Veren - Q2 2023

Transcript

Operator (participant)

Good morning, ladies and gentlemen. My name is Julie. I will be your operator for Crescent Point Energy's second quarter 2023 conference call. This conference call is being recorded today and will be webcast along with a slide deck, which can be found on Crescent Point's website homepage. 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 US dollars. The complete financial statements and management's discussions and analysis for the period ending June 30th, 2023, were announced this morning and are available on the Crescent Point Energy, SEDAR, and EDGAR websites. All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer session for members of investment community. If you'd like to ask a question over the phone line during this time, simply press Star 1 on your telephone keypad. If you'd like to withdraw your question, press Star 2. 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 operation or financial results are included in Crescent Point's most recent additional 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 in the non-GAAP measured sections of the press release issued earlier today.

I will now turn the call over to Craig Bryksa, President and Chief Executive Officer at Veren. Please go ahead, Mr. Bryksa.

Craig Bryksa (President and CEO)

Thank you, operator. I'd like to welcome everyone to our second quarter 2023 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 a slide deck, which can be found on our website. Today, we're introducing a new format to our conference call to add a level of further engagement and to turn the call into more of a discussion on our forward outlook. Earlier today, we issued our quarterly press release, financial results, and updated corporate presentation, each of which can be found on our website. During this call, I'll provide a brief strategy update, highlight our strong quarterly results, and discuss our overall outlook for the remainder of the year. We'll move into a Q&A session.

We will start by taking questions over the conference line, as we usually do, and once those questions have concluded, I'll then turn the call over to Shant Madian, our Vice President of Capital Markets, who will moderate questions from participants joining us on our webcast. We encourage those in our webcast to submit questions using the chat function on the online portal. We look forward to the discussion that this format will provide, so let's get started. On the strategy front, we significantly advanced our portfolio optimization through our successful Alberta Montney acquisition during the second quarter. This transaction materially enhances the quality of our portfolio, both in terms of our depth of premium inventory, as well as our excess cash flow profile and our return of capital per share.

This acquisition is consistent with our strategy of pairing quick payback, short cycle assets such as the Alberta Montney and Kaybob Duvernay, with our longer cycle, low-decline assets in Saskatchewan. This mix of short and long cycle plays results in significant excess cash flow for the company and our shareholders. It also allows us to execute on our strategy to generate sustainable long-term returns through a combination of per share growth and a compelling return of capital offering, all while maintaining a strong balance sheet. Our multi-basin approach remains strategically focused on oil and liquids, which account for 75% of our current production. By remaining dedicated to this approach, we are able to deliver on one of the highest cash flow net backs in the industry, along with significant excess cash flow per share.

We are successfully integrating the new Montney asset into our portfolio and have a near-term goal of further enhancing our returns through additional productivity gains and cost efficiencies. Part of our early success in this play has been the result of our efforts to leverage our existing relationships with our suppliers to reduce our costs. We have also identified additional areas for potential efficiencies, including ongoing well completion optimization, deploying longer lateral lengths, and shifting to larger multi-well pads. As you can tell, we're excited about our new Alberta Montney position, especially given its recent prolific well results. For example, 4 of the top 5 liquids wells drilled in the Western Canadian Sedimentary Basin in May were our wells in the Montney, highlighting the attractive reservoir characteristics and the scalability of this asset.

We have continued our drilling success into June, achieving impressive results that are in line with or exceeding our early well results. Like the Kaybob Duvernay, our Montney play provides the opportunity for new reserve additions and ultimately, net asset value per share growth, given that only 25% of the locations we have internally identified have been booked. This transaction, along with our strategic steps we have taken over the past few years, has allowed us to build a very strong portfolio that is well positioned to generate long-term returns for our shareholders. I'll now shift to our quarterly results and the execution across our portfolio. During the past quarter, we continued to demonstrate our operational excellence, as reflected in strong performance of our Kaybob Duvernay assets.

I'd note that our second quarter production of 155,000 BOE per day included the impact of approximately 7,000 BOE per day of downtime associated with the wildfires. First off, I'd like to commend our teams in the field and thank our local community members and first responders for their incredible efforts to keep everyone safe during the wildfires. Thanks to our dedicated teams and advanced field operation technology, we were able to quickly restore our Kaybob Duvernay volumes as the fire subsided. These wildfires masked our true outperformance in the quarter, which was driven by our Kaybob Duvernay assets, with recent onstream production outpacing our type wells in the area. Due to this outperformance in the first half of the year, we have kept our annual production and capital expenditures guidance unchanged. Our second quarter results also demonstrate our commitment to returning capital.

