Feb 23, 2017
Executives
Scott Saxberg - President and CEO Ken Lamont - CFO Neil Smith - COO Trent Stangl - SVP of IR and Communications
Analysts
Patrick Bryden - Scotiabank Thomas Matthews - AltaCorp Zain Shafiq - Mackenzie Investments
Operator
Good morning, ladies and gentlemen. My name is Liz, 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 2016 Conference Call. [Operator Instructions] 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. The complete financial statements and management's discussion and analysis for the period ending December 30, 2016, 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 may be 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 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 2016.
With me is Ken Lamont, Chief Financial Officer; Neil Smith, Chief Operating Officer; Trent Stangl, Senior Vice President of Investor Relations and Communications. Before we begin, I’d like to take a minute to announce that Trent will be stepping down from Crescent Point in April of this year.
Trent has been a valuable member of our team for the past 11 years and has provided strong leadership, hard work and many contributions to the company. He's a great friend and I wish him well in his future endeavors.
Trent's responsibilities will be assumed by Brad Borggard, our Vice President of Corporate Planning and Investor Relations. Brad has been working alongside Trent since 2010 and was previously a top ranked sell side analysts before coming to Crescent Point.
I think he might have wrote that in there. I'm confident that this transition will be seamless, given the strength of our team.
2016 was a successful year operationally. We exceeded our production targets on budget, increased drilling efficiencies and developed new plays that more than replace the wells we drilled in 2016.
We also added new reserves that replaced 137% of our annual production at top quartile F&D costs of CAD7.02 a barrel. This resulted in a recycle ratio of 3.2 times or over 4.5 times under current commodity prices.
And I’d just like to highlight as well we spent CAD1.1 billion this year in achieving the CAD7.02 barrel F&D is pretty amazing with that size of program. Given that we've achieved these milestones during a volatile year in commodity prices, I think it's important to review our management team’s execution plan during 2016.
At this time last year, our first quarter production was well ahead of budget and WTI prices were approximate CAD30. At that time, we made a strategic decision to defer 100 million of capital expenditures to the second half of the year.
This allowed us to further reduce costs and protect our balance sheet. This defensive plan allowed us to protect our average annual production volume of 165,000 barrels per day, while still fully funding our capital program and dividend at prices of CAD35 a barrel in 2016 and CAD45 a barrel in 2017.
Within our budget, we remain focused on long-term value creation initiatives versus just simply high grading our drilling program. For example, we allocated 100 million to initiatives such as expanding our Flat Lake area through step-out drilling, testing the Castle Peak zone in Uinta for horizontal development and we achieved extremely positive results, highlighted by the CAD7.02 per BOE reserve out through these initiatives.
Adding over 1000 net new drilling locations in 2016, bringing our total corporate drilling inventory to over 8,000 locations. We also doubled our Tight Rock Waterflood programs, developed our ICD system, which has demonstrated encouraging results.
Through ICD pilot in late 2016, we’re able to increase water injectivity and improve sweep efficiency. We believe that this technological evolution is comparable to the advent of isolated packer systems in 2006.
In September, we made the decision to raise 650 million in equity offering to reduce bank indebtedness. Given the commodity price uncertainty before the OPEC agreements to cut production and the US election, we wanted to remove any downside risk to our balance sheet.
In 2016, we spent less than our funds flow from operations and achieved a total payout of 89%. We forecast 2017 guidance to generate a total payout ratio of 91% based on current strip prices.
We entered fourth quarter with a strong balance sheet and successfully executed our capital program, driving production, strong production and exit rate of over 167,000 BOEs per day. We also exceeded our annual average guidance in 2016.
We're very excited about 2017. We're focused on executing our organic growth plan, which is expected to generate exit per share growth of 10%.
We have started the year in an excellent position and are currently ahead of our first quarter 2017 budget of 170,000 BOEs per day. Similar to prior years, we plan to revisit our annual guidance post spring break out.
In addition to our growth plan, we are focused on improving our investor communications. We realize that communication around our recent financing could have been better and are making efforts to continue improving our overall investor engagement.
We spent a significant amount of time with our shareholders this past year and have listened and responded with several improvements to our compensation, governance and corporate messaging. We always welcome shareholder feedback and remain committed to maximizing returns to our shareholders.
I will now turn it over to Neil who will discuss our operation highlights and 2016 reserves in more detail. Neil?
Neil Smith
Great. Thanks Scott.
So as Scott mentioned -- touched on, we had a very successful year operationally in 2016. Our reserves program generated 2P F&D costs of CAD7.02 per BOE, including changes in future development capital, one of the lowest in our history.
We achieved a top quartile recycle ratio of 3.2 times based on an average corporate net back prior to hedging of CAD22.18 per BOE in 2016. This profitability measure demonstrates management's strategic capital allocation and the company’s high net back, high quality asset base.
