Aug 11, 2016
Executives
Scott Saxberg - President and CEO Neil Smith - COO Ken Lamont - CFO Trent Stangl - SVP, IR
Analysts
Nima Billou - Veritas Investment
Operator
Good morning ladies and gentlemen. My name is Paul, and I will be your conference operator today.
At this time, I would like to welcome everyone to Crescent Point Energy's Second Quarter 2016 Conference Call. [Operator Instructions].
This conference call is being recorded today and will also be Web cast 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.
The complete financial statements and management's discussion and analysis for the period ending June 30, 2016, were announced this morning and are available on Crescent Point's Web site at www.crescentpointenergy.com and on the SEDAR and EDGAR web sites. 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 may be accessed through Crescent Point's Web site, the SEDAR Web site, the EDGAR Web site 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 second quarter conference call for 2016.
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 start off with a quick overview of the quarter and first half achievements.
Neil will discuss our operational highlights and Ken will speak to our financial highlights. We're very happy to report that Crescent Point delivered another solid quarter with daily average production of 167,218 BOEs per day, representing an increase of 10% over our second quarter 2015.
We're on track to meet or exceed our production guidance of 165,000 BOEs per day and plan to exit the year with more than 165,000 BOEs per day. As you may recall, our strong Q1 production allowed us to shift approximately C$100 million of capital from first half of 2016 to the second half.
This capital shift enabled us to take advantage of lower cost, protect our balance sheet, improve our positioning for 2017. As a result of the shift, we spent C$250 million less in Q2 this year than last year.
As planned in 2016, capital from our drilling activity has since resumed during the third quarter with 18 rigs currently active. Another highlight during the first half of the year was our continued reductions in both our capital costs and operating expense.
Our operating expenses are on track to achieve a C$50 million of savings or C$0.85 per BOE in comparison to our initial budget of 2016. During second quarter, we generated funds flow in excess of our dividend and capital expenditures of approximately C$280 million.
We used this portion of this excess cash flow after the quarter to fund two acquisitions with the remainder going towards debt reduction. Our two recent acquisitions are aligned with our strategy of focusing on our core resource plays.
We strategically acquired land and production within our Flat Lake resource play as well as low-decline conventional waterflood assets in Southeast Saskatchewan. To further increase our focus, we also signed a letter of intent to dispose off noncore assets in Northwest Alberta for approximately C$31 million.
These acquisitions provide us with a significant number of high-quality drilling locations for future production and reserve growth. Our Flat Lake acquisition has approximately 300 net internally identified drilling locations across multiple zones, and increase our drilling inventory in the area by 30% to approximately 1,300 locations.
This acquisition also helped solidify our land position in the area for future waterflood in the Torquay and Ratcliffe zones. We're very excited about our long-term potential in Flat Lake area and throughout each of our resource plays.
However, we're maintaining our C$950 million budget at this time. We plan to review our capital program as our production guidance later this year -- as well as our production guidance later this year.
For the second half of 2016, we remain focused on living within cash flow to protect our balance sheet, execute our long-term growth objectives. These objectives include our waterflood initiatives, new technology advancements and our step-out programs.
Before I hand things over to Neil to discuss our operational highlights, I'd like to thank our employees for their hard work in delivering another successful quarter and first half of 2016.
Neil Smith
Okay, great. Thanks Scott.
During the second quarter, we reduced our drilling activity not only because of annual spring break-up conditions, but also because of our decision to move approximately C$100 million of drilling capital to the second half of the year. Our ability to shift this capital was driven by our strong first quarter production performance and should enable us to take advantage of reduced costs and any potential improvements in commodity prices.
During second quarter, we continued to expand the economic boundaries of the Viewfield Bakken play with the drilling of another step-out well. In the core of the Viewfield Bakken play, we advanced our waterflood and received technical approval from the Government of Saskatchewan for our second unit, the NS unit.
We are targeting to receive full approval for this unit by early 2017 and the two remaining core area units by the end of 2018. This approval is another significant milestone in the development of our waterflood strategy within all our core resource plays.
Our new waterflood technology initiatives are also continuing to deliver strong results. We've been testing multiple-stage segregated strings, a new proprietary technology to improve water distribution in the reservoir.
Initial pilots in our Viewfield Bakken play have allowed for three times the amount of water injectivity, without any corresponding increase in the percentage of water produced. Increased water injectivity is expected to help manage reservoir pressure, potentially leading to lower decline rates and improved ultimate recoveries.
