May 9, 2019
Operator
Good morning, ladies and gentlemen. My name is Sylvie, and I will be your conference call operator for Crescent Point Energy's Q1 2019 Conference Call.
This conference call is bring recorded today and will be broadcast along with a slide deck, which can be found on Crescent Point's Web site homepage. The webcast maybe not be recorded or rebroadcast without the expressed 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 March 31st, 209, were announced this morning and are available on Crescent Point's, SEDAR's and EDGAR's Web sites.
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. 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, SEDAR's, EDGAR's Web site or by contacting Crescent Point Energy.
Management also calls your attention to the forward-looking information and non-GAAP measures section of the press release issued earlier today. I now would like to turn the call over to Brad Borggard, Senior Vice President, Corporate Planning and Capital Markets.
Please go ahead, sir.
Brad Borggard
Thank you, Operator, and I'd like welcome everyone to our first quarter 2019 conference call. With me are Craig Bryksa, President and Chief Executive Officer; Ken Lamont, Chief Financial Officer; and Ryan Gritzfeldt, Chief Operating Officer.
Other members of our senior leadership team are also present to provide additional insight during the question-and-answer period at the end of the call. As the operator highlighted, the conference call is being webcast along with slide deck which can be found on Crescent Point's Web site.
I'll now pass things over to Craig for an overview of Crescent Point's Q1 2019 activities and results.
Craig Bryksa
Thanks, Brad, and thank you, everyone for joining us today. Our strong first quarter results continue to demonstrate the changes within our organization.
New management is focusing on capital discipline, increased free cash flow generation, and improved shareholder returns. We have had a great start to the year including net debt reduction of over $100 million during the first quarter.
Share repurchases totaling more than $5.6 million since the launch of our normal course issuer bid, ongoing cost improvements and increased hedging activity to protect our financial flexibility. We remain on track for our annual guidance with unchanged capital expenditures further highlighting our focus on capital discipline.
We now expect to generate approximately $600 million of excess cash flow in 2019 based on guidance at current strip prices. We have planned to allocate these excess funds to additional net debt reduction and accretive share repurchases.
During the first quarter, we initiated a process for asset dispositions which continues to progress. In fairness to those involved, we will not be discussing any additional details with respect to potential dispositions on this call.
I do want to emphasis that we will remain disciplined and flexible as we focus our asset base and create value for our shareholders. I'll now pass the call over to Ken to discuss our financial results in greater detail.
Ken Lamont
Thank you, Craig. During the first quarter of 2019, we reported adjusted fund flow of $514 million or $0.93 per share fully diluted based on strong operating net backs of approximately $34 of Boe.
This compares to adjusted fund flow of approximately $430 million or $0.78 per share at the same time last year despite lower WTI prices. As a part of our asset review conducted in 2018, we identified key focus areas based on returns, free cash flow generation, scalability, and market access.
These plays which include Viewfield, Shaunavon, and Flat Lake generated operating net backs approximately 8% higher than our corporate average in the first quarter highlighting the lower cost and premium oil pricing associated with these areas. Our Q1 adjusted funds flow was $514 million which compares the capital expenditures of any $380 million during the quarter.
By being more consistent and disciplined in our capital and drilling program, we reduced capital expenditures in Q1 by almost 50% compared to the first quarter in 2018. In the first quarter, adjusted net earnings from operations totaled approximately $160 million or $0.29 per share fully diluted, up from $63 million or $0.12 per share in Q1 of 2018.
First quarter results incorporated just over $30 million of positive non-recurring contributions. These primarily include a payment under a settlement agreement related to the successful resolution of a previously announced legal and regulatory action.
As a result of management's negotiated settlement agreement, Crescent Point will also benefit for a revised pipeline tariff that is expected to increase our net back for oil production transported in Saskatoon pipeline system. In terms of realized pricing, our oil differential improved in the first quarter by over 60% compared to the fourth quarter of 2018 to $8.36 a barrel.
