Crescent Point Energy Corp

TSX:CPG

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, ladies and gentlemen. My name is Joanna, and I will be your operator for Crescent Point Energy's Year-End 2020 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 website 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, unless otherwise stated. The complete financial statements and management's discussion and analysis for the period ending December 31, 2020, were announced this morning and are available on the 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 the Crescent Point's 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. 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, CEO & Director]

Thank you, operator. I would like to welcome everyone to our year-end 2020 conference Call. With me today are Ken Lamont, 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 website. I think I speak for many in our industry when I say it's difficult to fab on the scope of turbulence and uncertainty we faced over the past year. 2020 tested our resolve, but by meeting this test, we were able to demonstrate the strength of our asset base and operations, our financial discipline and our agility. Throughout the year, I was impressed by how well our staff embrace change and adapted to the new normal, while remaining focused on our key pillars of balance sheet strength and sustainability. We accomplished this while protecting the health and safety of our employees and stakeholders throughout this pandemic. Despite facing strong headwinds, we realized notable success across a number of different metrics, including achieving annual average production ahead of guidance and under budget, reducing our net debt by more than $650 million, improving our sustainability by reducing costs and lowering our decline rates; enhancing our ESG performance, including by setting new targets and expanding our ESG disclosure; and increasing our 2P net asset value by approximately 13%, excluding year-over-year changes in commodity prices. Our achievements over the past 2 years have provided us with added flexibility to capitalize on return enhancing opportunities, such as our recently announced acquisition in the Kaybob Duvernay area of Alberta. This strategic acquisition checks the number of boxes that align with both of our key pillars. These assets enhance our sustainability by providing over 10 years of internally identified high-quality drilling locations in the core of the condensate rich fairway. They also have attractive risk-adjusted returns, free cash flow generation and scalability and provide strong market access given the significant infrastructure that is already in place. Financially, the acquisition is highly accretive on a per share basis and is expected to strengthen the company's free cash flow generation, netbacks and leverage ratios. We are very excited about these assets, including the opportunity we will have to enhance efficiencies and potentially identify new drilling locations over time, given the significant land position included in the transaction. I'm very proud of our team and the significant accomplishments they have achieved over the past year. We are very excited about 2021 and remain focused on further enhancing shareholder value through the execution of our strategy. With that, I'll now turn it over to Ken to discuss our financial results.

[Kenneth R. Lamont, Chief Financial Officer]

Great. Thanks, Craig. For the quarter ended December 31, 2020, adjusted funds flow totaled over $220 million or $0.41 per share fully diluted. Annual adjusted funds flow in 2020 was over $874 million or $1.64 per share fully diluted. Fourth quarter development expenditures totaled $169 million or $655 million for the year, beating our most recent annual guidance by $10 million. Net debt as of December 31, 2020, was approximately $2.1 billion and reflects over $615 million of net debt reduction during the year, including $40 million in the fourth quarter alone. Our significant net debt reduction in 2020 was driven by both proceeds from an accretive disposition during the first quarter and excess cash flow we generated during the year through a disciplined capital expenditure program. Our unutilized credit capacity at the end of 2020 was approximately $2.6 billion, with credit facilities not due for renewal until October of 2023. Our excess cash flow generation during the year totaled approximately $125 million which was enhanced through various cost initiatives, including the reduction of approximately 10% in both operating expenses and per well unit costs. Based on our company's current hedge positions in place, approximately 30% of our forecast 2021 oil and liquids production, net of royalty interest, is hedged through the remainder of the year upon closing of the acquisition in April. These hedges consist primarily of swaps with an average price of over CAD 60 per barrel. We will remain disciplined in our approach to layering on additional hedge protection in the context of commodity prices. As previously announced during the first quarter of 2020, we recorded a noncash impairment charge of $3.6 billion or $2.7 billion after-tax, primarily due to a significant decrease in the independent engineering price forecast. This resulted in a net loss of $2.5 billion for the year ended December 31, 2020. However, neither our adjusted funds flow nor our credit capacity were impacted by this charge. This charge is reversible in future periods should there be indications of a change in value, including as a result of higher forecast commodity prices. For the year ended December 31, 2020, our adjusted net earnings was positive $177 million. Looking ahead, we anticipate generating significant excess cash flow in the current price environment and we will evaluate the return of capital to shareholders in the context of our returns-based capital allocation framework and leverage targets. I'll now turn things over to Ryan to provide some operational highlights. Ryan?