In our emerging growth Flat Lake area, we continue to expand the boundaries of the multi-zone resource plays. We drilled another step-out well during the quarter and have five additional step-out wells planned for the remainder of this year.
Over the last several years, our Flat Lake step-out program has added over 300 growth sections of high-quality internal identified drilling locations to our drilling inventory. In the Uinta Basin, we are increasing our efficiencies and learning more about the basin.
We have decreased the number of drilling days in our vertical program to seven in comparison to 14 during 2013. Differentials have continued to narrow and our operating costs have fallen from over C$13 in 2014 to USD$8.50 this year.
We continue to incorporate our recently interpreted seismic and core data into our 2016 horizontal drilling program, which commenced during the quarter. Given the success of our recent horizontal wells and the improved efficiencies we've achieved in the play, we are considering drilling up to six horizontal wells this year, which is up from our original plans of three.
For the remainder of this year, we will continue to test new technologies and ideas, expand and improve our waterflood programs and develop our plays. Our focus on advancing our resource plays during this low oil price environment provides us with long-term competitive advantage in the areas that we operate and enhance our long-term growth.
We look forward to a successful second half and remain well on track to achieve our year-end targets. Before handing things over to Ken, I'd like to recognize and thank all of our employees, both in Calgary and especially our field staff out in the field for their hard work in delivering another great quarter.
Ken?
Ken Lamont
Thanks Neil. During the second quarter, Crescent Point generated fund flow from operations of C$404 million or C$0.79 per share.
This is supported by strong netbacks of C$31.22 per BOE relative to average selling prices of C$42.45. The company once again benefited from its conservative hedging program and its high quality, high netback asset base.
In the quarter, we generated approximately C$280 million of excess fund flow over and above our second quarter capital expenditures and our dividend. Subsequent to the quarter, as Scott mentioned, we entered into an acquisition and disposition agreement for a total net consideration of C$212 million, which will show up in our third quarter financials.
Our balance sheet and financial flexibility remains strong with approximately C$1.4 billion of unutilized credit capacity as of June 30, 2016, which does not reflect our recent acquisition. We were also active in the quarter on the hedging front as we continue to take advantage of the recent volatility in oil prices.
During the second quarter and into the third quarter, we significantly increased our 2016 and 2017 hedge volumes. We added approximately 7,000 barrels a day of oil hedges for the balance of 2016 and 5,750 barrels a day of oil hedges for 2017.
We currently have 45% of our 2016 oil production hedged at approximately C$75 per barrel, and 29% of our first half of 2017 oil production at approximately C$68 per barrel. As Scott mentioned, we remain committed to maintaining a strong financial position and we'll continue to focus on living within our cash flow to protect our balance sheet and our current production levels.
I'll now hand things back over to Scott.
Scott Saxberg
Great. Thanks Ken.
So in summary, obviously, we had a great first half of the year. When I reflect back, we've never missed a quarter in the history of our company.
And I think the original -- or the start of this year and the beat in Q1 with further beat in Q2, really are additive to that reflection when you look back on the last 15 years and I think, you can translate that into that, we're going to beat our numbers here headed into the second half of this year and we're well positioned for that and when you look at the success we're having in our waterfloods, the amount of technology that we're adding and creating on our waterfloods in the Viewfield and Shaunavon, how well they've performed, our step-out drilling in Flat Lake and how well that's performed, our new drilling in Uinta and our first early indications in there and where that's outperformed. So I think, when you look at our track record and you look at these last two quarters and you look forward, we're in a very strong position to meet or exceed our current guidance and exceed our exit's guidance so far.
And then our budget includes C$75 million of those strategic growth initiatives, that's created a lot of long-term value in new drilling and technology and we're excited about those results, and we'll look again to revisit our budget in September. We're just starting the front -- start of our budget process and we'll look at maybe adding some more long-term initiatives to follow up on that success at the end of this year.
Another key highlight, I think, is the fact that we delayed our capital program in Q2 and pushed it into Q3 and we've had a lot of wet weather here in the last, I think, May, June, early July, and I think, that's really actually benefited us, that we did move that capital into Q3. So we're fortunate on that and we're back up and running with 18 rigs.
And I think, just to highlight of the fact that we had a significant amount of excess cash flow of C$280 million, and I think, in the past, I don't know if we've had many quarters with that amount of excess cash flow. And I think there's just more to come over time as money prices improve.
So at this point, I'd love to turn it back to the operator for questions from members of the investment community. Thanks.
Operator
[Operator Instructions]. The first question is from Nima Billou from Veritas Investment.
Nima Billou
Thank you. Good afternoon or good morning for your guys.
