Baytex Energy Corp (BTE) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Baytex Energy Corp second quarter 2013 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, Jade. Good morning, ladies and gentlemen. Thank you for joining us today to discuss our second-quarter financial and operating results. With me today are James Bowzer, President and Chief Executive Officer; Derek Aylesworth, Chief Financial Officer; and Marty Proctor, our Chief Operating Officer.

While listening, please keep in mind that some of our remarks will contain forward-looking statements within the meaning of applicable securities laws. I refer you to our advisories regarding forward-looking statements and non-GAAP financial measures contained in today's press release. I would now like to turn the call over to Jim.

Thanks, Brian, and good morning, everyone. During the second quarter, we generated production of 58,200 BOEs per day, an increase of 12% over the first quarter of this year. This is the highest quarterly production rate in Company history. Our strong operating results combined with an improving pricing environment for heavy oil resulted in a 53% increase in our funds from operations versus the first quarter to CAD155.8 million or CAD1.26 per basic share. This represents the second highest quarterly FFO in Company history. Our operating net factor in the second quarter of CAD31.71 for BOE represented in 27% increase over the first quarter. We expect continued strong operating and financial results in the second half of this year. In recognition of this, we are tightening our production guidance range for 2013 to 57,000 to 58,000 BOEs per day, up from our previously disclosed range of 56,000 to 58,000 BOEs per day.

In the first half of 2013, our capital spending has progressed as planned in our key development areas; spending for exploration and development activities totaled CAD178 million during the second quarter, with year-to-date spending of CAD344 million. About 70% of our capital spending to date has been directed toward drilling and completion activities with 30% being equipment and construction related, which does include our thermal expenditures. Consistent with our previous guidance, exploration and development expenditures for 2013 are forecast to be approximately CAD520 million. We are very pleased with the execution of our capital program through the first six months of this year.

To summarize, we drilled 17 multi-lateral wells at Peace River during the second quarter bringing the year-to-date drilling to 23 wells. From this year's program we have achieved average 30-day peak production rates of approximately 700 barrels per day. We drilled 63 net wells in our Lloydminster area, year to date, with a 98% success rate. We completed one successful thermal infield well at our Kerrobert's pilot project, which added incremental production of approximately 400 barrels per day. We continued to progress our thermal development with facility construction now under way at both our Cliffdale 15-well CSS module and are Gemini SAGD pilot project.

With respect to our balance sheet, we ended the quarter with total monetary debt of CAD771 million, which represents a debt-to-funds from operations ratio of 1.2 times based on second quarter 2013 FFO annualized. At the end of the quarter, we had CAD625 million in undrawn credit facilities with no long-term debt maturities until 2021. With our capital spending weighted towards the first half of the year and assuming continued strength in production levels and commodity prices, we expect the total debt levels will reduce over the balance of 2013. Production from our Peace River area properties averaged approximately 23,000 barrels per day in the second quarter, an increase of 22% over the first quarter. We drilled 23 total cold horizontal producers in the first half and plan to drill approximately 14 more wells in the second half.

In the Cliffdale area, successful operations continued on our 10-well CSS module with production averaging approximately 400 barrels per day. During the second quarter, the initial Cliffdale pilot well completed its fifth steaming cycle and was returned to production in mid June. Current production from the 10-well module is approximately 700 barrels per day. Facility construction at our new Cliffdale 15-well CSS module is well underway and drilling operations commenced in the second quarter. We expect to complete construction of the plant and commence cold production in the fourth quarter. First cycle steaming of the wells is expected to occur in the first half of 2014.

At Lloydminster, production averaged approximately 19,500 barrels per day during the second quarter, which was up just over 5% from the first quarter. Drilling activity in our Lloydminster region is usually pretty quiet during the second quarter due to spring breakup. We drilled 3.6 net oil wells which brings our year-to-date total drilling to 63.3 net wells. As you may recall, we drilled one thermal infill well at our Kerrobert SAGD project during the first quarter. This well commenced production in the second quarter adding an incremental production of 400 barrels per day. We are pleased with the performance of this well and plan to drill one more thermal infill well along with one SAGD well pair at Kerrobert during the second half of this year. In total, we expect to drill approximately 50 net wells in the Lloydminster area in the remainder of 2013.

At Angling Lake, construction of the Gemini SAGD pilot project facilities commenced in late in the second quarter, construction of the drilling pad is complete, mechanical crews have been mobilized and major equipment is being moved on site. We expect to drill the SAGD well pair during the third quarter and are on track for steaming late this year or in early 2014. In our Bakken/Three Forks development in North Dakota, production averaged 3,100 barrels per day, which is up 5% from the first quarter. We drilled 8 gross or 4.5 net horizontal oil wells and fracture stimulated 10 gross or 5.1 net wells. During the second quarter, nine operated wells on 1280-acre spacing established average 30-day peak rates of approximately 360 barrels per day. We plan to drill approximately two gross or one net well in North Dakota during the remainder of 2013.