Our Waterflood program continues to add incremental low cost reserve additions. In 2016, we added 10.5 million barrels of 2P waterflood reserves, the largest annual addition to our history in our history to date.
These additions accounted for 16% of our total organic reserves growth in 2016. This is the fourth consecutive year independent evaluators have recognized reserves attributed to waterflood and brings our total waterflood reserves to over 23 million barrels since 2013.
As Scott mentioned, we continue to advance our waterflood technology. In late 2016, we piloted our new injection control device or ICD technology.
We achieved encouraging results, including increased water injectivity and improved sweep efficiency. We've since begun installing additional ICD systems throughout our Williston basin in Southwestern Saskatchewan resource plays and plan to have upwards of 50 systems installed by the end of the first half of this year.
We expect production data from these new installations by the second half of the year. We have a consistent track record of organic reserve additions and organic value creation through drilling and completions and our waterflood programs.
We have generated over 644 million BOEs of organic reserve additions since our inception. So to put this in perspective, this represents close to 70% of our current reserves base.
It also -- these additions have doubled our required reserves through our organic drilling and completion and waterflood programs. We expect to add future reserves growth, given our large oil-in-place assets.
For example, if we increase recovery factors on a resource base of over 23 billion barrels by just 5%, this would equate to over 1 billion barrels of potential reserve additions and double our currently booked reserves. In our Uinta basin resource play, we drilled four one-mile horizontal wells during the fourth quarter, each targeting the Castle Peak zone.
Production results from wells completed to date continue to support our expected horizontal type curve. This curve generated a 90-day initial production rate of approximately 650 BOEs a day.
In 2017, we plan to drill a combination of 25 net one-mile and two-mile horizontal wells, up from nine one-mile horizontal wells last year. We also plan to test new zones and new completion techniques within this program to further expand the play and improve upon the encouraging results seen to date.
During 2016, we improved our drilling efficiencies. By fourth quarter, our average drilling days in both the Williston basin and Shaunavon resource play in Southwest Saskatchewan improved by approximately 11% compared to 2015.
To close, I’d like to thank our staff, especially our field staff during the winter months for their hard work and determination in delivering another successful year. I’d also like to thank our suppliers for being tremendous partners through this past year.
Ken will now discuss financial highlights. Ken?
Ken Lamont
Thanks, Neil. In 2016, we generated 1.6 billion of funds flow from operations.
We spent 1.4 billion, including capital expenditures and cash dividend, which resulted in a total payout ratio of 89%. We continue to reduce our cost structure as our annual operating costs of CAD11.27 per BOE were well below our initial budget of CAD12.25 per BOE, supporting strong 2016 netbacks of approximately CAD30 a BOE.
During the fourth quarter, the company reported a net loss of 510.6 million due to an after-tax non-cash impairment charge of 457 million. This impairment only represents approximately 3% of our total assets as at December 31, 2016, reflecting the high quality nature of the company's asset base.
This impairment does not impact the company's funds flow from operations or the amount available under our credit facility. The company's fourth quarter net loss also included an unrealized loss on derivatives related to changes in the futures market for commodity prices and foreign exchange.
Excluding these and other non-cash items, our adjusted earnings from operations was a positive 100.6 million during the fourth quarter. Through our 2016 equity financing, we lowered our net debt to funds flow from operations by more than 0.5 times.
We continue to retain significant unutilized credit capacity of approximately 1.9 billion with no material near term debt maturities. Since the third quarter of 2016, we have added approximately 11.8 million barrels of oil to our hedging program.
Currently, we have hedged 39% of our 2017 oil production at approximately CAD72 per barrel and 12% of first half of 2018 production at approximately CAD74 a barrel. As we enter 2017, we remain committed to maintaining a strong financial position and executing organic growth of 10% per share on an exit-to-exit basis.
I will now turn things back to Scott for some closing remarks.
Scott Saxberg
Thanks, Ken. We had a strong operational year in 2016.
We increased the long-term growth profile of the company by expanding our new plays and adding new drilling locations to our inventory. We also improved the long-term sustainability of the company by improving drilling efficiencies, strengthening our balance sheet and advancing new technologies such as our ICD waterflood system.
We expect 2017 annual average production guidance of 172,000 BOEs a day with exit production of 183,000 BOEs per day. This guidance has been risked for horizontal well production in the Uinta basin and excludes any benefit from our ICD waterflood system.
Before opening up the line for questions, I’d like to thank our staff and our board for their hard work and another successful year in 2016. At this point, we’re ready to answer questions from the members of the investment community.
Operator?
Operator
[Operator Instructions] Your first question comes from the line of [indiscernible] with TD Securities. Your line is now open.
