Baytex Energy Corp.
Q1 2015 Earnings Call Transcript

Published: 5 May 2015

[Executives:]

Brian G. Ector - Senior Vice President of Capital Markets & Public Affairs James L. Bowzer - Chief Executive Officer, President and Director

[Analysts:]

Mark J. Friesen - RBC Capital Markets, LLC, Research Division Patrick I. Bryden - Scotiabank Global Banking and Markets, Research Division Thomas Matthews - AltaCorp Capital Inc., Research Division

[Operator:]

Good morning, ladies and gentlemen. Welcome to the Baytex Energy Corp. 2015 First 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, Mr. Ector.

[Brian G. Ector:]

Thank you, Donna. Good morning, ladies and gentlemen, and thank you for joining us today to discuss our first 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. I would now like to turn the call over to Jim.

[James L. Bowzer:]

Thanks, Brian, and good morning, everyone. Welcome to our First Quarter Conference Call. I'm going to break my comments into 3 parts for you today

[Operator:]

[Operator Instructions] And the first question is from Mark Friesen, RBC Capital Markets.

[Mark J. Friesen - RBC Capital Markets, LLC, Research Division:]

Just a few questions here for you. Lot of discussion, obviously, around oil pricing. So just wondering what kind of pricing signals you would be looking for as you think -- may think about reviewing your CapEx budget probably around midyear. What would cause you to increase or decrease your spending at that time?

[James L. Bowzer:]

Good morning, Mark. I'll take you a bit to the extremes maybe, if we don't see oil get to and stay kind of in the, call it the 60s, I would look for Baytex to adjust our capital downward to maybe forego some of the capital spending we have in our current plan in the second half of the year, and that's an estimate at this point. But just kind of some of the markers that we've talked about openly as we put together our capital budget, leading on to the vision we made in February. And likewise, on the other side of that, if you see oil move up towards $70 or higher by sometime in the third quarter, we would likely just stick with our capital plan through the rest of the year. As it's outlined right now, it's probably the way we look at that and there's probably somewhere in the middle there between those 2. We'll have to look at things and take a look at each well we're drilling, and the incremental economics. our cash flows at the time, differentials are also going to affect it. Exchange rate will affect it somewhat. And we do have a few other moving pieces that go into those calculations. But in general, that's how we're thinking about it. And have been since probably late December of 2014, and certainly as we outlined our budget into the first part of the year this year.

[Mark J. Friesen - RBC Capital Markets, LLC, Research Division:]

So just focusing on Gemini for a second. I understand what you're saying and the actions you've taken there. But what kind of pricing outlook, may be shorter term for financing purposes or longer term for economics, would you be looking at in terms of making a sanctioning decision for Gemini? And based on that, when do you think that might begin producing?

[James L. Bowzer:]

Certainly, let me start by saying, the key information we obtained from that pilot is kind of all in the bank. And the #1 key piece of information is, we've got a good reservoir there that flows vertically and can -- in a higher price environment, with the steam flood, can be produced in paying quantities. So that's -- there is a lot of other information we got out of it, but the reservoir indication was the most important in the performance. So moving on from that to your -- directly your question. To be quite frank, we've been very open about our plans with thermal. They've shifted back substantially, with not only the lower commodity priced environment, but in addition, the change in our portfolio to a good inventory across our 3 key areas of conventional primary development and very, very high capital efficiencies. So it's been a couple of things that have shifted that. But we would probably need to get back into an $80 or higher $90 environment before we would see sanctioning further thermal projects including Gemini.

[Mark J. Friesen - RBC Capital Markets, LLC, Research Division:]

Okay. Last pressing question. I saw that you added some hedges in the mid-60s. What should we expect for your hedging activity going forward? Do you want to add more to that level or are you going to wait until prices change?

