Veren Inc (CPG) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen. My name is Paul and I will be your conference operator today. At this time I would like to welcome everyone to Crescent Point Energy's second-quarter 2016 conference call.

(Operator Instructions)

This conference call is being recorded today and will also be webcast on Crescent Point's website, but may not be recorded or rebroadcast without the express 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 June 30, 2016, were announced this morning and are available on Crescent Point's website at www.crescentpointenergy.com and on the SEDAR and EDGAR websites.

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 website, the SEDAR website, the EDGAR website or by contacting Crescent Point Energy.

Management also calls your attention to the forward-looking information and non-GAAP measures sections of the press release issued earlier today. I would now like to turn the call over to Mr. Scott Saxberg, President and CEO. Please go ahead, Mr. Saxberg.

Thank you, operator. I would like to welcome everybody to our second-quarter conference call for 2016. With me is Ken LaMonte, Chief Financial Officer; Neil Smith, Chief Operating Officer; and Trent Stangl, Senior Vice President of Investor Relations and Communications.

I will start off of with a quick overview of the quarter and first half achievements, Neil will discuss our operational highlights and Ken will speak to our financial highlights. We are very happy to report that Crescent Point delivered another solid quarter with daily average production of 167,218 BOEs per day, representing an increase of 10% over our second quarter 2015. We are on track to meet or exceed our production guidance of 165,000 BOEs per day and plan to exit the year with more than 165,000 BOEs per day.

As you may recall, our strong Q1 production allowed us to shift approximately CAD100 million of capital from first half of 2016 to second half. This capital shift enabled us to take advantage of lower cost, protect our balance sheet, and improve our positioning for 2017. As a result of the shift, we spent CAD250 million less in Q2 this year than last year.

As planned in 2016, capital perimeter drilling activity has since resumed during the third quarter with 18 rigs currently active. Another highlight during the first half of the year was our continued reductions in both our capital cost and operating expense. Our operating expenses are on track to achieve a CAD50 million of savings or CAD0.85 per BOE in comparison to our initial budget of 2016

During second quarter we generated funds flow in excess of our dividend and capital expenditures of approximately CAD280 million. We used this portion of this excess cash flow after the quarter to fund two acquisitions, with the remainder going towards debt reduction. Our two recent acquisitions are aligned with our strategy of focusing on our core resource plays.

We strategically acquired land and production within our Flat Lake resource play as well as low-declined conventional water-flood assets in southeast Saskatchewan. To further increase our focus we also signed a letter of intent to dispose of non-core assets in northwest Alberta for approximately CAD31 million. These acquisitions provided us with a significant number of high-quality drilling locations for future production and reserve growth.

Our Flat Lake acquisition has approximately 300 net internally identified drilling locations across multiple zones and increases our drilling inventory in the area by 30% to approximately 1,300 locations. This acquisition also helps solidify our land position in the area for future water-flood in the Torquay and Ratcliffe zones. We are very excited about our long-term potential in Flat Lake area and throughout each of our resource plays.

However, we are maintaining our CAD950 million budget at this time. We plan to review our capital program as our production guidance later this year -- as well as our production guidance later this year.

For the second half of 2016 we remain focused on living within cash flow to protect our balance sheet, execute our long-term growth objectives. These objectives include our water-flood initiatives, new technology advancements and our step-out programs.

Before I hand things over to Neil to discuss our operational highlights, I would like to thank our employees for their hard work in delivering another successful quarter and first half of 2016.

Okay, great. Thanks, Scott. During the second quarter we reduced our drilling activity, not only because of annual spring breakup conditions but because of our decision to move approximately CAD100 million of drilling capital to the second half of the year. Our ability to shift this capital was driven by our strong first-quarter production performance and should enable us to take advantage of reduced costs and any new potential improvements in commodity prices.

During second quarter we continued to expand the economic boundaries of the Viewfield Bakken play with the drilling of another step-out well. In the core of the Viewfield Bakken play we advanced our water-flood and received technical approval from the Government of Saskatchewan for our second unit, the [Innes] unit. We're targeting to receive full approval for this unit by early 2017 and the two remaining core areas units by the end of 2018.

This approval is another significant milestone in the development of our water-flood strategy within all our core resource plays. Our new water-flood technology initiatives are also continuing to deliver strong results. We have been testing multiple stage segregated strings, a new proprietary technology to improve water-flood distribution in the reservoir.

