Aug 13, 2015
Executives
Scott Saxberg - President and CEO Greg Tisdale - Chief Financial Officer Neil Smith - Chief Operating Officer Trent Stangl - Vice President, Marketing and Investor Relations
Analysts
Pavan Hoskote - Goldman Sachs Travis Wood - TD Securities Michael Knell - UBS Securities Sean Posner - Mergermarket
Operator
All participants, thank you for standing by, the conference call is ready to begin. Good morning, ladies and gentlemen.
My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to Crescent Point Energy’s Second Quarter 2015 Conference Call.
All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session for members of the investment community.
[Operator Instructions] Thank you. This conference call is being recorded today and will also be webcast on Crescent Point’s website, but may not be recorded or rebroadcast without the express consent of Crescent Point Energy.
All amounts discussed today are in Canadian dollars unless otherwise stated. A complete financial statement and management’s discussion and analysis for the period ending June 30, 2015 were announced this morning and are available on Crescent Point’s website at www.crescentpointenergy.com and on the SEDAR and EDGAR websites.
During the call, management may make projections or other forward-looking statements regarding future events or future financial performance. Actual performance, events or results may differ materially.
Additional information or factors that could affect Crescent Point’s operations or financial results are included in Crescent Point’s most recent annual information form, which maybe accessed through Crescent Point’s website, the SEDAR website, the EDGAR website or by contacting Crescent Point Energy. Management also calls your attention to the forward-looking information and non-GAAP measure sections of the press release issued earlier today.
I would like to turn the call over to Mr. Scott Saxberg, President and CEO.
Please go ahead, sir.
Scott Saxberg
Thank you, Operator. I’d like to welcome everybody to our second quarter conference call for 2015.
Before opening up to questions, I will start with a quick overview of the quarter and first half achievements and then discuss our decision to lower our dividend. With me is Greg Tisdale, our Chief Financial Officer; Neil Smith, our Chief Operating Officer; and Trent Stangl, our Vice President of Marketing and Investor Relations, who will be available to answer questions during the Q&A period.
Operationally, Crescent Point delivered an excellent quarter and continues to advance all of its core areas, the company was also successful improving it’s financial flexibility and lowering its overall cost structure. Second quarter production of 151,500 Boe per day increased 10% over second quarter 2014 with strong funds flow of $524 million, despite weak commodity prices.
We continue to execute on our cost saving initiatives and have now realized capital savings of approximately 20% or more in several of our plays. As a result, we have announced the reduction in our second half capital expenditure guidance by $100 million, with no change to our average production guidance of 163,500 Boe per day.
Our emerging growth assets continue to advance in the Uinta Basin. We're excited about the early results from our operated horizontal well program and we've reduced drilling times in horizontal wells from 24 days to 60 days.
In Flat Lake, we drilled several step-out wells and continue to extend the boundary of the play. This play is turn out to be a -- happen to be a big play for us.
Financially we remained strong with no significant near-term debt maturities and over $1.7 billion of unutilized credit capacity. During the quarter we executed our acquisition strategy with the strategic acquisitions of Legacy and Coral Hill.
We monitored both companies for several years and we are -- we familiar with their asset base, the quality of the inventory and the significant upside potential. This acquisition provides several strategic benefits.
Legacy acquisition proves that financial position due to the expected accretion of 5% to 9% in 2016. It also increases our inventory of highly economic locations in our core area of Southeast Saskatchewan, due to the Midale unconventional play, as well as our other conventional assets.
Coral Hill was a small tuck-in acquisition that was also accretive, but more importantly it consolidated a position in Swan Hills area and strategically provides us full operatorship and an increase position in the core play. Finally, I’d like to discuss our decision to lower our dividend to $0.10 per month and to suspend our dividend reinvestment and share dividend plans.
This is the right decision. Our strategy from day one has been built upon three core principals and excellent balance sheet, high quality reserve base, the significant upside and a prudent management team.
A decision to lower our monthly dividend to $0.10 per month and suspend our dividend reinvestment plan again, this is a right decision given the recent steep declines in oil prices, doing this we will protect our balance sheets, gets us to a 100% payout and will enhance our long-term per share growth for our shareholders. This cut in our dividend highlights our commitment to shareholders and our goal to internally fund our business and not build debt.
This is the right thing to do in this extremely low price environment to protect shareholder equity. The last six weeks have seen a dramatic change in macro environment and severe reduction in fundamentals for commodity prices.
