Baytex Energy Corp.
Q2 2021 Earnings Call Transcript

Published: 29 Jul 2021

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Baytex Energy Corp. Second Quarter 2021 Financial and Operating Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. I would now like to turn the conference over to Brian Ector, Vice President, Capital Markets. Please go ahead.

[Brian Ector:]

Good morning, ladies and gentlemen, and thank you for joining us today to discuss our second quarter 2021 financial and operating results. Today I am joined by Ed LaFehr, our President and Chief Executive Officer; Rod Gray, Executive VP and Chief Financial Officer; Chad Lundberg, Chief Operating and Sustainability Officer; Kendall Arthur, Vice President of Heavy Oil; Chad Kalmakoff, Vice President of Finance; and Scott Lovett, our Vice President of Corporate Development. 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 the advisories regarding forward-looking statements, oil and gas information and non-GAAP financial and capital management measures in yesterday’s press release. All dollar amounts referenced in our remarks are in Canadian dollars unless otherwise specified. And with that, I would now like to turn the call over to Ed.

[Ed LaFehr:]

Thanks, Brian and good morning, everyone. I’d like to welcome all of you to our second quarter 2021 conference call. I’m very pleased to highlight our strong operating and financial performance as we continue to build momentum following an increase in activity late last year. Our free cash flow profile continues to improve as we benefit from our diversified oil weighted portfolio and our commitment to allocate capital effectively. And we are taking proactive measures to reduce our net debt with the repurchase and cancellation of U.S. $106 million representing approximately 25% of our outstanding long term notes due in 2024. For current commodity prices, we now expect to delivery over $350 million of free cash flow this year, or $0.62 per basic share, which will accelerate our debt reduction efforts. During the second quarter we delivered adjusted funds flow of $176 million or $0.31 per basic share. This resulted in substantial free cash flow of $112 million on a quarter, which along with Canadian dollar strengthening relative to the U.S. dollar contributed to $129 million reduction in our net debt. We realized that operating net back of $34 for BOE which is up from $30 per BOE realized in the first quarter. Production during the second quarter averaged 81200 BOEs per day at 81% oil and NGLs up 3% as compared to 79,000 BOEs per day in Q1, 2021. The increase production reflects the timing of completion activity in the Eagle Ford and a strong performance across our light and heavy oil assets in Canada. Exploration and development expenditures totaled $61 million and included the drilling of 19.7 net wells with a 100% success rate. As a result of our strong performance through the first half of 2021, we are increasing our production guidance to 79,000 to 80,000 BOEs per day up from 77,000 to 79,000 BOE per day previously. At the midpoint this represents a 2% increase. There is no change to our capital guidance. We continue to forecast exploration development expenditures of $285 million to $315 million for 2021.

[Rod Gray:]

Thanks, Ed. And good morning everyone. As Ed mentioned, we have taken proactive measures to reduce our debt levels. On May 4, we repurchased and cancelled U.S. $5.8 million principal amount of 5.625% long term notes and subsequent to the quarter we use free cash flow generated in the first half of 2021 to repurchase and cancel an additional U.S. $100 million principal amount of the 5.625% long term notes at the call price of approximately 101 plus accrued interest. These measures demonstrate our commitment to reduce our leverage and drive our cost structure lower. Following these repurchases we continue to maintain in excess of $400 million liquidity. As of June 30 our net debt totaled $1.6 3 billion down from $1.76 billion at March 31, 2021. We are currently targeting a net debt of $1 billion to $1.2 billion which under our base plan of U.S $55 WTI we will reach by the end of 2023. At higher commodity prices, the timeframe to achieve our debt targets will be accelerated. Now turning to our risk management. We maintain a consistent approach to risk management and marketing utilizing various financial derivative contracts and crude by rail to reduce the volatility and our adjusted funds flow. For the remainder of 2021 we have entered into hedges on approximately 45% of our net crude oil exposure largely utilizing a three way options structure that provides WTI price protection at U.S. $45 per barrel, with upside participation to U.S. $52 per barrel. For 2022 we have entered into hedges on approximately 42% of our net crude oil exposure utilizing a combination of swaptions at U.S. $53.50 per barrel, and a three way options structure that provides price protection at U.S. $58 per barrel with upside participation to approximately U.S. 67.50 per barrel. For 2021 and 2022 we have also entered hedges on our Canadian light and heavy oil differential exposure. Full details of our hedging program can be found in our Q2 financial statements and are available on our website. And with that, I'll turn the call back to Ed.