Initial pilots in our Viewfield Bakken play have allowed for three times the amount of water injectivity without any corresponding increase in the percentage of water produced. Increased water injectivity is expected to help manage reservoir pressure, potentially leading to lower decline rates and improved ultimate recoveries.

In our emerging growth Flat Lake area, we continue to expand boundaries of the multi-zone resource play. We drilled anther step-out well during the quarter and have five additional step-out wells planned for the remainder of this year. Over the last several years our Flat Lake step-out program has added over 300 gross sections of high-quality internal identified drilling locations to our drilling inventory.

In the Uinta Basin we are increasing our efficiencies and learning more about the Basin. We have decreased the number of drilling days in our vertical program to seven in comparison to 14 during 2013. Differentials have continue to narrow and our operating costs have fallen from over [CAD]13 in 2014 to $8.15 this year. We continue to incorporate our recently interpreted seismic and core data into our 2016 horizontal drilling program, which commenced during the quarter.

Given the success of our recent horizontal wells and the improved efficiencies we've achieved in the play, we are considering drilling up to six horizontal wells this year, which is up from our original plans of three. For the remainder of this year, we will continue to test new technologies and ideas, expand and improve our water-flood programs and develop our plays. Our focus on advancing our resource plays during this low oil price environment provides us with long-term competitive advantage in the areas that we operate and enhance our long-term growth.

We look forward to a successful second half and remain well on track to achieve our year-end targets. Before handing things over to Ken, I would like to recognize and thank all of our employees, both in Calgary and especially our field staff out in the field, for their hard work in delivering another great quarter. Ken?

Thanks, Neil. During the second quarter Crescent Point generated fund flow from operations of CAD404 million, or CAD0.79 per share. This was supported by strong netbacks of CAD31.22 per BOE relative to average selling prices of CAD42.45. The Company once again benefited from its conservative hedging program and its high-quality, high-netback asset base. In the quarter we generated approximately CAD280 million of excess funds flow over and above our second-quarter capital expenditures and our dividends.

Subsequent to the quarter, as Scott mentioned, we entered into acquisitions and dispositions agreements for a total net consideration of CAD212 million, which will show up on our third-quarter financials. Our balance sheet and financial flexibility remain strong with approximately CAD1.4 billion of unutilized credit capacity as of June 30, 2016, which does not reflect our recent acquisitions.

We were also active in the quarter on the hedging front as we continue to take advantage of the recent volatility on oil prices. During the second quarter and into the third quarter we significantly increase our 2016 and 2017 hedge volumes. We added approximately 7,000 barrels a day of oil hedges for the balance of 2016 and 5,750 barrels a day of oil hedges for 2017. We currently have 45% of our 2016 oil production hedged at approximately CAD75 per barrel and 29% of our first half of 2017 oil production at approximately CAD68 per barrel.

As Scott mentioned, we remain committed to maintaining a strong financial position and will continue to focus on living within our cash flow to protect our balance sheet and our current production levels. I will now hand things back over to Scott.

Great. Thanks, Ken. In summary, obviously we had a great first half of the year.

When I reflect back, we have never missed a quarter in the history of our Company. I think the original -- or the start of this year and the beat in Q1 with further beat in Q2 really are additive to that reflection when you look back on the last 15 years and I think you can translate that into that we're going to beat our numbers here heading into the second half of this year we are well positioned for that.

When you look at the success we're having in our water-floods, the amount of technology that we are adding and creating on our water-floods in the Viewfield and Shaunavon, how well they've performed, our step-out drilling in Flat Lake and how well that is performed, our new drilling in Uinta and our first early indications in there and where that's well performed. I think when you look at our track record and you look at these last two quarters and you look forward, we are in a very strong position to meet or exceed our current guidance and exceed our exit guidance so far.

Our budget includes CAD75 million of those strategic growth initiatives. That's created a lot of long-term value in new drilling in technology and we are excited about those results. We will look again to revisit our budget in September. We are just starting the front start of our budget process and we will look at maybe adding some more long-term initiatives to follow up on that success at the end of this year.

Another key highlight, I think, is the fact that we delayed our capital program in Q2 and pushed it into Q3 and we've had a lot of wet weather here in the last, I think, May, June, early July. I think that has really actually benefited us that we did move that capital into Q3. We are fortunate on that end and we're back up and running with 18 rigs.