[Ryan Chad Raymond Gritzfeldt, Chief Operating Officer]

Thanks, Ken. In 2020, we achieved average production ahead of guidance at 121,642 BOE per day, comprised of over 90% oil and liquids. Our average production in the fourth quarter was 111,217 BOE per day, which reflects the impact of our reduced capital budget announced earlier in the year. Throughout the year, we continue to optimize our workflows and expand our operational technology, or OT platform across our Saskatchewan asset base. Through these efforts, we have permanently reduced our operating cost by approximately $60 million and we plan to continue to roll out our OT platform throughout the rest of our operating areas in 2021 to realize further efficiencies. Over the past year, we also successfully reduced our average per well capital cost by over 10%. This improvement highlights the benefits our significant operational experience has on our results, including the ongoing knowledge transfer and optimization within our asset portfolio. We are very excited to merge our track record of operational excellence with that of Shell's technical expertise to the Kaybob Duvernay area and are eager to pursue further improvements in production optimization and cost reductions from those assets. Our development plan of the Kaybob Duvernay asset includes pursuing horizontal well pad development at depths of approximately 3,000 meters. We are very familiar with operations at these depths as we have been developing our U.S. North Dakota operations and previously our Uinta Basin assets, our current East Shale Duvernay assets and our Swan Hills assets at similar depths. Also on the surface side, our Swan Hills land is in very close proximity to the Kaybob area. Over the years, we have drilled approximately 300 horizontal wells in these areas, including multi-well pad development and have successfully reduced unit costs in each play, particularly in recent years. We're excited to add the Kaybob Duvernay asset to our portfolio as it brings considerable undeveloped potential with strong, high netback proved plus probable reserves. In the past year, we increased our 2P net asset value per share by approximately 13%, excluding the impact from changes in commodity prices. This improvement was driven by our success in lowering our cost structure, reducing our debt and disposing of certain assets. Due to lower commodity prices during late first quarter, we revised our capital budget and allocated our remaining capital primarily to low risk, high-return drilling locations. And so the revised 2020 drilling program centered more on previously booked wells versus step out locations. And as a result, our net reserve additions were not as meaningful as in prior years. When combining the impact of lost reserves due to lower commodity prices, minimal reserve additions resulting from our prudent capital allocation decision to focus on low-risk wells, and a significant reduction in future development capital by 18% due to lower well capital costs and drilling of previously booked wells, we don't view the F&D calculations generated this year as meaningful. At year-end, our 2P reserves totaled over 665 million BOE, which equated to a reserve life of over 16 years, up from 14 years in the prior year. I will note that these reserves do not include the impact of our recently announced acquisition, which includes over 107 million BOE of 2P reserves. From an operations perspective, these new assets are also expected to enhance our ESG profile as they carry minimal asset retirement obligations and have a low emissions intensity. Our ESG performance across our current operations remains strong, and I would like to note, in particular, the success of our environmental stewardship initiatives. Last year, we set an emissions intensity reduction target of 30% by 2025, a target that includes a 50% reduction in methane emissions. We've made significant progress towards meeting these targets, and as a result of our efforts are currently on track to meet or exceed these targets ahead of schedule. During the year, we also continued to minimize our environmental footprint through our proactive asset retirement program. Through this program, we safely retired approximately 300 wells in 2020; and looking ahead, we plan to further reduce our standing well count by approximately 10% in 2021. 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, especially in today's environment of heightened COVID-19 protocols and guidelines and in continuing to pursue our purpose statement of bringing energy to our world the right way. I will now pass it back to Craig for some closing remarks.

[Craig Bryksa, President, CEO & Director]

Thanks, Ryan. Despite a challenging year with unprecedented market conditions, we remain disciplined and focused on our key pillars. By doing so, we successfully enhanced our balance sheet strength and our sustainability. We have built an asset portfolio that is well positioned to benefit from a rising price environment given our light oil weighting and high netbacks. We expect to generate $375 million to $600 million of excess cash flow this year at USD 50 to USD 60 WTI pricing. In the near term, for us to prioritize our balance sheet with the allocation of excess cash flow following our recent acquisition. Over time, we will evaluate returning additional capital to shareholders in the context of our capital allocation framework, commodity prices and leverage targets. I'd like to thank all our stakeholders for their continued support and confidence in our business as well as our employees for their exceptional efforts this year. With that, I'll now open the call for questions from the investment community. Operator, please open the call.

[Operator]

[Operator Instructions] There are no questions at this time. I will now turn the call back over to Craig Bryksa for closing comments.

[Craig Bryksa, President, CEO & Director]

Thank you, everyone, for joining us today. If you have any questions, you can always reach out to our Investor Relations team at your convenience. Thanks again for taking the time.

[Operator]

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