Veren Inc (VRN) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen. My name is John I will be your conference operator today.

At this time, I would like to welcome everyone to Crescent Point Energy's second-quarter 2015 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session for members of the investment community.

(Operator Instructions)

This conference call is being recorded today and will also be webcast on Crescent Point's website, but may not 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, 2015 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 like to turn the call over to Mr. Scott Saxberg, President and CEO. Please go ahead, sir.

Thank you, operator, I'd like to welcome everybody to our second quarter conference call for 2015. Before opening it up to questions, I'll start with a quick overview of the quarter and first-half achievements and then discuss our decision to lower our dividend. With me is Greg Tisdale, our Chief Financial Officer; Neil Smith, our Chief Operating Officer; and Trent Stangl, our Vice President of Marketing and Investor Relations, who will be available to answer questions during the Q&A period.

Operationally, Crescent Point delivered an excellent quarter and continues to advance all of its core areas. The Company was also successful in proving its financial flexibility in lowering its overall cost structure.

Second-quarter production of 151,500 BOEs per day increased 10% over second-quarter 2014, with strong funds flow of CAD524 million, despite the weak commodity prices. We continue to execute on our cost-saving initiatives and have now realized capital savings of approximately 20% or more in several of our plays. As a result, we have announced a reduction in our second-half capital expenditure guidance by CAD100 million, with no change to our average production guidance of 163,500 BOEs per day.

Our emerging growth assets continue to advance. In the Uinta Basin, we are excited about the early results from our operated horizontal well program, and we have reduced drilling times in horizontal wells from 24 days to 16 days. In Flat Lake, we drilled several step-out wells and continue to extend the boundary of the play. This play is turning out to be a -- getting to be a big play for us.

Financially, we remain strong with no significant near-term debt maturities and over CAD1.7 billion of unutilized credit capacity. During the quarter, we executed our acquisition strategy with the strategic acquisitions of Legacy and Coral Hill. We monitored both companies for several years, and we are deeply familiar with their asset base, the quality of the inventory, and the significant upside potential.

This acquisition provides several strategic benefits. The Legacy acquisition improves our financial position due to the expected accretion of 5% to 9% in 2016. It also increases our inventory of highly economic locations in our core area of southeast Saskatchewan, due to the Midale unconventional play, as well as our other conventional asset. Coral Hill was a small tuck-in acquisition that was also accretive, but up more importantly, it consolidated our position in Swan Hills area and strategically provides us full operatorship and an increased position in the core play.

Finally, I'd like to discuss our decision to lower our dividend to CAD0.10 per month and to suspend our dividend reinvestment and share dividend plans. This is the right decision. Our strategy from day one has been built upon three core principles: an excellent balance sheet, high-quality reserve base with significant upside, and prudent management team.

A decision to lower our monthly dividend to CAD0.10 per month and to suspend our dividend reinvestment plan, again this is the right decision. Given the recent steep declines in oil prices, doing this will protect our balance sheet, gets us to 100% payout, and will enhance our long-term per-share growth for our shareholders. This cut in our dividend highlights our commitment to shareholders and our goal to internally fund our business and not build debt. This is the right thing to do in this extremely low price environment to protect shareholder equity.

The last six weeks have seen a dramatic change in macro environment and a severe reduction in fundamentals for commodity prices. The significant drop in recent spot prices and wider differentials are negatively impacting our realized oil prices by approximately CAD15 a barrel, or approximately 24% for the first half of 2015. For instance, spot price has declined by CAD17 a barrel. Forward strip oil -- forward curve oil prices in 2016 and 2017 have declined by approximately CAD11 and CAD8, limiting our ability to lock in higher oil prices.

Net backs have been further eroded by widening of Canadian heavy and light oil differentials, and NGLs and natural gas prices remain depressed. We considered delaying any dividend decision until the end of 2015; however, the risk of potentially increasing our debt should prices not recover was not something we were comfortable with. This is considered -- this is considerable risk that commodity prices may be lower for longer. This is the right decision to protect our balance sheet and to position as well to finance our growth strategy within our cash when oil prices improve.

