Jul 27, 2017
Executives
Scott Saxberg - President and CEO Neil Smith - COO Ken Lamont - CFO Brad Borggard - VP of Corporate Planning and Investor Relations
Analysts
Amir Arif - Cormark Securities Travis Wood - National Bank Financial
Operator
Good morning, ladies and gentlemen. My name is Andrew, and I will be your conference operator today.
At this time, I would like to welcome everyone to Crescent Point Energy's Second Quarter 2017 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. The complete financial statements and management's discussion and analysis for the period ending June 30, 2017, were announced this morning and are available on Crescent Point's website at www.crescentpointenergy.com and on 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 the 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 to your attention to the forward-looking information in 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 2017 conference call.
With me is Neil Smith, our Chief Operating Officer, who will discuss our operation highlights; Ken Lamont, our Chief Financial Officer, who will speak to our financial results; and Brad Borggard, Vice President of Corporate Planning and Investor Relations. We've delivered a strong second quarter and exceeded our production targets by 5% or approximately 8,000 BOEs per day.
This follows our first quarter, which was also ahead of our planned production budget. With these strong results, we are increasing our 2017 average production guidance to 174,500 BOEs per day, up from 172,000 BOEs per day.
Our capital expenditures remained unchanged at $1.45 billion, given our performance year-to-date, we are on track to meet or exceed our targeted exit production growth of 10% per share and do not anticipate to the need to change our 2017 capital program. Results from all of our core resource plays have been very encouraging.
In the Williston Basin in Southwest Saskatchewan, our development strategy continues to benefit from a combination of low-risk high-return infill drilling, successful step-out drilling to expand the economic boundaries and down-spacing programs to identify new drilling locations. In the Uinta Basin, we are very excited about the progress we've made in our horizontal program.
In the Castle Peak Zone, we recently began testing extended reach horizontals up to 2-miles in length, as well as increased tonnage per stage on completion in our 1-mile program. Initial results are very positive with IP 30 rates in each our program above 1,000 BOEs per day.
This is a 60% increase from our current 1-mile type curves. further improvement upon already strong economics.
In 2017 program we also include testing and proving up new zones, like the Wasatch and Uteland Butte, which have already remonstrated success on industry results. Of note, our recent 1-mile Wasatch well was flowing at approximately 2,000 BOEs per day after approximately 30 days.
This is on a chock back rate. This compares to industry's IP 30 rates of 2,000 barrels a day, which were achieved on 2-miles, so that's I think important point to make that this is a 1-mile well versus the industry's average 2-miles.
Obviously these are pretty spectacular results. And we expect this well to payout in one year, which is an impressive in this current oil price environment.
Our recent well results highlight the opportunity in our Uinta land base, which now totals almost 287,000 net acres. These initial production rates in well returns also demonstrate how this play favorably ranks compared to top quartile returns in major US shale plays like the Permian.
For the balance of 2017, our Uinta program will include the completion of our recently drilled Uteland Butte well and the expansion of our operated lands on the western side of the basin. We continue to monitor well results and expect to provide an update on our Uinta horizontal inventory toward the end of the year.
Additional locations or any improvements to our type wells only enhance our current five-year plan, which generates an annualized growth rate of 25% go forward. Before I hand things over to Neil, I'd like to touch on our non-core dispositions.
During the quarter, we closed our previously announced disposition of non-operated assets in Manitoba for $93 million. We are currently marketing or negotiating to dispose of certain non-core assets with an aggregate value of approximately $180 million.
We expect to transact on a majority of these sales during the second half of 2017. We also plan to market an additional package of non-core assets similar in value later this year.
Proceeds of these dispositions provide additional financial flexibility and further improve the strength of our balance sheet. And I think before I turn it over Neil again, just what excites me about this year's our performance in revision upward, it's all organic and it takes into account our small acquisitions that have been offset by the dispositions that we've done to-date and some planned dispositions in the second half.
So pretty exciting Q2 and excited for the remainder of the year. And I'll turn things over to Neil to discuss our operational highlights.
Neil Smith
Okay. Thanks Scott.