I want to spend a few minutes on heavy oil pricing and our marketing efforts. I think most everyone is aware that the benchmark price for our heavy oil in Canada is Western Canadian Select, or WCS, which trades at a discount to WTI. This discount, during the second quarter, as measured by the price differential between WTI and WCS averaged 20%. This is a significant improvement from the 34% price differential in the first quarter. As heavy oil differentials narrowed, our realized oil and NGL price of CAD66 per barrel increase by 14% from the first quarter. WCS and Mayan crudes have recently been trading closer to their transportation differentials. We are optimistic that this will continue as refinery demand grows in the US Midwest and transformation capacity expands to the US Gulf Coast and northeast through both pipeline projects and increase rail deliveries. The forward market for the second half of 2013 suggests a WCS to WTI differential of approximately 20%.

We have taken advantage of the recent strength in WTI prices and a weaker Canadian dollar to add to our hedge portfolio. For the second half of 2013, we have entered into hedges on approximately 63% of our WTI exposure at a weighted-average price of just over $99 per barrel; 42% of our exposure to WCS heavy oil differentials, through a combination of long-term physical supply contract and rail delivery; 54% of our natural gas prices exposures; and 51% of our exposure to currency movements between the US and Canadian dollars. As part of our hedging program, we are focused on opportunities to further mitigate the volatility in WCS price differentials by transporting crude oil to higher value markets by rail. During the second quarter, approximately 17,000 barrels per day of our heavy oil volumes were delivered to market by rail as compared to 7,500 barrels per day for full-year 2012. For the third quarter, we expect to deliver approximately 20,000 barrels per day of our heavy oil volumes by rail and we continue to explore additional opportunities for rail deliveries.

So in summary, our operational execution remains on track. We expect continued strong operating and financial results in the second half of this year, and we are confident in achieving our full-year production guidance. We remain committed to a growth and income model and its three fundamental principles -- delivering organic production growth, paying a meaningful dividend to our shareholders, and maintaining capital discipline. We will continue to manage our business with a focus on creating shareholder value through effective capital allocation and quality project execution. We maintain a conservative balance sheet with low debt levels and adequate liquidities to support our growth and income model.

So with that, I will conclude my formal remarks and ask the operator to please open the call now for questions.

(Operator Instructions)

Mark Friesen, RBC Capital Markets.

Just want to focus on Seal. Obviously, very strong performance from the drilling in the first half. It looks like the wells that have been licensed are on trend with the wells that were drilled in the first half. Is it reasonable to expect similar IP30 rates in that 700 range from the continued drilling program, or does this go into thinner reservoir and return more to the average type curves?

Marty, our Chief Operating Officer, why don't you address that question.

Good morning, Mark. We haven't changed our model for our expectations going forward. We are still anticipating 300 to 700 barrel per day IPs for our new wells there. We have gotten good results, maybe slightly better than that model up until now, or in the upper end of that model. We are anticipating similar results, within that range, going forward. We have got a good inventory for the remainder of this year plus years beyond as well.

Okay. So you see a steady -- you talk about a multi-year drilling inventory, and you see that as being relatively consistent across the years?

Yes.

In terms of quality?

You bet.

I know you summarized your second-half drilling plans in your comments there, Jim, but maybe you could summarize, just very high level, how you expect the corporate overall production rates to remain steady over the second half, or even grow, based on lower spending activity over the second half of the year?

Certainly. As you know and we had projected, our first half was heavily weighted towards increased capital spending, so we are about two-thirds spent through the first part of the year with the remaining one-third of our capital throughout the rest of the year. So, the number of wells, as we quoted, are lower than what they were in the first half of the year. Given those facts, we do expect that the production growth will continue, albeit at probably a lighter pace than what you saw between the first and second quarters.

Okay. Now that you've got back onto that growth trajectory coming out of the weaker Q1 and operations are going well and you have highlighted that you will be repaying some debt on the balance sheet for the second half, is the corporate model looking at acquisition opportunities or asset acquisition opportunities changing at all? Is it becoming, perhaps, more active or are you becoming more aggressive in that area?

Mark, we have been pretty consistent with our comments regarding acquisitions. We have been and continue to look for things that fit our business model and minimize the risk in bringing something new in. That is most easily done by trying to target things in and around our current property base. Secondly, with something that fits our skill sets in terms of execution capabilities. There is no real change in what we have been looking at or targeting overtime, so still looking for kind of the right things to add more of and largely of what we already have.

Okay. That's it for me. Thanks, gentlemen.

Christina Lopez, Macquarie.

It's actually a follow up to Mark's question with respect to production in the back half of the year. In particular, going into next year, we did see some drop of inventory in Q4 of 2012 which led to a drop in inventory volume in Q1. Are you expecting that again in 2014 where you have a lower Q1 and build up to the rest of the year?

