community. [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 Web sites, 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.

I will now turn the call over to Craig Bryksa, President and Chief Executive Officer at Crescent Point. Please go ahead, Mr. Bryksa.

[Craig Bryksa, President and Chief Executive Officer]

Thank you, Operator. I'd like to welcome everyone to our second quarter 2023 conference call. With me today are Ken Lamont, our Chief Financial Officer; and Ryan Gritzfeldt, our Chief Operating Officer. As the operator highlighted, this conference call is being webcast along with the slide deck, which can be found on our Web site.

Today we are introducing a new format to our conference call to add a level of further engagement and to turn the call into more of a discussion on our forward outlook. Earlier today we issued our quarterly press release, financial results, and updated corporate presentation, each of which can found on our Web site. During this call, I'll provide a brief strategy update, highlight our strong quarterly results, and discuss our overall outlook for the remainder of the year. We will then move into a Q&A session. We will start by taking questions over the conference line, as we usually do. And once those questions have concluded, I'll then turn the call over to Shant Madian, our Vice President of Capital Markets, who will moderate questions from participants joining us on our webcast. We encourage those in our webcast to submit questions using the chat function on the online portal. We look forward to the discussion that this format will provide. So, let's get started.

On the strategy front, we significantly advanced our portfolio optimization through our successful Alberta Montney acquisition during the second quarter. This transaction materially enhances the quality of our portfolio, both in terms of our depth of premium inventory, as well as our excess cash flow profile and a return of capital per share. This acquisition is consistent with our strategy of pairing quick payback, short-cycle assets, such as the Alberta Montney and Kaybob Duvernay, which are longer-cycle low-decline assets in Saskatchewan. This mix of short and long-cycle plays results in significant excess cash flow for the company and our shareholders.

It also allows us to execute on our strategy to generate sustainable long-term returns through a combination of per-share growth and a compelling return of capital offering, all while maintaining a strong balance sheet. Our multi-basin approach remains strategically focused on oil and liquids, which account for 75% of our current production. By remaining dedicated to this approach, we are able to deliver on one of the highest cash flow netbacks in the industry, along with significant excess cash flow per share. We are successfully integrating the new Montney asset into our portfolio, and have a near-term goal of further enhancing our returns through additional productivity gains and cost efficiencies.

Part of our early success in this play has been the result of our efforts to leverage our existing relationships with our suppliers to reduce our costs. We have also identified additional areas for potential efficiencies, including ongoing well completion optimization, deploying longer lateral lengths, and shifting to larger multi-well pads. As you can tell, we're excited about our new Alberta Montney position, especially given its recent prolific well results. For example four of the top five liquids wells drilled in the Western Canadian Sedimentary Basin, in May, were our wells in the Montney, highlighting the attractive reservoir characteristics and the scalability of this asset.

We've continued our drilling success into June, achieving impressive results that are in line with or exceeding our early well results. Like the Kaybob Duvernay, our Montney play provides the opportunity for new reserve additions, and ultimately net asset value per share growth, given that only 25% of the locations we have internally identified have been booked. This transaction, along with our strategic steps we have taken over the past few years has allowed us to build a very strong profile or portfolio that is well-positioned to generate long-term returns for our shareholders.

I'll now shift to our quarterly results and the execution across our portfolio. During the past quarter, we continued to demonstrate our operational excellence, as reflected in strong performance of our Kaybob Duvernay assets. I'd note that our second quarter production of 155,000 boe per day included the impact of approximately 7,000 boe per day of downtime associated with the wildfires. First off, I'd like to commend our teams in the field and thank our local community members and first responders for their incredible efforts to keep everyone safe during the wildfires. Furthermore, thanks to our dedicated teams and advanced field operation technology, we were able to quickly restore our Kaybob Duvernay volumes as the fires subsided.

These wildfires massed our true outperformance in the quarter, which was driven by our Kaybob Duvernay assets, with recent onstream production outpacing our type wells in the area. Due to this outperformance in the first-half of the year, we have kept our annual production and capital expenditures guidance unchanged. Our second quarter results also demonstrate our commitment to returning capital. During the quarter, we returned CAD 167 million or approximately 60% of our excess cash flow directly to our shareholders. This included CAD 93 million of share repurchases in addition to our dividends.

