Baytex Energy Corp (BTE) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Baytex Energy Corporation First Quarter 2012 Results Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Brian Ector, Vice President, Investor Relations. Please, go ahead, Mr. Ector.

Thank you. Good morning, everyone. Again, my name is Brian Ector. I'm the Vice President of Investor Relations for Baytex Energy. I will be hosting this morning's conference call. With me on the call today are Ray Chan, Executive Chairman, and as of today our interim Chief Executive Officer, and Derek Aylesworth, our Chief Financial Officer.

The format for this conference call will go like this. First, Derek will provide some commentary on what was another very strong quarter for Baytex. Second, Ray will discuss the departure of Anthony Marino that was announced this morning. And lastly we will open the call for questions. While listening, please keep in mind that some of our remarks will contain certain forward-looking statements within the meaning of applicable securities laws. I would refer all listeners to our advisory regarding forward-looking statements contained in today's press release. Derek?

Thanks, Brian. Let me provide you with a few of the highlights from the first quarter. We generated record quarterly production of 53,433 boe per day during the first quarter and remain on track to meet our full year guidance of between 53,500 to 54,500 boe per day. On a year over year basis our production was up 14%. Our funds from operations totaled CAD142 million or CAD1.20 per basic share. On a year over year basis, our funds from operations were up 25%. Our payout ratio net to our dividend reinvestment plan remain strong at 39% and our balance sheet remained in excellent shape with a debt to funds from operations ratio based on the trailing 12 months of about 1.2 times.

As we have previously disclosed, subsequent to the end of the first quarter we entered into an agreement to sell the non-operated portion of our North Dakota assets for gross proceeds of $311 million. This transaction is scheduled to close later this month. Assuming all of the proceeds are debt reduction, pro forma total monetary debt as of March 31, 2012 would be approximately CAD380 million which represents the debt to funds from operations ratio based on the trailing 12 months of 0.7 times.

Two additional points I would like to make -- first, we continue to actively hedge our exposure to commodity prices and foreign exchange rates. At this time, we have established forward contracts for 2012 on 38% of our WTI exposure, 24% of our heavy oil differential exposure, 18% of our natural gas exposure and 28% of our exposure to currency movements between the Canadian and US dollars.

Lastly, with respect to heavy oil differentials, subsequent to the end of the first quarter, we have witnessed a much improved market for heavy oil pricing. At this time, the prompt WCS differential for WTI is approximately 16% with a forward strip suggesting approximately 20% for the balance of the year. This certainly compares favorably to the 30% plus differentials we were experiencing in March and April.

That concludes my Q1 comments.

Thanks, Derek. I'm sure many of you on the call today have had dealings with Ray during his long tenure here at Baytex. But for those who are not as familiar, I wanted to provide a brief background on Ray's work experience. Ray joined Baytex as Senior Vice President, Chief Financial Officer, and a Director in October 1998. He was the founding Chief Executive Officer of Baytex when the Company converted to an income trust in September 2003. He was appointed to his current position as Executive Chairman in January 2009. Under his leadership as Chief Executive Officer, Baytex delivered top tier performance amongst all energy trusts and set a solid foundation for a successful growth and income strategy. As Executive Chairman, Ray has been focusing on strategic issues, has worked closely with management in the continued delivery of superior returns to Baytex's shareholders. Ray?

Thank you, Brian. I guess with that introduction that clarifies that I'm the oldest guy in the room. I'm sure that you're all aware now that Baytex announced this morning that Tony Marino, our President and Chief Executive Officer is leaving the Company. Mr. Marino has served Baytex since 2004. On behalf of the Board of Directors of the Company, I would like to thank him for his numerous contributions during his tenure and wish him success in his future endeavors.

Mr. Marino will assist as necessary to facilitate an effective leadership transition. As Brian mentioned, with Tony's departure, I will assume the additional duties of Chief Executive Officer on an interim basis. The Board of Directors of Baytex will immediately commence a search for a new president and Chief Executive Officer.

