Baytex Energy - Q3 2019

Transcript

Operator (participant)

Welcome to the Baytex Energy Corp third 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 one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star zero. I would now like to turn the conference over to Brian Ector, Vice President, Capital Markets. Please go ahead, sir.

Brian Ector (VP, Capital Markets)

Thank you, Savi. Good morning, ladies and gentlemen, and thank you for joining us today to discuss our third quarter 2019 financial and operating results. With me today are Ed LaFehr, our President and Chief Executive Officer; Rod Gray, our Executive Vice President and Chief Financial Officer; Kendall Arthur, Vice President, Heavy Oil; and Chad Lundberg, Vice President, Light Oil. 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 in today'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.

Edward LaFehr (CEO)

Thanks, Brian, and good morning, everyone. I'd like to welcome everybody to our third quarter 2019 conference call. I'm very pleased with our strong operating performance, which continued across our asset base during the third quarter. And I'm excited to announce that given our year-to-date results, we now expect to exceed our 2019 full-year annual production guidance of 97,000 BOEs per day, with exploration and development capital expenditures of approximately $560 million. This level of capital spending is at the low end of our original guidance range and reflects our continued commitment to driving cost and capital efficiencies. And for the third consecutive quarter, we are delivering substantial free cash flow. In Q3, this amounted to $74 million and brings the free cash flow generated year to date to $271 million.

This strong free cash flow has contributed to a 13% reduction in our net debt this year, including the redemption of our $150 million of long-term bonds during the third quarter. Our commitment remains to generate free cash flow and further improve our balance sheet. We maintain strong financial liquidity, with our credit facilities approximately 50% undrawn. For the quarter, we generated production of 95,000 BOEs per day, which brings production for the first nine months of the year to 98,000 BOEs per day. These results are consistent with our expectations and reflect the timing of our 2019 development program in Canada and the Eagle Ford and the impact of our third-party facility turnaround at Peace River. There is no change to our 2019 exit production rate forecast of 95,000 to 97,000 BOEs per day.

We delivered adjusted funds flow of $213 million, or $0.38 per basic share, and $670 million, or $1.20 per basic share for the first nine months of 2019. And our exploration development capital expenditures totaled $139 million, bringing aggregate spending year to date to $399 million. Our diversified oil portfolio generated a corporate-level operating netback, including hedging, of $29 per BOE, which is among our highest since 2014. Our Canadian operations generated an operating netback of $25 per BOE, while our Eagle Ford asset generated an approximate operating netback of $28 per BOE. During the third quarter, Canadian differentials remained tight, which contribute to strong price realizations.

We also published our fourth corporate sustainability report this quarter, demonstrating our commitment to transparency and accountability and our progress in managing the environmental and social impact of our business. Over the past five years, we have reduced spill volumes by 76%, and this year we established a greenhouse gas emissions reduction target with an objective of reducing our corporate emissions intensity by 30% by 2021. I am incredibly proud of the work our teams are doing on the safety and environmental front. Let's turn our attention now to our operations, beginning with our light oil, Eagle Ford, and Viking assets. In the Eagle Ford, production averaged 37,000 BOEs per day, 77% liquids during Q3 2019. We commenced production from 20 wells as compared to 29 wells during the second quarter.

These wells generated an average 30-day initial production rate of approximately 2,100 BOEs per day per well, which represents a 20% improvement over wells brought on stream in 2018. In the Viking, production averaged just over 22,000 BOEs per day, with an operating netback of $41.60 per BOE, the highest in our company. We maintained an active pace of development during the third quarter, with 72.5 net wells drilled and 49.4 net wells brought on production. We currently have three drilling rigs and two frack crews executing our program and expect to drill approximately 245 net wells this year. As with all of our core plays, inventory enhancement continues to be a priority. We've completed multiple deals and swaps year-to-date, adding 220 net unbooked drilling opportunities.

Moving to our heavy oil assets in Canada. Peace River and Lloydminster produced a combined 28,500 BOEs per day during the third quarter. In Q3, we drilled 20 net heavy oil wells, including 4 net multilateral horizontal wells at Peace River. Our 2019 development program is strongly weighted about 80% to the second half of the year. As a result, heavy oil production is expected to increase to more than 30,000 BOEs per day during the fourth quarter due to the new well completions and the expansion of our Kerrobert thermal project. Finally, in the East Duvernay Shale, we continue to advance the delineation of this early-stage, high netback light oil resource play. To date, we have drilled 7 wells at Pembina, which confirms the prospectivity of our acreage.

Two wells brought on stream in 2019 generated an average 30-day initial production rate of approximately 1,050 BOEs per day per well at 75% liquids and are in the top 15% of all wells drilled in the play. The success of our drilling program in the Pembina area has significantly de-risked our approximately 38-kilometer-long acreage fairway, where we hold 275 sections of 100% working interest Duvernay lands. Let's turn to risk management. We continue to manage our commodity price risk through an active hedging program. In the third quarter, we realized a financial derivatives gain of CAD 21 million. For the fourth quarter of 2019, we have hedged approximately 53% of our net crude oil exposure at pricing in the mid-$60 range for WTI.

For twenty twenty, we have hedges on approximately 33% of our net crude oil exposure, largely utilizing costless three-way option structures that when WTI is between $51 and $58 per barrel, we receive $58 per barrel, and the contracts also provide upside participation to nearly $64 per barrel. Our hedges also include WTI-based fixed price swaps for 4,000 barrels per day at approximately $56 per barrel for the first quarter. Additionally, crude by rail is an integral part of our egress and marketing strategy for heavy oil. For Q4 2019, we expect to deliver 11,500 barrels per day, approximately 40% of our heavy oil volumes, to market by rail. For twenty twenty, our crude by rail volumes are currently contracted at 7,500 barrels per day.