In total, we have now repurchased for cancellation nearly 17 million shares year-to-date, and remain active on our buyback program, which is the tool of choice within our return of capital framework. Over the past 12 months, we have delivered more than CAD 550 million to shareholders, marking our fourth consecutive quarter of returning approximately 60% of our excess cash flow.

I'll now touch on our outlook for the remainder of 2023, along with our five-year plan. During the second-half of this year, we expect to realize the benefits of our recent Montney acquisition and continued momentum in our Kaybob Duvernay play, as we plan to bring on stream additional pads in both areas during the third and fourth quarter. Our second-half 2023 production is expected to average approximately 179,000 boe per day, generating over CAD 1 billion of excess cash flow on an annualized basis, assuming a $75 price tag.

As we look further out, we expect to generate CAD 5 billion of cumulative excess cash flow under our five-year plan, at similar commodity price assumptions, providing a combination of disciplined per-share growth, attractive return of capital, and further debt reduction. We plan to provide our preliminary 2024 outlook later this fall, alongside an updated five-year plan.

Lastly, on the ESG front, we remain steadfast in our commitment to strong environmental, social, and governance practices. During the quarter, we released our fifth annual sustainability report, highlighting our strong ESG performance and detailing our key ESG initiatives. I'm proud to report that our environmental initiatives over the past five years have resulted in a reduction of approximately 50% in both our Scope 1 emissions intensity and our asset retirement obligations. We also continue to achieve record safety scores, which speaks to our safety first culture.

I'd like to thank everyone for their continued support and engagement, in particular our staff who continue to deliver on our purpose of bringing energy to our world the right way.

We'll now open the call for questions from the analysts, and follow with a Q&A session for those on our webcast. Operator, please open the call.

[Operator]

Thank you. [Operator Instructions] Your first question comes from Dennis Fong from CIBC World Markets. Please go ahead.

[Dennis Fong, CIBC World Markets]

[Technical difficulty] the solid quarter, and thanks for taking my question. The first one I have is just related to Montney. There is a lot of discussion around Gold Creek East, and West. I was just curious as to some of the potential development plans around Karr, just given also attractive economics in that region, or is there any kind of, I don't call it hindrance, but things that you need to complete before further developing that region?

[Ryan Gritzfeldt, Chief Operating Officer]

Hey, this is Ryan here, I'll take that one. So, yes, Karr, obviously, it's an area that we really like. It's obviously a little bit more higher oil percent, higher liquids percent than Gold Creek. Not as many future drilling locations there as in Gold Creek. But we do like the area. We finished drilling a pad there when we took over from Spartan, and actually, right now, [fracking] (ph) a pad there, which we should have results to disclose next quarter. But yes, we are drilling there for the rest of this year, into 2024. And of course, we'll continue as we get locations ready. But yes, we just haven't talked about Karr yet because we don't have any results since the close of the acquisition. But we are fracking a pad there as we speak, and we'll speak to that next quarter.

[Dennis Fong, CIBC World Markets]

Great, thanks. And my follow-up here is also on the Montney here. You've obviously talked a lot about optimizing both cost structure and even completion design now that you've taken over the property. What would maybe drive the decision and/or timing to add a second rig in the Montney, and what are you looking for to help drive the confidence around accelerating capital deployment into that region? Thanks.

[Craig Bryksa, President and Chief Executive Officer]

Hey, Dennis, it's Craig here. Thanks for the question. So, obviously, very excited with the results we've been seeing to date, and bringing that acquisition now, and then having it in-house and our technical teams really being able to spend the time and dig into it. So, the more we get in there and the more we work through it the more excited we get about this, and you could see that as the results are coming out here, over through May, and into June, and what we were putting here into our quarter. So, on all fronts, it looks really good. I think as the technical team gets into it, we'll do things a little bit differently, like we did in the Duvernay.

