Baytex Energy - Q1 2019

Transcript

Operator (participant)

Welcome to the Baytex Energy Corp. First Quarter 2019 conference call and webcast. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press Star, then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing Star and zero. I would now like to turn the conference over to Brian Ector, Vice President, Capital Markets. Please go ahead, sir.

Brian G. Ector (SVP, Capital Markets and Investor Relations)

Thank you, Galen. Good morning, ladies and gentlemen, and thank you for joining us today to discuss our Q1 2019 financial and operating results. With me today are Ed LaFehr, our President and Chief Executive Officer, Rod Gray, Executive VP and Chief Financial Officer, and Jason Jaskula, Executive VP and Chief Operating Officer. While listening, please keep in mind that some of our remarks will contain forward-looking statements within the meaning of applicable securities laws, and I refer you to the advisories regarding forward-looking statements, oil and gas information, and non-GAAP financial and capital management measures in yesterday's press release. All dollar amounts referenced in our remarks are in Canadian dollars, unless otherwise specified. And with that, I would now like to turn the call over to Ed.

Ed LaFehr (President and CEO)

Thanks, Brian, and good morning, everyone. I'd like to welcome everybody to our Q1 2019 conference call. In 2018, we repositioned our company as a high netback light oil producer through our merger with Raging River. We created a new Baytex, one with stronger assets and organizational capability than ever before. And I'm very excited to report on our Q1 results today, which marks the Q1 that truly demonstrates the benefits of this combination. We have increased our operating netback, delivered significant free cash flow, and we are taking definitive steps to strengthen our balance sheet. The combination of strong performance in both Canada and the U.S., with improved pricing in Canada, has resulted in a 100% increase in our adjusted funds flow compared to the fourth quarter of 2018. Our Q1 results were underpinned by robust operating performance across our entire asset base.

We delivered production of 101 thousand BOEs per day, which exceeds the high end of our annual guidance, and we generated adjusted funds flow of CAD 221 million, or CAD 0.40 per basic share. Our exploration and development capital expenditures totaled CAD 154 million, consistent with our full-year guidance expectations, and we reduced our net debt during the quarter by CAD 90 million. In aggregate, our diversified oil portfolio generated a corporate-level operating netback of CAD 26.56 per BOE, which is CAD 28.63 per BOE, including hedging. The Eagle Ford operating netback was CAD 29 per BOE, while our Canadian operating netback was CAD 25 per BOE. Our financial liquidity remains strong, with our credit facilities 50% undrawn and our first long-term note maturity not until 2021.

I would also note that we have extended the maturity of our revolving credit facilities to April 2021. These facilities are covenant-based and do not require annual or semiannual reviews. We are well within the financial covenants and have CAD 500 million of undrawn capacity on these facilities. Let's turn our attention now to our operations, beginning with our light oil in the Eagle Ford and in the Viking. In the Eagle Ford, Q1 production averaged 41,000 BOEs per day, a 7% increase over the previous quarter. This represents the highest quarterly production rate ever achieved in the field for Baytex and reflects continued strong well performance and an active completion program. We commenced production from nine net wells, or 36 gross wells, which represents about a third of our planned 2019 activity.

The wells that were brought on stream during the quarter have established 30-day initial gross production rates of approximately 1,600 BOEs per day per well. In the Viking, production averaged just over 23,000 BOEs per day, and we maintained a steady pace of development with five drilling rigs and one and a half frac crews, which resulted in 68 net wells. We continue to experience positive results from our extended reach horizontal drilling program, which now represents 85% of our Viking activity. Our capital program includes the seasonal slowdown during the Q2, and we remain on track to drill 250 net wells this year. Moving to our heavy oil assets in Canada, Peace River and Lloydminster produced a combined 29,000 BOEs per day during the Q1, as compared to 28,000 BOEs per day in Q4 2018.

As commodity prices and operating netbacks improved during the Q1, we reinitiated field activity, including the completion of three previously deferred wells at Peace River. We also continued the ramp-up of our Parrot Thermal Expansion project, achieving a peak production rate of 2,500 barrels of oil per day. In addition, we expanded our acreage position at Peace River, acquiring 26 sections of prospective land, and we expect to drill our first exploratory multilateral well later this year. Finally, in our Duvernay Shale light oil asset, we continued to advance the delineation of this early-stage, high netback light oil resource play. In Q1, we drilled two of four planned land retention and appraisal wells. The two wells drilled have confirmed that the net reservoir thickness and geological characteristics remain consistent through the southern extent of our Pembina acreage.