[James L. Bowzer:]

Mark, how we thought about that is, prices are -- have been extraordinary low, and how we've looked at is there -- while there may be the potential for a single geopolitical event or production declines in primarily the U.S. shale plays to be sticky for a while, there are some negative things that can come out and maybe depress the prices further from a very short-term perspective. But it's unlikely that we would see a sustained level under $50 for years on in. So as we thought about that, there isn't a whole lot of downside further below the low kind of into the 40s for sustained periods. And therefore, when you look at -- when you would consider taking on hedges, we've kind of looked at it from our business model standpoint of where do hedges help start protecting us for sustaining our business model going forward, and that kind of starts to occur in the mid-60s and up towards $70. And we've consistently said that's kind of where we're balanced with capital plans. And again, there's a lot of moving parts in that, not only the price of crude itself. The price of natural gas is a smaller effect, the differentials are a bigger effect. And more importantly, now is the cost savings are getting to be a pretty big effect in the ability to bring on barrels at higher capital efficiencies. So all of those things are moving parts in that. So we have talked about, as we get into mid-60s, feathering on small amounts at that level. As time goes on and as it progresses upward in the higher level of protection that a hedge would provide, i.e. oil moves further up, maybe feathering on some more, and building a base to where we would normally be hedged at 25% to 50% of our production at a level that makes the difference for the company. And it's pretty consistent. So we've just started in the last few weeks to get into the 60s, today you can put on a hedge at over $65 for '16, I'm talking about U.S. dollars here, by the way. And you've seen it feather very small amounts in at that stage. And if prices gradually continue to increase, we will probably do a little more of it.

[Mark J. Friesen - RBC Capital Markets, LLC, Research Division:]

Just a couple of quick Eagle Ford questions. What percentage of your acreage would you say has exposure to the Chalk, exposure to the Upper Eagle Ford and exposure to all formations?

[James L. Bowzer:]

Well, the Lower Eagle Ford is, obviously, productive across all of it. The Chalk is at this stage is about 50% of it. And the other layers, the upper portion of the Lower Eagle Ford and Upper Eagle Ford itself are really just getting to find as we go through some of the testing this year. So you've heard some of the results today that we've got of our 30-day IPs that came out in the first quarter from one of our stack and frac pilots. You'll be hearing more of that. So we really are in the process in 2015 in defining really the all -- all 3 of the upper layers. But in particular, we have drilled quite a few more Chalk wells and have a pretty good definition of what we think that might be. There's probably a little further expansion that it could happen over time. But the middle portion of the Eagle Ford that we're testing here in 2015, is really the year to get it to bind, if you will. So we haven't quoted a number yet on what portion of our Upper Eagle Ford -- our acreage has been defined over.

[Mark J. Friesen - RBC Capital Markets, LLC, Research Division:]

Okay. And finally, do you expect the Eagle Ford to be self financing this year?

[James L. Bowzer:]

Mark, it depends on -- you're going to have to go through the math on that. We've got low capital -- we've got really high capital efficiencies and low development costs, but -- are you talking $40 deck, $60 deck, and $80 deck, $70 -- you're talking -- --

[Mark J. Friesen - RBC Capital Markets, LLC, Research Division:]

Well, basically based on your views and planning, that's all.

[James L. Bowzer:]

Yes, probably not quite, I would think. But I'm talking off the top of my head. We're little less self-funding all year long with everything in, but we don't have much in Canada, so that's probably a fair assessment at this stage.

[Operator:]

Your next question is from Patrick Bryden from Scotiabank.

[Patrick I. Bryden - Scotiabank Global Banking and Markets, Research Division:]

Jim, I was just wondering if you might be able to elaborate a little further on the Eagle Ford and its evolution as you look at the interplay between Chalk and the Upper and the Lower? How should we think about the inventory implications for you as we look ahead here?

