Mar 9, 2016
Executives
Scott Saxberg - President & CEO Ken Lamont - CFO Neil Smith - COO Trent Stangl - SVP, IR & Communications Brad Borggard - VP, Corporate Planning
Analysts
Neema Delu - Veritas Investments Patrick Bryden - Scotiabank
Operator
Good morning, ladies and gentlemen. My name is Wayne and I will be your conference operator today.
At this time, I would like to welcome everyone to Crescent Point Energy's Fourth Quarter and Year-End 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. The 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 December 31, 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 can be accessed through the 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 measures sections of the press release issued earlier today.
I would now like to turn the call over to Mr. Scott Saxberg, President and CEO.
Please go ahead, Mr. Saxberg.
Scott Saxberg
Thank you, operator. I'd like to welcome everybody to our fourth quarter and year-end conference call for 2015.
With me is Ken Lamont, Chief Financial Officer; Neil Smith, Chief Operating Officer; and Trent Stangl, Senior Vice President of Investor Relations and Communications. I'll give an overview of our results and outlook, Neil will discuss our operational highlights, and Ken will speak to our financial highlights.
We're happy to report that Crescent Point delivered another solid quarter with record production of more than 176,000 BOEs per day. Our high-quality asset base continues to generate strong netbacks benefiting from low operating cost and royalties.
In 2015, we worked closely with our suppliers and successfully reduced our capital cost by 30%. We are seeing additional cost improvements in 2016 and are targeting savings of approximately 10% for the year.
Our waterfloods continue to positively impact decline rates and ultimate recoveries. Since 2011, our waterfloods has allowed us to reduce our corporate decline rates from 35% to 28%.
We expect this trend to continue in 2017. The success of our business strategy in 2015 was highlighted by a 14% increase in fourth quarter production, and a 16% increase in 2P reserves.
This included reserves growth at each of our core areas and demonstrates the success of our long-term projects such as waterfloods, step-out drilling, and new technology. Operationally, we've entered 2016 in a strong position and are outperforming our original first quarter estimates.
With current production greater than 177,000 BOEs per day, we have increased flexibility to manage our 2016 capital program while maintaining our annual production guidance. In light of the current commodity price environment and our priority to maintain balance sheet strength, we are revising our 2016 capital expenditures budget, and our monthly dividend.
Our revised 2016 capital expenditures guidance is now $950 million putting us at the lower end of our range we announced in early January. As part of this budget, we are shifting approximately $100 million of capital from the first half of 2016 to the second half.
We are now budgeting approximately $525 million of capital spending in the second half of the year which puts us in a strong position for 2017 and allows us to take advantage of ongoing cost reduction. Our first quarter production levels and our outperformance versus our original estimate allows us to maintain our annual production guidance at 165,000 BOEs per day.
This is a key point and speaks to our early outperformance in 2016 that has set us up for a strong 2017. Our new dividend of $0.03 per month reduces our annual cash requirements by approximately $430 million and puts us in a solid position for increased free cash flow as commodity prices rebound.
We expect to live within cash flow at current strip prices and can generate an additional $600 million or $1.18 per share of free cash flow for every $10 increase in WTI. Operationally, we continue to execute our business strategy with a disciplined capital program.
In this environment we remain focused on our long-term initiatives across our entire asset base and are not just simply drilling our best inventory. This strategy was beneficial during 2015 which saw improvements in our decline rates, reserve additions, drilling inventory, and productivity.
Our growth profile was supported by our large oil-in-place resource play which continues to expand. For example at Flat Lake, we added 40 new drilling locations and identified a new zone for future development due to our successful step-out program.
We're also very excited about our most recent horizontal well results in the Utica Basin which highlights the potential for future horizontal development in that play. Our new technology initiatives are also yielding strong results.
For example, our Viewfield in 2015 we began testing a new completion fluid technology in certain areas within the play that has increased our initial 90-day oil production rates by 50%. We are currently testing new completion fluids in several of our resource plays.
We maintained a significant financial liquidity of more than $1.4 billion and remain well hedged in the current environment. I would also like to take this opportunity to welcome Barbara Munroe to our Board of Directors.
Ms. Munroe brings a wealth of experience and will be a tremendous value add to our team.
I would also like to thank all of our employees, including our field staff, executive team, and our Board of Directors for all their hard work in helping deliver another terrific year. We are well positioned to deliver long-term growth and maximize our value for our shareholders.
