Crescent Point Energy Corp

TSX:CPG

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, ladies and gentlemen. My name is Sylvie, and I will be your conference operator for Crescent Point Energy's Fourth Quarter 2022 Conference Call. This conference call is being recorded today and will be broadcast along with a 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 with the exception of West Texas Intermediate or WTI pricing, which is quoted in U.S. dollars. The complete financial statements and management's discussion and analysis for the period ending December 31, 2022, were announced this morning and are available on the Crescent Point, SEDAR and EDGAR website.

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 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 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, sir.

[Craig Bryksa, President, CEO and Non-Independent Director]

Thank you, operator. I'd like to welcome everyone to our fourth quarter 2022 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 website.

Our fourth quarter results wrap up a very successful year for our company and our shareholders. We made great strides in executing on our key pillars of balance sheet strength and sustainability. In many aspects, 2022 was an inflection point for us in terms of our fundamental strength of our business and our value proposition to our shareholders.

Over the past 5 years, we have worked diligently to optimize our portfolio, including our strategic entry into the Kaybob Duvernay and the execution of multiple noncore dispositions, prioritize our balance sheet strength by reducing our net debt by $3 billion, prove our capital discipline by executing our programs on budget, illustrate our technical capabilities with consistent operational excellence and affirm our commitment to returning capital to our shareholders.

As a result of our accomplishments, we generated $1.2 billion of excess cash flow in 2022, driven by our portfolio of industry-leading netbacks. We also reduced our net debt by $850 million, returned nearly $0.5 billion directly to our shareholders and delivered very strong year-end reserves. I'm pleased to report that in 2022, we also achieved our safest year on record, driven by our relentless focus on safe operations across our asset base.

During the past year, we executed a disciplined A&D strategy. by disposing of noncore assets while increasing our growth capacity in our core Kaybob Duvernay play. We currently have over 20 years of inventory in Kaybob, which gives us significant running room and operational flexibility as well as the opportunity to realize further efficiencies given our increased scale. We plan to accelerate development of this asset in late 2023 with the addition of the second drilling break.

Our capital discipline throughout 2022 mirrored our framework as we first prioritized our balance sheet strength to achieve our near-term leverage targets, we then began increasing our base dividend, which we supplemented with additional return of capital offerings. In total, we returned nearly $500 million to our shareholders in 2022 through dividends and share repurchases. This includes the return of 60% of our excess cash flow in the second half of the year once we formalized our return of capital framework. We continue to focus on share repurchases as our primary tool within this framework, given our current valuation.

During 2022, we repurchased over 5% of our float with an increased pace of repurchases in the second half of the year. Through our dedication to our strategy over the past 5 years, we have significantly transformed our company, delivering tangible results and an improvement in the underlying value of our business.

As we look to 2023, we are on track to generate $1 billion of excess cash flow at $75 WTI pricing, allowing us to return over $600 million of capital directly to our shareholders, while also delivering per share growth and further net debt reductions. Our long-term outlook is also very strong with a disciplined plan that focuses on maximizing returns and excess cash flow generations.

Under our current 5-year plan alone, we expect to generate over $4.2 billion of cumulative after-tax excess cash flow at $75 per barrel pricing. That's equivalent to 80% of our current market capitalization.

Before I pass it over to Ken to discuss our financial results, I'd like to thank our employees for their continued hard work and execution during the quarter and throughout the past year to realize our vision.

Ken?

[Kenneth Lamont, CFO]

Thanks, Craig. For the quarter ended December 31, adjusted funds flow totaled $523 million or $0.93 per share diluted. On an annual basis, our adjusted funds flow was $2.2 billion or $3.91 per share diluted, driven by our strong operating netback of approximately $63 per BOE.

Our 2022 capital expenditures, including drilling and development, facilities and seismic totaled $956 million, in line with our annual guidance. During the year, we significantly reduced our debt by $850 million or over 40% and exited the year with a leverage ratio of 0.5 times funds flow. We reported net income of approximately $1.5 billion for the year, including the positive impact of noncash impairment reversal of $400 million due to the higher commodity prices.

In 2022, we steadily increased our base dividend to $0.40 per share on an annualized basis. This dividend provides a stable yield and equates to a simple payout of less than 10% of funds flow at current commodity prices. As part of our return of capital framework, we target to supplement our base dividend with share repurchases and special dividends.

In the fourth quarter, we repurchased 8.6 million shares, bringing our total repurchases to greater than 31 million shares for the year, equating to over 5% of our shares outstanding. Altogether, we allocated $294 million to share repurchases in 2022. We remain active in our buyback program given the underlying value of our shares and have repurchased an additional 3.2 million shares year-to-date.

To ensure we return our targeted percentage of discretionary excess cash flow in each quarter, we also provide for a special dividend to round out our total return of capital to shareholders. Based on the fourth quarter 2022 results, we have declared a special dividend of $0.032 per share, which is payable on March 17, 2023. This is in addition to our quarterly base dividend of $0.10 per share or $0.40 a share on an annualized basis, which will be paid on April 3, 2023. Subsequent to the year-end, we successfully closed the acquisition of certain Kaybob Duvernay lands and associated production for cash consideration of $370 million. Our net debt as of closing of this deal on January 11, 2023, was approximately $1.5 billion.