Baytex recently reported yet another record year of production, cash flow and reserves growth for fiscal 2011. As well as reporting today strong operating and financial results for the first quarter of 2012. This management change will have no impact on our 2012 business plan and the Company is confident in achieving its capital and production guidance for this year and continues to execute its growth and income strategy. It will also have no impact on a longer range five year operating plan as we are likewise confident in our carefully conceived development plans for our current prospects. Baytex has an excellent asset base, a best in class balance sheet, and a talented management team to lead our dedicated employees in execution of this business plan.

This is clearly a significant change for Baytex. It is business as usual for us here and we are confident that an exceptional President and CEO will be identified to lead Baytex to continued financial and operating success.

Thank you, Ray, for those comments. At this time, Operator, we would like to open the lines for any questions.

(Operator Instructions) The first question is from Patrick Bryden from Scotiabank. Please, go ahead.

Good morning, gentlemen.

Good morning, Patrick.

Tony obviously was well valued in the market for his execution capabilities and leadership qualities and I guess market reaction to his departure is fairly negative today. So, to the extent you are comfortable and can appropriately address this, could you please elaborate on why the parting of the ways and what you think it in your view means for Baytex? Thanks.

Thanks, Patrick. I can tell you that the departure of Tony is a mutually agreeable decision. The reason for it to happen is that there was a disagreement between our CEO and the rest of our Board as to the long-term growth strategy of this Company. While we're fortunate enough to have a well defined and multiyear development inventory in our existing asset base, we never stopped to consider additional ways to further enhance the long-term prospects of Baytex. We're all relying on our objective in making Baytex the benchmark growth and income investment vehicle for many years to come. I'm sure all of you would agree it is paramount that the entire Company, led by a unified Board, including the CEO have to be on the same page when it comes to making important strategic decisions. Therefore, we, including Tony, determined that the change had to be made in this regard.

I appreciate that. I guess just a final question from me. Are there any financial costs associated with the departure that you can quantify for us or otherwise deem material or immaterial? Thanks.

Patrick, the key event today clearly is the departure of our CEO. I think the conversation that goes with the departure, number one, would not be a material event when it comes to the size of Baytex and secondly as you all know the executive compensation disclosure is a very -- is done under a very prescribed format and details and Tony has worked with this Company for a long time, including the first five plus months of this year.

So, he will be paid the salary, the benefits, the short-term performance bonus, his entitlement under our long-term incentive plan as well as considerations with regard to the cessation of employment all together. It would not be best practice for me to disclose them on a piecemeal basis. So, it should be reported in the required form and detail in our 2012 information circular.

Okay. That's great. I understand. And good luck with the next chapter.

Thank you very much, Patrick.

Thank you. The next question is from Eric Busslinger from Marret. Please, go ahead.

Hi. Maybe just elaborate on the disagreement in growth strategy? If the operating plan is in place for 2012 and no changes to the long-term plan to 2015 onward, would there be any first off financing or changes in how you'd finance the Company, whether it would be using equity as currency for M&A or changes in the debt structure of the Company? And then secondly maybe just some elaboration on that growth strategy initiative and how that would've differed versus the existing plan of Baytex? Is it related to acceleration of drilling of inventory? Prospects outside the existing Company or some other difference of opinion? Thanks for your time.

You were coming a little soft over the phone line here so I'm going to try to make sure that I answer all your questions. If you would forgive me, I really cannot go into great detail in discussing the strategic differences between Tony and the rest of the Board. I feel that is a very important piece of information and it would compromise our competitive advantage if we were to go into great detail and discuss what actually happened. I'm able and prepared to tell you that the operating plans of Baytex although they're always fluid, we are well on our way in executing what we have been marketing to The Street.