Just a quick question. You guys provide great detail around the excess fund flow and the payout.
I just wanted to sort of probe some of the assumptions behind it in your presentation on 2017. How come, for 2017, with a higher commodity price, I know part of it is explained by hedging gains rolling off, but there's only C$200 million of excess.
When I look at your cash dividends, the CapEx you disclosed, that slide suggests fund flow of about 1,200 -- C$1.2 billion on an annual basis to come up with C$200 million over cash dividends and CapEx. Is it because OpEx is heading higher and that it's spread out over a few number of barrels?
I just want to get a sense, what's the OpEx assumption behind this, and why is the fund flow diminishing from 2016 with a higher commodity price?
Scott Saxberg
Yes, I think, you touched on it at the beginning of your -- it's mainly the roll off of our hedges and the fact that our hedges -- hedging price achieved in 2016 is greater than our hedges in 2017. Because obviously, we are hedging into a downward market over the last, whatever, two years, and so that's the biggest impact.
Our OpEx has continually been going down. So if you look at Q1, Q2, we're like C$10.50 a barrel or something.
And we are actually projecting a slightly higher cost in the second half of the year. OpEx mainly seasonal stuff operational stuff, and just being conservative because we did a couple of transactions, the Legacy transaction last year and we basically just got a full year of history with that acquisition and their cost base and we've driven it down, but we don't really have a full annualized history of Legacy and then we're just being conservative on that cost.
And then in this forecast for 2017, it is basically the same OpEx assumption from 2016. So we would expect in this kind of price environment, if it stays at C$45, C$50, we'll continue to see those OpEx come down from what we've budgeted here.
But the main driver of what you're seeing and the difference in that cash flow is the difference in the hedge book effect. So --
Nima Billou
Yes, I do think you're being conservative, I'll be honest. I think you're going to be able to do better than that once the real numbers come out.
But hey, that's just me.
Scott Saxberg
One of the things on the OpEx side is that SaskPower is bumping their rates by 5%, and power is about C$100 million of our C$700 million of OpEx, so different than Alberta. Alberta guys are getting the benefit of lower gas prices and lower OpEx because of our power generation, whereas Saskatchewan is embarking on some climate change initiatives like wind power and coal sequestration projects and hydro that are bumping up their power costs.
We're still in discussions as industry and they're asking for a rate increase through the public. And so it hasn't been accepted yet for 2017, but we're anticipating that in this forecast.
Nima Billou
Got you. And I appreciate, you guys have a very good handle on the granular details.
That's very good. The other question I have for you, something I have just been noticing on sort of trend line.
When I look at our production mix, it's not baked, but it will have an impact on your pricing. NGLs are becoming a far more important part of the mix.
Where are you drilling? And also, in natural gas, I'm assuming it's a liquids-rich play, where are you directing your drilling dollars that NGL, for instance, has doubled over the prior year quarter?
So what play is driving this growth in nat gas and growth in NGL?
Scott Saxberg
That was just -- we had built a gas flow line from our Viewfield Bakken project to the seat [ph] facility, which basically extracts the ethane out of the gas. And that's why you see that sort of a onetime bump in those products and we're taking advantage of the pricing in there.
And we have the capability to flip back and forth with the propane and the ethane to take advantage of price. So our volumes on that kind of those byproducts will fluctuate depending on where we're getting the best price.
So that was the facility's long-term project that we implemented last quarter -- like in fourth quarter of last year. So that's where you would have seen.
And then we've -- I think, even through this time period, we've pulled some out and put some back in, like [indiscernible] [18:58] propane or ethane, even fluctuating in between first quarter and second quarter, and then heading even into the third quarter. So there'll be a little bit of noise, but I mean, it's a small volume relative to our overall mix.
But if you're seeing that, that's the main driver. All of our plays are oil plays with basically just associated gas.
So we don't have any -- we haven't drilled a gas well -- well, we might have drilled the gas, I know we've drilled gas wells in 2003.
Nima Billou
No, I'm well aware of the mix. I didn't know that there was that much associated gas in NGLs coming out of the Bakken.
I know in the U.S., they have high e-content gas from their Bakken properties. I just didn't envision it on the Canadian side and it's --
Scott Saxberg
Yes, 15%. It's the same mix, like 15%, but we're just -- we had the opportunity to pull it out of the mix.
I don't know, Neil, if you want to make any more comments on that?
Neil Smith
Yes. No, and that's right, and that's the main thing.
