Baytex Energy Corp.
Q3 2015 Earnings Call Transcript

Published: 6 Nov 2015

[Executives:]

Brian Ector - Senior Vice President, Capital Markets and Public Affairs Jim Bowzer - President and Chief Executive Officer Rod Gray - Chief Financial Officer Rick Ramsay - Chief Operating Officer

[Analysts:]

Dan Kecskes - Global Credit Advisers

[Operator:]

Good morning, everyone ladies and gentlemen. Welcome to the Baytex Energy Corporation 2015 Third Quarter Results Conference Call. Please be advised that this call is being recorded. I would like to turn the meeting over to Mr. Brian Ector, Senior Vice President, Capital Markets and Public Affairs. Please go ahead, sir.

[Brian Ector:]

Thank you, John. Good morning, ladies and gentlemen and thank you for joining us today to discuss our third quarter 2015 financial and operating results. With me today are Jim Bowzer, our President and Chief Executive Officer; 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 securities laws. I refer you to our advisories regarding forward-looking statements, oil and gas information and non-GAAP financial measures 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. Welcome to our third quarter conference call. Today, I am going to discuss our results for the quarter and how we continue to position our company to withstand the low commodity price environment. We remain focused on prudently managing our operations to maintain strong levels of financial liquidity. We are seeing the results of our cost reduction initiatives, which are occurring across all of our operations, including drilling and completions, production and operating expenses and G&A. Operationally, we continue to execute our capital program as planned. Production averaged approximately 82,200 BOEs per day in the third quarter, down 3% from the second quarter, which is largely attributable to reduced activity levels in Canada. Capital expenditures for exploration and development activities totaled $127 million and we participated in the drilling of 29.5 net wells. With the previously announced reduction in exploration and development activities in Canada, we anticipate our full year capital expenditures will be toward the lower end of our guidance of $500 million to $575 million. Similarly, we anticipate our full year 2015 production will be towards the lower end of our guidance of 84,000 to 86,000 BOEs per day. During the quarter, we generated funds from operations of $105 million, or $0.51 per share. Our operating netback was $15.57 per BOE or $18.90 per BOE, including derivative gains. Our Canadian operations generated an operating netback of $10.68 per BOE, while the Eagle Ford generated an operating netback of $21 per BOE. A couple of points I would like to highlight regarding our netbacks this quarter. Our Eagle Ford assets are located in South Texas and are very close to the Gulf Coast crude oil markets with established transportation systems, resulting in stronger realized pricing. Our light oil and condensate production in the Eagle Ford is priced primarily off of a Louisiana Light Sweet crude oil benchmark, which typically trades at a premium to WTI. This strong pricing, combined with low cash cost, contributed positively to our operating netback. We continued during the quarter to focus on cost reduction initiatives across all of our operations. Production on operating expenses decreased 10% on a BOE basis as compared to Q3 of 2014 despite the impact of fixed costs on lower production volume in Canada. We are also benefiting from the addition of the Eagle Ford assets, which have lower cost and comprised a larger percentage of our production. Transportation expenses in Canada have been reduced by 27% on a per BOE basis as compared to Q3 of 2014 largely due to lower trucking and fuel costs. On the corporate side, our G&A was $14 million in the quarter as compared to $16.8 million in Q3 of 2014. The decrease is primarily a result of reductions to staffing levels to coincide with lower activity levels, combined with a reduction in discretionary spending. Now, for a little more color on our financial liquidity. Total monetary debt at September 30 was $1.95 billion comprised of a bank loan of $208 million, long-term debt of $1.6 billion and a working capital deficiency of $161 million. We have unsecured revolving credit facilities consisting of a $1 billion Canadian facility and a $200 million U.S. facility. At September 30, 2015, we had approximately $1.05 billion in undrawn capacity on these facilities, which do not mature until June of 2019. The amount of undrawn capacity is essentially unchanged from where it stood at the end of the second quarter. In addition, our long-term notes have no meaningful maturities until the year 2021. We are committed to ensuring the long-term financial health of our company as evidenced by our results over the past couple of quarters. Moving to our operations and speaking about the Eagle Ford first. We have moderated our pace of development there throughout 2015. The number of drilling rigs is consistent with our reduced development plan, with approximately 6 rigs currently drilling on our acreage as compared to 12 rigs in late 2014. We currently have 3 frac crews working on completions. Production in the Eagle Ford averaged approximately 39,000 BOEs per day during the quarter as compared to 39,500 BOEs per day in the second quarter of 2015. Capital expenditures in the Eagle Ford totaled $93 million for the third quarter, down from $98 million in the second quarter and it’s also down from $126 million in the first quarter. We continue to work with our partner on cost reductions. To-date, we have achieved approximately 27% reduction in well costs, with wells now being drilled, completed, equipped and tied in for approximately $6 million as compared to $8.2 million in late 2014. Of the 31 wells that commenced production during the third quarter, 14 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. So there again, we continue to see very strong results from the drilling program. In addition to targeting the lower Eagle Ford formation, we are still actively delineating the Austin Chalk and we now have 45 wells producing from the Austin Chalk, with an average 30-day initial producing rate of approximately 1,000 BOEs per day. Additional advancements have been made to delineate the multi-zone development of our potential of our Sugarkane acreage. As we have talked about previously, we have initiated stack and frac pilots, which target up to four zones. And recent production data from a 6-well stack and frac pad achieved 30-day initial producing rates per well ranging from 700 to 1,480 BOEs per day. We now have 13 of these multi-zone projects in various stages of execution and production. In Canada, we proceeded with our budget plan in Peace River and Lloydminster. However, as commodity prices deteriorated, we suspended our development activities there. At Peace River, we drilled 5 net wells, and at Lloydminster, we drilled 12 net wells. For the wells that were drilled in Canada during the quarter, we achieved an approximate 20% reduction in well costs as compared to 2014, with these wells now being drilled, completed and equipped for approximately $2.7 million of Peace River, which was previously $3.4 million and $750,000 at Lloydminster, which was previously $950,000. Production in Canada averaged just over 43,000 BOEs per day during the third quarter as compared to 45,000 BOEs a day in the second quarter. At September 30, we had approximately 2,400 BOEs per day of uneconomic production shut-in, including the Cliffdale Cyclical Steam Stimulation project, which was suspended late in the third quarter. And lastly, with respect to our marketing efforts, we have been adding to our 2016 crude oil hedged portfolio during the third quarter. We now have hedged approximately 38% of our WTI exposure. Of this amount, 15% is fixed at approximately $64 per barrel and 23% utilizing a three-way structure. And you can find the details around our hedging program in today’s press release. In the third quarter, approximately 16,000 barrels per day of our heavy oil volumes were delivered to market by rail, down 20% from the previous quarter as we look to optimize our heavy oil netbacks. For the fourth quarter of 2015, we expect to deliver approximately 15,000 barrels per day of our heavy oil to market by rail. So in summary, we remain focused on cost reduction initiatives across all of our operations and maintaining strong levels of financial liquidity. We have built an exceptional asset base focused on crude oil and liquids with significant inventory of development prospects. We are well positioned for success when the oil prices improve. And lastly, I want to remind everyone that you can expect to hear from us again in December when we release our 2016 capital budget, following the approval by our Board of Directors. So with that, I conclude my formal remarks now and ask the operator to please open the call for questions.