Completion activities are set to commence in the Q2 to confirm well productivities and the de-risking of the majority of our 250 sections of land in the Pembina area. Let's turn now to risk management. We continue to manage our commodity price risk through an active hedging program. In the Q1, we realized a financial derivatives gain of CAD 19 million. For the balance of 2019, we have hedges of approximately 45% of our net crude oil exposure, which is up from 30% two months ago. We have also hedged 22% of our net natural gas exposure. For 2020, we have entered into hedges on approximately 15% of our net crude oil exposure. Additionally, crude by rail is an integral part of our egress and marketing strategy for heavy oil.

For 2019, we are contracted to deliver 11,000 barrels per day, or close to 40% of our heavy oil volumes to market by rail. You will find the full details of our hedge program in our Q1 press release and the notes to our financial statements. Let me then conclude by saying we are well positioned to execute our business plan focused on free cash flow generation. Given our strong operating performance in the quarter, we are tightening our 2019 production guidance range to 95,000 to 97,000 BOEs per day. It was previously 93,000 to 97,000 BOEs per day, with budgeted exploration and development capital expenditures of CAD 575 million-CAD 625 million, and previously, that was wider at CAD 550 million-CAD 650 million.

Based on the forward strip for 2019, we are forecasting adjusted funds flow of approximately CAD 950 million. At the midpoint of our guidance, the current forward strip will support in excess of CAD 300 million of debt repayment. Our year-end 2019 net debt to adjusted funds flow ratio is forecast to be two times. Over the longer term, as we continue to drive debt levels down, we believe we will be better positioned to offer returns through a combined per-share growth strategy, plus dividends and/or share buybacks. And with that, I will ask the operator to please open the call for questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. To join the question queue, you may press star, then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We'll pause for a moment as callers join the queue. Our first question is from Phil Skolnick with Eight Capital. Please go ahead.

Phil Skolnick (Managing Director and Equity Research)

Yeah, thanks. Good morning. A couple of questions. Just one. What would be your first preference once you get, you know, kind of to your one and a half times debt to cash flow? Would it, you know, be a combination of dividends and buybacks, or would you look to actually put on a dividend?

Ed LaFehr (President and CEO)

Well, Phil, we're very much focused on the first priority, which is debt repayment. So, at least in the near term, the remainder of this year, it's all about debt repayment. Anything beyond that, we would obviously go back to our board. We already have had intensive conversations around this, but, if the current price of our shares is trading where it is, we would have to strongly consider a component of buybacks. But we're not there today. We are in a place where we want to pay down our debt and become more investable with a wider range of institutional investors.

Phil Skolnick (Managing Director and Equity Research)

Perfect. Also, just, you know, any thoughts on the Alberta government's rail, you know, potential for you maybe to, you and some of those other smaller players to take on a part of that? Is that, you know, something you're in discussion or looking at?

Ed LaFehr (President and CEO)

No, not specifically, but we look at rail consistently through the year, both for the current year and for the next year. And as I said in the call, we've got 11,000 barrels a day on rail. And just this week, we were able to put on another 1,000 barrels a day, moving from Peace River to the Gulf Coast. So we'll be up from 7,500 barrels a day in Peace River to 8,500 barrels a day for the H2 of this year. That contract starts July 1st, I believe. So we're layering on rail deals right now that we believe when we look at the forward strip on WCS differentials, are attractive in that mid-teens, kind of mid to high-teens, differential equivalent. So we look at that all the time.

We layer on rail just as we layer on hedges when we get the right pricing and terms and volume.

Phil Skolnick (Managing Director and Equity Research)

Just finally, how far out are you talking when you're talking about that kind of mid to high teens?

Ed LaFehr (President and CEO)

That was a second-half, H2 this year deal that we did. Next year, we've got 5,000 barrels a day contracted. I would say full cost to rail for us should be CAD 16-CAD 18, and that's the kind of level at which we'd like to put on rail and guarantee our egress. The province is still restricted in terms of apportionment. However, we have nothing apportioned. We're flowing all of our barrels today out of Western Canada. It does give us egress protection, and we need a bridge until the time that Enbridge Line 3, TMX, and/or Keystone come in. That bridge, in the form of the current apportionment and further rail by all of us, we think is essential.

Phil Skolnick (Managing Director and Equity Research)

Perfect, thanks. That's it for me.

Operator (participant)

This concludes the question-and-answer session. I would like to turn the conference back over to Brian Ector for any closing remarks.

Brian G. Ector (SVP, Capital Markets and Investor Relations)

Thanks, Galen. Thanks, everyone, for participating in our Q1 conference call. Have a great day.

Operator (participant)

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.