Baytex Energy Corp (BTE) 2017 Q1 法說會逐字稿

Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Baytex Energy Corp. First Quarter Conference Call. (Operator Instructions) .

Brian Ector, Senior Vice President, Capital Markets and Public Affairs, you may begin your conference.

All right. Thank you, Sharon. Good morning, ladies and gentlemen, and thank you for joining us today to discuss our First Quarter 2017 Financial and Operating Results.

With me today are Ed LaFehr, our President and newly appointed Chief Executive Officer; 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 of applicable securities laws. I refer you to our advisories regarding forward-looking statements, oil and gas information and non-GAAP financial measures. All dollar amounts referenced in our remarks are in Canadian dollars unless otherwise specified.

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

Thanks, Brian, and good morning, everyone. Today marks my first official day as Chief Executive Officer of Baytex, and I'm pleased to begin that role by discussing our strong first quarter results.

When we spoke on our conference call last quarter, I outlined 2 priorities for Baytex as we make our way through 2017. The first is to arrest our production declines through a highly efficient capital development program in both the Eagle Ford and Canada, and the second is managing our debt position. These priorities will remain at the forefront of our strategy as we move forward over the next 12 to 24 months and look to reestablish Baytex as a leading intermediate company that is growth oriented.

We're off to a great start in 2017 with production in Q1 of 69,300 barrels of oil equivalent per day, up 6% over the fourth quarter and trending toward the high end of our full year guidance range. Our funds from operation also increased over the fourth quarter at $81 million.

Reflective of our strong first quarter operating results and planned activity level for the balance of the year, we are tightening our 2017 production guidance range to 68,000 to 70,000 barrels of oil equivalent per day. At the midpoint, this is an increase of 1.5%. We are now projecting organic production growth of 5% to 6% exit 2017 over exit 2016 as compared to 3% to 4% previously. We are also tightening our CapEx range for 2017 to $325 million to $350 million.

Overall, I am very excited about the operational momentum that we are building. In the Eagle Ford, production increased 8% to 36,000 barrels of oil equivalent per day, and we maintained a consistent pace of development with 5 drilling rigs and 2 frac crews operating on our lands.

During the quarter, we commenced production from 33 gross wells and established 30-day initial production rates of about 1,250 barrels of oil equivalent per day, with 1 pad in the oil window of our Longhorn acreage producing at 1,450 barrels of oil equivalent per day. We are just simply very pleased with our performance in the start of 2017.

And it's great to see record-low well costs continue during the first quarter with wells being drilled, completed and equipped for approximately USD 4.5 million, down 20% from USD 5.6 million in Q1 2016. These record-low well costs were achieved despite increasing the number of frac stages and proppant loading. In the first quarter, we increased the effective number of frac stages per well to 28, and the amount of proppant per completed flipped to 1,800 pounds.

Turning to Canada, we executed our first quarter drilling program with strong initial results in both Peace River and Lloydminster. In Peace River, we are successfully integrating the acquisition which closed on January 20, 2017. At the time of closing, these assets were producing approximately 3,000 barrels of oil equivalent per day. And since that time, production has increased by 13% as we initiated Phase 1 of our plan to bring 3,000 barrels a day of shut-in production back online.

We restarted 29 wells in the quarter at a total cost of $500,000, which resulted in an incremental 400 barrels of oil equivalent per day of production and capital efficiencies of $1,250 per BOE per day. Phase 2 will include additional gas conservation of vapor recovery systems that are expected to be implemented over the next 6 to 18 months.

We're also progressing actions to reduce operating costs. We expect to achieve 15% to 20% reduction in unit operating cost on the acquired assets this year and anticipate further improvements in 2018 and beyond. We drilled 4 multilateral horizontal wells in the Peace River area during the quarter, 2 of which have established a 30-day initial production rate, first well at 614 barrels a day and the second at 489 barrels per day. The cost to drill, complete and equip a multilateral well at Peace River is approximately $2.5 million, which is an 11% improvement from the wells that were drilled in the third quarter of 2015.

