Baytex Energy Corp.
Q3 2016 Earnings Call Transcript

Published: 2 Nov 2016

[Executives:]

Brian Aster - SVP, Capital Markets & Public Affairs Jim Bowzer - Chief Executive Officer Ed LaFehr - President Rod Gray - Chief Financial Officer Rick Ramsay - Chief Operating Officer

[Analysts:]

Greg Pardy - RBC Capital Markets

[Operator:]

Good morning, ladies and gentlemen. Welcome to the Baytex Energy Corp's Third Quarter Results Conference Call. Please be advised, this call is being recorded. I would like to turn the meeting over to Mr. Brian Aster, Senior Vice President, Capital Markets and Public Affairs. Please go ahead, sir.

[Brian Aster:]

Thank you, John. Good morning ladies and gentlemen and thank you for joining us today to discuss our 2016 third quarter financial and operating results. With me today are Jim Bowzer, our Chief Executive Officer; Ed LaFehr, our President; Rod Gray, our Chief Financial Officer; and Rick Ramsay, our Chief Operating Officer. While listening, please keep in mind that some of our remarks will contain forward looking statements within the meaning of applicable security laws. So, I refer you to advisory regarding forward looking statements, non-GAAP financial measures, and all GAAP information contained in today's press release. All dollar amounts referenced in our remarks are in Canadian dollars unless otherwise specified and I would now like to turn the call over to Jim.

[Jim Bowzer:]