Based on our guidance for the year, we expect our net debt at year-end '23 to be less than $1.1 billion at $75 WTI or 0.5 times net debt to adjusted funds flow. Given our high liquids weighting, a $5 change in WTI for us generates approximately an additional $200 million in funds flow in 2023. To further protect our financial position, we also remain disciplined in our hedging strategy. For 2023, we have currently hedged approximately 15% of our total production, including over 20% in the first half of the year.

I will now turn the call over to Ryan to speak to our operating highlights. Ryan?

[Ryan Gritzfeldt, COO]

Thanks, Ken. 2022 really was another strong year for us across our operations during which we achieved our safest year on record for both serious incident frequency and total recordable incident frequency.

Our results reflect our proactive approach to safety, our strong engagement with our employees and contractors and our prioritization of safe operations above all else. With respect to our annual results, average production for the year was 132,282 BOE per day, comprised of over 80% oil and liquids, which was in line with our annual guidance.

In our Kaybob Duvernay play, we continue to achieve strong production results, highlighting the consistency in our operational execution. For example, we recently brought on stream our sixth fully operated multi-well pad in the liquids-rich phase of the basin with an average IP30 rate of over 1,200 BOE per day per well comprised of 51% condensate, 15% NGLs and 34% gas. This is yet another highly productive multi-well pad for us that demonstrates our continued successful execution in the play and the scalability of this asset.

All of our results to date have generated strong reserve bookings from our independent reserve evaluator, McDaniel and associates. For the wells we have drilled and/or completed since entering the play, the independent engineers have currently booked wells with expected ultimate recoverable reserves, ranging from 700,000 BOE with 70% liquids, up to 2 million BOE with 45% liquids depending on their location within the basin.

For those that are not as familiar with the Kaybob Duvernay, the basin has multiple phase windows within it. In the north, it is more condensate rich and has more oil resource in place. As you move south into the more liquids-rich and then lean gas areas, the basin deepens and becomes gassier with a large gas resource in place, in addition to the condensate oil and natural gas liquids that are prevalent throughout the basin.

Our land base is primarily located in the northern volatile oil condensate-rich window, which delivers high condensate production. However, we also have lands in the liquids rich and lean gas windows. Each area generates very competitive returns with significant profitability. We've been very pleased with this asset since entering the play in 2021 and are currently on track to generate approximately $900 million of excess free cash flow or net operating income less CapEx by the end of first quarter 2023. This equates to a very quick 2-year payback on our original acquisition.

After nearly 2 years of operating within the basin, we made the strategic decision in late 2022 to increase our land position, and in so doing, have increased our drilling inventory in the play to over 20 years, which underpins our corporate 10-year plan. With these recent acquisitions and the outperformance we have achieved in the play, we now plan to grow our Kaybob Duvernay production from 40,000 BOE per day to over 60,000 BOE per day in our 5-year plan.

Outside of Kaybob, we continue to build momentum in our other resource plays during this past year. For example, in the Viewfield Bakken, we have identified approximately 150 new drilling locations or 4 years of additional inventory in the play by successfully implementing new wellbore designs in open-hole multilateral drilling. Our two most recent 8 leg wells using this new design delivered strong IP30 rates averaging over 225 barrels per day of oil with ultimate recoveries expected to be 3 times to 4 times greater than a traditional infill well.

We plan to drill several of these open hole wells in 2023 and are evaluating the potential to apply this technology in other areas within our portfolio. In addition to these asset development advancements, we also achieved great success in lowering our emissions profile. Earlier in 2022, we successfully reached our target to reduce our direct emissions intensity by 50%, including a 70% reduction in absolute methane emissions, 3 years ahead of schedule. To continue our momentum, we set an even more ambitious target to reduce our direct and indirect emissions intensity to 0.02 tons of CO2 equivalent per BOE by 2030 or a 38% reduction from 2020 levels. We also announced 2 new water targets in addition to our goal to reduce our inactive well inventory by 30% by 2031.

Before I hand it back to Craig, I will briefly speak to our reserve highlights. At year-end 2022, our 2P reserves totaled 713 million BOE, comprised of 82% liquids while our 1P and PDP reserves totaled 482 million BOE and 301 million BOE, respectively. On a 2P basis, we added approximately 55 million BOE during the year replacing 113% of our 2022 production. Majority of this increase in reserves was from organic adds relating to our development execution in our Kaybob Duvernay play, and included net positive performance-related technical revisions.

Within our Kaybob Duvernay asset, we generated an attractive F&D of approximately $12 per BOE for wells brought onstream in 2022, which equates to a strong recycle ratio of over 5 times. Overall, our reserve life index is approximately 15 years based on our 2022 production, giving us significant running room in the years ahead. Our reserve adds generated attractive recycle ratios of 3.4 times based on PDP FD&A or 2.3 times on a 2P basis, both including changes in future development capital. Altogether, our 2P net asset value reached $21.50 per share at year-end 2022, while our 1P and PDP NAVs were $15.14 and $10.38 per share, respectively. These NAVs per share are after deducting our net debt at year-end, reflecting an increase of 30% to 35% across all categories from the prior year.

