Crescent Point Energy Corp

TSX:CPG

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, ladies and gentlemen. My name is Colin, and I'll be your conference operator for Crescent Point Energy's Third Conference 2020 -- Conference Call. This conference 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 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 September 30, 2020, were announced this morning and are available on Crescent Point's 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 Crescent Point's SEDAR or EDGAR websites or by contacting Crescent Point Energy. Management also calls for your attention to forward-looking information and non-GAAP measure sections of the press release issued earlier today.I would now like to turn the conference over to Craig Bryksa, President and Chief Executive Officer at Crescent Point. Please go ahead, Mr. Bryksa.

[Craig Bryksa, President, CEO & Director]

Thank you, operator. I would like to welcome everyone to our third quarter 2020 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 the slide deck, which can be found on our website.Before I touch on our third quarter highlights, I would like to share some high-level thoughts around the future of our industry. Lately, we have seen uncertainty around the long-term outlook for the energy industry, driven by varying demand forecasts, including the shift to a lower carbon economy. We believe that responsibly developed fossil fuels will continue to play the most important role in meeting global energy demand. Our view is supported by well-respected bodies, including the IEA, which predicts that oil and gas will account for approximately half the total energy demand by the year 2040. As well, the reduction in capital spending we are seeing in the upstream sector is expected to result in a more favorable supply-demand outlook, delivering stronger commodity prices in the future. We believe this supply-demand balance, coupled with the increased disclosure and accountability by our industry around environmental initiatives, will improve the sentiment and perception towards the oil and gas companies, especially the Canadian industry.To that end, I'm proud to report on our strong ESG leadership, which has resulted in a significant drop in our greenhouse gas emissions, meaning we are on track to reach our goal of reducing our emissions intensity by 30% by 2025, continued strong safety performance throughout our operations and a dramatic reduction in kilometers driven due to the successful implementation of our optimized workflows and operational technology platform, which supports both employee safety and further emissions reductions. All together, these initiatives embody our purpose of bringing energy to our world the right way.In addition, our third quarter financial results demonstrate our commitment to our core principles of balance sheet strength and sustainability. During the past quarter, we generated approximately $120 million of excess cash flow. We continued to reduce our net debt, resulting in a year-to-date reduction of over $575 million. We revised our 2020 production guidance upwards with no change to our capital expenditures, and we announced a preliminary 2021 outlook that is fully funded at approximately USD 40 WTI, highlighting our enhanced sustainability and cost structure. We have achieved this success by staying disciplined and committed to our strategy, by continuing to find new ways to drive efficiencies and by executing effectively.With that, I'll now turn it over to Ken to discuss our financial results.

[Kenneth R. Lamont, Chief Financial Officer]

Thanks, Craig. For the quarter ended September 30, 2020, adjusted funds flow totaled over $235 million or $0.44 per share fully diluted, driven by a strong operating netback of over $21 per BOE, excluding hedging gains. The third quarter development capital expenditures totaled $93 million. As a result, we remain on track with our annual capital expenditures budget of $665 million, which was recently revised to the lower end of the prior guidance range.Net debt at September 30, 2020, was approximately $2.2 billion and reflects over $575 million of net debt reduction year-to-date. Our net debt is primarily composed -- or comprised of senior notes, leaving us with over $2.5 billion of cash and unutilized credit capacity at the end of the quarter. The company has no material near-term senior note maturities, and our credit facilities do not mature until October 2023.As a part of our risk management program to protect against commodity price volatility, we currently have hedged 70% of our fourth quarter 2020 oil and liquids production, net of royalty interest. These hedges consist primarily of swaps with an average price of over CAD 62 per barrel. We have used these hedges to further protect our fourth quarter capital budget, which remains allocated to high-return assets, including the continued advancement of long-term projects, such as decline mitigation.We are also active, during the quarter, to layer an additional hedge protection for 2021. 40% of our first quarter production next year is currently hedged, primarily through swaps, at an average price of over CAD 62 per barrel. We have additional hedges extending throughout the coming year, and we will continue to layer on added protection in the context of commodity prices.Looking ahead, we plan to formalize our 2021 budget towards the end of this year or early into the new year. Our current preliminary outlook anticipates being able to generate annual average production that is in line with or exceeds our estimated second half 2020 production of approximately 110,000 BOE a day, while keeping our current development capital spend at only $500 million to $550 million. This program, which is fully funded at approximately USD 40 WTI, continues to highlight our returns-based capital allocation framework; our commitment to the balance sheet strength and long-term sustainability; a 5% lower decline rate, going from 30% to 25%; and the positive impact we have obtained through our ongoing sustainable cost improvements.I'll now turn things over to Ryan to provide some operational highlights. Ryan?