Thanks, Brian, and good morning everyone. Our operating results for the third quarter are consistent with our expectations and demonstrate the commitment we have made during this downturn to deploy capital efficiency, reduce costs in all facets of our business and maintain strong levels of financial liquidity. First, I'd like to review some of the highlights for our third quarter. We generated production of 67,000 BOEs per day and delivered funds from operations of $72 million or $0.34 per share. Our funds from operations significant exceeded our capital expenditures for the quarter and year-to-date. We reduced our net debt by $79 million during the quarter and by 186 million through the first nine months of 2016. We reduced our operating expenses by 12% to $9.31 per BOE in the first nine months of 2016, compared to $10.55 per BOE in the same period of 2015. We realized an operating net back of $13.91 per BOE which is largely unchanged from Q2. The Eagle Ford generated an operating net back of $20.24 per BOE while our Canadian operations delivered an operating net back of $7.59 per BOE. I will now expand on our operating results for the quarter. Our emphasis on deploying capital efficiently was evident during the third quarter as we continue to curtail our level of capital spending and focus all development activity in the Eagle Ford. In the third quarter, our exploration and development expenditure totaled $40 million as compared to $36 million in the second quarter and $82 million in the first quarter. In the Eagle Ford, our pace of completion through the nine month of 2016 was down 21% compared to the first nine months of 2015. This reduced pace of completions combined with the previously announced divestiture of our operated assets in the Eagle Ford contributed to production averaging 33,550 BOEs per day during the third quarter as compared to 38,300 BOEs a day in the second quarter. We have continued to advance our completion activity in the Eagle Ford with increased frac stages and profit usage. During the third quarter, we averaged two to three drilling rigs and one to two frac crews on our lands. We participated in the drilling of 18 gross or 5.7 net wells in the Eagle Ford and commenced production from 30 gross or 8.8 net wells during the quarter. Of the 30 wells that commenced production during the third quarter, 15 wells have been producing for more than 30 days and have established an average 30 day initial production rate of approximately 1,350 BOEs per day. In Canada, we produced 33,600 BOEs per day as compared to 31,700 BOEs per day in the second quarter. This represents a 6% increase as we realized the full benefit of restoring previously shut-in production volumes. Now, I will talk about our success in reducing cost structure while maintaining our safety and efficiency in our operations. Cost in the Eagle Ford have continued to decrease with wells now being drilled completed and equipped for approximately $5.2 million per well, compared to $8.2 million in late 2014. The prevailing commodity price environment has not supported drilling on our Canadian assets in 2016. However, we continue to actively build on the 20% cost reductions we achieved in 2015 and strengthen the size and quality of our prospect inventory. And as I mentioned at the outset, operating expenses have been reduced by 12% to $9.31 per BOE in the first nine months of 2016. These cost reduction reflect a lower overall cost structure in Canada, combined with our lower cost Eagle Ford assets representing a large percentage of our total production. Transportation expenses are also down averaging $1.05 per BOE in the first nine months of 2016 compared to $1.81 per BOE for the same period in 2015. General and administrative expenses for the third quarter totaled $12 million, down from $14 million in the same period last year. The decrease is attributable to reduction in staffing levels combined with cost savings initiatives. Now, for just a little more color on our financial liquidity. As you will recall, we have targeted our capital expenditure to approximate funds from operations to minimize additional bank borrowing. In the third quarter, our funds from operations totaled $72 million as compared to capital expenditures of $40 million; and in the first nine months of 2016, our funds from operations totaled $199 million as compared to capital expenditures of $157 million. So I'm very pleased with how we have achieved this objective of balancing our spending profile with our funds from operations through the first nine months of the year in what has really been a pretty volatile pricing environment. Importantly, our net debt which includes our bank loan, our long-term notes and working capital deficiency has decreased to $1.86 billion at September 30, 2016, down from $2.05 billion at December 31, 2015. With respect to our financial covenants, our senior secured debt to bank EBITDA ratio at September 30, 2016 was 0.79 to 1 and that versus a maximum permitted ratio of 5 to 1. And our interest coverage ratio was 3.6 to 1 versus a minimum required ratio of 1.25 to 1. So, we are in very good shape with respect to our covenant. I would also like to update you on some of our minor non-core assets sales. On July 27, 2016, we disclosed the previously announced disposition of the operated assets in the Eagle Ford for net proceeds of approximately $55 million. At the time of disposition, these assets were producing about a 1000 BOEs per day and included reserves of 1.3 million BOEs on proved plus probable basis. In addition, we have disclosed of 650 BOEs per day of certain non-core assets in Canada. We do not anticipate any further assets sales at this time. Now with respect to our hedging activities, for the fourth quarter of 2016, we have entered into hedges on about 45% of our net WTI exposure with 15% of that fixed at $63.79 per barrel and 30% hedged using a three way auction structure. These three way auction structure provides us with downside protection to about $50 per barrel in U.S. and upside participation to about $60 per barrel in U.S. We have also entered into hedges on approximately 41% of our WCS heavy oil differential exposure and 65% of our natural gas exposure. For 2017, we have entered into hedges on 44% of our net WTI exposure using a three way auction structure that provides us with the downside protection at about $47 per barrel and upside participation to $59 per barrel. We've also entered into hedges on 24% of our net WCS heavy oil exposure and 49% of our net natural gas exposure. A complete listing of our financial derivative contracts can be found in note 15 to our third quarter financial statement. And now, I'll step into the plans for the remainder of 2016 along with our updated guidance. We are increasing our full year 2016 production guidance to 69,000 to 70,000 BOEs per day and this is different from our previous range of 67,000 to 69,000 BOEs per day on the back of continued strong operating results and planned activity levels through the end of the year. We anticipate that our full year 2016 exploration and development capital expenditures will be towards the high end of our range of $200 million to $225 million, so our production is tracking ahead of expectations with capital spending consistent with our base plan, both on which I'm very pleased. And importantly at this level of spending, we expect our funds from operations to exceed capital expenditures during the full year 2016. In the Eagle Ford, we're currently running four rigs and two completion crews on our lands and we expect about this level of activity to continue into 2017. We've also commenced preliminary work in advance a 2017 development program in Canada, which includes lease construction and surveying. We are in the process of setting our 2017 capital budget, the details of which are expected to be released as usual in our December meeting, following the approval of our Board of Directors. And now, in summary, as we entered 2016, we were pretty firm about our plans and laid out certain strategic objectives to guide us through this commodity price downturn, which included deploying our capital efficiently, continuing to emphasize cost reductions across all facets of our organization, and maintaining strong levels of financial liquidity. Our third quarter results were reflective of these strategic objectives, and I'm particularly pleased that we've reduced our net debt by $186 million so far this year. We remain well positioned to benefit from a continued price recovery in crude oil prices with strong capital efficiencies across our three core resource plays. I will now ask the operator to open the call for questions, please.

[Operator:]

Thank you. [Operator Instructions] Our first question is from Greg Pardy from RBC Capital Markets. Please go ahead.

