Baytex Energy Corp.
Q4 2014 Earnings Call Transcript

Published: 5 Mar 2015

[Executives:]

Brian Ector - SVP, Capital Markets & Public Affairs Jim Bowzer - President & CEO Rick Ransey - COO

[Analysts:]

Mark Friesen - RBC Capital Markets Gordon Tait - BMO Capital Markets Darcy Briggs - Bissett Investment

[Operator:]

Welcome to the 2014 Year-End Results and Reserves Conference Call. Please be advised 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, Melanie. Good morning, ladies and gentlemen. Thank you for joining us to discuss our fourth quarter and year-end 2014 financial and operating results. With me today are Jim Bowzer, our President and Chief Executive Officer, Rod Gray, our Chief Financial Officer and Rick Ramsey, our Chief Operating Officer. While listening, please keep in mind some of our remarks contain forward-looking statements within the meaning of applicable securities laws. On the call today we will also be discussing the evaluation of our reserves at year-end 2014. These evaluations have been prepared in accordance with Canadian disclosure standards which are not comparable in all respects to United States or other foreign disclosure standards. Our remarks regarding reserves are also forward-looking statements. I refer you to our advisories regarding forward-looking statements, oil and gas information and non-GAAP financial measures and a notice to U.S. residents contained in today's press release. All dollar amounts referenced in our remarks today are in Canadian dollars unless otherwise specified. I would now like to turn the call over to Jim.

[Jim Bowzer:]

