Baytex Energy Corp (BTE) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Baytex Energy Corp. third quarter results conference call. Please be advised this call is being recorded.

I will now turn the meeting over to Mr. Brian Ector, Senior Vice President to Capital Markets and Public Affairs. Please go ahead, sir.

Thank you, John. Good morning, ladies and gentlemen, and thank you for joining us today to discuss our 2016 third quarter financial and operating results. With me today are Jim Bowzer our Chief Executive Officer, Ed LaFehr our President, Rod Gray our Chief Financial Officer, and Rick Ramsay, our Chief Operating Officer.

While listening please keep in mind that some of our remarks will contain forward-looking statements within the meaning ever applicable security laws. I refer you to our advsories regarding forward-looking statements, non-GAAP financial measures and oil and gas information contained in today's press release. All referenced in our remarks are in Canadian dollars unless otherwise specified.

And I would now like to turn the call over to Jim.

Thanks, Brian, and good morning, everyone.

Our operating results for the third quarter are consistent with our expectations and demonstrate the commitment we have made during this downturn to deploy capital efficiency, reduce costs. in all facets of our business and maintain strong levels of financial liquidity.

First I would like to review some of the highlights for our third quarter. We generated production of 67,000 BOEs per day and delivered funds from operations of CAD72 million or CAD0.34 per share. Our funds from operation significantly exceeded our capital expenditures for the quarter and the year-to-date.

We reduced our net debt by CAD79 million during the quarter and by CAD186 million through the first nine months of 2016. We reduced our operating expenses by 12% to CAD9.31 per BOE in the first nine months of 2016 compared to CAD10.55 per BOE in the same period of 2015. We realized an operating netback of CAD13.91 per BOE, which is largely unchanged from Q2.

The Eagle Ford generated an operating netback of CAD20.24 per BOE while our Canadian operations delivered an operating netback of CAD7.59 per BOE. I will now expand on our operating results for the quarter. Our emphasis on deploying capital efficiently was evident during the the third quarter as we continued to curtail our level of capital spending focused all development activity in the Eagle Ford.

In the third quarter our expiration and development exemptions totaled CAD40 million as compared to CAD36 million in the second quarter and CAD82 million in the first quarter. In the Eagle Ford our pace of completions through the nine months of 2016 was down 21% compared to the first nine months of 2015.

This reduced pace of completions combined with the previously-announced divestiture of our operated assets in the Eagle Ford contributed to production averaging 33,550 BOEs per day during the third quarter as compared to 38,300 BOEs a day in the second quarter. We have continued to advance our completion activity in the Eagle Ford with increased frac stages and profit usage.

During the third quarter we averaged two to three drilling rigs and one to two frac crews on our lands. We have participated in the drilling of 18 gross or 5.7 net wells in the Eagle Ford and compensationed production from 30 gross or 8.8 net wells during the quarter.

Of the 30 wells that commenced production during the third quarter 15 wells have been producing for more than 30 days an have established an average 30 day initial production rate of approximately 1,350 BOEs per day. In Canada we produced 33,600 BOEs per day as compared to 31,700 BOEs per day in the second quarter. This represents a 6% increase as we realize the full benefit of restoring previously shut-in production volumes.

Now I will talk about our success in reducing cost structure while maintaining our safety and efficiency in our operations. Costs in the Eagle Ford have continued to decrease with wells now being drilled, completed, and equipped for approximately $5.2 million per well compared to $8.2 million in late 2014.

The prevailing commodity price environment has not supported drilling on our Canadian assets in 2016. However, we continue to build -- actively build on the 20% cost reductions we achieved in 2015 and strengthen the size and quality of our prospect inventory. And as I mentioned at the outset, operating expense have been reduced by 12% to CAD9.31 per BOE in the first nine months of 2016.

These costs reduction reflect a lower overall cost structure in Candia combined with our lower cost Eagle Ford assets representing a larger percentage of our total production. Transportation expenses are also down averaging CAD1.05 per BOE in the first nine months of 2016 compared to CAD1.81 per BOE for the same period in 2015.