If you remember, when we picked that up, we moved in there with purpose. We got smarter over, call it, the first couple years of owning that asset, and now are moving the second rig into the Duvernay here in October, of this year. So, look for us here to do it in a similar fashion, Dennis. We're going to spend some time, we're going to get active in there, we're going to do what we think is right as far as landing the wells in the landing zone of our preference. We're going to change up some completion design, ultimately really maximize some height growth within there. And then, ultimately, that should show through in the results.

As we think through our 2024 program, right now, it's sitting at one rig in the Montney. But if there is capital shifts across the portfolio, I would expect that to be moving into the Montney, and maybe out of other areas. But I wouldn't expect anything over -- within the next 12 months, Dennis. So, right now, it's a one-rig plan here. We'll see how things play out as we get smarter, and really test what we want to do. And again, this is where I get excited about it, Dennis, is because, I -- you think of our technical teams within this organization and what they were able to unlock in the Duvernay, and now parlay that into the Montney.

I guess that's a longwinded way of me saying that nothing here incremental in the next 12 months, but over that -- when we get beyond that and we're a little bit smarter, to look for us to start shifting some capital.

[Dennis Fong, CIBC World Markets]

Great, thanks. And appreciate the color there, Craig. I'll turn it back.

[Craig Bryksa, President and Chief Executive Officer]

Yes, okay. Thanks, Dennis.

[Operator]

We have time for one more question coming from Travis Wood from National Bank Financial. Please go ahead.

[Travis Wood, National Bank Financial]

Yes, thanks, and good morning. Wanted to talk about divestitures and with a few things in the fire, and just assuming that something closes across the portfolio here over the next several months, how are you thinking about the allocation of those proceeds, maybe just from a debt, variable, special, and base dividend perspective? But then also, as you look at opportunities and with future business opportunities, and you evaluate those, how are you ranking those future opportunities from a conventional oil or oil-sands, liquids-rich perspective as you look at future inventory expansion from a M&A perspective?

[Craig Bryksa, President and Chief Executive Officer]

Thanks, Travis. So, it's Craig, I'll take this one. And if Ken and Ryan or Shant want to add any color, feel free, [gents] (ph). So, Travis, obviously a lot of work in the last five years of what we've been doing as far as building out our portfolio. I can tell you how we sit today, we're extremely excited about what we have, especially when you think of the short-cycle and the long-cycle pairing, like we've talked to you about quite a bit in the past in really two premium North American non-conventional resource plays, paired with our Saskatchewan waterflood asset. So, really love the balance in the portfolio.

We love the weighting that we have in the portfolio, particularly when you think [indiscernible] around 75% liquids. And at the same time, now on the backend of this transformation, we have a premium inventory of 15 years. So, we're sitting in a really good spot, and feel really good about it. Your question as far as [dispos] (ph), we have talked in the past, but there is maybe some things that don't necessarily fit with the build-out here in the long-term, and we'll look to move off a piece that or a piece or two over time, and we'll see how that plays out.

And I would tell you, as happy as we are with how things have come together, and the balance sheet, and our balance sheet strength, and only 1.4 times debt-to-cash flow here, and that should be around 1 times at the end of this year, call it a CAD 75 deck. So, balance sheet is strong, Travis. But I would expect the proceeds of any of those sales to be earmarked for near-term debt reduction, so, to further strengthen that even more. And then to your comment around what does the portfolio look like going forward, Travis, again, very happy with where we are.

I would tell you our sandboxes are fairly well-defined right now. Don't look for us to expand out of where we are between Kaybob and Montney, the Alberta Montney, and then into the Saskatchewan waterflood. I would say our sandbox is fairly well defined on that front.

So, we'll see how things play out; happy with how things are, absolutely in no rush to do anything on an A or a D front. We've spent, call it, the last five years really building this out, and extremely happy with where we are.

[Travis Wood, National Bank Financial]

Okay, that's great color. Thanks for that. That's all for me.

[Craig Bryksa, President and Chief Executive Officer]

Okay, thanks, Travis.

[Operator]

There are no further questions over the phone at this time. Craig, please proceed.

[Craig Bryksa, President and Chief Executive Officer]

Okay, I'll pass it over to Shant. I think he has a few questions here coming in from the line.