Unidentified Analyst
Thanks and good morning. So I have a question on your asset sale initiative.
I understand that you won't comment on specifics, but since you haven't been a seller historically, maybe you could just talk us through how you're thinking about the process more generally and where the proceeds could get reinvested? And then as a follow-up to that, should we expect straight up dispositions or could you conceivably get more creative with JVs and spinouts?
Scott Saxberg
I think basic simple non-core assets, smaller in nature within the company that will either pay down debt or redeploy into our capital program and grow at a faster pace.
Unidentified Analyst
You couldn't really give us any sense of sort of target divestitures or anything like that, any comments out regionally or by play.
Scott Saxberg
As you know we're very focused company in Saskatchewan and so we'd be the non op, mostly non op in nature type assets that we've collected over the years anywhere from CAD50 million to CAD100 million kind of size range, so we're not pretty focused and use that money to pay down debt and then or reinvest it into capital program.
Operator
Your next question comes from Patrick Bryden with Scotiabank. Your line is now open.
Patrick Bryden
Just wondering if you might be able to provide a sense for the second half response, in this year maybe going ahead from the ICD you mentioned that there's no benefit for those numbers in the annual guidance. So just want to get a feel you have a sense for that.
Scott Saxberg
Yeah, I mean just to give you a sense of magnitude of you know on our risk volumes for Uinta alone, it roughly equates about 3,000 barrels a day or 2% to our growth rate, so exit could be you know 12%, 13% just with that one item alone. On the ICD waterflood front, we're basically installing close to 50 injectors by the end of Q1 and the purpose there is to get that data sooner to then make a decision mid-year to accept further accelerate putting those systems in our other 300 or so injection wells.
And then from there expanding and adding even more injectors. So you know it’s key to us in Q1 to see those results.
And so because the system is sort of a six to eight month or six months sort of response time will have a good answer by the end of the summer for that.
Patrick Bryden
And prior response times would have been 12 to 24 months or so.
Scott Saxberg
Yeah, 12 to 18 months.
Patrick Bryden
Maybe if we can just flip back to the Uinta quickly. Just curious if you were to not be choking back on wells in the first 80 days or so or thirty days, is there a potential for greater volumes that we might be not seeing in the data right now.
Scott Saxberg
Yeah for sure, I mean we these facilities that we put on are 2,000 barrel a day facilities. Our next wells that we're completing in February are two-mile horizontals with larger fracs.
So ideally those two mile wells will even further outperform the one mile wells that we're doing. So we're continually evolving the results there, it's obviously very early stages on that play in that new play development.
But we've moved because of all the history we have in the past we've moved to a two mile horizontals, the newer technology figure fracs and so these wells can produce in the thousands of barrels a day rate if we were to open them up full. And so what we're reporting in the 90 days is a choked back production rate to keep a steady production flow and not to oversize facilities.
Patrick Bryden
I'm not sure maybe I don't understand it fully. But when you're having the combination of one milers and the two milers, is there still sort of experimentation or are you seeing the preference economically would be to gear more towards the two milers I think you're maybe a point.
Scott Saxberg
Well I think when you look at all the other plays throughout North America, the move is to two mile horizontals because of efficiencies of cost and then higher productivity and reserves per well. And so this would be similar in nature of doing that.
Patrick Bryden
And just lastly I appreciate the slides on the ford renewal process. I know conversations with shareholders are obviously not something everybody's privy to but as the company kind of moves along on a path of maturation, can you give us any kind of elaboration on what those conversations in general might have been like and how they’re adjusting your strategy going ahead.
Scott Saxberg
I think one of the key slides that we added into our slide deck was Slide 27 on our employee engagement and integrity and every year and we've done this for ten years so we just you know we've never ever put out this kind of information, never felt really the need to it, but I think it really highlights our management team, style that we have as a management team that we do the surveys every year to our staff and we respond to the results and make positive changes and we're always open to improving the company trying to make us better and outperform year-over-year. And if you think back to all the different stages of our company from a junior to a trust company to a divco to now more senior producer.
We've continually tried to evolve, we realize we were not perfect and there's always room and things that we need to do to improve and be better and be stronger and try to be better, not only for our staff but obviously for our shareholders. But we've had a long lot of conversations over this last year with our shareholders taken a lot of their feedback and responded and tried to be proactive.
And I think that slide kind of highlights just the nature of style of our company, I think how we are.
Operator
[Operator Instructions] Your next question comes from Thomas Matthews of AltaCorp. Your line is now open.
Thomas Matthews
I figured I just I have three questions that I figured out kind of start with the elephant in the room. I know you guys have been on blackout for the last few weeks and haven't addressed anything in public, but I was wondering if you could comment potentially on the activism rumors that are circulating out there, if you've heard anything directly or kind of your thoughts surrounding that.