Full details of our hedge program can be found in our Q3 financial statements. So now let me conclude by saying we are well positioned to execute our business plan focused on free cash flow generation. As I mentioned at the outset, given our strong operating performance, we now expect to exceed our 2019 annual production guidance of 97,000 BOEs per day. Based on the forward strip for the balance of 2019, we are forecasting adjusted funds flow of approximately $875 million, and we expect to generate approximately $300 million of free cash flow, which supports our deleveraging strategy. Over the longer term, as we continue to drive debt levels down, we believe we will be positioned to offer returns through a combination of per share growth, share buybacks, and/or dividends.

Lastly, I would point out that we are in the process of setting our 2020 capital budget, the details of which are expected to be released in early December, following approval by our board of directors. With that, I will ask the operator to please open the call for questions.

Operator (participant)

Thank you, sir. We will now begin the question-and-answer session. To join the question queue, you may press star one on your telephone keypad. You will 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 two. We will pause for a moment as callers join the queue. Our first question comes from Phil Skolnick with Eight Capital. Please go ahead.

Phil Skolnick (Analyst)

Yeah, thanks, good morning. A couple questions. First, just in terms of the Alberta government's announcement yesterday with curtailment relief for rail ramp-up and that. Should we think about impacting Baytex at all? And if so, by how much, and how do we think about that?

Edward LaFehr (CEO)

Yeah, on that question, Phil, curtailment relief has been discussed quite openly with ourselves and the government and have been signaled now for months. And we believe that the differential has reflected that. So the differential moved from where it was in 3Q, around $13 a barrel. It's moved up steadily, sitting at $16-$17 a barrel, and now with Keystone, December's widened out to 19 or 20. But the point here is that with the announcement and that discussion, we're now sitting at a point where heavy oil differentials are at the full cost of rail. So while we're not expecting to participate in the government program, reason being, we continue to rail 40% of our crude. We were doing that in Q1, all last year, and throughout this year.

A dominant majority of those barrels move to the Gulf Coast on advantage pricing for us, so we don't need to move more rail. But with the differential now moved to the full cost of rail, we think that will incentivize quite a bit more rail, and that's gonna be good for the industry and good for business.

Phil Skolnick (Analyst)

Yeah, for sure. Then in terms of free cash flow given how robust it is for you guys, you know, how should we think about the priorities of that? and you know, what are the certain levers that you could pull in terms of, you know, on production side of things?

Edward LaFehr (CEO)

Yeah, well, as you can see, first half of the year was quite strong on production. Activity was ramped down in 3Q. Our exit rate is projected 95-97 thousand barrels a day. We're pointing towards the high end of that. So these assets want to grow on CAD 560 million of capital. We're, or at least on our old capital range. So, our capital efficiencies are incredibly strong. We'll point to a budget next year, though, that continues to drive free cash flow through these strong capital efficiencies and our strong cost structure that we've delivered. And the reason we'll do that is the number one priority in the company remains to delever our balance sheet and get that part done.

and then we'll get to the point where we can talk about more shareholder-friendly initiatives, such as share buybacks at this point in time with our shares trading where they are, but we need to take another step on the debt first with that free cash flow.

Phil Skolnick (Analyst)

Okay. And would share buybacks then be more desirable than a dividend?

Edward LaFehr (CEO)

I think at this point, with where our share price is trading, I would say yes, that would be behind, second priority behind the deleveraging in terms of capital allocation. That's always a board discussion, though, and one that we're having every quarter now.

Phil Skolnick (Analyst)

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

Edward LaFehr (CEO)

Thanks, Phil.

Operator (participant)

Once again, if you have a question, please press star one. Our next question comes from Tom Callahan with RBC Capital Markets. Please go ahead.

Thomas Callahan (Analyst)

Morning, guys. Just to follow up on Phil's question there. Given debt reduction is the priority, wondering if you guys could talk a little bit about your plans with respect to funding or refinancing your long-term notes as they begin to come due there in 2021?

Edward LaFehr (CEO)

Let me just say something very briefly on that and pass it over to our CFO, Rod Gray, but the two fundamental points that underpin our ability to delever are, number one, free cash flow, and number two, having strong liquidity on our revolving credit facility, and fortunately, both of those are very healthy, and they're very healthy at $50 oil prices, so with that as a backdrop and what I said previously about deleveraging, I'll leave the specifics to Rod.

Rodney Gray (EVP and CFO)

Yeah. Hi, Tom. More just to carry on what Ed had alluded to, so the bond maturity isn't until June of 2021. We just, in September, redeemed $150 million and continue to have, post that redemption, over $500 million of credit capacity on our revolving credit facilities. As Ed mentioned, we're in debt reduction mode. Our intention is to maintain the business in this commodity price environment and maximize free cash flow, which will be directed toward debt repayment. It might also be helpful to point out that, you know, we've managed the business within funds flow for the last five years in a very volatile commodity price environment, and so maybe to summarize, I think we have time and options to kind of deal with the upcoming maturities, and we're evaluating all options going forward.

Thomas Callahan (Analyst)

Perfect. Thanks, guys.

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.

Edward LaFehr (CEO)

All right, thank you, Savi. Thanks, everyone, for participating in our third quarter 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.