Based on realized prices to date and the current forward curve, we expect our second quarter 2019 realized oil price to increase by approximately 15% relative to the first quarter of 2019. We reduced our net debt in the quarter by over a $100 million resulting in net debt to adjusted fund flow of approximately two times and unrealized credit capacity of approximately $1.7 billion as at March 31st 2019.
We expect to generate approximately $600 million of excess cash flow in 2019 based on our guidance at current strip prices which will significantly improve our leverage and financial flexibility. These funds did not include any benefit from the potential asset dispositions.
On an accounting note, Crescent Point adopted International Financial Reporting Standard 16 on January 1st 2019. This new standard requires companies to recognize most operating leases as liabilities on their balance sheet, and equate it to approximately $224 million as at March 31st 2019.
I would like to highlight that this accounting change does not impact our debt conveyance or credit available under our bank credit facilities. I will now pass things over to Ryan to discuss our operating results.
Ryan?
Ryan Gritzfeldt
Thanks, Ken. Our average production in first quarter 2019 was $175,955 boe per day.
Of which, approximately 91% was comprised of oil and liquid. As part of our focus on improved sustainability, we continue to realize additional cost savings and advanced our waterflood programs in each of our key focus areas.
Specifically on reducing cost, our teams have mitigated any impact from modest cost pressures resulting from higher commodity prices through continued optimization and supply chain initiatives. We are also expanding the use of technology and automation throughout our field operations to change our staff's workflow.
We expect these initiatives to result in reduced downtime in work over frequency and overall increased productivity that we believe will lead to additional improvements in our operations cost structure. As for our decline mitigation program, our 2019 budget includes converting a total of 145 producing wells to injectors.
Of which, approximately 75 or just over half were completed in Q1. In Viewfield, we recently completed the unitization of our fourth waterflood unit.
We now have four approved waterflood units consisting of approximately 1 billion barrels of oil in place, which will allow us to better control the pace of future waterflood development. Base decline rates within these units continue to demonstrate the success of our waterflood program and the opportunity for improved ultimate reserve recovery and free cash flow generation.
I would like to thank our field teams and service partners for their dedication, hard work, operational execution, and continued focus on our health and safety initiatives especially during a much colder than usual first quarter. I'll now turn it over to Brad to discuss our capital allocation and recent hedging activity.
Brad Borggard
Thanks, Ryan. Our 2019 production and capital budget remains unchanged notwithstanding the increase in commodity prices since releasing our annual guidance in mid January.
We continue to target annual average production of 170,000 to 174,000 Boe per day and capital expenditures of $1.2 billion to $1.3 billion. Approximately 70% to 80% of our excess cash flow in 2019 is expected to be allocated toward debt reduction with the balance going to our normal course issuer bid.
We believe that share repurchases represent an attractive allocation of shareholder capital given our current valuation. In our yearend results, we provided our net asset value of $13.38 per share based on a conservative flat price deck of $55 WTI.
This NAV includes $5.37 per of value on proved developed producing basis including land, seismic, and derivatives. Assuming a flat $60 WTI price, our yearend NAV would increase by over 20% highlighting the strong underlying fundamental value of Crescent Point's assets relative to our current share price.
On that note, to date we have repurchased over $5.6 million shares or approximately 15% of the normal course issuer bid we launched in late January. We remain committed to our share repurchase program and plan to continue repurchasing additional shares as we further strengthened our financial position.
Since our last update in early March, we have significant increased our hedge position by adding new hedges to 2019 and extending through 2020, utilizing a combination of swaps and three-way colors. As of May 3, approximately 45% of Crescent Point's oil and liquids production net of royalty interest was hedged at the remainder of 2019.
With respect to 2020, we are now approximately 35% hedged for the first-half of the year, and 23% hedged for the second-half. We will remain disciplined as we continue to look to layer on additional hedges to further protect our financial flexibility.
I'll now pass things back to Craig for closing remarks.