I think just the highlight of the fact that we had a significant amount of excess cash flow of CAD280 million, and I think in the past I don't know if we've had many quarters with that amount of excess cash flow and I think there's just more to come over time as commodity prices improve. At this point I would love to turn it back to the operator for questions from members of the investment community. Thanks.

Thank you.

(Operator Instructions)

Nima Billou, Veritas Investment.

Thank you. Good afternoon, or good morning for you guys.

Just a quick question. You provide great detail around the excess funds flow and the payout. I just wanted to probe some of the assumptions behind it in your presentation on 2017. How come for 2017 with a higher commodity price -- I know part of it is explained by hedging gains rolling off, but there's only CAD200 million of excess. When I look at your cash dividend, the CapEx you've disclosed, that slide suggests funds flow of about CAD1.2 billion on an annual basis to come up with CAD200 million over cash dividends and CapEx. Is it because of OpEx is heading higher, that it's spread out over a few number of barrels? I just want to get a sense -- what's the OpEx assumption behind it? And why is the funds flow diminishing from 2016 in the higher commodity price?

I think you touched on it at the beginning. It's mainly the roll off of our hedges and the fact that our hedging price achieved in 2016 is greater than our hedges in 2017. Obviously we are hedging into a downward market over the last -- whatever -- two years. That's the biggest impact.

Our OpEx has continually been going down, so if you look at Q1, Q2 we are CAD10.50 a barrel or something; and we're actually projecting a slightly higher cost in the second half of the year, OpEx -- mainly seasonal stuff, operational staff -- and being conservative because we did a couple transactions -- the legacy transaction last year; and we've basically just got a full year of history with that acquisition and their cost base. We've driven it down but we don't really have a full annualized history of legacy. And then we are just being conservative on that cost initiative.

This forecast for 2017 is basically the same OpEx assumption from 2016, so we would expect, in this kind of price environment, if it stays at CAD45, CAD50, we'll continue to see those OpEx come down from what we budgeted here. But the main driver of what you are seeing and the difference in that cash flow is the difference in the hedge book effect.

I do think you are being conservative, I will be honest. I think you're going to be better than that once the real numbers come out.

One of the things on the OpEx side is that SaskPower is bumping their rates by 5% and power is about CAD100 million of our CAD700 million of OpEx. So different than Alberta -- Alberta guys are getting the benefit of lower gas prices and lower OpEx because of that power generation, whereas Saskatchewan is embarking on some climate change initiatives like wind power and coal sequestration projects and hydro that are bumping up their power costs. We are still in discussions as industry and they're asking for a rate increase through the public. It hasn't been accepted yet for 2017, but we are anticipating that in these forecasts.

Got you. No, I appreciate you guys have a very good handle on the granular details. That's very good.

The other question I have for you, something I've been noticing on certain trend lines: when you look at your production mix, it's not big but it will have an impact on your pricing. NGLs are becoming a far more important part of the mix. Where are you drilling? And also in natural gas -- I'm assuming it's a liquid rich -- where are you directing your drilling dollars that NGL, for instance, is doubled over the prior-year quarter? What play is driving this growth in nat gas and growth in NGL?

That was just -- we had built a gas flow line from our Viewfield Bakken project to the [seat] facility, which basically extracts the ethane out of the gas, and that's why you see that one-time bump in those products. We're taking advantage of the pricing in there. We have the capability to flip back and forth with the propane and the ethane to take advantage of price, so our volumes on those byproducts will fluctuate depending on where we are getting the best price. That was a facilities long-term project that we implemented in fourth quarter of last year.

That's where you would have seen -- and we've, even through this time period, we've pulled some out and put some back in as far as propane or ethane, even fluctuating in between first quarter and second quarter and heading even into third quarter. There will be a little bit of noise but it's small volume relative to our overall mix. If you're seeing that, that's the main driver. All of our plays are oil plays with basically just associated gas. We haven't drilled a gas well -- well, we might have drilled a -- I know we drilled gas wells in 2003.

I'm well aware of the mix. I didn't know there was that much associated gas and NGLs coming out of the Bakken. I know in the US they have high e-content gas from their Bakken properties. I just didn't envision it on the Canadian side and it's --

It's 15%. It's the same mix, 15%. We had the opportunity to pull it out of the mix. I don't know, Neil, if you want to make any more comments.