[Shant Madian, Vice President of Capital Markets]

Yes, thanks, Craig. Couple questions coming in as we've been chatting; one, or a couple, so around cost front, one asking if we're continuing to see any cost pressures. And someone also seeing if we're actually seeing any cost easing. So, maybe we can give a little bit of an update on that front.

[Craig Bryksa, President and Chief Executive Officer]

Yes, that one is probably best for Ryan to speak to.

[Ryan Gritzfeldt, Chief Operating Officer]

Yes, I would say, in general, we're seeing a flattening of costs and rates coming out of the recent inflationary environment here, probably led by reductions in casing steel tubing costs. But probably cost pressures still remain more on equipment utilization, labor costs, et cetera. But with that, we're keeping our current cost estimates status quo, puts us kind of right in range of our 2023 capital budget of CAD 1.15 billion to CAD 1.25 billion. I would say couple exciting things. Upon the close of our acquisition, like Craig said, in the Montney, we had our Gold Creek type wells at around CAD 9 million to CAD 9.5 million per well range.

We've quickly, after really only operating there for two months, been able to leverage our existing supply chain, our current service partner relationships, already reduced our casing costs, reduced some of our frac costs, specifically on sand sourcing. And so, already have line of sight to sub CAD 9 million well costs there. So, that's one thing that I'd highlight, and something that we're really excited about.

[Shant Madian, Vice President of Capital Markets]

Thanks, Ryan.

Couple more questions here on return of capital. I'll probably break it up into two. One, someone is just looking for clarity, it looks like, our return to capital payout or questioning whether or not we increased it from 50% to 60%. So, if you we can give some clarity there first. And then the second question, someone is asking if we were looking at or would consider increasing that return in capital payout or perhaps accelerating buybacks and narrow the discount to that?

[Ken Lamont, Chief Financial Officer]

Sure, maybe I'll take this one, Craig. It's Ken. No, our framework hasn't changed. Our total return of capital is really comprised of two parts. One of the base dividend and the other is a return of some discretionary excess cash. And really, the 60%, what we've done here is just simplified how we present it. We're doing that now in aggregate return of capital as a percentage of excess cash, and that really now just makes us more comparable to our peers when you're comparing our return of capital proposition relative to peers. So, I guess, that's the first part, it has not changed.

And obviously, we're proud of this framework. We've been following it now for -- or this is the fourth quarter. So, the second part of that is, no, we don't have any plans to revisit the 60% return level. I think this really strikes a healthy balance between a competitive return of capital, as well as allowing us some access to capital to reinvest in the business and to repay debt. So, no, we don't have any plans to revisit the 60%.

[Shant Madian, Vice President of Capital Markets]

Another question around hedging, any plans to have more hedges in for 2024, and just someone asking particularly on why it dips in Q4, '23.

[Craig Bryksa, President and Chief Executive Officer]

Ken, you're probably best to speak to that as well.

[Ken Lamont, Chief Financial Officer]

Sure. So, just as matter of an update, we are about 25% hedged now through the second-half of 2023. So, I think we've built a pretty solid book there, and always just looking to enhance it a little bit. But I would expect us probably not to get past the 30% level. As we look into 2024, we've actually started a program now into 2024, into the first-half, so we're going to start chipping away at hedging there. We are looking to get hedged out about a year out in that 20% to 30% level, and obviously, still fighting a little bit of backwardation as you get out a year out here now. And so, we'll be patient and disciplined.

And when, as these market moves up, as it has done in the past week here, we'll look to take advantage of that.

[Shant Madian, Vice President of Capital Markets]

Thanks, Ken.

Market access-related question, can you talk to CPG's relative market access position, and if Trans Mountain coming online soon will help in any way.

[Craig Bryksa, President and Chief Executive Officer]

You want to grab that, Ryan?

[Ryan Gritzfeldt, Chief Operating Officer]

Yes, sure. Yes, obviously, Trans Mountain coming on definitely helps egress out of the basin. We don't have any volumes earmarked for that pipeline, but definitely it will open up space. And you'd have to think that differentials for most products, hopefully especially our products out of the Montney will strengthen significantly with that. So, I think that's a definitely a positive for industry, and hopeful that will help realize pricing go forward.