At Lloydminster, we drilled 13 net wells during the quarter. We're now applying our multilateral drilling and production techniques adopted from our Peace River region, which we expect will lead to a 25% improvement in individual well capital efficiencies compared to single well -- a single lateral horizontal wells.

First quarter drilling in Lloydminster included 8 multilateral horizontal wells at Soda Lake. Depending on the overall length and completion, budgeted well costs range from $700,000 to $900,000. Through efficient operational execution and lower service costs, the cost to drill, complete and equip our first 6 multilateral wells have come in approximately 15% below budget with 30-day initial production rates meeting expectations at an average of 110 barrels of oil equivalent per day.

Let's shift now to our financial results and balance sheet. We generated funds from operations of $81 million or $0.35 per share in Q1 2017, as compared to $77 million or $0.36 per share in Q4 2016. The increase in FFO is attributed to higher production in commodity prices, offset by lower realized hedging gains.

Our operating netback, excluding hedging, improved to $19.42 per BOE in the first quarter from $17.62 per BOE in the fourth quarter.

Our net debt totaled $1.85 billion at March 31, 2017 as compared to $1.78 billion at December 31, 2016. The increase primarily relates to the Peace River acquisition that closed in January 2017 and was funded with a $115 million equity issue that closed December 2016.

We continue to maintain strong financial liquidity with our $575 million U.S. dollar revolving credit facilities 1/3 drawn and our first meaningful long-term note maturity in 2021. With our strategies to spend within funds flow, we expect this liquidity position to remain stable going forward, and we will continue to look for opportunities to delever the balance sheet.

Our revolving credit facilities, which currently mature in June 2019 are covenant based and do not require annual or semiannual reviews. We are well within our financial covenants on these facilities, and our senior secured debt-to-bank EBITDA ratio as at March 31, 2017, was 0.7 to 1.0 compared to a maximum permitted ratio of 5.0 to 1.0. And our interest coverage ratio was 4:1 compared to a minimum required ratio of 1.25:1.

With respect to commodity price risk management for 2017, we've entered into hedges on approximately 50% of our net WTI exposure with 10% fixed at a USD 54.46 per barrel and 40% hedge utilizing 3-way collar structures with downside protection at just under $50 a barrel and upside participation to $59 a barrel, WTI. We have also entered into hedges on approximately 38% of our net heavy oil differential exposure and 60% of our net natural gas exposure.

So to conclude, we are extremely pleased with our sequential quarterly growth in production and funds from operations. The combination of increased activity levels and operational execution are generating impressive results across our portfolio. Our acquisition in Peace River is being successfully integrated, with production on these assets increasing and operating cost improvements under way. And I am very pleased to see our organic growth rate increasing, now targeted at 5% to 6% exit rate 2017 to exit rate 2016, up from 3% to 4% that we announced previously in December. These first quarter results demonstrate our ability to generate strong funds from operations and grow production in today's crude oil price environment.

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

(Operator Instructions) Okay. Your first question comes from Oscar -- from David Popowich from CIBC.

Your first question comes from Thomas Matthews from AltaCorp Capital.

I just had a quick question on your Eagle Ford results. So moving up into the oil window, we've seen some of the other operators actually have some pretty good rates from the Austin Chalk part there. And so I didn't notice that you referred specifically to the Chalk. So I'm just wondering if you had any update on some of the Chalk drilling. And of the 1,400 -- I guess 1,400 BOE per day average that you had, just how much would be oil from that production rate?

Right. Very good question. Of the 33 wells we brought on, I think the first point is we've been active in all 4 benches in the Eagle Ford. We've brought on 11, 9, 11 in the lower -- the upper, lower and then the upper. And then only 2 wells in the Austin Chalk were brought on. So it's very light activity set in the Austin Chalk in Q1. But on the other hand, we're very aware in working with the operator on the trend that's breaking open in the northern part of our acreage, where some of the competition had drilled a number of wells to the northeast of us and averaging sort of 2,500 barrels a day, IP30 wells. That trend is coming right across the main Karnes trough fault. South of that fault into our acreage looks extremely attractive, and we permitted 3 wells to be drilled very, very soon. So we and the operator are very encouraged by these results. And there's another operator just north of us. It's basically derisked across the very northern strip of our oil window, if that helps.