I will now turn it over to Neil to discuss reserves and our operational highlights. Neil?
Neil Smith
Thanks, Scott. 2015 marked the 14th consecutive year of strong organic reserve additions.
As Scott mentioned, we experienced fourth quarter production growth of 14%, 2015 reserves growth of 16%, and we replaced 315% of our annual production. Our cost reduction initiatives during 2015 allowed us to realize Finding and Development cost of $9.83 per 2P BOE that includes changes in future development capital.
This equated to a recycle ratio of 2.6 times. In fact, over the last five years our weighted average F&D excluding changes in FDC equates to a recycle ratio of 2.2 times.
Our independent engineers recognized reserve growth in our Flat Lake, Viking, North Dakota, Bakken, and Uinta resource plays. We added 4.5 million barrels of 2P reserves attributable to the waterflood in the ViewField, Bakken and Shaunavon plays.
This is the third consecutive year since the independent started booking independent waterflood reserves at ViewField and they first started assigning that in 2013. In our Uinta Basin play, we added approximately 7 million barrels of 2P reserves during 2015 that have long-term potential for significant growth through horizontal drilling.
Overall, we have increased 2P reserves by close to 70% in just the three years since we have acquired the play. Since inception, in aggregate, we've added 570 million barrels of organic reserve additions across our entire asset base.
This equates to 50% of our current 2P reserves plus cumulative production over that period or stated otherwise since acquisition or discovery, we have doubled the remaining reserves of our assets at an average F&D cost of just $17.83 excluding changes in FDC. At year-end 2015, our 2P reserves equated to a net asset value of $26.49 per share.
We have a large drilling inventory of over 7,700 locations which provides us with at least 14 years of future drilling and additional un-booked upside. Our waterflood development continued to expand in 2016 which is expected to improve our decline rates throughout this year and next.
We are planning for over 120 water injection conversions in 2016 and having waterflood programs within each of our core Canadian resource plays. In closing, I'd like to thank our staff especially our field staff for their hard work and determination in delivering another successful year.
I'd also like to thank our suppliers for working with us and being tremendous partners during this commodity price downturn. Ken will now discuss the financial highlights.
Ken?
Ken Lamont
Thanks, Neil. We continued our growth in the fourth quarter generating fund flow from operations of $497 million or $0.98 per share.
This represents an increase of 3% from the third quarter despite a 9% decline in the company's average selling price per BOE. Our netbacks remained strong relative to our average selling prices.
In the fourth quarter we realized a netback of $34.17 per BOE versus an average selling price of $41.98 per BOE. This is partly due to our robust hedging program, which contributed $11.69 per BOE of realized gains as well as a reduction in operating cost and royalties from the third quarter of 2015.
During the fourth quarter, we reported a net loss of $382 million due to an after-tax non-cash impairment charge of $589 million. This impairment represents approximately 3% of our total assets as at December 31, 2015 reflecting the high quality nature of the company's asset base.
This impairment had no impact on the company's fund flow from operations or the amount available under our credit facility. As Scott mentioned, our priority in this low commodity price environment is to protect our balance sheet.
Our revised monthly dividend of $0.03 per share saves us $430 million per year and allows us to live within our cash flow in 2016 at U.S. $35 WTI and in 2017 at U.S.
$45 WTI which is in line with current forward prices. Our initial plans for 2017 are based on capital expenditures of $950 million and production of 165,000 BOE per day.
We are also protecting our balance sheet through our hedging activity. Approximately 39% of our 2016 oil production is currently hedged at Canadian $80 a barrel and 9% of our 2017 oil production is hedged at Canadian $76 per barrel.
We have the ability to increase this hedge position for production by moving forward our 2018 hedges. At year-end, our net debt to fund flow stood at 2.2 times with unutilized credit capacity of more than $1.4 billion.
Our unsecured credit facility is not subject to periodic redeterminations based on changes in reserves and we have no material near-term debt maturities. I will now hand things back to Scott.
Scott Saxberg
Thanks, Ken. We've had a solid year and are having a great start to 2016 despite it's been a tough environment.
We're outperforming operationally, remain in a strong financial position and continue to benefit from our high netback high quality asset base. Our plan in the current environment is to protect our production levels and to live within cash flow to protect our balance sheet.