Thanks, Brian and good morning, everyone. We're pleased to report our 2014 results which reflect the continued strong performance of our Canadian assets and the significant growth in assets associated with our Eagle Ford acquisition. I am going to break my comments into three parts for you today. First, I will talk about the fourth quarter results and year end reserves. Second, I will provide an update on our operations and marketing. And, lastly, I will provide an update on our plans for 2015. Despite the challenging oil price environment in late 2014, we continue to achieve strong operating results across our core assets. Production averaged just over 92,000 boe's per day during the fourth quarter, an increase of 53% over the fourth quarter of 2013 and just over78,000 boe's a day for the full year 2014, an increase of 37% over 2013. In Canada we produced 56,200 boe's per day in 2014, an increase of 4% over 2013. And in the Eagle Ford production averaged, 38,000 boe's a day during the fourth quarter, an increase of 12% over the third quarter and 36% from the time of acquisition. Capital expenditures for exploration and development activities totaled CAD215 million in the fourth quarter and CAD766 million for the full year 2014. Full year capital expenditures came in at the low end of our guidance range of CAD765 million to CAD790 million. In 2014 we participated in the drilling of 217 net wells with a 99% success rate. We generated funds from operations of CAD246 million or CAD1.47 per share during the fourth quarter representing an increase of 66% from the fourth quarter of 2013. For the full year funds from operations was CAD880 million, or CAD5.91 per share, an increase of 46% compared to 2013 and established a new Company record for annual FFO. This increase was largely due to higher sales volumes resulting from the Eagle Ford acquisition and higher realized commodity prices. In addition to the strong volume growth, I want to highlight another key benefit of our Eagle Ford acquisition. Corporately, we generated an operating net back in the fourth quarter of CAD26.80 per boe. Our Canadian operations generated an operating net back of CAD23.45 per boe, while the Eagle Ford generated an operating net back of CAD31.58 per boe. Our light oil and condensate production in the Eagle Ford is priced primarily off of Louisiana Light Sweet, or LLS, benchmark which typically trades at a premium to WTI. This strong pricing combined with low cash costs contributed positively to our operating net back in the fourth quarter. Today, LLS is trading at about CAD6 to CAD7 premium to WTI. Due to the significant decline in commodity prices the estimated future cash flows from certain assets dropped below the carrying value of those assets. As a result, we recorded a goodwill impairment charge of CAD450 million in the fourth quarter including CAD412 million related to goodwill associated with the Eagle Ford acquisition and CAD38 million related to goodwill associated with certain conventional oil and gas assets in Canada. No impairment was recorded on our heavy oil assets. Total monetary debt at the end of the year is CAD2.3 billion comprised of a bank loan of CAD700 million and long-term debt of CAD1.4 billion. And a working capital deficiency of CAD200 million. We have unsecured revolving credit facilities consisting of a CAD1 billion Canadian facility and a CAD200 million U.S. facility that mature in June of 2018. At the end of December we had approximately CAD565 million in undrawn capacity on these facilities. We recently amended the financial covenants contained in these facilities, which provides us with increased financial flexibility, through 2016. Now moving on to our year-end reserves, our 2014 reserves report reflect significant growth associated with our Eagle Ford acquisition and the subsequent well performance. From the time of acquisition our approved reserves increased 57% to 167 million boe and our proved plus probable reserve increase 13% to 188 million boe. Our FD&A costs for the Eagle Ford including future development costs is CAD25 for boe. In addition and not captured in these numbers, is an incremental 220 million boe of possible reserves which reflect the significant upside contained in the Austin Chalk and Upper Eagle Ford formations. The addition of the Eagle Ford to our portfolio provides us with exposure to one of the premier oil resource plays in North America. These high quality reserves generate the strongest capital efficiencies in our inventory, provide the highest cash net backs and have the potential to continue to grow our inventory of development projects into the future. In aggregate, our proved reserves increased 78% to 283 million boe and proved plus probable reserves increased 36% to 432 million boe. Year-end 2014 proved plus probable reserves are comprised of 84% liquids and 16% natural gas. As a measure of the enhanced quality of the reserve base our approved reserves now represent 66% of 2P reserves up from 50% at year-end 2013. Our suite of heavy oil assets at Peace River and Lloydminster also provide strong capital efficiencies. At Peace River we replaced 154% of our production growing our 2P reserves to almost 73 million barrels equivalent. At Lloydminster we added 5.9 million barrels equivalent of 2P reserves which essentially replaced production. Overall reserves at Lloyd declined by 9.5 million barrels as a result of an asset sale and the removal of undeveloped locations and future recompletions at Tangleflags which are no longer in our development plans. With the enhancements to our portfolio, the time line for developing our thermal projects has changed. At Cliffdale, pad 5 no longer falls within our five-year business plan and as a result we recorded an 8.8 million barrel technical revision and transferred these reserves into contingent resources. Summarizing the reserves for the Company, we replaced 118% of production through expiration and development activities with F&D costs of CAD19.77 