We've had another excellent quarter operationally, which further highlights the high-quality nature of our Company and our assets, as well as our ability to lower cost and drive positive economic results in a low-price environment.

Before I open it up to questions, I'd like to thank all of our employees, including our field staff and executive team and our Board of Directors for their hard work through this difficult economic period. We're excited about our future growth, given our top-tier asset base and our increased ability to fund these opportunities internally.

At this point, we're ready to answer questions from the members of the investment community, and I'll pass it back to the operator. Operator?

(Operator Instructions)

Pavan Hoskote from Goldman Sachs.

Thank you a lot. Thanks a lot for the discussion on the dividend cut.

I wanted to follow up on this. Is the dividend cut a catalyst or maybe part of a broader management rethink on strategy and capital allocation? In the last few years, you guys have focused a lot of acquisitions to drive growth. Are you looking to refocus a little bit more on organic growth, or are acquisitions still very much a part -- a key part of your strategy?

Pavan, that's a great question. I think it's the right decision. It protects our balance sheet. It definitely positions us better when things turn around.

And I think the reality is we're maturing as a Company. At our size and scale, we need to fund not only our capital program, but acquisitions more internally. And this cut really increases our access to capital, and that's access to internal capital.

And really sets us up -- we ran our models and our sensitivities around anything above CAD60 oil. We have significant excess cash flow, and that cash flow build increases very dramatically, CAD70, CAD80 price environment.

So even with a moderate return to commodity prices that are significantly lower than they were in the past, we'll have a lot more access to internal cash flow to fund acquisitions, to fund increased capital spend, and grow on a per-share basis more dramatically. And I think that's -- you hit it on the head; it's a real key highlight for us in a maturing of our Company from that perspective. And puts us in a really strong position when things turn around.

Got it. Thank you for that. And you talked about some of your internal modeling, so a follow-up on that. If you assume strip prices and current exchange rates and recent well productivity and cost improvements, how do you see growth, free cash, and dividend payout trending over the next few years?

Under the forward strip right now, we're in that 100% to 110% payout range, depending on your view on cost. And we haven't really -- we're at -- at this time of year, it's only halfway through the year. Obviously, we got about a 25% cost savings, and that was prior to this latest drop in commodity prices.

And so I would anticipate that into next year if this forward strip holds the way it is, that we'd see further cost reductions that would put us in line into the 100% payout fairly reasonably, with not a lot of huge assumptions. And so, hence the reason why we set our dividend policy the way it is.

Obviously, if commodity prices diminished significantly further where we're at today, we will revisit it and maintain our balance integrity and our debt position. So we don't need to see too significant of a commodity price increase from here to see positive cash flow at some point. So that's kind of where I would look at it, out into 2017, that's pretty far out, even at this stage in the cycle.

Got it. And one last unrelated question.

There's obviously a lot of moving parts here in terms of we have seen big changes in commodity prices, exchange rates, and also different piece of productivity and well cost improvements in different areas. So as things stand today, can you rank your top five plays right now? And give us a rough idea in terms of the oil price that we need at the wellhead in each of these areas to add or take away capital.

Okay. I would say our conventional southeast Saskatchewan assets, combined with our Viewfield Bakken assets would be our number one and two; they fight -- in our corporate presentation, we actually have a pretty good slide in there that highlights our payout under, obviously, under engineering price deck -- July price deck. But it gives you a good sense of the ranking.

And in that, it basically speaks through to the Viewfield as number one, I think Conventional is number two. Then I think we go to Shaunavon -- Flat Lake, sorry, and then Shaunavon, number four. Something like that. And so I think across our whole basin, a majority of our companies in Saskatchewan you would see basically all of our plays in there, depending on where you're drilling within each of those fields ranking pretty highly. That is our exercise that we're going to go through in Q4 here for 2016, again a further high grading of those assets and our drilling program, and obviously with costs.