We remain flexible in how we manage our business and we'll look to improve our balance sheet, increase our growth, internally fund acquisitions or increase our dividend as commodity prices rebound. At this point, we're ready to answer questions from the members of the investment committee and I will pass it back to the operator.
Operator
Thank you. [Operator Instructions].
Your first question comes from the line of Neema Delu from Veritas Investments. Please go ahead.
Neema Delu
Just a quick question, you had and I appreciate you guys are adjusting to very depressed economic environment, you've taken all prudent measures but clearly I think a lot of people are expecting oil to stay down in the $35 range, I love the presentation you did previously because you gave ranges under different scenarios, would it be fair to say like what was in the 50s that you could have a CapEx budget of $1.5 billion plus? And I'm just trying to think of a scenario where more reasonable recovery in revision in prices and I appreciate you guys putting the $950 million out now but just to get a sense of how that capital budget may adjust or as commodity prices recover?
Ken Lamont
Yes, that's a great question because we've really outperformed in Q1 and I probably can't say enough but the fact that we're shifting capital $100 million from Q2 into Q3 and essentially it's pushing capital that will help 2017 and put us in a stronger production position for 2017. So we were effectively taking $100 million out of our budget for '16 in our production basis.
And in all of our models, if we tweak the CapEx up $50 million to $100 million, which every dollar change in WTI is roughly $50 million to $60 million of cash flow to us. So like a dollar or two if you think of a $50 price environment from today's price, it's at from $45 it's obviously is $300 million increase in cash flow and so we can increase our CapEx budget by $200 million, $300 million fairly quickly.
And in all of our models, $50 million to $100 million change in our CapEx program sort of mid-year to early or late third quarter, we could bump our exit rate pretty substantially and get back up into the 170,000 barrel level very quickly and then obviously that will affect 2017 again. So we really are at that sensitivity point where it doesn't take a lot of capital for us to roll production very rapidly and I think that's really when we say flexibility, I think that's really the key highlight to me is that we're literally small wedge of capital could really affect our exit production and then average for '17 with a slight improvement in commodity and then you can kind of I mean we're feeling that a little bit today over the last week with $2 or $3 bump in WTI.
We're just very cautious around that. Then it's pulseless because it short and then it's not a real fundamental change.
Neema Delu
I appreciate the detail on that. And just to reiterate what sort of capital cost savings are you seeing from service providers, is it 15% or you still able to work with them to generate I guess more reasonable pricing for this environment, is that also another piece of being able to keep production flat to keep the budget so low?
So I just want to get a sense of what percentage savings you're still able to receive from these suppliers?
Ken Lamont
Yes, so far this quarter, we've seen about 4% to 5% reduction in cost and probably a key highlight there for this quarter, we had 25 rigs running at one point in February, our historical high for the number of rigs, we've ever run as a company was I think 28. So we had pretty impressive drilling program in the first quarter and we saw 4%, 5% reduction.
We are anticipating a further 10% reduction in cost in the second half of 2016 with the same commodity price environment. And so we're -- with the shift of capital into Q3, obviously that will give us some more exposure of our capital program, I think we've got more than 55% of our capital from is still yet to be spent in the second half of the year.
And so we can work with suppliers to try to bring those cost even further down, part of those cost savings are also tied to technology in the new fluids that we’re using and how we’re actually operating. So it’s not a complete give by suppliers, it’s also our efficiencies and things that we’re doing in the field.
Operator
Thank you. We have time for one more question.
This question comes from Patrick Bryden from Scotiabank. Please go ahead.
Patrick Bryden
Good morning. Thanks very much.
Just wondering if you might be able to expand a little bit on the fluids that you’re experimenting and having success with it, do you feel you talk about how the 90-day IPs of showing 50% improvement in certain areas. I'm just wondering how that is amendable to those certain areas and the extent to which that's transferable to other projects.
Ken Lamont
Yes, we obviously the fluids that we're using are proprietary to us at this stage. So we’re not really willing to go into more descriptive than that.
It’s been very successful, we’ve tested it for probably six months, Neil, and obviously early results are pretty impressive. And so now we're applying some of that across Shaunavon into the Viking and into some other plays.
So and Uinta, which is still very early days on the horizontal there so, we’re actually using older technology at this stage on the completions there and we’ll see the next round of drilling with probably our newer technology as well so. It’s pretty exciting stuff in this environment and I think the low cost environment allows us to do a lot of this experimentation and we probably put $50 million of our budget across all of our fields towards that technology and testing different things.