per boe. Inclusive of acquisitions and divestitures we replaced 497% of production with FD&A costs of CAD31.10 per boe. If you exclude our thermal projects our F&D costs were CAD11.71 per boe on a 2P basis which generates a strong recycle ratio of 3.1 times. In 2014 we completed a portfolio review of our asset base which lead to the disposition of several non-core assets. Divestitures totaled CAD466 million in 2014 and included 63.5 million boe of 2P reserves at a price under CAD20 per boe. Adjusting for 2014 divestitures, our FD&A costs are CAD27.56 per boe, an improvement of 13% over our reported FD&A which reflects relatively weaker capital efficiencies of the disposed assets. All in all we're very pleased with our year-end reserves and the repositioning of our portfolio. I will now update you on our operations beginning with the Eagle Ford where our drilling results have exceeded our expectations with wells drilled in 2014 outperforming the tight curves used in our acquisition evaluation. The evaluation was based on 30-day producing rates of 800 to 1,000 boe's per day. Since acquisition 128 wells have been placed on production with an average 30-day initial producing rate of 1,000 to 1200 boe's per day and this represents an approximate 22% improvement. This improved performance is driven by a combination of factors including the drilling of longer lateral's, tighter spacing of frack and increased amount of profit per stage. We have also identified additional well locations to support future growth. In addition to targeting the lower Eagle Ford formation we're now actively delineating the Austin Chalk. To date we have delineated the Austin Chalk on over 50% of our acreage. Since acquisition we participated in 14 Austin Chalk wells with 12 of those now on production. These wells have averaged 30-day initial producing rates of just over a thousand boe's a day. Importantly, we have entered a new phase of development in the Eagle Ford with the initiation of stack and frack pilots which may target up to three zones in the Eagle Ford formation in addition to the over lying Austin Chalk and we expect results from these pilots in 2015. Shifting to Canada, our overall Canadian operations continue to perform well. At Peace River production averaged 25,700 boe's per day in the fourth quarter in line with third quarter production of 26,500 boe's per day. We drilled only five cold horizontal producers during the quarter bringing the total for the year to 31 wells. At Lloydminster production averaged 18,200 boe's per day in the fourth quarter. We participated in the drilling of five net wells bringing the total for the year to 90 wells. The reduced activity reflects some of the adjustments given the current commodity price environment. And with respect to our marketing efforts we attempt to mitigate some of the volatility and commodity prices with the risk management program and for the first quarter of 2015 we have entered into hedges on approximately 51% of our WTI exposure with 43% fixed at $93.19 per barrel and 7% receiving WTI plus $11.50 per barrel when WTI is below $80 per barrel. The unrealized financial derivatives gain with respect to our WTI hedges at December 31, 2014 was approximately CAD175 million. As part of our hedging program we also focused on opportunities to mitigate the volatility of heavy oil differentials by transporting crude oil to markets by rail when the economics warrant. We have no fixed investment nor take or pay obligations to transport crude by rail. The recent growth in rail infrastructure around our core heavy oil producing regions allows us to optimize deliveries by rail and pipe on a month-by-month basis. In the fourth quarter approximately 24,000 barrels a day of our heavy oil volumes were delivered to market by rail and for the first quarter of 2015 we expect to deliver approximately 20,000 to 22,000 barrels per day of our heavy oil to market by rail as we optimize our heavy oil net backs. Now for a comment on our 2015 outlook. Our production guidance remains at 84,000 to 88,000 boe's per day with budgeted expiration and development expenditures of CAD500 to CAD575 million. Our guidance includes 2,000 boe's per day of uneconomic production that has been shut in. We expect our production to be approximately evenly split between Canada and the U.S. and our production mix is forecast to be approximately 82% liquids and 18% natural gas. About 80% of our 2015 capital budget will be invested in our Eagle Ford operations where we expect to drill 39 to 45 net wells. The remaining 20% will be invested in our heavy oil operations at Peace River and Lloydminster. Our budget for Canada will see approximately 70% of planned expenditures occurring in the second half of the year. We're committed to a growth and income business model and have three fundamental principles. First, delivering organic production growth. Second paying a meaningful dividend. And, lastly, maintaining capital discipline. When oil prices fall as far as they have, this can put stress on any business model. However, we believe we're taking the right steps to weather the current downturn and we will continue to prudently manage our business in order to preserve financial flexibility. Adjusting our dividend level in December was a decision not taken lightly by our Board of Directors, but it was one that was necessary to enhance our liquidity. At the same time we have reduced our expiration and development spending for 2015 by approximately 40% from original plans. Operationally we believe we have strong capital efficiencies across our portfolio which allows us to add production at relatively low capital costs. We have also amended the financial covenants contained in our revolving credit facilities which provide us with increased financial flexibility through 2016 and we remain focused on creating long-term value for our shareholders. With that, I will conclude my formal remarks and ask the Operator to please open the call for questions.