The significant drop in recent spot prices and wider differentials are negatively impacting our realized oil prices by approximately $15 a barrel, or approximately 24% for the first half of 2015. For instance, spot prices declined by $17 a barrel for strip oil -- forward curve oil prices in 2016 and '17 have declined by approximately $11 and $8, limiting our ability to lock in higher oil prices.
Netbacks have been further eroded by widening of Canadian heavy and light oil differentials, and NGLs and natural gas prices have remained depressed. We considered delaying any dividend decision until the end of 2015.
However, the risk of potentially increasing our debt should prices not recover was not something we’re comfortable with. This is considerable risk that commodity prices maybe lower for longer.
This is the right decision to protect our balance sheet and to position us well to finance our growth strategy within a cash flow when oil prices improve. We’ve had another excellent quarter operationally, which further highlights the high quality nature of our company and our assets, as well as our ability to lower cost and drive positive economic results in a low price environment.
Before I open it up to questions, I would like to thank all of our employees, including our field staff and executive team and our Board of Directors for their hard work through this difficult economic period. We are excited about our future growth, given our top-tier asset base and our increased ability to fund these opportunities internally.
At this point, we are ready to answer questions from members of the investment community and I will pass it back to the operator. Operator?
Operator
[Operator Instructions] First question is from Pavan Hoskote from Goldman Sachs. Please go ahead.
Pavan Hoskote
Thanks a lot for the discussion on the dividend cut. I wanted to follow up on this.
Is the dividend cut a catalyst or maybe part of a broader management rethink on strategy and capital allocation? In the last few years, you guys focused a lot on acquisitions to drive growth.
Are you looking to refocus a little bit more on organic growth or acquisitions still very much a part -- a key part of your strategy?
Scott Saxberg
Pavan, it’s a great question. I think it's the right decision.
It protects our balance sheet. It definitely positions us better when things turnaround.
And I think the reality is we're maturing as a company. At our size and scale, we need to fund not only our capital program but acquisitions more internally.
And this cut really increases our access to capital and that access to internal capital and really sets us up. We ran our models and our sensitivities around anything above $60 oil.
We have significant excess cash flow and that cash flow build increases very dramatically $70, $80 price environment. So even with the moderate return to commodity prices, that are significantly lower than they were in the past, we'll have a lot more access to internal cash flow to fund acquisitions, to fund increased capital spend, and grow on a per share basis more dramatically.
And I think that’s -- you hit on the head it’s a real key highlight for us in the maturing of our company from that perspective and put us in a really strong position when things turn around.
Pavan Hoskote
Got it. Thanks for that.
And you talked about some of your internal modeling, so a follow-up on that. If you assume strip prices and current exchange rates and recent well productivity and cost improvements, how do you see growth, free cash and dividend payout trending over the next few years?
Scott Saxberg
Under the forward strip right now, in that 100% to 110%. So the payout range depending on your view on cost and we haven't really -- we're at this time of year.
So it's only halfway through the year obviously we got about 25% cost savings. And that was prior to this latest drop in commodity prices.
And so I would anticipate that into next year if this forward strip holds the way it is that we'd see further cost reductions that would put us in line into the 100% payout fairly reasonably, with not a lot of huge assumptions and so hence the reason why we set our dividend policy the way it is. Obviously if commodity prices diminished significantly further where we’re at today, we’ll revisit it and maintain our balance, integrity and our debt position.
So we don't need to see two significant of a commodity price increase from here to see positive cash flow at some point. So that's kind of where I would kind of look at it -- into ‘17 year -- that's pretty far out even from at this stage in the cycle.
Pavan Hoskote
Got it. And one last unrelated question.
There's obviously a lot of moving parts here in terms of -- we have seen big changes in commodity prices, exchange rates and also different piece of productivity and well cost improvements in different areas. So as things stand today, can you rank your top five plays right now and given us a rough idea in terms of the oil price that you need at the wellhead in each of these areas to add or take away capital?
Scott Saxberg
Okay. I would say our conventional Southeast Saskatchewan assets combined with our Viewfield Bakken assets would be our number one and two, they fight.
In our corporate presentation, we actually have a pretty good slide in there that highlights our payout under obviously under engineering price deck, July price deck but it gives you a good sense of the ranking. And in that, it basically speaks through to the Viewfield as number one.