During the quarter, we returned CAD 167 million, or approximately 60% of our excess cash flow, directly to our shareholders. This included CAD 93 million of share repurchases in addition to our dividends. In total, we have now repurchased, for cancellation, nearly 17 million shares year to date, and remain active on our buyback program, which is the tool of choice within our return of capital framework. Over the past 12 months, we have delivered more than CAD 550 million to shareholders, marking our fourth consecutive quarter of returning approximately 60% of our excess cash flow. I'll now touch on our outlook for the remainder of 2023, along with our five-year plan.

During the second half of this year, we expect to realize the benefits of our recent Montney acquisition and continued momentum in our Kaybob Duvernay play, as we plan to bring onstream additional pads in both areas during the third and fourth quarter. Our second half 2023 production is expected to average approximately 179,000 BOE per day, generating over CAD 1 billion of excess cash flow on an annualized basis, assuming a $75 U.S. price deck. As we look further out, we expect to generate CAD 5 billion of cumulative excess cash flow under our 5-year plan at similar commodity price assumptions, providing a combination of disciplined per share growth, attractive return of capital, and further debt reduction. We plan to provide our preliminary 2024 outlook later this fall, alongside an updated 5-year plan.

On the ESG front, we remain steadfast in our commitment to strong environmental, social, and governance practices. During the quarter, we released our fifth annual sustainability report, highlighting our strong ESG performance and detailing our key ESG initiatives. I'm proud to report that our environmental initiatives over the past 5 years have resulted in a reduction of approximately 50% in both our Scope 1 emissions intensity and our asset retirement obligations. We also continue to achieve record safety scores, which speaks to our safety-first culture. I'd like to thank everyone for their continued support and engagement, in particular, our staff, who continue to deliver on our purpose of bringing energy to our world the right way. We'll now open the call for questions from the analysts and follow with a Q&A session for those on our webcast. Operator, please open the call.

Operator (participant)

Thank you. As a reminder for members of the investment community, if you'd like to ask a question, please press star, then 1 on your telephone keypad. If you'd like to withdraw your question, please press star 2. We will pause for a moment to compile the webinar roster. For those on the webcast, please use the chat function to ask a question. Your first question comes from Dennis Fong from CIBC World Markets. Please go ahead.

Dennis Fong (Equity Research Analyst)

The solid quarter, and thanks for taking my question. The first one that I have is just related to Montney. There's a lot of discussion around Gold Creek, East and West. I was just curious as to some of the potential development plans around Carr, just given also attractive economics in that region, or is there any kind of, I don't call it hindrance, but things that you need to complete before further developing that region?

Ryan Gritzfeldt (COO)

Hey, this is Ryan here. I'll take that one. Yeah, Carr, obviously it's an area that we really like. It's obviously a little bit more higher oil %, higher liquids % than Gold Creek. Not as many, you know, future drilling locations there as in Gold Creek, but, you know, we do like the area. We finished drilling a pad there when we took over from Spartan, and actually right now, fracking a pad there, which we should have results to disclose next quarter. Yeah, we are drilling there for the rest of this year into 2024. Of course, we'll continue, you know, as we get locations ready.

Yeah, we just haven't talked about Carr yet, because we don't have any results since the close of the acquisition. We are fracking a pad there as we speak, and we'll speak to that next quarter.

Dennis Fong (Equity Research Analyst)

Great. Great, thanks. Sorry, my follow-up here is also on the Montney here. You've obviously talked a lot about optimizing both cost structure and even completion design now that you've taken over the property. What would maybe drive a decision and/or timing to add a second rig in the Montney, and kind of what are you looking for to help drive the confidence around accelerating capital deployment into that region? Thanks.

Craig Bryksa (President and CEO)

... Hey, Dennis, it's Craig here. Thanks for the question. Obviously very excited with the results we've been seeing to date and bringing that acquisition now and then having it in-house, and our technical team has really been able to spend the time and dig into it. You know, the more we get in there and the more we work through it, the more excited we get about this. You can see that as the results are coming out here over through May and into June, and what we were putting here into our quarter. On all fronts, it looks really good. I think as the technical team gets into it, we'll do things a little bit differently, like we did in the Duvernay.