[Operator:]

[Operator Instructions]. The following question is from Mark Friesen of RBC Capital Markets. Please go ahead.

[Mark Friesen:]

Jim, I just have four questions for you. First, in 2014 a lot of moving parts in the reserve reconciliation. Divestitures played a pretty big role. What are the current plans, if any, for divestiture's in 2015?

[Jim Bowzer:]

Mark, we don't have any defined plans we're openly speaking about at this point in time for 2015.

[Mark Friesen:]

Okay. The other thing in the reserve report and you eluded to it in your comments was the revision at Cliffdale just removing pad five from the five-year plan. Do you see that as being sort of on the bubble? Could that come back in if commodity prices recover or conversely, do you see pads three and four being at risk of being revised out?

[Jim Bowzer:]

I don't really see many changes from this point, Mark. Either way. To give an example, pad five has not had an application submitted yet. It clearly falls outside the five-year plan with the high capital efficiencies we have spending plans on for the rest of the future we see. The flip side of that is, the other two pads, we have those applications in for approval. It looks like they are going to stay in the five-year period. We will see over time how oil prices fluctuate over the coming years and see how they fit in. They stand where they are right now and I really don't anticipate other moves there at this point in time.

[Mark Friesen:]

I guess what I am driving at with both of those questions is probably a more and not quite as many moving parts in the reserves going forward in a more stable corporate F&D number.

[Jim Bowzer:]

I think that is a fair assessment, Mark. We had four separate areas where we disposed of assets, a relatively large acquisition, a precipitous decline in oil prices that lead to the rescheduling of higher capital efficiencies moving forward and lower capital efficiencies moving out of the portfolio or, in the case of thermal, moving back in the portfolio and the other big factor that fits into this is a reduced capital budget that we significantly for 2015 slows down the pace of the development of everything. You would anticipate that 2016's capital while it may or may not be higher than we're, it is very unlikely to be as high as what we had anticipated in a CAD90 to CAD95 world and I don't think we will be back there certainly in 2016. All of those are big time moving parts this year that affected the numbers and had quite a few moving parts. You know, we tried to bring as much clarity in the disclosure as possible. I think we have everything broken down for you. And if anyone has any follow-up don't hesitate to get a hold of Brian. If you have any questions about it, we can further break that down.

[Mark Friesen:]

There was a lot of clarity in the release on that. There wasn't a lot of comments though on Gemini. Can you may be give an update in terms of your planned spending and timing on that project?

[Jim Bowzer:]

On Gemini, we don't have anything planned to spend this year and frankly I don't see being able to fund much of it in 2016. Let me take you all the way back. When we purchased that it was submitted as a 10,000 barrel a day project which we never really thought was probable there. We knew we would need to do a bunch of stratigraphic service well testing to better define the entire play there of the suite of reservoirs that you could steam flood. So we undertook that work in late 2013 and part of 2014 so that is all moved forward. It gave us the data we needed to go ahead and submit the amendment to that application. So it is in. It will take some time to get that approved and the actual return to spending levels there will be dictated by oil price in our overall relative capital efficiencies we have at the time. So it is likely to be pushed out somewhat in the portfolio from the 2016 spend we may have been quoting before.

[Mark Friesen:]

And my final question is just with respect to how you would prioritize the levers that you have. You have used a couple of them already in terms of a CapEx cut and the dividend cut. On a go forward basis looking at CapEx dividends, balance sheet borrowing possible new equity issues, how would you rank those?

[Jim Bowzer:]

Where we're at today, Mark, is we have taken the very large levers we pulled. The first two were pretty big moves on our capital. We took the biggest move on our capital right out of the gate in December. We made another modification about three weeks ago. In December the other big move we made and with a lot of well thought out and concern, was our reduction in the dividend at the time. Going forward we have our bank facility set up nicely to carry us through to the end of 2016. We're quite optimistic about that. While we don't see a CAD90 world coming back anytime soon as a result of those moves I have described we can foresee ourselves balanced in the mid CAD60s going forward. That's a very nice position for us to be in. And then lastly, we did two other things. In addition to the recent reduction in the Eagle Ford capital, we back loaded this year for Canadian spend and, frankly, if we don't see some sort of improvement by the mid-year time frame and into the third quarter, we could simply take most of that out for yet another reduction. So, that's kind of our priorities as we see them there today, Mark.

[Mark Friesen:]

Okay. And you didn't comment on equity.

[Jim Bowzer:]

You know what, I don't really have anything to say about that. It is certainly a lever that a lot of people have been using today. We feel like we're in pretty good financial shape as we stand going forward and we'll see what the market bears as time goes forward.