[Ryan Chad Raymond Gritzfeldt, Chief Operating Officer]

Thanks, Ken. In the third quarter of 2020, average production was 113,383 BOE per day comprised of over 90% oil and liquids. As previously announced, we reactivated economic volumes during third quarter that were formally shut in.On the capital cost side, I'm proud to report that our average per well capital cost continue to trend in line with our previously announced expectation that we could deliver cost reductions of over 10% by year-end 2020. These capital cost improvements reflect the positive impact from both the improved internal efficiencies we have delivered through supply chain initiatives and drilling and completion optimization and the benefits we have achieved by effectively transferring knowledge throughout our asset portfolio.Our operations team constantly strives to innovate. As an example, even after 14 years of developing our most mature resource play, we are still making improvements in the Viewfield Bakken, such as faster drilling days and ongoing completion optimization, which are expected to result in a 5% improvement to well costs in 2020. We expect these improvements to continue moving forward, especially as we apply our learnings to other less developed areas, such as the Duvernay.On the operating cost side, during the quarter, we expanded the implementation of our operational technology, or OT platform, to cover our entire Saskatchewan asset base. By adopting this technology in conjunction with optimizing workflows and other cost reduction initiatives, we have now removed approximately $60 million or 9% of our budgeted operating expenses in 2020. We plan to continue to roll out this platform to other areas throughout 2021 and look forward to delivering additional efficiencies as a result.Further, we used our new workflows and OT platform to augment our risk management practices, improve our preventative measures in the field and reduce emissions. For example, over the past 2 years, we have enhanced operator safety and reduced fleet emissions by decreasing the number of kilometers driven in our Canadian operations by over 20% on a per BOE basis.Regarding our decline mitigation program, we have converted 110 producing wells to water injection wells year-to-date to further enhance our long-term sustainability. We expect to convert a total of 135 wells in 2020. We budget and allocate our capital through a disciplined combination of base maintenance capital, longer-term projects, such as decline mitigation or step-out drilling, and other expenditures, including land retention and environmental initiatives. Our preliminary 2021 budget of $500 million to $550 million follows this framework in order to create and sustain value over the long term.Finally, I would like to commend our employees, and specifically, our field staff for their dedication and commitment to ensuring we continue to operate safely while also realizing notable cost and production efficiencies.I will now pass it back to Craig for some closing remarks.

[Craig Bryksa, President, CEO & Director]

Thanks, Ryan. In closing, I'd like to reinforce our commitment to our core principles of balance sheet strength and overall sustainability. Our continued operational execution and capital discipline have enabled us to increase our 2020 production guidance without changing our capital expenditures. For the year ahead, we have established a conservative program that is expected to be fully funded at approximately USD 40 WTI, and we will continue to manage commodity price risk through our disciplined hedging strategy. Assuming oil prices of USD 45 to USD 50 WTI, our current program would generate approximately $175 million to $350 million of excess cash flow.In a lower price environment, we remain flexible to protect our financial position. And in a higher price environment, we will prioritize excess cash flow and sustaining production. We will also evaluate the potential return -- additional capital to shareholders in the context of our balance sheet and overall market conditions. Since last quarter, we have witnessed several mergers or A&D announcements within the North American energy industry. We firmly believe that consolidation is necessary for our industry to enhance efficiencies and returns as well as long-term sustainability and relevance among investors.Over the past 2 years, Crescent Point has been active on the disposition side, having sold approximately $1.5 billion of assets at accretive metrics. We will continue to be patient and disciplined when considering A&D opportunities to further enhance our long-term shareholder value through improved sustainability or balance sheet strength.At this time, I'd like to thank our shareholders for their continued support and confidence in our business. I'd also like to thank our employees for their willingness to adapt and remain highly engaged during the current COVID-19 pandemic. Our organization will remain flexible in its operations and business practices to continue to protect the health and safety of all our stakeholders.With that, I'll now open the call for questions from the investment community. Operator?