[Craig Bryksa, President and Chief Executive Officer]

And the only thing I would add on that is when you look at our portfolio, we are very good positioned as far as where we sit on the Enbridge Mainline. So, on that front, takeaway for us is the strength. I would also say as we look into -- as we look at assets, in particular what we liked about both Montney and Duvernay acquisitions that we have done over the past few years, is the takeaway or the flexibility around the takeaway out of those assets. So, that's certainly a criteria we look at is ensuring that we always have that market access.

[Shant Madian, Vice President of Capital Markets]

Thanks, Craig. Another question back on Montney Gold Creek West, why are you seeing Gold Creek West results stronger than Gold Creek?

[Ryan Gritzfeldt, Chief Operating Officer]

Yes, I'll take that, Craig.

[Craig Bryksa, President and Chief Executive Officer]

Yes.

[Ryan Gritzfeldt, Chief Operating Officer]

So, yes, I mean Gold Creek East still where we get our results are on type well there. Three of the four wells that we are in the top five of the top of the top Alberta liquids producers in May are Gold Creek East, so, really on type well there. I think we are obviously most excited about are the Gold Creek West results we are getting. I would say based on all the work our teams have done geo-modeling, reservoir, petrophysical, when you look at the outperformers in Gold Creek West, still early days there. But we think -- kind of like we what we did in the Duvernay was wells that are landed at the bottom part of the reservoir are getting the best results. And so, we think that the way we are going to frac these wells, we can access all of the net pay by drilling a single bench.

And so, that we think is going to be the most capital efficient way to develop this area. The results we are getting and they are worth repeating because they are significant. The first well 1,900 boe a day, plus 85% liquid, it's also the IP90. So, that well is hanging in there. The first pad that we fracked, the two best wells are averaging 1,600 boe a day. And then as the second pad that we fracked at only 15 days production, we are over 1,000 boe a day, 80% liquid -- liquid is already in, and so, obviously very excited about that area, recall that 300 locations of the 600 locations that we identified in the acquisition are in this Gold Creek West area. Less than 20% are booked. And also recall the type well -- the booked type well is only 1,000 boe a day IP30 like less than 60% liquid. So, obviously we are really excited about this area. I think it's kind of upside. And like I said, with only a couple months operating so far, we've already seen well cost past to get to sub-9 million. And we will continue doing that as we trial different drilling techniques, different bid technology as we continue to drill here. So, obviously really excited about that area and what it could do in our five and 10-year plans.

[Shant Madian, Vice President of Capital Markets]

Thanks, Ryan.

Another question just going back on the M&A team, you guys have clearly grown in the Montney and Duvernay. You've defined your sandbox. Is there more opportunities still do on the conventional oil side of the business back in Saskatchewan?

[Craig Bryksa, President and Chief Executive Officer]

Yes, I think. I mean like anything we'll always look at opportunities that are in front of us. And you never know what's put in front of you. And we certainly will do our homework and look at it. I'll just double back to what I was saying earlier that we have done a lot of work strategically as we reposition the company here over the last five years. And extremely excited about where we are at now. And the pairing of the two North American premier resource plays with the Saskatchewan water floods, it's got us extremely excited, especially when you think of the balance within the portfolio. So, certainly we will look at doing it. I would say again I am going to double back to earlier, don't expect us to go outside our sandboxes.

Our sandboxes are extremely well-defined, and we will see again how it plays out here over the next 12, 24, 36 months on those things. But very contend with where we are today. And feel really good about not only the five years in our five-year plan, but the next 10 years. And how that looks for Crescent Point and what that means for everybody; our shareholders, our employees, our staff. There is a lot of excitement now around this table. So, feeling really good about where we are.

[Shant Madian, Vice President of Capital Markets]

Thanks, Craig.

[Craig Bryksa, President and Chief Executive Officer]

This time, there are no additional questions from those listening online or on the phone lines as well. So, thanks everyone for joining our call today, and if you have any follow-up questions that weren't answered, please call our Investor Relations team at your convenience. Thanks, everyone.

[Operator]

Crescent Point's Investor Relations department can be reached at 1-855-767-6923. Thank you, and have a good day.