No -- yes, that helps a lot. And then the other operator that you're referring to did reference some new completion techniques and just kind of some of the technology being deployed. Are you guys deploying the same thing in the Eagle Ford? You just haven't necessarily talked specifically about it. Or is that a step change that's still to come if that proves to work that you haven't tried yet?

Yes, I would call it operational optimization and testing. Other people are calling it new technology. But we've moved to very tight spacing on 2 of the pads. I think we talked fairly openly about the Medina-Jonas A pad that came on at an average of 1,450 barrels of oil equivalent per day. There's also the Franke-May A pad that looks very exciting to the Northwest, similar sort of rates. Those have both moved to 200-foot stage phasing. So we've gradually over the last 1.5 years moved from 300 to 250 to 200. And there's always optimization of slick water and the types of frac fluids that are being used. But -- and it's important. It's driving performance. So we've got some really, really strong pads up there being developed right now at the -- and I would call it operational optimization and ingenuity rather than straight new technology.

(Operator Instructions) Your next question comes from David Popowich from CIBC.

I wanted to ask about the Eagle Ford results as well. I appreciate the color. Just on another note, it was interesting to see some of the capital efficiency improvements you guys were talking about in Peace River and Lloydminster. I was just wondering if you would comment on improvements in operating costs in those 2 assets as well, operating or any other cash costs. Have you seen any improvements relative to what you would've expected maybe 6 months or 1 year ago?

Right. On the cash cost side of the business, I think we announced our OpEx at $10.28 per barrel. Our guidance was $11 to $12. I think we didn't move that guidance. We're -- but I did say we're driving performance and driving operating improvements across the board. So Rick, our COO, Rick Ramsay, can speak more about the biggest driver we have, which is integrating the Peace River acquisition. We're off to a great start there. And I did say we're coming down 15% to 20%. And he can talk more about the steps we're taking to drive -- that's an example. It will be an example of the kind of things we're doing, but it's a big one. Rick, do you want to discuss that?

Yes. Yes, sure. Thanks. Thanks, Ed. Yes, Ed is accurate. The greatest savings that we're seeing in the Peace River region is on the CL assets that we picked up in late January. And overall, we're going through every category out there, but we're seeing our biggest savings in labor and in our fluid hauling, which are historically our highest components of our operating costs. And really, that's from restructuring, the overall labor force that we've got out there and renegotiating the truck rates for the fluid that we're moving. And overall, we're going to see about a 15% reduction anticipated by the end of the year. And in the future years, we're really going to be relying upon accessing more processing capacity in the CL asset, which is an activity that we're pursuing right now. So future years will become driven by increasing the volumes as well as getting the overall costs lower.

Does that help, Dave?

Yes, I guess, I was also -- you guys reported a bit of an uptick in your OpEx in the Canadian assets just because you guys have been engaged in so much work-over activity. So when you talk about the 15%, 20% reduction, is that relative to Q1 levels or relative to kind of what you were expecting last year before you had all of this -- you were undergoing all this work-over activity?

No, that will be CL only. The 15% to 20% refers to the acquired assets and what we're doing to drive those costs down. So OpEx, I think I'd say with the number we've reported, which is $10.28, and then our guidance of $11 to $12, I think we split the Canadian OpEx out. That should be transparent to you as well. And we're probably being conservative, but I would stay with all of our guidance numbers on that.

Your next question comes from Hanif Mamdani from PHN.

Ed, Hanif here. Can you talk a little bit more about the deleveraging options available, the likely time frame to conduct this exercise? Management on this call has talked about deleveraging for every quarter that I can remember with little to show for it. So can you be more specific, Ed? Under your helm, what is the confidence level that you'll actually get the needle to move on the leverage in the coming quarters?

