Baytex Energy - Earnings Call - Q2 2020

Transcript

Operator (participant)

Thank you for standing by. This is the conference operator. Welcome to the Baytex Energy Corp second quarter 2020 results conference call. As a reminder, all participants are requested to press star, then one on your telephone keypad. Should you need assistance during the conference, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Brian Ector, Vice President of Capital Markets. Please go ahead.

Brian Ector (VP of Capital Markets)

Thanks, Chad. Good morning, ladies and gentlemen, and thank you for joining us today to discuss our second quarter 2020 financial and operating results. With the COVID-19 situation still front and center, we continue to prioritize the health and safety of our employees, and with that in mind, today I am joined remotely by our executive team, Ed LaFehr, our President and Chief Executive Officer, Rod Gray, Executive VP and Chief Financial Officer, Kendall Arthur, our Vice President of Heavy Oil, Chad Kalmakoff, our Vice President of Finance, Chad Lundberg, Vice President of Light Oil, and Scott Lovett, our Vice President of Corporate Development. While listening, please keep in mind that some of our remarks will contain forward-looking statements within the meaning of applicable securities laws.

I refer you to the advisories regarding forward-looking statements, oil and gas information, and non-GAAP financial and capital management measures contained 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)

Great. Thanks, Brian. And good morning, everyone. Welcome to our second quarter 2020 conference call. During the second quarter, we took decisive steps to adjust our business plan in the face of extremely volatile crude oil markets. We moved aggressively to shift our operating and capital activities to maintain financial liquidity, minimize capital outlays, and emphasize cost reductions across all facets of our business to retain long-term value. We shut in some production, we suspended drilling operations in Canada, and we moderated our pace of activity in the Eagle Ford. I'm very pleased to say that we are now starting to benefit from the actions we have taken as we generated positive free cash flow during the quarter and maintained approximately CAD 300 million of financial liquidity. As you will recall, we previously announced voluntary production shut-ins of approximately 25,000 BOEs per day. These volumes remained offline for April and May.

As operating netbacks improved in June, we initiated plans to bring approximately 80% of these volumes back online. The quarterly impact of voluntary shut-ins was approximately 20,000 BOEs per day. As a result, production during the second quarter averaged 72,500 BOEs per day, consistent with our previously announced guidance. Production in Canada averaged 37,700 BOEs per day, while production in the Eagle Ford averaged 34,800 BOEs per day. We generated an operating netback of $6 per BOE during the second quarter, or $8 per BOE inclusive of realized financial derivative gains. We delivered an adjusted funds flow of $18 million, and our exploration and development spending totaled a modest $10 million. So despite this being one of the most challenging pricing environments we have ever experienced, we still delivered positive free cash flow during the quarter.

We continued to forecast annual capital spending of CAD 260-CAD 290 million, and an approximate 50% reduction from our original plan of CAD 500-CAD 575 million. Our production guidance range for 2020 is unchanged at 78,000 to 82,000 BOEs per day. We also remained intensely focused on driving further efficiencies to capture or sustain cost reductions identified during this downturn. We have now identified approximately CAD 98 million of cost reductions for 2020 relating to operating, transportation, and general and administrative expenses. During the second quarter, our operating expense of CAD 11.17 per BOE compared favorably to CAD 11.66 per BOE in Q1 2020, as we strive to mitigate the costs associated with our field operations. In addition, we realized an approximate 35% reduction in our per BOE transportation expense due to reduced volumes.

General and administrative expense totaled CAD 7.4 million in the second quarter, down from CAD 9.8 million in the first quarter as we implemented reductions to salaries and annual retainers and benefited from the Canada Emergency Wage Subsidy. I want to take a minute and highlight our work on the ESG front. We are committed to managing the environmental and social impacts of our business, and continual improvement is an important element of this commitment. As a reminder, in 2019, Baytex established a GHG emissions reduction target. Our objective is to reduce our corporate GHG emissions intensity by 30% by 2021, relative to our 2018 baseline. We have just released our 2019 ESG data, which is available on our website.

In 2019, we made significant improvements in our emissions profile, achieving a 15% reduction in our GHG emissions intensity as we commissioned our Peace River gas plant in mid-2018 and progressed our Viking Gas Conservation Project. We remain committed to achieving our 30% target by the end of 2021. I will now turn the call over to Rod to discuss our balance sheet and risk management.

Rod Gray (EVP and CFO)

Thanks, Ed, and good morning, everyone. As Ed mentioned, given the unprecedented collapse in crude oil prices experienced during the second quarter, our priority quickly shifted to preserving financial liquidity. We reduced net debt by $57 million during the quarter as the Canadian dollar strengthened relative to the US dollar, and we generated positive free cash flow of $6 million. Importantly, based on the forward strip, we expect to maintain our financial liquidity and remain onside with our financial covenants through 2021. Our credit facilities total approximately $1.1 billion and have a maturity date of April 2, 2024. These are not borrowing-based facilities and do not require annual or semiannual reviews. As of June 30, 2020, we had $363 million of undrawn capacity on our credit facilities, resulting in liquidity, net of working capital of approximately $300 million.