Craig Bryksa
Thanks, Brad. I'm very pleased with our start to the year and the changes we are implementing.
In a short period of time we have improved our overall capital efficiencies, reduced G&E drilling and completion costs, and lowered our operating expenses, improved our capital allocation process to generate stronger corporate returns, and significantly increased our free cash flow profile giving us the flexibility to reduce our net debt and make accretive share repurchases. We are also being disciplined in our disposition process making sure we obtain appropriate value for our non-core assets.
In addition to the changes made to our management team, our key value drivers and our overall strategy, Crescent Point has also recruited notable new directors with strong and diverse skill sets. Following our upcoming AGM, our board will have completed a full renewal since 2014.
Before we open the call to questions, I'd like to thank our shareholders for their continued support and engagement. I'll now turn it back to the Operator for questions.
Operator
Thank you, sir. [Operator Instructions] And the first question comes from the line of Travis Wood at National Bank of Canada.
Your line is open.
Travis Wood
Yes, good morning, guys. Brad, I think this question is for you.
I missed the tail part of your opening remarks there just with respect to allocating that free cash. I mean, obviously, WTI pressures are up substantially, year-to-date, the NCIB is in place, can you walk us through and remind us again that allocation and that strategy around that free cash wedge, please?
Craig Bryksa
Travis, it's Craig here. I think Brad and I will tag team this one, but we've messaged in the past that we're looking at 70% to 80% of that free cash flow will be directed towards net debt reduction, with the remainder so call that 20% to 30% going towards our NCIB.
You can look for us to be a little bit more active here in the second-half of the year on the NCIB as we realize this free cash flow that's been coming in. I don't know Brad if you have anything…
Brad Borggard
I think that's -- pretty much sums it up.
Travis Wood
Okay. And is there scenario, whether it's macro driven on the commodity price or other, is there a scenario where that allocation changes that you're considering today, whether it's -- did the free cash wedge start to become larger and you allocate more to that NCIB -- advance the NCIB or expand it?
Craig Bryksa
Yes, so to that, Travis, net debt reduction is obviously a priority and a pillar of our strategy. So we remain very focused on that.
If commodity prices continue to prove over and above what they are right now, then we'll have to direct -- that same sort of percentage will be directed towards the NCIB. So again, call that 20% to 30%.
On the back-half or the back-end of the disposition, again, we'd look to work or direct most of that towards net debt reduction with some of that again being directed towards an NCIB as well. So we're staying very disciplined around this and focused on it and any decision we do make will be with returns in mind.
Travis Wood
Okay, great, that's all, thanks, guys.
Craig Bryksa
Thanks, Travis.
Operator
Thank you. [Operator Instructions] And your next question will be from Thomas Matthews at AltaCorp.
Please go ahead.
Thomas Matthews
Hey, guys, I just had a quick question on op costs, just looking at your historical op costs, they tended to go up in Q2, in Q3. I'm just wondering with this new cost focus and the potential for production to decline as you get through break up here are you going to see those unit costs go up this iteration, or have you mitigated that again with your new cost focus?
Greg Bryksa
Hey, Thomas, it's Craig again. That's a good question.
Definitely a focus for us here is we continue to transform the company and change the company into more of a returns based company, and I'll maybe pass that along to Ryan and he can speak to some of the initiatives that we're working on.
Ryan Gritzfeldt
Yes, I think just to kind of reiterate, I think what I previously said, like, we are -- we were laser focused on operating costs as Craig mentioned. We were operating differently, like I said, utilizing some new technology and automation to just change the way we operate, try to be more proactive on reducing downhole failures and just utilizing our time more wisely.
And from my perspective, it's going to be really difficult to forecast how much of reductions these initiatives will bring, but we are confident that it'll lower our cost structure to go forward.
Thomas Matthews
Sounds good. And then just one question on Uinta differentials, you know, obviously, they are widening out here.