Right. Well, good question, Hanif, and we talked about this. I've been fairly open with many of our investors. And let me just start by saying we have a lot of liquidity. I want everyone to understand there's no urgency to have a below-market sort of a movement in the M&A world. But we've got strong liquidity. Our first maturity is 2021, as you and others would know very well. So it's not as if we have a wall of debt staring at us in the next 12 months. On the other hand, I do have a sense of urgency. And I stated I've got 2 priorities coming in. The first one was to arrest the production decline and to make the business model work at today's prices so that we can be competitive in a $50 to $60 macro world, not a $90 world. And we've -- I talked about that. We're on a really good footing in terms of making progress there. On the second point, though, around debt, it is a priority and it, for me, means months rather than years. I would like to see steps taken over the next 12 to 18 months, where we materially change our financial structure. But -- and let me just say a little bit more about the options we have. We sold some noncore assets last year. We've got more we could sell this year. The market, we'd like to pop a little bit to do that in terms of gas or oil prices. We over-equitized the acquisition we did at Peace River. We're performing really well. We used some of our excess funds from operations to pay down some debt last year. And then lastly comes the M&A opportunities we have. It's not a panic situation at the company. We have a very patient board. On the other hand, they have a sense of urgency, as I do, coming in to make some changes. But we don't typically talk about M&A openly. And it's a part of our normal ongoing business, but I would just say, Hanif, that it's going to be more of a priority and more of a sense of urgency to do something over the course of the next months. I know that's still generic, but that's all we can say at this point.

And based on the improved operating performance in the Eagle Ford, you're confident that there is good demand for that asset? Can the Eagle Ford be sold in pieces, Ed? Is it quite fungible in that respect? Can you talk a little bit about -- without getting into specific M&A opportunities in the works, can you talk a little bit about monetization of the Eagle Ford and how that might work?

Sure. Well, the Eagle Ford is one of the highest-quality assets really, in the world and in North America. It really is a truly exceptional asset, and you're seeing that in the growth we just demonstrated basically with the same CapEx levels and tweaking the operations. We grew 8% quarter-on-quarter and costs are at the very, very low levels. So we're throwing off a lot of free cash flow in that asset and we're generating growth in the asset. So it is one of these rare sort of areas within the Karnes trough, the center of the core part of Eagle Ford and, in fact, in all of Texas, all of North America, as I said. And of course, it would be very attractive to many, many people out there, but it's also extraordinarily attractive to us. And we're in a place where the strip price is sitting at $50 for 5 years. And we believe more strongly that in the future, in the very near term, we believe prices will rebound, but it's very fungible, Hanif, to answer your question. We can do lots of different things. We have great assets. We can do lots of different things in Canada. We can do lots of different things in the Eagle Ford. There are no constraints to what we could do other than we want to maximize value for our shareholders.

(Operator Instructions) Your next question comes from Harp Singh from Harp Investments.

So I just wanted a little bit of color on Peace River and the pipeline. So if you can just talk a little bit about that.

Well, in Peace River, we acquired the asset from Murphy that has an 87-kilometer egress pipeline, if that's maybe what you're referring to.

Yes, that's what I'm referring to.

Yes. It's a long-distance pipeline sized at 55,000 barrels a day, and it's moving maybe half that capacity or less today. But when the basin is producing at its full potential, which it could in the future, that pipeline will become very, very important to the egress in the area. The thing that it gives us is now we have the opportunity to maximize our netbacks through 3 egress points. We have -- we rail 5,000 barrels today out of Napa, which is just next door to Harmon Valley. We truck 10,000 barrels a day over to [Nipizi]. And now we're pipelining 3,000 to 4,000 barrels a day, and we're pipelining for others. Shell now, CNQ comes through this pipeline as well as Penn West. So we're all reliant on this pipeline. It's an important piece of infrastructure, although it's probably the first piece of real export line or egress pipe that we operate as a company. So we're looking at it today. It's very commercially advantaged and strategic for us. But it may also be of high value to other folks. We're not in any sort of a process right now to monetize it, but it's being discussed in the company.

At this time, I will turn the call over to the presenters.

All right. Thank you very much, Sharon, and thank you, everyone, for joining us on our Q1 conference call. And I look forward to chatting in a few months for our future results.

This concludes today's conference call. You may now disconnect.