[Greg Pardy:]

Jim, I just want to come back to the Eagle Ford for a minute. I know you have indicated really no change in that four rig count that you're going to continue. How many rigs do you think you would need to run to offset the clients in Eagle Ford in 2017?

[Jim Bowzer:]

We would be probably in that range of -- the best way to kind of look at Greg is the number of net wells we bring on in a year; and that's probably in the range of 28 to 30 net wells; and that puts you probably close to a four rig program with a couple of frac crews, as we continue through time and that should approximate a fairly stable production rate.

[Greg Pardy:]

Okay. So with what you're saying that is, it's actually looking pretty good in terms of what the year-over-year numbers would look like in Eagle Ford based upon the program you've laid out?

[Jim Bowzer:]

Yes and keep in mind, we haven't finalized our 2017 budget yet. We're right in the process of working on that. But I do expect it to be at the levels that we're at today; and if prices get back into the 50s, the entire industry knows OPEC has got a pretty important meeting coming up here at the end of the month. And if there is some benefit from that, it could go up a little bit. But we’ll take a good view and be flexible like we have been in the previous two years to guide our capital expenditures around our FFO for the year. But in general, I don’t see this program being reduced at this stage with where prices are at.

[Greg Pardy:]

Okay. And then fourth quarter I mean you're -- you have kind of under spent what we thought and you pointed that out. You spent closer to 70 million bucks or so in the fourth quarter. Where is most of that activity going to be focused on and to some extent is this getting a little bit more aggressive in the year-end?

[Jim Bowzer:]

Not really, Greg. It’s more of how the scheduling has worked out. In the second quarter, we had at times one to zero frac crews on our lands. Just the way the scheduling worked in the way that it was being implemented. And in the fourth quarter as a result of that we had several more wells on our lands that were remained uncompleted and pretty much this entire quarter we had two fracs crews on our lands the whole time, and actually for a portion of it, we have had three. So, it’s really just a reflection of the lumpiness of how we spent throughout the year. So, it was just a little less in the second quarter, in particular the second quarter. The third quarter was stepped up just a little bit in terms of the number completions. In the fourth quarter, we've ended up having our frac crews rotate around our lands and we’re going to have them pretty much all quarters. So, that’s really what is reflective of.

[Greg Pardy:]

Okay, that helps. Thanks very much.

[Jim Bowzer:]

I will say that we did get down to about three rigs and part of the time two rigs during the second and third quarter, so we are all also back up to the steady four rigs as we have stepped up the pace. Keep in mind; we made a pretty significant cut as you all know. We've spent I think, I quoted $82 million in the first quarter and then that was down substantially. So, we are running close to six rigs on our lands at the very beginning of this year and then when oil prices hit into the high 20s and low 30s there. I mean you remember we adjusted guidance and took a pretty big cut in our Eagle Ford capital as well during that time, and then it’s coming back a little bit now, as prices have improved into the high 40s and low 50s.

[Greg Pardy:]

Okay. And then maybe just as a follow-up but shifting gears onto the Canadian stuff and I think in the past you’ve talked what you need well north of 50 or so, obviously the exchange rate figures into that, but without saying crossing lines here and what your 2017 buzzer looks like. How price sensitive will be your activity on the Canadian stuff in ’17 or is it more matter that hey pricing -- or costs are so much better that it makes sense for us at 50?

[Jim Bowzer:]

You’ve summed it up for us pretty much right there, Greg. It’s getting to the point where it does make sense for us at 50 and higher. And as we enter the year, we’ll just take a good hard look at that and we are making plans that we have permits and surveys in place. So, if need be, we can hit the ground running as we enter 2017 with the program there. And prices hold up here as we go through the end of the year, we’ll probably end up doing something like that and have a Canadian program again as we go forward, but the jury is still out. And like I said, a couple of important meetings coming up here in our industry, at least one I know by the end of the month. And we’ll see how that holds forward and we'll be flexible as we need to be.

[Operator:]

Thank you. [Operator Instructions] And there are no further questions for the moment. I'll turn the meeting back over to Mr. Aster. Please go ahead, sir.

[Brian Aster:]

All right, thanks John, and thanks to everyone for participating in our third quarter results conference call. Have a great day.

[Operator:]

Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.