During the second quarter, we achieved average production of 175,600 BOEs a day, and again that is 5% higher than our target. This success resulted from continued strong operational execution in each of our resource plays, along with better-than-expected spring breakup conditions.
Our second quarter capital expenditure program totaled just under $300 million including $64 million on land, seismic and facilities. Our team has been successful in controlling capital costs, which allows us to remain on track with our current capital expenditures guidance of $1.45 billion excluding property and land acquisitions.
We are achieving increased success in our Uinta horizontal program. In addition to those strong production results, we are also working to improve our capital cost to multi-well pads, faster drilling days and continual frac optimization, and are targeting well cost improvements of up to 15%.
With our waterflood strategy, we remain focused on the continued installation of our injection control device systems. We currently have 40 systems in place, with approximately 10 additional system expected to be installed during the remainder of the year.
Initial results since our pilot are encouraging and will continue to be monitored throughout 2017. During the second quarter, our Innes unit became effective in the Viewfield Bakken making this our second unit to become effective within this play.
Full unitization will help manage reservoir pressure in a larger portion of the pool, leading to lower declined rates and higher ultimate recoveries. We continue to work towards completing the remaining original two of four in total Bakken units, as well as additional units that would increase our unitized land base by approximately 70%.
We continue to invest in and take proactive measures surrounding climate change initiatives. This includes our voluntary asset retirement fund, our asset integrity programs and green initiatives to reduce our carbon footprint.
In our Uinta Basin resource play, we are pleased to report that we have nearly eliminated the use of freshwater in our current completions process, conserving freshwater in the area. This follows the responsible work our team has been doing in Canada, where we have been reducing freshwater usage in our core resource plays.
Before handing things over to Ken, I want to recognize and thank all of our employees, especially our field staff for their hard work, their dedication. We are also excited about the new technology that is being implemented in the field such as automation tools to further increase efficiencies.
Ken?
Ken Lamont
Thanks Neil. During the second quarter, we generated funds flow from operations of $418 million, an increase of 3% from the second quarter in 2016.
Net income of $83.6 million was also up compared to a loss of $226.1 million in the second quarter of 2016. Total capital expenditures of $295 million resulted in a total payout ratio including our cash dividends of 82%.
These strong financial results reflect our continued operational execution and growth within our resource plays and the benefit of our high netback, low-cost asset base. Netbacks during the second quarter were approximately $30 per BOE, during a period when WTI prices averaged approximately US$48.
Our commodity hedges provide additional flexibility during this current oil price environment. 39% of our remaining 2017 oil production and 13% of the first half of 2018 oil production are hedged at an average price of approximately $70 per barrel.
During the second quarter, our operating expenses increased slightly to $12.85 per BOE, partly due to the increased work-over activity because of better-than-expected weather and one-time related payments. We continue to budget approximately $12 per BOE in operating expenses for 2017, along with the royalty rates of 15%.
As discussed earlier, we remain focused on executing non-core asset disposition to fund core tuck-in acquisitions and further improve the strength of our balance sheet. We are currently marketing or negotiating to dispose of approximately $180 million of certain non-core assets and plan to market an additional asset package of similar value later this year.
Lastly, we are pleased to have successfully renewed our covenant base unsecured credit facilities totaling $3.6 billion with the maturity date extension to June 2020. We will retain a significant amount of liquidity with no material near-term debt maturities and an unutilized credit capacity of approximately $1.5 billion.
I will now hand things back to Scott for some closing remarks.
Scott Saxberg
Thanks Ken. We are very pleased with the results during the second quarter and the first half of 2017.
Our new play development is exceeding our expectations and continues to enhance the growth potential within our asset base. Our continued focus for 2017 is to maintain the strong financial position by balancing our cash outflows with inflows including asset dispositions.
Organically developing our land base of approximately 4 million net acres and continue realizing capital efficiencies through our cost reduction initiatives. We'll continue to allocate capital based on the balance of returns and our long-term development goals for each resource play.