We wanted to be a growth and income investment vehicle. I think you would hear, you have been hearing from Tony, from Brian, from Derek, maybe even from myself as CEO of the Company that we want to grow the production by anywhere from 5% to 10% and want to deliver a consistent and hopefully growing inventory dividend stream along with that story. So, combining the two, we hope to be able to generate double digit long-term return for shareholders. And that part has not changed and will not change. That is still the business model of this Company. Where we differ is not so much on how to develop our current asset base at the pace of spending at CEO, et cetera. I think we have a very well defined five year plan that could sustain our total double digit return that we see we can deliver to the shareholders.

Rather our disagreements center on certain growth aspects and ambition that we can undertake for this Company. Like I said before, although we have very well defined and understood inventories over the next number of years, asset management and the Board of Directors of this Company, we are not going to sit on our laurels and not try to improve this Company each and every day. So, when we get to that situation that we unfortunately were stuck in a place that we just could not reconcile our difference.

Now, there's always two ways to do things. You can always try to work it out and a lot of companies especially those that I experience and the kind of success that we have would like to not rock the boat and maybe just do it the safe way and try to work out differences over time. That would also be my choice but unfortunately that option wasn't really available to us. In that regard we feel that it is very important for us to be marching in the same direction. We feel that a change out would be necessary and that again is a mutually agreeable decision and we will manage the Baytex story as you have seen it the last number of years whether it was Jeremiah Tanner as the CEO or during Tony's and we will go forward and hopefully we will also be able to add to this story certain pieces that we don't have right now that we feel would further that investment horizon and the attractiveness of Baytex as a stock to own.

Great. Thank you.

Thank you. The next question is from [Rebecca Pente] from the Calgary Herald. Please, go ahead.

I think my question was answered there. I was interested in more details on why Anthony Marino has departed. I guess maybe I can ask a different one though. Derek, you mentioned the differential issue and that differentials have come in compared with the last couple of months. Can you provide any outlook on what you see for Western Canada Select versus WTI? I know Baytex was looking at rail a while ago.

Sure. I can. I think I already alluded to what the market is telling us. The market is telling us the forward strip is a 20% expectation for the differential for the second half of the year. We believe that the heavy oil market is obviously impacted by access to market pipeline capacity and ultimately demand for the product by refining capacity. Both of those are in a bit of a fluid state at the moment. In other words there have been a couple of refinery outages. There have been some discussion about expansion of takeaway capacity. So, we believe that the market is absolutely going to improve over the longer-term. In the near-term we think it's going to continue to be a volatile market and hence our hedging activities.

We've been quite active in doing what we can do to manage the Company's exposure to volatility in heavy oil pricing both through financial and physical forward contracts. You alluded to the rail. We were one of the early movers in terms of getting our product to market using alternative methods, including transportation by rail. At the moment we've got about 20% of our heavy oil volumes contracted to be delivered by rail. We're working with other counterparties to expand that takeaway capacity by that outlet. I think that answers your question.

Thank you.

Thank you. The next question is from Kyle Preston from National Bank. Please, go ahead.

Thanks a lot, guys. Just a couple more questions here on the Tony departure here. I'm just wondering if there's any concerns about other further executive departures with him leaving and second question here, just relating to your strategy, any change on your view with respect to expansion in the US. We just saw you sell some of your North Dakota acreage and also your focus on the commodity mix, heavy oil versus light oil versus even gas?

Okay. I guess you fired off three questions for me here. I'm sorry, what was the very first one?

Other executive changes.

Okay. In terms of other executive changes for those that have been working in Calgary for a long time, you know that this is a very competitive town for anything, whether it's a piece of pizza during lunch time or executive employees that you could hire. I don't think we're in any different position in that regard. However, I do believe that we have a very dedicated and loyal team of managers running the operations of Baytex for the last number of years. Hopefully we have an effective compensation scheme that would help us retain the services of those individuals. At this particular time, I really cannot predict whether the departure of Tony would necessarily slow down or accelerate that kind of attrition. I think we just have to deal with it and I'm confident that with what we have as the future as an employer that we will have no trouble landing on the right people. As far as expansion opportunities and our most recent disposition, frankly we saw the opportunity as one in making sure that our balance sheet is one of the best in this business so that we can sustain our operations regardless of the volatility in the capital market. That's number one. So, the attractiveness of getting in CAD300 million in this market today should not be over looked.