Morning, Christina. It's Marty again. You're right. We had a very slow pace of drilling at the end of last year. We expected it to be a bit better and different this year. As Jim said, we spent about two-thirds of our capital in the first half. The second half is going to be pretty measured and more evenly spaced, albeit at a lower total spend than our first half. But we expect, whereas in Q2 we were actually, we had five drilling rigs working in the Peace River area, which of course is responsible for a good part of our capital spend, but it also really contributed to our production growth. We've now tapered that to where we're going to have probably two rigs drilling through most of the remainder of the year, including right up until the end of year. So, we should have some Peace River wells coming on in the first part of 2014, which is a little different than we had last year. I think measured growth through the end of the year and we should be growing into the new year.

Just to clarify, because last year I believe you drilled 15 wells in the Peace River area in that second half of the year, but all of those were actually in the third quarter. This year you will be spreading those out between the two quarters? Am I interpreting that correctly?

Yes, exactly so. That's our intent and that's what we've got scheduled with our drilling rigs.

Then, does that get you a flat production volume from Q4 into Q1 and then keep building again through 2014? Then, in 2014 do you have a more of a consistent spent program or is it still going to be a front-end loaded program? I know that it's early to talk about 2014.

I'd rather not get too specific. All I will do is reinforce what I had said. I think we are going to have fair to modest growth through the end of this year and we expect to be increasing slightly into Q1 2014.

Speaking on rail, moving to 20,000 barrels per day being shipped by rail in the third quarter, can you talk about the difference in pricing that you are receiving right now on rail versus pipe?

It hasn't changed a lot from our previous comments. When we are in kind of this 20%, 22% differential environment, depending on the variety of contracts and we have of the 20,000 barrels per day that we move, there is probably 10 or 11, maybe even 12 separate individual deals. So depending on those, it ranges when we are in this kind of differential environment from CAD2 to CAD4, maybe CAD5 a barrel is the increment you pick up. With the various components, that it isn't all just getting to a higher net-back market. There's the quality discount you save the dealing with this well, so that's kind of the range we are in right now. That's where we are at.

Perfect. Thanks so much for your time.

Travis Wood, TD Securities.

Just a question for the Peace River area. Of the 17 wells you have drilled through Q2, what is that lateral number attached to those 17 wells? Is that the same type of lateral count we can expect on the 14 wells set for the rest of this year?

This is Marty again, Travis. Good morning. We had over 200 laterals with those 17 wells in the second quarter. We expect between 12 and 13 laterals per well going forward, so right in that range. The stuff going for the rest of the year should be quite similar to the first half.

Okay. Thanks. Just expanding on the earlier question on the M&A front, are you thinking of that -- are there any themes that or trends that are you seeing from some of the deal flow that's coming through the office? Do you see more opportunities on the oil sands/thermal type opportunities, or are you more focused on the conventional, whether that be light oil or heavy oil?

Travis, we are seeing, and have been over the past six to nine months maybe, increased number of opportunities. We are looking for things where we can see growth potential within them. It doesn't do us any good to really buy a decline curve, so there is quite a bit of those sort of opportunities out there. We're open to additional acreage or production in and around our areas that leads to more cold drilling in Lloydminster or Peace River. If there was a quality SAGD project, or something like that, that fits our thermal skill set, that would be okay as well.

Okay. Thanks very much.

Derek Weaver, Opticore Capital.

Thanks very much, and congratulations on a nice quarter. I wonder if you could touch on Cliffdale? We've got the fifth steam. You are at 700 barrels a day. Is this meeting your expectations? Through the work on your Cliffdale, have you learned anything that you are going to be applying to your plant that you are building? You start steaming in the first half of 2014. When do you think you are going to see production, like when do you stop the steaming and you start producing?

Okay, Derek, good morning, it's Marty here. I would say, I guess first off, that we are completely satisfied with how the Cliffdale wells are performing. They are pretty bang on with our expectations. You've got to keep in mind that we actually didn't complete all of our steam generation building until the second half of last year. Although we've actually started this Cliffdale project in phases, we had a pilot late 2009. We expanded it, we built some additional steam capacity in late 2011, added the rest of the steam capacity in second half of 2012. When we look at individual well performance, particularly, especially I'd say the first well of our whole commercial project, that first well it initially was a pilot well, it's performing bang on with our modeled expectations. It's ramping up as expected. We are going to see some lumpy performance going forward.

Everything is kind of timed with our steam injections. In the second quarter, we actually had the best well, this oldest well on steam for most of the quarter. It didn't give us much contribution until late in the quarter, but it is really contributing now to our current performance. We are on track there, we're very satisfied. We are learning as we go. That's one of the benefits of going at the measured pace that we are. Further to the end of your question there, we do anticipate steaming on the 15-well module early in 2014. Yes, we have learned from our current program and we think we can do better even with next year. We expect we're going to be on track with that model that we've been talking about all along.