If you remember, when we picked that up, we moved in there with purpose. We got smarter over, call it the first couple of years of owning that asset, and now are moving in the second rig into the Duvernay here, in October of this year. Look for us here to do it in a similar fashion, Dennis. We're gonna, we're gonna spend some time, we're gonna get active in there. We're gonna, do what we think is right as far as landing the wells, in the, in the landing zone of our preference. We're gonna change up some completion design, ultimately really maximize some height growth within there. Ultimately, that should show through in the results.

You know, as we think through our 2024 program, right now it's sitting at 1 rig in the Montney. If there is capital shifts across the portfolio, I would expect that to be moving into the Montney and maybe out of other areas. I wouldn't expect anything over, you know, within the next 12 months, Dennis. Right now, it's a 1-rig plan here. We'll see how things play out as we get smarter and really test what we wanna do. Again, this is where I get excited about it, Dennis, is because, you know, you think of our technical teams within this organization and what they were able to unlock in the Duvernay and now parlay that into the Montney.

I guess that's a long-winded way of me saying that, you know, nothing here, incremental in the next 12 months, but over that, you know, when we get beyond that and we're a little bit smarter, look for us to start shifting some capital.

Dennis Fong (Equity Research Analyst)

Great. Thanks, and appreciate the color there, Craig. I'll turn it back.

Craig Bryksa (President and CEO)

Yeah. Okay. Thanks, Dennis.

Operator (participant)

We have time for one more question coming from Travis Wood from National Bank Financial. Please go ahead.

Travis Wood (Managing Director, Equity Research)

Yeah, thanks, and good morning. Wanted to talk about divestitures and with a few things in the fire and just assuming that something closes across the portfolio here over the next several months. How are you thinking about the allocation of those proceeds, maybe just from a debt variable, special, and base dividend perspective? Also, you know, how are you as you look at opportunities and kind of future business opportunities and you evaluate those, how are you ranking those future opportunities from a conventional oil or oil sands, liquids rich perspective, as you look at future inventory expansion from an M&A perspective?

Craig Bryksa (President and CEO)

Thanks, Travis. It's Craig. I'll take this one, and if Ken and Ryan or Shant Madian want to add any color, feel free, gents. You know, Travis, obviously a lot of work in the last five years of what we've been doing as far as building out our portfolio. I can tell you how we sit today. We're extremely excited about what we have, especially when you think of the short cycle and the long cycle pairing, like we've talked about quite a bit in the past. Really two premium North American unconventional resource plays paired with our Saskatchewan waterflood assets. Really love the balance in the portfolio. We love the weighting that we have in the portfolio, particularly when you think about it, around 75% liquids.

At the same time, you know, now on the back end of these, this transformation, we have a premium inventory of 15 years. We're sitting in a really good spot and feel really good about it. You know, your question as far as dispos, we have talked in the past that there's maybe some things that don't necessarily fit with the build-out here in the long term, we'll look to move off, you know, a piece of that or a piece or two over time, we'll see how that plays out.

I would tell you know, as happy as we are with how things have come together and the balance sheet, our balance sheet strength at only kind of 1.4 times debt to cash flow here, and that should be around 1 time at the end of this year to call it CAD 75 debt. Balance sheet is strong, Travis, but I would expect the proceeds of any of those sales to be earmarked for near-term debt reduction, so to further strengthen that even more. Then to your comment around what does the portfolio look like going forward? You know, Travis, again, very happy with where we are. I would tell you, our sandboxes are fairly well defined right now.

Don't look for us to expand out of where we are in between K-Bob and Montney, the Alberta Montney, and then into the Saskatchewan waterfloods. I would say our sandbox is fairly well defined on that front. You know, we'll see how things play out. Happy with how things are. Absolutely in no rush to do anything on an A or a D front. You know, we've spent the last five years really building this out and extremely happy with where we are.

Travis Wood (Managing Director, Equity Research)

Okay. That's great color. Thanks for that. That's all for me.

Craig Bryksa (President and CEO)

Okay. Thanks, Travis.

Operator (participant)

There are no further questions over the phone at this time. Craig, please proceed.

Craig Bryksa (President and CEO)

Okay. I'll pass it over to Shant. I think he's gonna has a few questions here coming in online.