[Ed LaFehr:]

Thanks Rod. I would like to also highlight our just released 2020 environment, social and governance report. This is our fifth biennial report and demonstrates our commitment to transparency and accountability and our progress in managing the environment and social impacts of our business. I'm also pleased to announce the appointment of Chad Lundberg as Chief Operating and Sustainability Officer. Chad will retain his existing responsibilities as head of the light oil business and will spend more time explicitly linking our sustainability priorities and efforts to our capital allocation and strategic planning processes.

[Operator:]

Certainly. Our first caller is Phil Skolnick with Eight Capital. Please go ahead.

[Phil Skolnick:]

Yes. Good morning. I'd start questions on the Clearwater. I mean, I know it's only two wells, but you're using in terms of two laterals, you're getting better results and maybe we're seeing what you're seeing with some of your peers in other parts of Clearwater. Is that repeatable do you think? I mean what do you think is kind of differentiating where you are in the Clearwater versus may where others are?

[Ed LaFehr:]

Yes. Very good question. We've had a lot of interest in what we're doing in the Clearwater. And let me take a step back before I answer the question, Phil. The first thing I would say is we've been evaluating this play for a couple of years. And we landed the deal with a Peavine Métis settlement a year ago, a year and a quarter ago. And also I want to give a big shout out or support to the Peavine Métis settlement who are doing a great job integrating with us and working with us to do what we're doing up there. We are a multilateral exploration and development company. Everybody knows that we run this probably as well or better than anyone.

[Phil Skolnick:]

Yes, for sure. And you just you mentioned that the East one is another important test. And what exactly are you testing expectancy out there?

[Ed LaFehr:]

Yes. Well we knew we were drilling this first well down dip, the discovery well is down deep, has further risks associated with us and that's the one we got 175 barrels a day, we're on that pad now with four producing wells. The fifth well is as I said three miles to the east. So what we believe happens out there is that the structure moves up deep. And we're seeing that from the laterals we're drilling off of the discovery pad that extend to the East. So it's confirming our view of structure. As we move up structure, there is a potential for lighter oil and as you see lighter oils, mobilities improved.

[Phil Skolnick:]

Okay, great, thank you.

[Operator:]

Te next question is from Jeremy Mccrea from Raymond James. Please go ahead.

[Jeremy Mccrea:]

Yes. Hi. This is a bit of a follow up from Phil's question there too. Like what are you guys wanting to see from the Clearwater before you really start putting some more capital into the play and just dragging capital from other areas? And where does where do you see this Clearwater play going into over the next Q3, four, five years here like, how does this play interact with your five year plan here just given these initial results that 500 barrels a day here for the first 10 days there?

[Ed LaFehr:]

Well, we've got about 100 sections of perspective land in the Clearwater, and about 60 of that is in the Peavine, as I said. So 40 sections to the north, in our main and beyond area. So that's kind of the scope of the play. We've got four wells a section. That's quite a lot of inventory. So what I would do is risk weight that which we've done and 50 sections work four wells a section, that's a couple 100 wells. If we've got, on one rig year, we can drill 18 to 20 wells per year. So that's about a 10 year inventory of prospect inventory. So the beauty of this is it, if it's what we think it is, and benchmarks to similar areas we believe it grows within its own cash flow. And that's the beauty of Clearwater that very few other places can do. And if it does, then it doesn't put a burden on the corporation as we go into development mode. The economics are very strong. There are 100% to 200% returns, less than a year paybacks, two to three times recycle ratios. So at our base, our IP expectation was about 300 barrels a day by P30 and 150,000 to 170,000 barrel we would expect to generate those economic results and to grow it. So what could it mean? I think I've kind of subtly alluded to. It would be very straightforward to if we have success on this program into September we will know the answer to that I could see us very clearly going to a riskier program in that 18 to 20 well level for next year, but we've got to make those calls in the fall as we set up the 2022 budget and move on from there. We're thinking about that quite hard.

[Jeremy Mccrea:]

Okay, that's everything.

[Operator:]

This concludes the question and answer session. I'd like to turn the conference back over to Brian Ector for any closing remarks.

[Brian Ector:]

Alright, thanks, . Thanks, everyone, for participating in our second quarter conference call. Have a great day.

[Operator:]

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.