That's right. That's the main thing. It's an ethane extraction plant that's a third-party plant that we have taken our gas to. The majority of our oil in liquids still is over 90% and the growth is mainly on the oil side. That's where the bulk of the value is.

Thank you. One final question I have.

And you guys have gone into detail before, but I want to reiterate it: CAD950 million -- I've come to the same conclusion in terms of a maintenance level of capital for your 165,000 barrels. I think that's reasonable. The question I have, again -- can you run through what WTI price increase and how much extra capital would be associated in the growth? Just a rule of thumb? A CAD5 increase will lead to another CAD100 million (technical difficulty) production by 3%? You put out those types of estimates before, so can you run through what sort of oil price increase and how much capital dollars and what production growth that would increase? That's all my questions.

If you reflect back, our original budget, CAD950 million, was based on CAD35 WTI; and so that's where that excess cash in our budgeting comes from. On a price level, even in this price environment, in the CAD40s, I think where we would add capital would be just to expand upon our long-term plays, which are just a bit -- it's more riskier production, so we are not -- and that capital would come towards the end of the year, which really would not affect this year's production, but obviously affect longer-term upside into the Company. Then next year we have the drop in our hedge cash flow coming off. The CAD50 and CAD950 million capital budget gives us that smaller excess cash flow that we, again, we'd look to either with acquisitions or bump our long-term drilling and water-flood and injector conversions.

Every CAD1 change in WTI is about CAD50 million of increased cash flow for us. We would then look at taking that cash and either paying down debt would probably be our first step. Second step, again, those long-term initiatives, and then acquisitions. We're just in the budget phase of this year and looking at, at some point, with the drop in costs that we have, the significant drop in costs and the economics and the returns, you can see in our corporate presentation the payouts that we have are in the one- to two-year payout in this kind of price environment and cost environment.

At some point we are going to decide to get after it and bump CapEx in 2017 to grow production and have a higher exit. We target 5% to 6% growth with a couple percent changes -- or 2% to 5% changes through acquisitions on top of that. We try to target on a base case 10% to 12% per-year growth with a combination of the drilling and acquisitions with that excess. I really think, once we get up over CAD55 to CAD60, you can start to push more capital in those price environments and look to start to grow. I think the oil industry is probably in that realm is CAD60 or greater when you start to look at more significant growth. I would say we would be in our moderate range of growth in that CAD50 to CAD60 range.

I don't know, Neil, if you want to -- or Ken, if you want to maybe add to that, or Trent?

I think if you take a look back into a more normalized oil price environment, if you target that 1% to 3% yield and then another 5% to 6% growth, inorganic, combined with 1% to 3% accretive acquisitions -- some time periods a little more heavy on the acquisitions; sometimes some periods a little bit higher growth on the organic side -- but targeting that overall 10% to 12% overall growth. It doesn't take much of a move in oil prices before you can start to put a little bit more capital towards some of these longer-term programs that we are working on, particularly as you look into Uinta with the horizontals, the water-flood at Viewfield Bakken, and then the Radcliffe and the Torquay at Flat Lake.

When we get more cost certainty on the Uinta, next five, six well program, relative to the rates and productivity that we are seeing there, we've really proved up the Flat Lake side with our cost structure. You start to think, with CAD50-plus WTI into late 2017 we should be adding capital to grow in advance of that and being a bit more aggressive than just trying to stay flat into 2017. Those are some of the things that we are contemplating and discussing in our upcoming budgeting process, which is basically getting kick-started here in the next couple of weeks.

At the end of the day right now, even in this price environment we are making money. Most of our drilling is paying out in under two years under the current pricing. Even when oil was (technical difficulty) our projects are profitable. We are being disciplined currently to live within our cash flow from dividend, capital, and our acquisitions. With numbers that Scott's talking about, we can step up some of our (technical difficulties) once we start seeing some strengthening in the commodity pricing.

Thank you very much. Appreciate it.

(Operator Instructions)

There are no further questions registered at this time. I would now like to turn the meeting back to Mr. Saxberg.

Great. Thank you very much. Thanks, everybody, for participating in our Q2 2016 conference call.

Thank you, ladies and gentlemen, for participating in Crescent Point Energy's 2016 second-quarter conference call. If you have more questions you can call Crescent Point's Investor Relations Department at 1-855-767-6923. Thank you and have a good day.