Before opening up the line for questions, I'd like to thank all of our employees for their hard work and delivering another successful quarter. I'd also like to take this opportunity to thank our shareholders for their patience and support.
Our results for the first half of 2017 demonstrate our continued strong execution and we remain committed to deliver solid financial results in meeting or exceeding our guidance. At this point, we're ready to answer questions from the members of the investment community.
Operator
[Operator Instructions]. We will pause a moment to compile the Q&A roster.
And our first question comes from Amir Arif with Cormark Securities. Your line is now open.
Amir Arif
Thanks. Good morning, guys.
Just a couple of quick questions. Just first on the Castle Peak well.
Can you just give us some more color, was it just the location of the well or did you increase their frac intensity in terms of the good rates you saw out of that well?
Neil Smith
So on our Castle Peak program, we've drilled several wells across several townships of our land to delineate the Castle Peak. And on our latest Castle Peak wells, we upped the tonnage pretty significantly, very similar to like a Permian type frac and those results are what we are speaking to of the 1,000 BOEs per day.
Scott Saxberg
Yes, I think also on top of that is again, remember over the last year-and-a-half, we've been doing our homework, so we've shut over 130 square mile 3D program. We've done 3,000 feet of core.
We've been optimizing our fractures. So we've been doing our homework over the last year-and-a-half.
There hasn't been a rush on the production in this area. It's been a rush - it's been a patience on the technology.
And now that's paying off in speeds with the results that we are starting to see.
Amir Arif
Okay. And then the…
Brad Borggard
Healthy well productivity rates that we're talking about on the wells that we've been completed with that new style.
Amir Arif
That makes sense. And then for the Wasatch well, was that on the eastern on the western portion of your acreage?
Neil Smith
I would say it's more like middle of the basin. So probably - well, it's in the middle of our lands, in the middle of the basin and then closer to Newfield's lands and where they are drilling as well, so we've got a good delineation relative to where Newfield is drilled and where we have drilled.
And again it's a 1-mile well, so that's the impressive I think highlight beyond the fact that the 2-mile wells that Newfield is drilling around 2,000 barrels a day. This well is a 1-mile and 2,000 barrels a day.
So I think the frac design that we've implemented there has really worked well.
Amir Arif
Okay. Sounds good.
And then just a final question on the guidance. Is the $180 million asset sale and the additional planned asset sale all the way factored in your production guidance or can you tell us how much production is associated with the divestitures?
Ken Lamont
Yes. So the exit guidance and the guidance that we have for the bump-up include a portion of our current marketed package in those numbers.
I don't know, Brad, if you want to maybe...
Brad Borggard
Yes, I think like where it stands right now on the $180 million package that we have out there, we're fairly far down the path on, if you want to call it, half of that value. So we notionally put in a couple of thousand barrels a day impact on the exit and relate to that half but we're hoping obviously there is to sell closer to that $180 million in total and then we'll look at putting out an additional package later in the year as well of similar type size.
Scott Saxberg
As the year unfolds how much we outperform that exit number will fall in line with those dispositions.
Amir Arif
This is for the exit. And just to be clear, that exit number only reflects about half of the $180 million sale?
Brad Borggard
Yes, couple of thousand barrels a day.
Amir Arif
So a couple of thousand barrels a day at most, okay for the additional remainder. Okay.
Thank you.
Scott Saxberg
Good. Thanks.
Operator
Thank you. [Operator Instructions].
Our next question comes from Travis Wood with National Bank Financial. Your line is now open.
If you're phone is on mute, please unmute it sir.
Travis Wood
Sorry about that. With the pretty strong first half of the year and the updated guidance that you've laid out, can you help us just understand the capital spend profile through H2, the timing of that spend and that profile of the production to reach that $183 million in December?
Brad Borggard
Yes, Travis. It's Brad here.
So keep in mind, so $1.45 billion is excludes land and capitalized G&A that sort of thing, which is D&C, facilities and seismic. And so to get to the 14.50 for the year you assume around 400 or a little over 400 for Q3.
That should leave about 250-odd-million in Q4 again to get you to the 1.4 bucks. So in and around those ranges will get into the 145 for the year.