Shant Madian (VP, Capital Markets)

Yeah. Thanks, Craig. A couple of questions coming in as we've been chatting. One or a couple still around the cost front. One asking if we're continuing to see any cost pressures and someone else seeing if we're actually seeing any cost easing. Maybe we can give a little bit of an update on that front.

Craig Bryksa (President and CEO)

Yeah, that one is probably best for Ryan to speak to.

Ryan Gritzfeldt (COO)

Yeah. I would say in general, we're seeing a, you know, a flattening.

...of costs and rates, you know, coming out of the recent inflationary environment here, probably, you know, led by reductions in casing, steel, tubing costs. You know, probably cost pressures still remain more on equipment utilization, labor costs, et cetera. You know, with that, you know, we're keeping our, kind of our current cost estimates. Status quo, puts us kind of right in range of our 2023 capital budget of CAD 1.15 billion-CAD 1.25 billion. You know, I would say a couple exciting things, you know, upon the close of our acquisition, like Craig said, you know, in the Montney, you know, we had our Gold Creek-type wells at around a CAD 9 million-CAD 9.5 million per well range.

We've quickly, you know, after really only operating there for two months, been able to leverage our existing supply chain, our current, you know, service partner relationships. You know, already reduced our casing costs, reduced some of our, of our frack costs, specifically, you know, on sand sourcing. Already have line of sight to sub CAD 9 million well costs there. You know, that's one thing that I'd highlight and something that we're really excited about.

Shant Madian (VP, Capital Markets)

Thanks, Ryan. A couple more questions here on return of capital. I'll probably break it up into two. One, someone's just looking for clarity. It looks like our return of capital payout there. They're questioning whether or not we increased it from 50% to 60%, so we can give some clarity there first. The second question, someone's asking if we are looking at or would consider increasing that return of capital payout or perhaps accelerating buybacks to narrow the discount to that?

Ken Lamont (CFO)

Sure. Maybe I'll take this one, Craig. It's Ken. No, our framework hasn't changed. Our total return of capital is really comprised of 2 parts. 1 is the base dividend, and the other is a return of some discretionary excess cash. Really, the 60%, what we've done here is just simplified how we present it. We're doing that now in aggregate return of capital as a percentage of excess cash. That really now just makes us more comparable to our peers when you're sort of comparing our return of capital proposition relative to peers. I guess that's the first part. It has not changed, and obviously, we're proud of this framework. We've been following it now for this is the Q4.

The second part of that is, no, we don't have any plans to revisit the 60% return level. I think this really strikes a healthy balance between, you know, a competitive return of capital, as well as allowing us some access to capital, to reinvest in the business and to repay debt. No, we don't have any plans to revisit the 60%.

Shant Madian (VP, Capital Markets)

Yeah. another question around hedging. any plans to load more hedges in for 2024? Just someone asking, particularly on why it dips in Q4 2023.

Craig Bryksa (President and CEO)

You're probably best to speak to that as well.

Ken Lamont (CFO)

Sure. Just as a matter of an update, we are about 25% hedged now through the second half of 2023. I think we've built a pretty solid book there, and always just looking to enhance it a little bit, but I would expect us probably not to get past the 30% level. As we look into 2024, we've actually started a program now into 2024, into the first half. We're gonna start chipping away at hedging there. We are looking to kinda get hedged out about a year out in that 20%-30% level, and obviously, still fighting a little bit of backwardation as you get out, a year out here now.

We'll be patient and disciplined, and when, as this market moves up, as it has done in the, in the past, week here, we'll, look to take advantage of that.

Shant Madian (VP, Capital Markets)

Thanks, Ken. Market access-related question. Can you talk to CPG's relative market access position, and if Trans Mountain coming online soon will help in any way?

Craig Bryksa (President and CEO)

You wanna grab that, Ryan?

Ryan Gritzfeldt (COO)

Sure. Yeah, obviously, Trans Mountain coming on, definitely helps egress out of the basin. You know, we don't, you know, we don't have any volumes earmarked for that pipeline, but definitely, you know, we'll open up space and, you know, you'd have to think that differentials, you know, for most products, you know, hopefully, especially, you know, our products out of the Montney will strengthen significantly with that. You know, I think that's definitely a positive for industry and, you know, hopeful that will help realize pricing go forward.