[James L. Bowzer:]

I guess, I would point to our year end disclosure on reserves is the best indicator of that. Last year, when we concluded the acquisition, we thought at that point, we had Lower Eagle Ford locations net to Baytex of about close to 200 to 250. As we ended this year, the Lower Eagle Ford, both probable and undeveloped locations were close to that 200 mark in net locations. And in addition, we did certify a probable reserve -- or excuse me, a possible reserve category that defined some of the Upper Eagle Ford and most of the Austin Chalk we saw at that point. And there are about 390 additional locations. So as time has gone on here, the potential for this has certainly grown in our minds. And that's probably the best way to reflect this. Just go, look straight at the number of locations that we got in, what we call 2P proved and the 3P. We've quantified it as best we can at this stage, which has grown substantially since we first took a look at this in 2014.

[Patrick I. Bryden - Scotiabank Global Banking and Markets, Research Division:]

Great, I appreciate that. And then maybe just one more question, if possible are there distinctions you would draw at this point between the economics, between all of those zones and the way you complete them?

[James L. Bowzer:]

Thanks, Pat. Not really. There are some minor variances between individual wells across the entire acreage position for sure. And there's variances across the liquids window from the volatile oil to retrograde condensate. But you're really asking the question in elevation as we move up and down the pay levels. The differences between the wells are not a lot from an economic standpoint. They're pretty close to each other within the same liquids or PVT window, if you will.

[Operator:]

The next question is from Thomas Matthews from AltaCorp Capital Inc.

[Thomas Matthews - AltaCorp Capital Inc., Research Division:]

Jim, just 2 quick questions here. Just on the stack and frac pilots, that 4-well pad. Do you have any more of those planned? Or are you currently working on any more of those in Q2 and beyond?

[James L. Bowzer:]

Yes, we do, Tom, yes. We've got several plans throughout the year. So each quarter we'll probably have some results. We kind of wait until we've got 30-day IPs and the data is all in. So it takes some time, because we are in all pad drilling modes. So you don't bring individual wells any longer, you essentially bring on the entire pad when all the work is completed and the facilities are installed. So you will see us talk about this a little bit more through the year as time goes on.

[Thomas Matthews - AltaCorp Capital Inc., Research Division:]

Okay. So I guess my -- let me rephrase my question. Then the pad that you're going forward now, will have the multi-zone potential mainly, or will you be still just targeting the Lower Eagle Ford in some of those pads?

[James L. Bowzer:]

No, we'll have quite a few pads throughout the year. If you take a look at our first quarter numbers, about 25% of all the wells drilled were in the Chalk, and then in the Eagle Ford were the rest, with a few of those wells being the Upper Eagle Ford included on some of the pads. So you'll see, it's probably 50% or 60% of Lower Eagle Ford and the other 40% to 50% in that range will be a mix of the other layers mixed in with Lower Eagle Ford. So we'll get a good series of tests as time goes on and that's the approximate numbers.

[Thomas Matthews - AltaCorp Capital Inc., Research Division:]

Okay, sounds good. And then just finally, with the WCS desk coming in, and obviously, the improvement in WTI. I guess, when do you look at bringing on your shut-in production, again, in Canada?

[James L. Bowzer:]

It varies well by well and area by area. It's just going to be a matter of economics. So we're getting to the point where we're looking at it right now as WCS -- as we moved into driving season, this is the time of the year where that crude gets exceptionally high in demand. You've seen it trade inside of single-digit netbacks here -- excuse me, single-digit differential, so we're in around $8 differential to WTI right now. So that certainly helps. And WTI moved up towards the low 60s on a spot basis, that certainly helps. And it depends on what the operating expenses were, I mean, some of the production was single-digit netback at $90 oil, but it was still making positive cash flow. So some amounts will not come back on until we get probably with cost reductions back up in the 80s. So it will feather back in here as -- if prices continue to improve and if they don't, some of that will remain shut in. So it's just going to depend on price. So parts of it we are looking at right now.

[Operator:]

There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Ector.

[Brian G. Ector:]

Thank you, Donna. And thanks, everyone, for participating in our First Quarter Conference Call. Have a great day.

[Operator:]

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