Okay. When would you expect, then, first round of production to come from the new module?

Well, we actually put these wells on cold production for a little bit before we start steam, so we will get a small amount of cold production from those 15 wells probably even beginning late this year. The steam production, we won't see much of it until mid next year. Then it takes a while to ramp up to our peak rates, so we still don't expect peak rates until three or four years after steaming begins. We are anticipating hitting that model as expected.

Thank you very much.

(Operator Instructions)

Gordon Tait, BMO Capital Markets.

Most of my questions have been answered. I just want to go back Seal for a minute because it was a standout. With those IP rates at 700, that looks like it's quite a big leap over where you were last year, second the year before, these 30-day IP rates. Can you maybe talk about what accounts for that difference? Secondly, what rate do you think these wells would be producing at after say 12 months?

Sure, Gordon. This is Jim. There's a few things that contribute to it. It's a little bit better reservoir rock. We've continue to improve our drilling capabilities there in the number of laterals we can get out. I would also throw out that we have also done a better job of really increasing the way that we target these laterals in certain portions of the reservoir. All that has led to what we're seeing today in some of these higher end rates of our portfolio.

Where do you think that these wells would produce, then, say after 12 months on production?

Yes, the first year decline, is that what you are asking?

Yes.

That first year on a new well is in the 50% to 55% range, Gordon, is what they decline out and then stabilize after that.

All right. Then, just quickly on your two steam projects, the 10-well pilot. What are the SOR's you are seeing it Cliffdale, plus on that first well pair you've drilled at Kerrobert?

Right now it's running about 2.6, is our [cumulative] to date. That fluctuates depending on -- it will be a little higher right now because we have put a large load of steam into the most mature well and now it's back on production just as we speak today. That will fluctuate up and down as we go through the project. It starts out early and is expected to average about 3.0 as the target over the life.

And that was for which? That was for Cliffdale?

Yes, that's for the Cliffdale 10-well pilot.

And that is consistent with what you are modeling had forecast?

Yes, it is.

What would you expect at Kerrobert?

The new well pairs are going to be in the range of three or so. We've got a fairly mature project at Kerrobert, so some of the older wells, which have taken steam for a long time, their cumulative steam-oil ratios are a little higher than that. The new SAGD pairs that we drilled over the last couple of years and that we intend to drill in the second half of this year, they will be around three steam-oil ratios.

Okay, thanks.

Mark Warner who is a private investor.

I want to compliment you all for the operations that the Company has been performing, getting the oil out of there. I have called in several times saying that the second leading periodical in the States, Investor's Business Daily, rates Baytex with an extremely poor grade. I have gotten very little response from the Company. If we want to market Baytex and get the most we can for stockholder value, it needs to be corrected. None of the metrics they show, Investor's Business Daily published every day, shows Baytex as actually the lowest of all the energy and exploration companies in North America. I have gotten very little action, if any, on this. Would somebody please answer me directly on this, or may I have Mr. Bowzer please call me off line if possible?

Mark, it is Derek here. I can call you off line after this call if you like. We have spoken a couple of times, Mark, and I have actually talked to that publication that you referred to. We did point out to them miscalculations of some of the ratios that they have reported on Baytex. They did commit to correct them, but the reality is even if they have the correct data, they are an independent publication and their ranking of us versus others, as I said to you on our previous call, if they've got errors in our numbers, they probably got errors in other companies numbers. There's not much we can do about a ranking that had us ranked by independent publication. I'll talk to you after the call, Mark.

Excuse me. May I make another comment please? Derek, my dad used to say, I don't care what the other students in class do. I care about what you do. I know that Baytex spend hundreds of thousands of dollars going around the country promoting Baytex. Now, as soon as an American investor goes on IBD and looks at the stats on Baytex, which are inaccurate, they immediately shut it down. So, what I'm saying is for a few thousand dollars or with a call from perhaps the legal department, this could be corrected. The company uses voiders statistics. It does not do this subjectively. It is objective numbers. It is collectable with the proper amount of effort. I am doing this as an advocate of Baytex, not an enemy of Baytex. I am a shareholder, and it's very important to me. If you all want to be valued at the $50 you ask that you should be valued at, I am humbly suggesting that someone aggressively take action to be sure this is corrected. Not because it is someone's opinion, not because it's their opinion, it's because their figures are totally inaccurate.

Mark, thanks. We appreciate your comments and we will follow up with the publication and I will get back to you after the call.

Okay. Thank you.

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Ector.

Thank you, Jade. Thanks to everyone for participating today in our second-quarter conference call. Have a great day.

Thank you. The conference call has now ended. Please disconnect your lines at this time, and we thank you for your participation.