So, it's been very positive for us over the last six months to year.
Patrick Bryden
Great and if I might have time for just some quick follow-up on the waterflood seeing the recognition in the reserve book come now year-in, year out obviously that progression is nice to see [indiscernible] up with lowering of the treadmill speed is also excellent. Can you just give me a quick sense for whether those bookings are kind of in line with what should expect right now or if there may be a bit ahead and some perspective on that?
Scott Saxberg
Yes, I mean we're I think as you know in 15 years in to this company; we've been very conservative of how we book our reserves. This year we had a very impressive reserve add across the board and we've been conservative in how we book those reserves and I think when you in regard to the waterflood we're just continually wanting to be conservative in those types of reserve beds.
We still have drilling -- low risk drilling inventory to book, so we’re more focused on booking those at a time. But over time as time marches on the waterflood reserve beds will be more and more significant and gets up 10% right now of our reserve, I think $4.5 million on 65 is 8% or whatever reserve bookings and you’ll see that percentage will decline over time as we expand these waterfloods in this year with the big expansion to the water injectors, you'll probably, you may not see that reflected next year but you will see it probably for the end of '17 reserve add, you will see it more in those numbers.
Neil Smith
And Pat it’s Neil here. A lot of the trigger for the waterflood assignment has been the unitization.
So the first unit in the ViewField Bakken, not been unitized. We're originally the independents which is totally expected they just give you a little bit as you’re getting some water in the ground and getting some performance reaction, they’re now getting enough data that they can, they are at the point rather than just doing it on a pattern basis.
There is now starting to recognize where we're indicating, we’re going to flood. So, rather than not just hey we see that there is a response now that they’ve got that record where we are going to start doing some injection, they’re giving us some credit for future capital spending.
Our next unit the applications is going into the government within the month here that’s the innocent unit. And then we have to work with the freehold owners and hopefully we’ll see that unitize before the year is out.
So, this unit, we had to build molds, now that we have those molds, you should start seeing some escalation through this year and into next of the independents getting more comfortable to see the vision that we have.
Scott Saxberg
And then on top of that, we’re actually in our press release today expanding all of those units or adding several new units. I can remember the exact like a 60% increase in the land basis something like.
So it’s a very significant growth to the units and so we’re early stages just marking out that territory and so that will continue our waterflood growth in the latter years of '18, '19 and '20. So, just in that field alone, so we’re pretty excited about that as well.
Patrick Bryden
Great, great. Much appreciate it and then if you have time just couple very quick tack-ons I'm sure the wording in the press release is also kind of proprietary but the shallower zone which is kind of coincident with the Torquay any commentary or ability to elaborate on whether that’s kind of resource side or more conventional and any characteristics?
Scott Saxberg
Yes more conventional and it’s probably now over a township in size. So we had a pretty good run this last go at that in the Flat Lake area.
So we’re pretty excited about that as well. That Flat Lake trend is now stretches all the way from our original Flat Lake lands all the way across to legacy lands to the east and so that’s we basically over the last three years and it’s kind of been of a quiet process but basically almost replaced our ViewField asset with Flat Lake discoveries, step-out drilling, three zone horizon discoveries across that whole southern trend of Saskatchewan along the North Dakota border.
So we’re pretty excited about that play, going production there from zero to like 20,000 barrels a day or something. So, we’re pretty excited about that play in the early stages that is that.
Patrick Bryden
I’m sure Brad will happy any last commentary on the Saskatchewan election call yesterday?
Brad Borggard
No, not really all right I think, we hope for pretty supportive government there, they’ve done a great job for that province and hopefully they will continue to do so in the future.
Operator
Thank you. There are no further questions registered at this time.
Scott Saxberg
Great. Thank you very much operator and thanks again for attending our conference call.
I think we've got a great start to 2016, very well set up operationally I think on all levels outperforming and really positions us to protect ourselves in this low price environment and sets us up for continued growth into an upward rebound in commodity prices that hopefully we see it towards the end of this year. Thanks again.
Operator
Thank you. Thank you ladies and gentlemen for participating in Crescent Point Energy’s 2015 fourth quarter and year-end conference call.
If you have more questions, you may call Crescent Point’s Investor Relations Department at 1 (855) 767-6923. Thank you and have a nice day.