I think Conventional is number two. Then I think we go to Shaunavon -- Flat Lake, sorry and then Shaunavon number four, something like that.
And so I think across our whole basin, majority of our companies in Saskatchewan you would see basically all of our plays in there depending on -- where you are drilling within each of those fields, ranking pretty highly. That is our exercise that we're going to go through in Q4 here for 2016, again a further high grading of those assets and our drilling program and obviously with costs.
So all of those plays are economic at this current commodity price environment. And I think our last sensitivity we ran, it was below $30.
We're still economic depending on as and costs come up. So, we've seen enough dramatic drop-in cost to make all these plays economic at this level.
Obviously, we're going to be prudent on our capital spending with the forward strip prices that are out there so.
Pavan Hoskote
Got it. Thanks a lot.
Operator
Thank you. The following question is from Travis Wood from TD Securities.
Please go ahead.
Travis Wood
Yeah. Good morning guys.
Can you give us a quick sense of where -- given where capital has been through the first half and where you see production going through the second half of the year, where you see your decline rate, corporate decline rate shaking out?
Scott Saxberg
Okay. Great question.
We had a great start to Q2 with breakup happening sooner. So, we're ahead of our numbers in Q2 and we're ahead of our numbers in Q3.
We're sort of looking at that 72,000 to 74,000 -- 172,000 to 174,000 barrel a day range through Q3, Q4 barring any kind of weather and so far into September, October. So, we're really well on track on that, which will hit our yearly target of 163.5 and that will set us up for 2016 drilling.
On the decline side, obviously the pullback in capital from last year, we were originally under commodity price of this time last year. We were planning to spend something like $2.5 billion of capital.
We're now down to $1.45 billion of capital, so a pretty significant drop. That has flattened our growth out, which therefore flattens our decline out.
And so I put us, I think sub 30% decline. We budgeted, I think 32% decline somewhere in there.
So, I think we're probably ahead of numbers. Again, our waterfronts are doing really well.
The decline rates there are diminishing and obviously helping. So, I think -- I would in a lower price environment, one of the silver linings I guess is the flattening of that decline curve as you pull back your capital and flatten out your growth profile.
So there is for us -- and I was telling that too. We had our employee meeting actually this morning.
One of the silver linings for us, especially that stands out between other companies is we are a waterflood company and we are adding waterfloods continually even through this downturn and expanding on that. And that's lowering our corporate declines.
So this kind pause and growth is really a healthy thing for us on an internal basis, on our decline trends with the waterfloods that we're expanding and continually expanding and seeing the great success that we've had. So, we're adding a lot of reserves and value in behind that low-cost that gets in the $2 per Boe range withat that waterflood.
Travis Wood
What's -- so looking at the end of the year, how much production do you think is impacted by waterflood as a percentage of, call it 175,000 a day.
Scott Saxberg
I think in the Bakken alone, I think we are 65,000 barrels a day and that’s starting to push up to 30,000, so getting close to half our volumes in there. And then in Shaunavon, we are about 25,000 barrels a day.
In that field, it's about 10 to 12, so about half there, so serious volumes that are starting to be impacted. We're expanding our units in southeast Saskatchewan and the Bakken.
We're starting a waterflood pilot in the Flat Lake already and we are still, as we had mentioned before, announcing our step-out locations and the success there. And that plays expanded, at least by more than a township just in this last quarter and we're starting a waterflood there.
And then a good chunk of our conventional asset base in southeast Saskatchewan is inherently water flooded and natural dry waterflood. So more than half of our production would be under the waterflood tag I guess.
Travis Wood
Okay. And then last question related to the dividend and kind of what seems to be maybe a shift in corporate strategy and thought around capital spending and balance sheet.
Is there with the new dividend in place? Is there a level, whether it's on a trailing basis or a forward 12-month basis based on commodity price sensitivity?
Is there a level of leverage debt to cash flow as an example that you're comfortable with before you look at the dividend again, whether it's to feel comfortable to increase it once the cycle improves or whether it's another cut down the road if we had lower?
Scott Saxberg
Yeah. Obviously, I think this shows our commitment to protect our balance sheet and our commitment to stay within our cash flow and not issue equity and stress our balance sheet.
And so I think we're going to make those decisions similar to this decision where we see forward strip pricing and a change in the decision. And I think on the uptick side, this really positions us well for a moderate uptick in commodity prices and an excess of cash flow where we can I think increase our CapEx initially, pay down debt, look at internally funding acquisitions in that upswing.