Scott Saxberg
We always welcome feedback and engagement with our shareholders and we have not had any in our entire history - we've never had or been approached by an activist. So you know that's all I really can say to that.
We are pretty focused on doing things that we can control as a company, growing our business organically focused on our new play development and beating our numbers and beating our targets.
Thomas Matthews
My next question is on Uinta. I know that before when you were restricting some of these wells.
If I recall correctly it was just due to restrictions on the surface side on potentially the liquids handling or how big you were building the surface lease. So when you do have more robust program there, will that be addressed where you will see some bigger rates or is it just kind of restricting just a view how the type curve will behave and how the decline profile will look or is it a combination of both.
Scott Saxberg
Yeah, it's a good question. It's a combination of a lot of things.
So as a company in general our goal and this is through Saskatchewan and this has been for 16 years. I'm a reservoir engineer.
We always restrict our well to manage A, the cost of the facilities and size of the facilities. So we never want to over fill the facility just to produce for a rate for one month.
We don't we see it as we don't want to damage the reservoir by over producing and so those kind of constraints are what we kind of build in. In this play, it's all single well facilities and trucks volumes, and so our initial locations that we drilled on were vertical drilling locations that we converted to horizontal, our next drilling locations are now sized for horizontal wells.
And so that will give us more flexibility to produce the wells at higher rate if we chose to just because of the trucking volumes but in general it's the combination of lower capital cost on the surface facility side and reservoir protection and management of our production.
Thomas Matthews
Maybe I'll ask a follow up, on the down spacing there, I know in the presentation it said that your horizontal inventory was just based on four wells a section, but is that four wells just in the Castle Peak zone and how does the other horizons obviously factor into that potential in that downspacing.
Scott Saxberg
Yeah, so we have those seven potential zones in this basin and that location count is just for the Castle Peak over a fixed area four wells per section, so it's early days.
Thomas Matthews
So there's lots of room to revise that number. And then just finally on the waterflood, so the reserve bookings that you've been getting they've been growing but also if you look backwards the amount of conversions and CapEx spend on waterflood was also increasing over that time and so there's that lag.
Just wondering on you know in 2017 now that you aren't doing new conversions but you're using this new technique. Will that pace of reserve engineer recognition slow or do you think the new technology will kind of keep that pace of water flood reserve additions going into 2016 you know technically the pace of development isn't the same.
Scott Saxberg
So it's a great question. Super highlight that I think you know we added 10 million barrels of reserves.
We might have spent CAD100 million – CAD50 million on waterflood. So that's CAD5 a barrel F&D on the waterflood.
That really highlights our corporate strategy as a company which is small changes in the recovery factor create sustainability long-term reserve adds value significant underlying value and that’s kind of what Neil said of the 5% change in recovery factor that's a billion barrels of reserves. So we barely scratch the surface of adding reserves.
Those injectors every day inject water day after day after day and every year reserve analysts go back and look at our reserves and re-evaluate the performance of those wells and give us reserve bookings without spending any capital. And so this is just sort of highlights the momentum that's starting to build with our water floods and water flood technology.
And the ICD technology accelerates the response of the production. Recovery factors based on the simulation work we've done is basically around 33% is our latest.
That's up from I think 28% the last time we did our simulation, runs with our historical matching and we see those numbers growing even further. But we've only booked as a company I think in this area something like 8% to 10% of our recovery factor.
So we've got a lot of running room on reserve out. So it's a great question which still really highlights that success.
Operator
We have time for one more question. This question comes from Zain Shafiq with Mackenzie Investments.
Your line is now open.
Zain Shafiq
So just one quick question, could you help me understand why the production stream of CPG seems to be changing over time. In 2014, oil was about 86% of overall production and fell to give or take 80% in 2016.
Gas production seems to have gone higher and seems to be rising in 2017 based on guidance if I understand it correctly. Could you walk me through that a bit.
Scott Saxberg
I think our liquids are up.
Zain Shafiq
I meant oil specifically as opposed to liquids, NGL as a percentage of liquids have gone up significantly.
Neil Smith
We in southeast Saskatchewan [indiscernible] we have some of our volumes going through a deep cut plant and so we're capturing more liquids out of that and so you're just seeing that the liquid component, the natural gas liquids component is increasing relative to the overall level that's really what’s happening. All the plays that we’re in are [indiscernible] all those plays have that same high oil percentage waiting but they all have a little bit associated gas with it.
Scott Saxberg
Well thanks everybody for attending our fourth quarter conference call and thank you very much.
Operator
Thank you ladies and gentlemen for participating in Crescent Point Energy’s 2016 fourth quarter and year-end 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.