In addition, our first long-term note maturity of $400 million is not until June 2024. We also continue to manage our commodity price risk through an active hedging program. We realized financial derivative gains of $14 million in the second quarter. For the remainder of 2020, we have entered into hedges on the majority of our net crude oil exposure. This is comprised of WTI fixed price swaps on approximately 16,000 barrels a day at $38 per barrel, and a three-way option structure on 24,500 barrels a day that at current oil prices give Baytex WTI plus $7.60 per barrel. We also have WTI par MSW basis differential swaps on 8,000 barrels a day of our light oil production in Canada at $5.80 per barrel, and WCS differential hedges on 8,700 barrels a day at a WTI to WCS differential of approximately $14.50 per barrel.

We have started to layer in hedge protection for 2021 as forward markets have improved. Today, we have protection at $45 WTI on approximately 10% of our expected 2021 exposure. For full details of our hedge program, can be found in our second quarter financial statements. And with that, I'll turn the call back over to Ed for some concluding comments.

Ed LaFehr (President and CEO)

Thanks, Rod. I believe our second quarter results demonstrate our commitment to succeed in a low-price environment. We have responded decisively to dramatically reposition operating activity to maximize our cash flow and minimize the draw on our liquidity. And we remain intensely focused on driving further efficiencies to capture or sustain cost reductions identified during this downturn while protecting the health and safety of our personnel. And with that, I'll ask the operator to please open the call for questions.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we'll pause momentarily to assemble our roster. Our first question will come from Phil Skolnick with Eight Capital. Please go ahead.

Phil Skolnick (Analyst)

Yeah, thanks. Good morning. The two Duvernay wells that you drilled earlier this year, what do you need to see to complete them?

Ed LaFehr (President and CEO)

Yeah, really good question. We've got two wells drilled but not completed, as you say, in the first quarter. They're right in the core of our play, and we've got about 250 sections in the area. So it's very important to us to move beyond where we are now, where we believe we've de-risked 125 sections of land, to fully, I guess you'd say, gaining confidence in our production rate deliverability and the cost structure of the two wells. So we need to get the completions done for those tactical reasons, but also for strategic reasons. It really helps us position ourselves as the leading public company in the basin and perhaps the leading company in the Pembina sub-basin. So what do we need to see to get there? First of all, we needed to see a stable $40 WTI.

On half-cycle economics, where you've got the drill costs sunk, it only takes about $40-$45 WTI to pay these wells out in a year. And that's not necessarily on the high-case curve of the 14-31 well that we drilled, completed, and brought on production at some of the highest rates in the entire basin, around 1,300 BOEs per day. So I think we're very, very close, Phil, is the answer to the question to making a call on whether we spend the additional frac costs this year to bring on those two wells by the end of the year versus holding them until around just after breakup next year. We'll make that decision in August. And if we do frac the wells, you'll see them come on roughly October. And they'll be very tactically important but also strategically important for us as well.

We're in a place where we've got free cash flow for the full year, but it's very tight on strip. We'll be free cash positive and maintain our $300 million liquidity, and that remains our number one priority. We have to see the prices are stable or that we can hedge them in, which we can talk further about. We're pretty well hedged this year. As Rod says, we've just started to layer in some hedges for next year.

Phil Skolnick (Analyst)

Yeah, thanks. That actually segues into my second question then with hedging because you did enter into some in 2021. What is your philosophy as you do approach 2021, and how do we think about, or how are you thinking about the hedging with respect to activity levels for 2021 and spending?

Ed LaFehr (President and CEO)

Well, let's start with 2020. As we brought back on production, we wanted to ensure that production, those positive cash flows, were going to be stable in a very volatile environment. So we did layer on the hedges in 2020. What that did is it protected our ability to have confidence in that liquidity that Rod talked about, and also that we wouldn't breach any covenants for this year or next year on strip pricing. So that was step one. Step two then is thinking about 2021. And we had been targeting $45 as the place to come in and start layering in some hedges to further protect positive, if not free cash flow in the following year. And so what we've done is we've put about 10% of our crude oil on three-way options, 35, 45, 55.

And as Rod says, it gives us a floor at 45 and upside participation with the collar up to $55. And we think we see the markets leveling out there, but we'll layer in hedges now as we start to see prices moving into that 45 range, but also that you can attract some very reasonable other kind of derivatives like two-way and three-way collars where we can participate in the upside. So that's kind of at a high level. Rod, did you want to elaborate?

Rod Gray (EVP and CFO)

No, I think Ed's covered it. I think, Phil, one thing when we think about 2021, I think we'd like to have more protection on as the year goes here. And so we'll be looking to layer in positions. Our track record would say that we like to layer them in as the market moves as opposed to making one big move. So our anticipation is that we'll be pretty active in the second half of 2020 here, looking to secure a decent hedge book by the end of 2020 for 2021.

Phil Skolnick (Analyst)

Okay, great. That's it for me. Thanks.

Operator (participant)

Again, as a reminder, if you would like to ask a question, please press star, then one. Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Brian Ector for any closing remarks.

Brian Ector (VP of Capital Markets)

All right. Thanks, Chad. Thanks, everyone, for participating in our second quarter conference call. Have a great day.

Operator (participant)

Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.