And then eventually, all of those three pieces combined and the accretion of that and the growth of our cash flow per share will give us a greater opportunity to increase our dividend in the long run through all those internally generated cash flow usage. And so I think that's really our highlight.
And I think it's again -- it's a maturity of our company and the growth of our company and just the scale size of our company. We could see a billion of excess cash flow pretty quickly at $70 to $80 price environment and significant access to internal cash flow to grow our business, which we didn’t have.
Travis Wood
So there's no kind of hard number that you’re monitoring in terms of where you start to get comfortable with the parade of outcomes?
Scott Saxberg
We -- like I said, I think, the priorities are going to be capital paving down debt, getting -- I think before and I'll just say our continued view is, keeping the debt to cash flow around one times at those higher commodity price environments, and well hedged and a low payout and staying within cash flow are the priorities to get us to where we would then start to consider dividend. So, I think, we've got a lot of tools now with that excess cash flow that’s going to hopefully come to us with increase and improvement in commodity prices.
And I think further protected ourselves with this dividend in a continued downward scenario here, we've got some flexibility there with where we are at with our dividend, so.
Travis Wood
Okay. Thanks Scott.
That's everything for me.
Scott Saxberg
Good. Thanks, Travis.
Operator
Thank you. [Operator Instruction] The following question is from [Michael Knell] [ph] from UBS Securities.
Please go ahead.
Michael Knell
Hi, guys. My question has been answered.
Thanks very much.
Scott Saxberg
Thanks Mike.
Operator
Thank you. The following question is from [Sean Posner] Mergermarket.
Please go ahead.
Sean Posner
Oh! Hi.
Giving the acquisitions that you have guys made in the past year or so, I’m just wondering, if you would still be considering acquisitions or if there is anything on the radar that you would be interested in and if so, what kind of assets would you be looking for?
Scott Saxberg
Yeah. I think, we -- when you look at our history, obviously, we’ve been very positive over the past 15 years and we just completed two acquisitions.
We are in the phase right now, I think, of consolidating those acquisitions. Again, we’re going to be really patient in this market and into the next while here and look to try to fund those any kind of future acquisitions through internal cash.
And so at this stage, we don’t really see a lot of opportunity. I don’t think there is a lot of sellers in this market at this stage.
And I think that’s going to be a while through Q4 and into next year. And I think if you look at the last few years of us, we’ve been kind of a year -- we went a year or more without a transaction and then this last year, there was another almost nine months to a year between transactions.
And I think when you look at our internally -- our internal cash flow models and where prices go, we’re going to accumulate some excess cash and put ourselves in a position to internally fund acquisitions and our capital program’s focus on cutting cost and our capital programs through this time period this next little while and focus on consolidating the acquisitions we just did a couple of months ago. So at this stage, we don’t see any anything that compelling.
Sean Posner
Would you be -- alternatively would you consider selling any assets or rationalizing?
Scott Saxberg
We’re very focused company. And I don't think at this stage, there is really any assets that we -- we're not sellers.
Typically, we haven't sold a lot of production. We've done and looked at on the smaller side of spending out assets to smaller entities and private cos and things like that that are just normal course type business, but we don’t see any need to sell any assets.
Our balance sheet is strong and we want to -- we’ve got a very focused asset base as it is sold.
Sean Posner
Okay. Thank you very much.
Scott Saxberg
Thanks Sean.
Operator
Thank you. This concludes our question-and-answer session.
I’ll now turn the call over to Mr. Scott Saxberg.
Scott Saxberg
Great. Thank you very much and thank you for participating in our second quarter conference call.
Again, we believe this lower dividend is the right decision. It protect ourselves and protect our balance sheet, puts us in a better position when things turn around and will have more access to internal capital.
And again we have a strong asset base high-quality reserve base with the significant amount of upside over 7000 drilling locations, $15 billion of inventory to access here and grow our business and grow our per share metrics. So we are positive for the future and hopefully we can see some improvement in commodity prices.
Thank you again and have a good morning.
Operator
Thank you, ladies and gentlemen for participating in Crescent Point Energy’s second quarter 2015 conference call. If you have more questions, you can call Crescent Point’s Investor Relations department at 1-855-767-6923.
Thank you and have a good day.