Craig Bryksa (President and CEO)

The only thing I'd add on that is when you look at our portfolio, we have a very good position as far as where we sit on the Enbridge mainline. On that front, you know, takeaway for us is a strength. I would also say, as we look at assets, and particularly what we liked about both the Montney and the Duvernay acquisitions that we've done over the past few years, is just the takeaway or the flexibility around the takeaway out of those assets. That's certainly a criteria we look at, ensuring that we always have that market access.

Shant Madian (VP, Capital Markets)

Thanks, Ken. Another question here back on Montney, Gold Creek West. Why are you seeing Gold Creek West results stronger than Gold Creek?

Ryan Gritzfeldt (COO)

Yes, I'll take that, Craig.

Craig Bryksa (President and CEO)

Yeah.

Ryan Gritzfeldt (COO)

Yeah, I mean, Gold Creek East still, you know, very good. Our results are on type well there. You know, 3 of the 4 wells that, you know, were in the top 5 of the top Alberta liquids producers in May are Gold Creek East, so really on type well there. I think what, you know, we're obviously most excited about are the Gold Creek West results we're getting. I would say, you know, based on all the work our teams have done, geomodeling, reservoir, petrophysical, you know, when you look at the outperformers in Gold Creek West, you know, still early days there, but, you know, we think, you know, kind of like what we did in the Duvernay was, you know, wells that are landed at the bottom part of the reservoir are getting the best results.

We think that the way we're gonna frack these wells, we can access all of the net pay, by drilling, you know, a single bench. That's, you know, we think is gonna be the most capital efficient way to develop this area. You know, the results we're getting and, you know, they're worth repeating because they are significant. You know, the first well, you know, 1,900 BOE a day, 80+, 85% liquids. It's also the IP90, so that well is hanging in there. The first pad that we fracked, the two best wells are averaging 1,600 BOE a day. You know, the second pad that we fracked, at only 15 days production, we're over 1,000 BOE a day, 80% liquids already.

Obviously very excited about that area. Recall that, you know, 300 locations of the 600 locations that we identified in the acquisition are in this Gold Creek West area. Less than 20% are booked. You know, also recall the type well, the book type well is only 1,000 BOE a day, IP30 at, like, less than 60% liquid. Obviously, you know, we're really excited about this area. I think a ton of upside. Like I said, you know, with only 2 months operating so far, we've already seen, you know, well costs, you know, path to get to sub CAD 9 million. You know, we'll continue doing that as we trial, you know, different drilling techniques, different bit technology, as we continue to drill here.

Obviously, really excited about that area and what it can do in our five- and ten-year plans.

Shant Madian (VP, Capital Markets)

Thanks, Ryan. Another question, just going back on the M&A theme. You guys have clearly grown in the Montney and Duvernay, and you've defined your sandbox. Is there more opportunities still to do on the conventional oil side of the business back in Saskatchewan?

Craig Bryksa (President and CEO)

Yeah, I think, I mean, like anything, we'll always look at opportunities that are in front of us, and you never know what's put in front of you. We certainly will do our homework and look at it. I just double back to what I was saying earlier, that we've done a lot of work strategically as we've repositioned the company here over the last five years, and extremely excited about where we're at now and the pairing of the two North American premier resource plays with the Saskatchewan water floods. It's got us extremely excited, especially when you think of the balance within the portfolio. Certainly, we would look at doing it. I would say again, though, I'm gonna double back to earlier. Don't expect us to go outside our sandboxes.

Our sandbox is extremely well-defined, and we'll see again how it plays out here, you know, over the next 12, 24, 36 months on those things. Very content with where we are today and feel really good about, you know, not only the 5 years in our 5-year plan, but the next 10 years, and how that looks for Crescent Point and what that means for everybody, you know, our shareholders, our employees, our staff. There's a lot of excitement now around this table. Feeling really good about where we are.

Shant Madian (VP, Capital Markets)

Thanks, Greg.

Craig Bryksa (President and CEO)

Mm-hmm.

Shant Madian (VP, Capital Markets)

Yeah, at this time, there's no additional questions from those listening online or no one on the phone lines as well. Thanks, everyone, for joining our call today. If you have any follow-up questions that weren't answered, please call our investor relations team at your convenience.

Craig Bryksa (President and CEO)

Thanks, everyone.

Operator (participant)

Crescent Point's Investor Relations department can be reached at 1-855-767-6923. Thank you, and have a good day.