[Operator:]

Thank you. The following question is from Gordon Tait of BMO Capital Markets. Please go ahead.

[Gordon Tait:]

Just to maybe follow-up on something Mark was asking about. In your heavy oil properties maybe medium oil properties what sort of a WCS price do you think you would need to see to make those investments more competitive with your U.S. options? That's the first part. Secondly, are you seeing enough movement in the cost structure up there to maybe at some point justify putting more capital back into those projects?

[Jim Bowzer:]

Gord, let me take the first one of those. Those are competitive expenditures going forward. Like I had in my remarks, the Eagle Ford has the highest net backs and the highest returns and the highest capital efficiencies so that's where we want to put our first dollar. Having said that, the level of spend we have in Peace River or Lloyd today is simply dictated by the cash flow that is coming in that we have available for discretionary capital expenditures and until that improves we really don't have a need to increase that spending and probably wouldn't do that. It is more about that. If you look to the IR slides we have had out over the past several months, we've got some break even pricing that is set in there and I am talking from memory here a little bit, but I think Peace River is right at CAD47 a barrel, in the high 40s anyway. And Lloyd, on a breakeven standpoint and what I mean by breakeven is a 10% return on capital, is about CAD41. So that's on new capital expenditures for new projects going forward, those are darn good numbers and it is really a matter of the amount of cash flow you have in this kind of environment to increase the spend there. Does that help answer that?

[Gordon Tait:]

It does. And how about on the cost side? Do you see movement there?

[Jim Bowzer:]

I will let Rick talk to you about what we seeing in costs at a high level across the portfolio.

[Rick Ransey:]

Sure, Gord, the area we're seeing the greatest cost-savings is where demand has dropped off the most and that's on the drilling rig side of the business. We currently have one drilling rig running a few strats on winter access only lands. And we're seeing about a 30% reduction in the rate relative to what we were paying back in June of last year. The other services such as service rigs we're still continuing to utilize those services. We still have 10 service rigs running. We're not seeing quite the savings there that we're seeing on the drilling side. Roughly an 8% to 10% savings on that part of our business. Down in the Eagle Ford we've managed to see about a 17% reduction in our total DCE costs on our program down there. So, from an overall development program this year we're anticipating about 10% to 15% savings relative to what we would have seen in the middle of 2014.

[Operator:]

Thank you. The following question is from Darcy Briggs of Bissett Investment. Please go ahead.

[Darcy Briggs:]

I just have a quick question and it is in regards to your hedging strategy for the remainder of 2015 going into 2016. You have a number of hedges that are rolling off so I am curious as to what your thought process regarding that particular part of the business is?

[Jim Bowzer:]

Certainly. With where the forward curve is today, as you look out over the long haul we would like to see our long dated hedging get back into the type of pricing that would protect what we would call a balance in flows and out flows of cash that gets into the mid-60s and low 60s. At least today and Darcy, we will see how things change with oil pricing or how we will think about it when it comes to it, but that's kind of how we're thinking about it now. You may start layering on some certain low percentages of hedges at those prices. It is hard to layer on a $52 hedge today over the long haul. I think we're in the time of year where the refining turnarounds are happening. This is where we typically build 30 million to 40 million barrels of crude in the U.S. with the refusal of the OPEC group to not cut production and the hang over from all of the wells drilled in '14, getting completed in the first quarter of '15, it will probably be well into the second quarter before you start to see U.S. gains start to slow down. And so, this is a time when it is probably as suppressed as it is going to get and we're not too keen on it in the short term. If that helps you understand how we're thinking about it at this time anyway.

[Darcy Briggs:]

Yes, it does. There were various other producers that have layered on some various types of hedging mechanisms like puts in the mid-50s if they were able to do it. It is depending on your outlook of the evolution of the price going forward. So that does help clarify what you are thinking.

[Operator:]

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

[Brian Ector:]

Thank you, Melanie and thanks to everyone for participating in our fourth quarter and year-end conference call. Have a great day.

[Operator:]

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