Also I think we saw this as an opportunity to focus on our spending plans. As we said in the press release, the properties that were disposed -- that we are disposing, I guess because we haven't closed the deal yet are all off lower working interest and often on operators' nature. So, they actually were not allocated a material amount of capital expenditures in our 2012 capital budget. So, in this regard I think we can further concentrate and focus our spending in the most efficient way. So, in a lot of ways it's a deal that brings different levels of advantages to the Company both on a balance sheet and the operating side of things.

We are not trying to shrink down our US operations. Quite to the contrary. As you know, we have been ramping up in our Denver up with the intention that we can participate with growing a business South of the border. To me, that is a natural place for a Canadian Company to look first and that's not to say that we won't go outside of the North American boundary but I think in order to compare opportunities we need to understand both domestic, US opportunities before we can go about and step outside of this continent. So, our US business will continue to be a very important part of the Baytex story.

Lastly, just on the commodity mix, obviously you've been very, very focused on heavy oil and moving a little bit more into light oil, any shift on that strategy or view?

I think the commodity mix decision -- I can tell you that we definitely prefer oil over gas and that is something that Baytex has been implementing for many years. So, we're having to sort of change our mind because of the recent turmoil in the natural gas market. We've always chosen to be an oil producer. Now, when it comes to whether it should be heavy oil or light oil, honestly I don't think we make a big distinction when we screen our opportunities. To me it's always nice to have a bit of diversification where we look at each and every project based on its prospects and based on its perceived rate of return. So, if it happens to be heavy oil, great, because we're one of the best heavy oil operators in this basin but if it happens to be light oil I think we can handle that as well. So, I don't really think we have a preconceived mix of percentages that we want to strive for.

Okay. Thank you.

Thank you. The next question is from Gordon Tait from BMO Capital Markets. Please, go ahead.

Good morning. I just have one question maybe to follow-up on the strategy. You've answered most of them and then I have a couple of questions on the operations. I guess just following up on the strategic direction, it sounds even though you sold those non-op properties and you didn't really deploy the cash specifically anywhere you're still committed to developing tight or light oil in conjunction with your heavy oil. Would you agree with that?

Absolutely, Gordon. I think again the disposition opportunity was just giving us so much other flexibility as a Company in today's environment. So, it's a deal that we just wanted to do. It has nothing to do with our ranking of development of tight oil, light oil versus the expansion or development of heavy oil. As my previous answer said we look at each and every project on the basis of merit and I can say that we do prefer oil but after that we basically look at which is the best project to put our money into.

Okay. Now just then maybe flipping to operations. With the price of oil, although it's come down it's still at CAD96, we have a very high oil price and you've recently liberated CAD300 million or so. I'm wondering about the pace of development, that you plan your first 15 well commercial CSS module at Cliffdale sometime this year, with oil prices if they stay above CAD95 or well into the CAD90s with that extra cash do you foresee that you might speed up the pace of the development of these modules at Seal?

I think at this present time we wouldn't be changing that operating plan. We have a well conceived five year development plan when it comes to the thermal development of Seal. In conjunction we'll still be doing many years of cold flow development as you know. So, this -- both the departure of Tony and the sale of the assets do not change our plan in that regard. Now, you're going to say -- Geez, you have so much money. You've got such a clean balance sheet. You can easily double or whatever, accelerate those developments. While that's a true statement, you know my history with this Company in the past. To me, if you just set the bar higher as a base, then you just turn the treadmill speed a little bit higher as well.