[Operator]

[Operator Instructions] So your first question comes from Juan Jarrah from TD Securities.

[Juan Jarrah, Former Research Analyst]

I thought I'd follow up a little bit on your closing remarks there, Craig. For the first time in your presentation, I see you've got a couple of slides, I get Slides 4 and 5, where you talk about capital allocation, your framework. Just wondering what the thought process was there? And how that plays into 2021?

[Craig Bryksa, President, CEO & Director]

JJ, thanks for the question. I think it's probably best if Ken and I tag team on this one. So as you know, we've talked in the past that every decision we make really revolves around the fundamental pillars of our strategy, one being balance sheet strength, the second being long-term sustainability. And we spoke to that over the last 2 years, and that continues to be the focus as we move forward.If you look at balance sheet strength, I think we've made a number of initiatives on that and really strengthened it here over the last couple of years. And when we're talking sustainability, we're talking our decline rate, our cost structure. But then at the same time, there's another part that goes into that, and that's your capital allocation and your framework around that or your process around that.We thought that it'd be very helpful if we laid this out to the market and give a little bit more transparency around the process that we go through internally as we're making these budgeting decisions. And maybe before I speak to 2021 and how that plays out into that, I'll get Ken to walk you through the framework.

[Kenneth R. Lamont, Chief Financial Officer]

Sure. So I guess, JJ, where this framework starts is we've got to optimize our current cash flow generation on our PDP asset base. So the way we maximize that cash flow generation, and that's really the result of, obviously, previous year's capital investments, is our relentless focus on costs and efficient production techniques. And a recent example of that cost focus is what Ryan mentioned is that OT platform initiative that he spoke to in his operations update. So obviously, this cash flow now, in turn, funds our maintenance budget.And this maintenance budget is comprised of 3 main buckets. The first bucket, as you can see in the presentation, is our base plan, which attracts the majority of our capital. And we allocate our capital across our asset base on a risk basis, full cycle returns, both at a well and a project level. The second main bucket is long-term projects. These are things like decline mitigation, step-out drilling. And the third bucket that we speak of is kind of the other expenditure bucket, which is land retention and some environmental initiatives. The maintenance budget is allocated and involves sort of various technical and financial disciplines, is done in a team-based approach, but obviously, overlaid with a strong ESG focus.We also stress test that base budget at various commodity prices to trying to develop a flexible budget, but still an eye on returns and our balance sheet. So now we look at the excess funds after our base budget allocation, and these can really be directed towards 2 different things: one, being the balance sheet to further address our leverage targets; the second being towards funding a core dividend. After that, the remaining excess cash flow after addressing the maintenance budget, the balance sheet and the core dividend will be directed to a number of different opportunities, all which need to compete based on returns or value generation. These options include additional returns of capital to shareholders in the form of further dividend or share buybacks, organic growth, inorganic acquisitions, further debt reduction and other long-term projects.So maybe with that framework, what I'll do is I'll turn it back to you, Craig, just to talk about how this plays out into the 2021 plans.