I'll now turn things over to Craig to provide some closing remarks.

[Craig Bryksa, President, CEO and Non-Independent Director]

Thanks, Ryan. As you can see, we had some great accomplishments during the past year that have really set us up for success going forward. Through the continued execution of our strategy over the last few years, we have significantly enhanced our free cash flow generation, improved our long-term sustainability and ultimately increase the underlying value of the business. We've consistently demonstrated our strong technical know-how and continue to optimize our assets while prioritizing safe operations.

This execution further reinforces my belief that our asset teams are the best in the business. as they continue to innovate and build upon our track record of operational excellence. We continue to look forward into 2023 and beyond to our 5- and 10-year plans. We are well positioned to deliver sustainable returns for our shareholders now and well into the future. Our value proposition continues to be centered around returning a meaningful amount of capital back to our shareholders, combined with sustainable per share growth and a strong balance sheet.

In closing, I'd like to thank our shareholders for all their support and continued engagement.

Operator, please open the line for questions.

[Operator]

[Operator Instructions] And your first question will be from Travis Wood at National Bank. Please go ahead.

[Travis Wood, National Bank]

Yes. It's probably for Ryan. And I just wanted to see if you could provide some context around the kind of multilateral locations that you've identified? It looks like you've kind of been pushing the Bakken boundary at Viewfield with the first couple of those. Is there opportunity to bring that back into the core and even taking a step further, is there opportunity to potentially go back into existing wells and recomplete those, so to speak?

[Ryan Gritzfeldt, COO]

Yes. Travis, thanks for the question. Yes, I would say -- I mean, we're looking at applying this across all of our areas. I don't know if it would be applicable to go back into the core where this really works, as we've said, we're pushing the boundaries of the pool where it gets a little bit thinner and there's overlying large pool water. So fracking doesn't exactly work that well because you'll bring in water from above. So these multilaterals are definitely pushing the boundaries of the pool we see approximately 150 more locations. And essentially, the way to think about it is you can basically drill these multilaterals for 1.5 times the capital of a kind of a traditional infill well. And we're expecting 3 times to 4 times the EUR. So definitely better economics and pushing the boundaries of the play where our kind of traditional fracked wells wouldn't access those reserves.

[Travis Wood, National Bank]

And then you kind of alluded to that in terms of pushing and trying to deploy this across other plays. Would this work in the Shaunavon as you think about the reservoir there as well?

[Ryan Gritzfeldt, COO]

Yes. Yes, you bet. And the Shaunavon is thicker as well. So maybe instead of just doing multilaterals that are at the kind of the same height, maybe we start to access more vertical height than our reservoirs in Shaunavon. But early days there, it's a different reservoir, different rock, but our teams are looking at it and exciting to try something here soon.

[Operator]

Next question will be from Chris Sakai at Singular Research. Please go ahead.

[Chris Sakai, Singular Research]

Yes, just had a question on -- for 2023, are you still forecasting costs in the 85 WTI range? And did your inflation assumptions changed at all in the fourth quarter?

[Ryan Gritzfeldt, COO]

Yes. So I would say we're -- yes, we're assuming kind of prices in the $75, $85 WTI range. We're basically assuming the same capital costs, the same unit costs that we experienced at the end of 2022. There have been small movements in unit costs I would say, costs more related to services with labor. Those have crept up a little bit, but we've offset those with efficiencies and even some commodity-based costs like steel, diesel, chemicals, they've came down a little bit to offset those increases. So overall, we're assuming the same cost that we saw at year-end 2022.

[Chris Sakai, Singular Research]

And then for 2023, if your percentage hedge ratio is still going to be in the 20% range. Can you shed some light there?

[Craig Bryksa, President, CEO and Non-Independent Director]

Yes. Thanks for the question, Chris. It's Craig here. When you look at us here in the front half of the year, we're about 20% hedged, using mainly the callers as the tool. And then when you look to the back part of the year, we're about 10% hedged. We do have hedge targets set, and we are hedges, as you do well know. Historically, when you look at Crescent Point, we've been somewhere in the neighborhood of bought 40% to 50% of our volumes hedged with our balance sheet being in the position that it's in right now is as strong as it is.

And with some of that backwardation in the curve, we don't really feel the need to continue to build that book up into that 40% to 50% level. I think going forward, you're going to see a hedge book in the range of around that 20-ish, 25% and then building that out roughly 12 months going forward. And that -- what that really does for us, Chris, is it allows us to protect our fixed costs at the same time that base level dividend here into the future. So we will have a hedge book, probably somewhere in that 20%, 25% range. going out about 12 months and typical tool right now has been callers. So targets are set. And as the market moves into that, we bump into those.

[Operator]

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

[Craig Bryksa, President, CEO and Non-Independent Director]

Thanks 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.

[Operator]

Thank you sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.