In this regard, as I said in the very beginning, we are committed to executing a growth and income strategy that investors can come to rely on a good return and a good growth for a Company of our size for the long-term. So, where there may be opportunities to acceleration, even in that regard it may not be that quick because you've got a lot of government regulations, permitting issues you have to work through but nonetheless I do feel that steady as she goes so to speak is the way we prefer to do things. Now having said that obviously if the opportunity is there we would step out and do something entirely different and I guess unfortunately that's where we tripped up in terms of our debate and discussion with our just departed CEO.

Okay. Do you have a sense of a well defined you said five year plan at Seal how many modules you would have in place say five years from now?

I'm going to look to Brian and Derek to help me out on this because they've been on the road and I don't want to tell an inconsistent story here.

Sure. Gordon, it's Brian. The five year plan, the long range plan that we've laid out which is really our 2012 budget year and then the five year period, 2013 through 2017 would see us drilling a total of 185 thermal wells. The initial ten well module -- commercial module started off in mid-December of last year. We were seaming a number of those wells in the first quarter of this year. We put in place the regulatory applications for the next 15 well module. That we hope to have in place and construction started here in the fourth quarter of 2012 and carrying into 2013. So, that will give us a total of 25 wells. But during that total period, that six year period you would see us drilling or certainly targeting around that 185 thermal well level.

Alright. And then I also noticed that you're doing more work at Reno. It looks like the IP rates are not as high as at Seal -- I understand that seam isn't as thick. But what do the rates of return there look like? I presume there's a lower cost to develop those?

The cost -- it's a little deeper drilling it at Reno, Gordon. The wells we're drilling, the cold multilaterals at Seal the depth is probably below 600 meters. The depth there at Reno is probably around 700 meters. So, there is an incremental cost to provide drilling depth. But we're probably with these multilaterals we're drilling, CAD2.5 million to CAD2.7 million per well down at Reno. As you mentioned, the pay thickness for the Bluesky formation which is what we're targeting, at Reno it is a little thinner, probably eight to nine meters of thickness versus what we see up at Seal. So, we do expect to see lower rates on average coming out of the Reno properties and I would say the rates we're seeing to date have certainly been consistent if not slightly better than our initial expectations when we acquired it over a year ago.

Thanks.

Thank you. The next question is from Kate Minyard from JPMorgan. Please, go ahead.

Hi. Good morning. Thanks very much for taking my questions. Just very quickly on the CEO search, do you have a sense as to how long it might take? And are you looking both internally and externally? Is it an extremely comprehensive search?

Yes. Very much so. It is going to be a comprehensive search. We will be engaging a search firm to help us in this regard and we will consider all candidates. As far as timing is concerned we'll take the necessary time. I have done this job before as you know. And I have no really any good timeline here. It's not my intention to be here forever or on a permanent basis. That's why we're mounting this search. But it doesn't have to be done next month or in a certain restricted time period. But we'll take the time that is necessary to locate the right individual and frankly I think the brand that Baytex has developed both in the operating market and in the capital market, I'm hoping this will be viewed as a very attractive opportunity for high quality executives.

Great. Then you also mentioned that the change doesn't have any impact on the 2012 business plan and in addition to that you stressed that the long-term plan and strategy are very much intact. But as we approach the end of 2012, if the position isn't filled, is there any risk to 2013 and what 2013 might hold or is that defined enough that it could sort of run on autopilot even if the slot isn't filled in a permanent manner?

I don't think you have to worry about beyond this year because the game plan and the bold strategy of Baytex is one that is put together by the Board with the input of Tony. The history of this Company will tell you that we're always very good in meeting expectations and in our mind we pretty much have a lot of things we want to do for 2013 are well defined within our current asset base. So, lacking a sort of a game changer type of transaction for this Company we actually would be cutting a budget, would likely will be spending a little bit more money. This is all kind of based on commodity prices staying in a cooperative range. We'll be shooting for a high single digit production growth. We'll be shooting for a stable and hopefully chance to grow a dividend stream also. If you're buying based on those reasons there's absolutely no reason for you to feel any different today versus the last month because the business model will keep on going the way that you have understood it to be.