Is there anything in the works that it will change that either from your perspective with the new contract or from the industry, and how does that have any potential to impact your capital deployment either for the balance of the year, or for next year? I know it's not a big part of your program, but yes, just wondering if you're seeing anything on the horizon that will change that either positively or negatively.
Brad Borggard
Hey, Thomas, it's Brad here. I'll try and handle that one.
As you probably would've saw differentials in Q1 were a little bit wider. So we did see that sort of filter through our result and cash flow for the quarter.
We are working on stuff, nothing really that I could comment on publicly. It is obviously a focus for us to try and improve egress within the Uinta Basin and as everyone knows we pulled back on capital there given our returns focus and some egress restraints.
So we're still optimistic that we can try and get some stuff done there, but there's nothing I can really relay right at the current moment that's going to say we're going to break that open. I don't know any of the other members have something to add to that, but again, it's something that we're long-term focused on.
Nothing imminent that I could really point to though, I'd want to comment on the call.
Thomas Matthews
Okay. That's it for me, thanks.
Operator
Thank you. Your next question will be from Juan Jarrah at TD.
Your line is open.
Juan Jarrah
Hey guys, good morning, everyone. Clearly, your budget was at 50% or else 60% obviously, that's a great place to be, made it pretty clear in the press release in your comments that there's not going to be any change to your capital budget, but I guess, my question to you is does the allocation within your budget change now that you've got another $10 basically in your pocket that might change the rates of return that you can see from some of the different assets across your asset base.
Craig Bryksa
JJ, it's Craig here. So that allocation process hasn't changed here throughout the year.
So we built that budget, laid it out in January 15. We stayed pretty steady with the capital allocation.
So 55% of that is being directed towards our three core focus areas, 15% of that is then split between the emerging areas in Uinta and East Shale with the remainder going to the remainder of the asset. So the capital allocation within the portfolio really hasn't changed throughout the year.
We're going to stay disciplined to what we've laid out. Thanks for the question.
Juan Jarrah
Yes, that's great to hear. Appreciate that, that's all I had.
Operator
Thank you. Next question is from David Popovich at CIBC.
Your line is open.
David Popovich
Yes, thanks guys. I just wanted to follow-up on realized pricing.
I think in your commentary you said that with marketing settlement that you guys realized in the first quarter you're expecting a 15% increase in realized oil pricing, I guess, does that WTI neutral -- does that reflect a improvement in the differential, like, how should we be thinking about the 15% improvement in realized pricing throughout the remainder of the year?
Brad Borggard
Hey, Dave, it's Brad. I can try and handle that one.
So it's based on the forward curve as of right now. So the forward curve would imply for Q2 a bit better U.S.
dollar WTI and then also Canadian dollar WTI pricing. So it reflects basically sort of 61 and change U.S.
dollar WTI and about a $0.75 - $1 for Q2, and then basically take your differential off of that to get to that 15% improvement at the -- on the realized overall corporate price.
David Popovich
Okay. So that's not contingent on any change in like the LSB or a UHC differential throughout the remainder of the year?
Craig Bryksa
No. So the LSB, obviously, part of the dips have been sort of traded and settled for Q2 already.
So, we have some confidence in where the dip is going to settle out. We have probably less confidence on WTI, because obviously that's still just trading, and that's going to be based on whatever the market does between now and the end of June.
But when you look at our projection, it basically implies a little bit wider dip, but it incorporates in the improvement in WTI prices on a net basis get you to that 15% corporate improvement. So, just to give you a sense, Q1 WTI was 54.90 and Q2 based on the time we updated our script model was like 61.50 type of range.
David Popovich
Great, thanks a lot.
Operator
Thank you. And at this time, we have no other questions.
I would like to turn the call back over to Craig.
Craig Bryksa
Thanks everyone for joining our call today. If you have any questions that weren't answered, you can reach out to our Investor Relations team at your convenience.
Operator
Thank you, sir. Crescent Point's Investor Relations department can be reached at 1-855-767-6923.
Thank you, and have a good day.