General and administrative expenses for the third quarter totaled CAD12 million, down from CAD14 million the same period last year. The decrease is attributable to reductions in staffing levels combined with cost savings initiatives. Now for just a little more color on our financial liquidity. As you will recall we have targeted our capital expenditures to approximate funds from to minimize additional bank borrowings.

In the third quarter our funds from operations totaled CAD72 million as compared to capital expenditures of CAD40 million and in the first nine months of 2016 our funds from operations totaled CAD199 million as compared to capital expenditures of CAD157 million. So I'm very pleased how we have achieved this objective of balancing our spending profile with our funds from operations through the first nine months of the year in what has really been a pretty volatile pricing environment.

Importantly, our net debt, which includes our bank loan, our long-term notes and working capital efficiency has decreased to CAD1.86 billion at September 30, 2016, down from CAD2.05 billion at December 31, 2015. With respect to our financial covenants, our senior secured debt-to-bank EBITDA ratio at September 30, 2016 was 0.79 to one and that's versus a maximum permitted ratio of five to one.

And our interest coverage ratio was 3.6 to one versus a minimum required ratio of 1.25 to one. So we are in very good shape with respect to our covenants. I would also like to update you on some of our minor non-core asset sales. On July 27, 2016 we disclosed the previously-announced disposition of the operated assets in the Eagle Ford for a net proceeds of approximately CAD55 million.

At the time of the disposition these assets were producing about 1000 BOEs per day and included reserves of 1.3 million BOEs on a proved plus probable basis. In addition, we have disposed of 650 BOE per day of certain non-core assets in Canada. We do not anticipate any further asset sales at this time.

Now with respect to our hedging activities for the fourth quarter of 2016 we are entered into hedges on about 45% of our net WTI exposure with 15% of that fixed at $63.79 per barrel and 30% hedged using a three-way option structure. This three-way option structure provides us with downside protection to about $50 per barrel and upside participation to about $60 per barrel.

We have also entered into on approximately 41% of our WCS heavy oil differential exposure and 65% of our natural gas exposure. For 2017 we have entered into hedges on 44% of our net WTI exposure using a three-way option structure that provides us with a downside protection at about $47 per barrel and upside participation to approximately $59 per barrel.

We have also entered into hedges on 24% of our net WCS oil exposure and 49% of our net natural gas exposure. A complete listing of our financial derivative contracts can be found in note 15 to our third quarter financial statements.

Now I will step into the plans for the remainder of 2016 along with our updated guidance. We are increasing our full year 2016 production guidance to 69,000 BOEs to 70,000 BOEs per day and this is different from our previous range of 67,000 BOEs to 69,000 BOEs per day on the back of continued strong operating results and planned activity levels through the end of the year.

We anticipate that our full year 2016 expiration and development capital expenditures will be toward the high-end of our range of CAD200 million to CAD225 million, so our production is tracking ahead of expectations with capital spending consistent with our base plan both of which I'm very pleased. And importantly at this level of spending we expect our funds from operations to exceed the capital expenditures during the full year 2016.

In the Eagle Ford we are currently running four rigs and two completion crews on our lands and we expect about this level of activity to continue into 2017. We have also commenced preliminary work in advance of a 2017 development program in Canada, which includes lease construction and surveying.

We are in the process of setting our 2017 capital budget. The details of which are expected to be released, as usual in our December meeting following the approval of our Board of Directors. And now as we -- in summary as we entered 2016 we were pretty firm about our plans and laid out certain strategic objectives to guide us through this commodity price downturn, which included deploying our capital efficiently, continuing to efficacy cost reduction across all facets of our organization and maintaining strong levels of financial liquidity.

Our third quarter results were reflective of these strategic objectives and I'm particularly pleased that we have reduced our net debt by CAD186 million so far this year. We remain well-positioned to benefit from a continued recovery in crude oil prices with strong capital efficiencies across our three core resource plays.

I will now ask the operator to open the call for questions, please.