Great. And then just finally from me, to the extent you can comment on it, did Tony Marino have a non-compete agreement?

There is really no non-compete agreement although Tony would understand that as Chief Executive Officer of a public Company of our nature there are certain fiduciary responsibilities that he needs to maintain. In that regard, I'm not worried. We parted on good terms. Tony is a gentlemen. I've worked with this guy for eight years. And so in that regard I'm not worried about that.

Thank you so much. Appreciate it.

Thank you for your question.

Thank you. (Operator Instructions) The next question is from Robert Mark from MacDougall. Please, go ahead.

Hi, guys. I was just wondering, Ray, if you could elaborate about what the exact responsibilities you held as the executive chairman and whether they were exclusive from the role of the CEO?

Rob, you're asking me what I've been doing the past three years? Is that the question? I'm not being facetious here. I just want to make sure I understand.

Yes. Just what the difference is between you as an Executive Chairman as opposed to a typical Chairman and whether or not that overlapped or was exclusive from Tony's role in the CEO?

Yes. As you know I'm actually the person that brought Tony into this Company back in 2004 through a search firm process. So, I hired Tony into this Company as Chief Operating Officer and at that time I promised him -- Tony, do a good job for us and my position is open. Low and behold I think obviously he demonstrated to us that he is a man worthy of the promotion.

So, we did a very orderly transition, first moved him to be the President of the Company for calendar 2008 and then I conceded the CEO position and he became President and CEO in 2009. Along the way we have also been working with the same Board of Directors and they feel that because of my history and my experience in the public market and my history with the Company I could help out at least in the beginning when Tony was getting his feet wet as the first assignment as a public Company CEO to manage both the strategic direction of the Company and also the dealings with capital markets, et cetera.

So, therefore I was given the title of Executive Chairman. Over the last three plus years I actually have a very good working relationship with Tony mainly because we worked together before for four, five years before the change out. So, we have a very good understanding as to when he wants to come to me and ask a question to get my input before a decision is made or when to take a decision to the Board. In that regard, I actually keep an office at the Baytex premises here and Tony and I know each other's cell phone by heart. In fact it's sort of on our favorite list.

And we talk any given time of the day, any given day of the month. Whenever he feels that he needs to bounce something off, I will be there. If I happen to be in the office, meet with him face to face, look at a presentation that he's mulling over, I would do that. I definitely would say that I have been more engaged in the strategic discussions and the more important issues of the Company than a non-Executive Chairman but I also understand that a CEO has to establish his own following and his own identity. So, in that regard hopefully I have struck the right balance over the last three years. I think given the relationship Tony and I have over the last three plus years, I feel that we are very happy with the coexistence of these two offices.

Okay. Thanks. Best of luck.

Thank you.

Thank you. There are no further questions on the telephone lines at this time. I'd like to turn the meeting back over to Mr. Ector.

Thank you, Operator. There was one question on the webcast asking -- the question was -- Why did Anthony Marino leave the Company? I do think we have addressed that question here this morning, this afternoon with Ray. With that, Ray, any closing comments?

No. I guess I think I said this before when answering some of your questions. To me it is business as usual. If you like what you got from Baytex as an investor over the last number of years, there's no reason to change today with this news because I can assure you that the business plan of Baytex has not changed and we will continue to position ourselves as one of the best growth and income investment vehicles that you can find in the energy sector. With that, thank you very much for everyone's participation and we look forward to talking to you on the road or in our offices and looking forward to reporting to you again results in the second quarter.

Thank you, Operator. That concludes the call.

Thank you. The conference has now ended. Please disconnect your lines at this time. And thank you for your participation.