It's an ethane extraction plant, that's a third party plant that we've taken our gas to. I mean, the majority of our oil and liquids still is over 90% and the growth is mainly on the oil side.
So that's where the bulk of the oil is in the field.
Scott Saxberg
Good question.
Nima Billou
Thank you. One final question I have, and you guys have gone into detail before, but I just want to reiterate it.
So C$950 million, I have come to the same conclusion in terms of the maintenance level of capital for your 165,000 barrels. I think that's reasonable.
The question I have, again, can you just run through what it would -- what sort of a WTI price increase and how much extra capital would be associated in the growth? Like just sort of a rule of thumb, like a C$5 increase will lead to another C$100 million of coal production by 3%?
You put out those types of estimates before. So can you just run through what sort of oil price increase and how much capital dollars and what production growth that would increase?
And that's all my questions.
Scott Saxberg
Yes, I mean if you reflect back, like our original budget C$950 million was based on C$35 WTI, and so that's where that excess cash in our budgeting comes from. On a price level, even in this price environment in the C$40s, I think, where we would add capital would be just to expand upon our long-term plays, which are just a bit -- it's more riskier production.
So we're not -- and that capital would come towards the end of the year, which really wouldn't affect this year's production. But obviously affect longer-term upside into the company.
And then next year, we have the drop in our hedge cash flow coming off. So the C$50 in C$950 million capital budget gives us that excess, smaller excess cash flow that we again we'd look to either with acquisitions or bump our long-term drilling and waterflood and injector conversions.
Every dollar change in WTI is about C$50 million of increased cash flow for us. So we would then look at taking that cash and either paying down debt would be probably our first step.
Second step, again, those long-term initiatives and then the acquisitions. And we're just in the budget phase of this year and looking at -- at some point, with the drop in cost that we have, the significant drop in cost and the economics and the returns, you can see in our corporate presentation the payouts that we have are in the one to two year payout in this kind of price environment and cost environment.
And so at some point, we're going to decide to get after it and bump CapEx on the -- in 2017 to grow production and have a higher exit. We target 5% to 6% growth with a couple of percent changes or 2% to 5% changes through acquisitions on top of that.
And we try to target on a base case, 10% to 12% per year growth with a combination of the drilling and acquisitions with that excess. And I really think, once we get up over C$55 to C$60, you can start to push more capital in those price environments and look to start to grow.
I think, the oil industry is probably in that realm of C$60 and greater when you start to look at more significant growth. But I'd say, we'd be in our moderate range of growth in that C$50 to C$60 range.
I don't know, Neil, if you want to -- or Ken, if you want to maybe add to that or Trent?
Trent Stangl
Yes, I think if you sort of -- take a look back into a more normalized oil price environment. If you target that 1% to 3% yield and then another 5% to 6% growth in organic and combine with 1% to 3% accretive acquisitions.
Some time periods a little more and heavy on the acquisitions. Sometimes, some periods, a little bit higher growth on the organic side.
But targeting that overall, 10% to 12% overall growth. And it doesn't take much of a move in oil prices before you can start to put a little more capital towards some of these longer-term programs that we are working on, particularly as you look into Uinta with the horizontals, the waterflood at Viewfield Bakken and then the Ratcliffe and the Torquay and Flat Lake.
Scott Saxberg
Yes, when we get more cost certainty on Uinta next five, six well program relative to the rates and productivity that we're seeing there, we've really proved up the Flat Lake side with our cost structure. You start to think with C$50-plus WTI into late 2017, we should be adding capital to grow in advance of that, and be in a bit -- maybe a bit more aggressive than just trying to stay flat into 2017.
So those are some of the things that we're contemplating and discussing in our upcoming budgeting process, which is basically getting kickstarted here in the next couple of weeks.
Neil Smith
And at the end of the day, right now, even in this price environment, we are making money. Most of our drilling is paying out in under two years under the current pricing.
And even when oil was in the -- sorry, our projects are profitable. So we are being disciplined currently to live within our cash flow from dividend, capital and our acquisitions and the numbers Scott's talking about, is going to step up some of our growth and once we start seeing some strengthening in the commodity pricing.
Nima Billou
Thank you very much. Appreciate it.
Scott Saxberg
Great. Thanks a lot.
Operator
[Operator Instructions]. There are no further questions registered at this time.
I'd now like to turn the meeting back to Mr. Saxberg.
Scott Saxberg
Great. Thank you very much, and thanks everybody for participating in our Q2 2016 conference call.
Operator
Thank you ladies and gentlemen for participating in Crescent Point Energy's 2016 second quarter 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.