Thank you. (Operator Instructions). Our first question is Greg Pardy from RBC Capital Markets. Please go ahead.

Yes. Thanks. Good morning. Jim, I just want to come back to the Eagle Ford for a minute. I know you have indicated really no change in that four rig count that you're going to continue. How many rigs do you think you would need to run to offset the clients in Eagle Ford in 2017?

We would be probably in that range of -- the best way to kind of look at it, Greg, is the number of net wells we bring on in a year and it's probably -- that's probably in the range of 28 to 30 net wells and that put you, probably, close to a four rig program with a couple of frac crews as we continue through time and that should approximate a fairly stable production rate.

Okay. So with what you're saying then is it's actually looking pretty good in terms of what the year-over-year numbers would look like in the Eagle Ford based upon the program you have laid out.

Yes. And keep in mind we haven't finalized our 2017 budget yet. We're right in the process of working on that, but I do expect it to be at the level that we're at today and if prices get back into the 50's, the entire industry knows OPEC has got a pretty important meeting coming up here at the end of the month.

If there's some benefit from that it could go up a little bit, but we'll take a good view and be flexible like we have been in the previous two years to guide our capital expenditures around our FFO for the year, but in general I don't see this program being reduced at this stage with where prices are at.

Okay. Okay. And then fourth quarter I mean you're -- you have kind of underspent what we thought and you pointed that out. You spent closer to CAD70 million or so in the fourth quarter. Where is most of that activity going to be focused on and to some extent is this getting a little bit more aggressive in the year-end?

Not really, Greg. It's more of how the scheduling has worked out. In the second quarter we had, at times, one to zero frac crews on our land. Just the way the scheduling worked and the way that it was being implemented and in the fourth quarter as a result of that we had several more wells on our land that were -- remained uncompleted and pretty much this entire quarter we have had two frac crews on our lands the whole time and actually for a portion of it we have had three.

So it's really just a reflection of the lumpiness of how we spend throughout a year. So it's a just a little -- it was a little less in the second quarter and in particular the second quarter. The third quarter was stepped up just a little bit in terms of the number of completions and the fourth quarter we ended up having the frac crews rotate around our lands and we're going to have them pretty much all quarter so.

Okay.

That's really what it's reflective of.

Okay. That helps. Thanks very much.

I will say that we did get down to about three rigs and part of the time two rigs during the second and third quarter so we are also back up to the steady four rigs as we have stepped up the pace.

Keep in mind we made a pretty significant cut, as you well know, we spent I think I quoted CAD82 million in the first quarter and that was down substantially so we were running close to six rigs on our land at the very beginning of this year and then when oil prices hit into the high 20's and low 30's there you remember we adjusted guidance and took a pretty big cut in our Eagle Ford capital as well during that time and then it's coming back a little bit now as prices have improved into the high 40's and low 50's

Okay. Maybe just as a follow-up but shifting gears on the Canadian stuff I think in the past I have talked what you need north of -- well north of $50 or so. Obviously, the exchange rate figures into that but without saying across the lines here on what your 2017 budget looks like how price-sensitive will be your activity on the Canadian stuff in 2017 or is it more a matter that hey, pricing -- or costs are so much better that it makes sense for us at $50?

It's -- you summed up for us pretty much right there, Greg. It's getting to the point where it does make sense for us at $50 and higher and as we enter the year we'll just take a good hard look at that and we are making plans, we have permits and surveys in place so if need be we can hit the ground running as we enter 2017 with a program there.

Prices hold up here as we go through the end of we'll probably end up doing something like that and have a Canadian program again as we go forward, but the jury is still out, like I said a couple important meetings coming up here in our industry, at least one I know of by the end of the month and we'll see how that holds forward and we'll be flexible as we need to be.

Okay. Thanks very much.

Thank you, Greg.

Thank you. (Operator Instructions). And there are no further questions for the moment. I'll turn the meeting back over to Mr. Ector. Please go ahead, sir.

All right. Thanks, John, and thanks everyone for participating in our third quarter results conference call. Have a great day.

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