[Craig Bryksa, President, CEO & Director]

Yes. So JJ, so if you look at 2021, our base program consists of basically what Ken was saying. So we have the base program in there and then some long-term initiatives as well. We're fully funded at $40 WTI. And then if you start to look at the $45 to $50 WTI range, that's where we generate significant free cash flow. So we get into that $175 million to $350 million range at those commodity price environments. So at the $50 and as we start to creep up into that $50 level, I would expect us to maybe spend 1/3 to slightly less than 1/3 of that and deploy that into a little bit more of a sustaining capital, and then the rest of that be directed towards the balance sheet.And then if you look at a commodity price environment like we're living today, where oil has slid down here these last few days from the $40 range into the $36, $35 range, look for us to peel back a little bit of capital and then live within cash flow on that front. So...

[Juan Jarrah, Former Research Analyst]

That's a great answer. So the number you have on there that you're going to target a total reinvestment of less than 75% of funds flow, I mean, that's going to be regardless of what the commodity price environment is. Is that a fair comment?

[Craig Bryksa, President, CEO & Director]

Yes. You're going to -- we're going to try and live within that range, for sure, JJ. So depending on the commodity price environment, we'll skate somewhere between, I guess, if it's -- the price environment is moving the way we want it to, then, obviously, that will slide down into, call it, 65% range. And then as commodity prices fall away, we'll probably be in that 75%, 80% range. So look for us to stay within that.

[Juan Jarrah, Former Research Analyst]

That's great. So just one more question that kind of ties into that as well, and it's on the decline rate, substantial improvement in the decline rate from 30% to 25%. I was hoping that you would quantify what the dollar impact of such a drastic improvement is on your sustaining capital. I mean, what order of magnitude, what are we talking about in terms of how much less you have to spend as -- by virtue of the slower decline rate?

[Craig Bryksa, President, CEO & Director]

Yes. So it's a good point, JJ, and thanks for highlighting that for us. We have moved our decline rate down substantially here over the last 18 months. In particular, we entered the year right around 31%, 32%. Right now, we're going to be exiting the year around 25%, and that's forecast to carry through into 2021. So it's a substantial improvement on the decline rate. We're going to continue to focus on that.As far as every percent, it's probably around -- somewhere around, I don't know, I'd say probably somewhere between $80 million to $100 million that we can peel out of our capital program. So it's a significant improvement on that front. So look for us to continue to stay active. Like I mentioned, 2021 has a number of long-term initiatives in there already within that budget that we've laid out. So we'll continue to drive this down.

[Operator]

We have one more question from Patrick O'Rourke of ATB Capital Markets.

[Patrick Joseph O'Rourke]

Guys, that was a very comprehensive answer on the capital allocation, and that was sort of where I was initially going to go with my question, but I have a second follow-up question here. And maybe on the M&A front, we're seeing very, very impactful M&A, something that we haven't seen in a while. I think to Husky and Cenovus, it's quite a large transaction, or even south of the border, a Parsley and a Pioneer. You guys have been in divestiture mode. When you're thinking about the scale of potential M&A opportunities that are out there that are -- make it meaningful and worthwhile, can you maybe put some guideposts around that for us?

[Craig Bryksa, President, CEO & Director]

Yes. So thanks for the question, Patrick. And we would agree with you that the M&A that's happened here, not only in Canada over the last few days, but then on the U.S. side of the sector, has been well received over that time frame. So we've certainly been paying attention to that. Like you'd mentioned, we've been fairly active on the dispo side over the last couple of years as we shored up our balance sheet. I think we've done a pretty good job of that, especially when you look at the metrics we are able to get those dispositions done at.When we look at the A&D side -- or, sorry, the acquisition side, we will certainly look at things that improve us in the context of our overall sustainability or our balance sheet strength. So know that those core pillars that we have talked about over the last 24, 30 months haven't changed. So if there is something out there that makes sense for us to do, regardless of the size or the scale of it, and it improves us in one or both of those, and we will look at that, for sure.

[Operator]

There are no further questions at this time. Please proceed.

[Craig Bryksa, President, CEO & Director]

Thanks, everyone, for joining our call today. If we haven't got to any of your questions, please call our Investor Relations line at your convenience. Thanks, again, everyone.

[Operator]

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