Travis Wood
And can you help us a little bit around Q3 volumes, given what probably was a pretty strong exit into Q3 with the Uinta results?
Scott Saxberg
Yes, I would say that Q3 will be in and around the range of Q2 from maybe slightly below Q2 and with the one sale, asset sale, and then obviously our Q4 is a ramp up from the Q3 spending. So it's I think will be probably 1,000, 1,500 barrels lighter than…
Brad Borggard
Yes, we're looking for a little bit lighter in Q3 relative to Q2 but I think that the main things that impacted or one of the main things that helped Q2 is that we had a pretty good breakup early in the quarter. And so we didn't have as much volume offline as we budgeted for and so that helps perform our Q2 budget.
Neil Smith
And we are on track on Q3. Pretty strong obviously volumes into Q3, but we're still obviously pretty early into Q3 for us to really make that comment about performance to Q3 but I think we're definitely on track to exceed the average for the year and then our exit.
So part of it is depends on what the timing of the sales of these assets in those numbers as well.
Travis Wood
Okay. And then two questions related to each other somewhat.
Can you provide any more color around what you see for tuck-ins or strategic acquisitions within Utah similar to what you announced for Q2? And then, can you give us any more technical information in terms of what you're doing differently now than a couple of years ago to drill these wells and provide us any data around the science that you're looking at that could lead us to believe that results can continue to get better out of the Uinta?
Scott Saxberg
Yes. so on the acquisition front, I think we've pretty much completed the small tuck-ins that we want to do in Uinta.
The remainder of any of the transactions in there are the larger operators out there and we are, at this stage, really just focused on - we got 287,000 net acres, so pretty large swath of land to develop and so that's our focus go forward. And so what's really changed in the last year to two years is - so two years ago all the vertical wells with multiple zone completions and then we slowly went added on horizontal basis after we had done all the testing of the different zones looking at which had the highest productivity.
And so we followed that up with more of, I'd say kind of a North Dakota type frac sizes, so that's 60 ton, 70 ton sort of fracs per stage. And then this last, I'd say just over a year now, we move to 150 tons to over 200 tons a stage, similar to how the Permian and STACK/SCOOP Basins would have developed where they started with smallest fracs and then they ramped it up to the larger fracs as that technology became available.
And so now our standard frac is about 2,700 pounds per foot or over 200 tons per stage type completion. And so that's - by and large now it's just a matter of whether we do a 1-mile or 2-miles.
And so the progression will be mostly all 2-mile wells and then the progress next year and into '19 will be multi-pad, you can call it, the cube completion style that Encana uses or what, but it will move to that type of efficiencies. And so we'll see in returns and production growth improve dramatically with that kind of move.
Travis Wood
Okay. And then so with - final question I promise - with these results, then are you guys getting more comfortable?
I know you laid out a bit of an outlook at the Technical Day a couple of months ago. But could we see a surprise on the upside around CapEx given these results focused into Utah?
Neil Smith
Yes, for sure. I mean, we are allocating more and more capital to the basin.
I would say obviously we are executing our planned for this year and then you will see probably a bit more shift of capital into Uinta into '18, but also keep in mind our Torquay play, which is close to a 1,000 square mile play is highly economic and has higher returns as well. And so those two projects are competing for capital, pretty high levels of rates of return.
And as long with our Shaunavon, so we tend to try to do more of a balanced approach because of that because we have that rates of return obviously and the different style of Uinta pad drilling eventually will take into account and the timing of that. So that's more to come, I guess, in '18.
Travis Wood
Okay. Thanks for the time.
Scott Saxberg
Great. Thank you.
Operator
[Operator Instructions]. One more moment for questions.
And I'm showing no questions at this time. I would like to turn the call back to Mr.
Saxberg for further remarks.
Scott Saxberg
Great. Thank you, everybody, for attending our Q2 conference call.
And again, we are pretty excited about our results and the second half of 2017 and continuing that strong execution. Thanks again
Operator
Thank you, ladies and gentlemen, for participating in Crescent Point Energy's 2017 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 great day.