[Operator:]

Thank you. We will now take questions from the telephone lines. [Operator Instructions] We have a question from Jarrett Hasson [ph] from Hawk Capital. Please go ahead.

[Unidentified Analyst:]

Good morning.

[Jim Bowzer:]

Good morning.

[Unidentified Analyst:]

I just have a quick question on your debt situation, I know you might see sort of extended open maturities on the debt, which obviously creates comfort and you have done some nice steps in the last couple of months on management of cash, just on top of that, just curious if you guys had any sort of thoughts or strategy with respect to the asset sales that was on the table for you right now or just given your position where you can hold off for now?

[Jim Bowzer:]

At this point in time, we don’t have anything that we are actively marketing, Jarrett. And we typically don’t talk about speculation on any acquisitions or dispositions anyway. But that’s kind of where we stand today.

[Unidentified Analyst:]

Okay, thank you.

[Jim Bowzer:]

Thank you.

[Operator:]

The following question is from Dan Kecskes from Global Credit Advisers. Please go ahead.

[DanKecskes:]

Hey, good morning. With regards to your total leverage going into next year, do you foresee a situation where you might be closer to the covenant under the revolving credit facility?

[Jim Bowzer:]

At this point Dan, we think we are going to end the year at right around approximately three times debt to EBITDA. And we have got relief all the way through ‘16 to four and half by the end of ‘16. So at this stage, it doesn’t appear too, that it really depends on oil prices as we go through the year and if we see some sort of improvement. But at this stage, we don’t anticipate an issue during ‘16.

[DanKecskes:]

Is there a certain oil and gas price point that would cause more concern for you?

[Jim Bowzer:]

If we get into sub-40s that would cause a concern around the existing covenant status that we are at today. But if we can say in this 45 to 50 range or even higher as we move through the year, we don’t anticipate an issue with that.

[DanKecskes:]

Okay, thank you.

[Jim Bowzer:]

Thank you, Dan.

[Operator:]

Thank you. We have no further questions registered. I would like to turn the meeting back over to Mr. Brian Ector. Please go ahead.

[Brian Ector:]

Alright. Thanks John. And thanks to everyone for participating in our third quarter conference call. Have a great day.

[Operator:]

Thank you. The conference has now ended. Please disconnect your line at this time. Thank you for your participation.