Baytex Energy Corp.
Q2 2015 Earnings Call Transcript

Published: 30 Jul 2015

[Executives:]

Brian Ector - SVP, Capital Markets and Public Affairs Jim Bowzer - President and CEO Rod Gray - CFO Rick Ramsay - COO

[Analysts:]

Nima Billou - Veritas Investment Research

[Presentation:]

[Operator:]

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

[Brian Ector:]

Thank you, Anthony. Good morning, ladies and gentlemen and thank you for doing this today to discuss the second 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 as some of our remarks will contain forward-looking statements within the meaning of the 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 other specified and I would now like to turn the call over to Jim.

[Jim Bowzer:]

Thanks, Brian and good morning everyone welcome to our second quarter conference call. I think as everyone is aware, these certainly are challenging times in oil and gas industry with the drop in crude prices over the last few weeks. The industry continues to respond to the challenges of declining cash flows, capital allocation decisions and then potentially increasing leverage. I will get to our operational update in a couple of minutes. But before doing so, I want to start today's call by addressing our shareholders. I know this hasn't been easy for you, over the past few weeks and it hasn't been easy for us. We are all shareholders of Baytex and I want to assure you that we will continue to manage our operations, in interest of creating long-term shareholder value. One of our key attributes of Baytex is our portfolio of projects. With strong capital efficiencies and attractive rates of return and these projects will serve us well as we move forward in a lower oil price environment. I want to start by talking about our financial position because we have already taken many steps to maintain strong levels of financial liquidity. These steps have included reducing our capital spending and monthly dividend, negotiating cost savings with service providers, amending our financial covenants, extending the term of our bank line, and completing an equity financing. Our balance sheet and liquidity were significantly enhanced during the second quarter, as we raised $606 million in equity, which was applied to reduce bank debt. In addition, there were no way incremental borrowings during the second quarter to fund our capital or dividend programs. Our credit facility consists of a $1 billion Canadian facility and a $2 million US facility. With the newly extended maturity date of June 2019. These facilities do not require any mandatory principle repayments prior to maturity and can be further extended beyond June 2019 with the consent of the lenders. As of June 30, 2015 we had approximately $1 billion in undrawn capacity on these facilities. In addition, we have $1.5 billion of long-term debt with no mature repayments required till 2021. Our total monetary debt at end of the second quarter is $1.8 billion, which results in a debt-to-EBITDA ratio of 1.7 times based on the trailing 12 months period. As a reminder, a revised financial covenants now allow this ratio to reach a maximum of 4.7 times through mid-2016 and 4.5 times through December 2016. So with that background about our solid financial position. I'll turn to the highlights for the quarter itself. First on our operations, during the second control quarter, we continue to execute our 2015 capital program as planned and the results are consistent with the expectations we have. In response to the weakness in modern prices, our overall level of spending was lower for the third consecutive quarter, as we deferred activity in Canada and reduced activity in the Eagle Ford. Reflective of our reduced activity, our production averaged 85,000 BOEs a day in the second quarter as compared to 90,700 BOEs a day in the first quarter Capital expenditures for exploration and development activities totalled $106 million in the quarter, down from $1.47 million in the first quarter, and also down from $215 million in the fourth quarter of 2014. During the quarter, we participated in the drilling of 51 gross or 15.2 net wells. Our 2015 production guidance remains unchanged at 84,000 to 88,000 barrels a day with full year capital spending of $500 million to $575 million. Our 2015 capital program remains flexible and allows for adjustments to second half spending. Speaking to our Eagle Ford operations, production average 39,500 BOEs a day during the second quarter, compared to 41,000 BOEs a day during the first quarter and 38,000 BOEs a day, during the fourth quarter of last year. Capital expenditures totalled $98 million for the second quarter which are down from $126 million in the first quarter and down from $150 million in the fourth quarter. Reflective of our scale back activity in the Eagle Ford, we reduced the number of drilling rigs on our lands from 12 in the late 2014 to five currently. In addition, the number of frac crews has been reduced from three in 2014 to averaging between one and two currently. Of the 40 gross well that commenced production during the second quarter 27 of those wells have been producing for more than 30 days and have established an average 30-day initial production rate of approximately 1,200 BOEs per day. In addition to targeting the Lower Eagle Ford formation. We are still actively delineating the Austin Chalk formation. The number of wells on our lands producing from the Austin Chalk is now 37 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 potential of our Sugarkane acreage. We have initiated stack and frac pilots, which target up to three zones in the Eagle Ford formation in addition to the overlying Austin Chalk. Recent production data from two pads which includes a total of nine wells that targeted three zones achieve 30-day initial production rates per well ranging from 900 BOEs to 1,600 BOEs per day. We now have 11 multi-zone projects, in various stages of execution and production. In Canada our assets continue to perform as expected with the limited capital investment. Production in Canada that average just over 45,000 BOEs a day during the second quarter, as compared to 49,600 BOEs per day in the first quarter. These reduced volumes in Canada are a result of lower drilling activity. The decommissioning of our Gemini SAGD pilot project and on economic production that we have shut in. As you may recall our development activity in Canada includes limited spend in the first half of the year and a modest program in the second half of the year. As a result capital expenditures for Canadian assets totalled approximately $8 million in the quarter down from $21 million in the first quarter. At Lloydminster we have drilled two horizontal wells and at Peace River no drilling occurred during the quarter. Corporately, we generated funds from operations of $158 million or $0.77 per share and maintained a conservative payout ratio net of our dividend reinvestment of 25%. We generated an operating get back in the second quarter of $20.66 per BOE or $25.85 per BOE including hedging gains. Our Canadian operations generated an operating net back of $16.48 per BOE while the Eagle Ford generated operating net back $25.45 per BOE. Our live oil and condensate production in the Eagle Ford is priced primarily off of Louisiana Light Sweet benchmark which typically trades at a premium to WTI. This strong pricing combined with low cash cost contributed positively to our operating net back in the quarter. With respect to our marketing efforts our third quarter, 2015 crude oil hedge position amounts to approximately 24% of our net WTI exposure with 17% fixed at approximately $80 US per barrel. The unrealized financial derivatives gain with respect to our WTI hedges is at June 30, 2015 was approximately $46 million. As part of our hedging program, we also focus on opportunities to mitigate the volatility in heavy oil differentials by transporting crude oil to markets by rail when economics warrant. We have no fixed investment or take or pay obligations to transport crude oil by rail. The recent growth and rail infrastructure around our core heavy oil producing regions has allowed us to optimize deliveries by pipe and rail In the second quarter approximately 18,000 barrels per day of our heavy volumes were delivered to market by rail. And for the third quarter, 2015 we expect to deliver approximately 15,000 barrels per day of our heavy oil to market by rail. In summary given the low crude price environment. We remained focused on prudently managing our operations to maintain strong levels of financial liquidity. The execution of our capital program has yielded impressive results in the Eagle Ford as we advance to multi-zone development potential of our acreage. And in Canada our assets continue to perform as expected with the limited program to 2015. Through negotiated cost saving with service providers, our portfolio development opportunities in the Eagle Ford, Peace River and Lloydminster continue to provide attractive returns. And with that I will conclude my formal remarks and ask the operator to please open the call for questions.

[Operator:]

[Operator Instructions] Our first question comes from Nima Billou from Veritas Research. Please go ahead.

[Nima Billou:]

[Jim Bowzer:]

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[Nima Billou:]

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[Operator:]

Thank you. There are no further questions retrospect this time I'd like to turn it over to the panel for closing remarks.

[Brian Ector:]

All right well thank you operator and thanks everyone for participating today in our second quarter 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.