So all of those plays are economic at this current commodity price environment, and I think our last sensitivity, we ran it was below CADD30; we're still economic depending on as costs come off. We've seen enough dramatic drop-in costs to make all these plays economic at this level. Obviously, we're going to be prudent on our capital spending with the forward strip prices that are out there.

Got it. Thank you a lot.

Travis Wood from TD Securities.

Good morning, guys. Can you give us a quick sense of where, given where capital has been through the first half? And where you see production going through the second half of the year, where you see your decline rate, corporate decline rate shaking out?

Okay. Great question.

We're -- we had a great start for to Q2 with breakup happening sooner, so we're ahead of our numbers in Q2, and we're ahead of our numbers in Q3. We're looking at that 72,000 to 74,000 -- 172,000 to 174,000-barrel-a-day range through Q3, Q4, barring any kind of weather and so far into September, October. So we're really well on track on that, which will hit our yearly target of 163,500, and that will set us up for 2016 drilling.

On the decline side, obviously, the pullback in capital from last year, we were originally under commodity price. Of this time last year, we were planning to spend something like CAD2.5 billion in capital. We're now down to CAD1.45 billion in capital, so a pretty significant drop. That has flattened our growth out, which therefore flattens our decline out.

And so I'd put us I think sub 30% decline. We budgeted I think 32% decline, somewhere in there. So I think we're probably ahead of numbers. Again, our waterfloods are doing really well. The decline rates there are diminishing, and obviously helping.

So I think I would, in a lower price environment, one of the silver linings is the flattening of that decline curve, as you pull back your capital and flatten out your growth profile. So there is, for us, and I was telling that to -- we had our employee meeting actually this morning. One of the silver linings for us, especially that stands out between other companies, is we are a waterflood Company, and we are adding waterfloods continually, even through this downturn and expanding on that. And that's lowering our corporate declines.

So this pause in growth is really a healthy thing for us on a internal basis on our decline trends with the waterfloods that we're expanding and continually expanding and seeing the great success that we've had. So we're adding a lot of reserves and value in behind that low cost, in the CAD2 per BOE range with that waterflood.

What, as we're looking at the end of the year, how much production do you think is impacted by waterflood as a percentage of call it 175,000 a day?

I think in the Bakken alone, I think we're 65,000 barrels a day and that starting to push up to 30,000. So getting close to half our volumes in there.

And then in Shaunavon, we're at about 25,000 barrels a day in that field; it's about 10,000 to 12,000, so about half there. So we're serious volumes that are starting to be impacted. We're expanding our units in southeast Saskatchewan in the Bakken, we're starting a waterfront pilot in the Flat Lake already.

And we are still, as I mentioned before, announcing our step-out locations and the success there. And that plays has expanded at least by more than a township just in this last quarter, and we're starting a waterflood there.

And then a good chunk of our conventional asset base in southeast Saskatchewan is inherently water-flooded, and natural dry waterflood. So more than half of our production would be under the waterflood tag, I guess.

Okay, and then last question related to the dividend and what seems to be maybe a shift in corporate strategy and thought around capital spending and balance sheet. Is there, with the new dividend in place, is there a level, whether it's on a trailing basis or forward-12 month basis based on commodity price sensitivity, is there a level of leverage debt to cash flow as an example of -- that you're comfortable with before you look at the dividend again? Whether it's to feel comfortable to increase it once the cycle improves, or whether it's another cut down the road if we head lower.

Obviously I think I think this shows our commitment to protect our balance sheet and our commitment to stay within our cash flow and not issue equity and stress our balance sheet. And so I think we're going to make those decisions similar to this decision where we see forward strip pricing and a change in the decision.

And I think on the uptick side, this really positions us well for a moderate uptick in commodity prices and an excess of cash flow, where we can I think increase our CapEx initially, pay down debt, look at internally funding acquisitions in that upswing. And then eventually, all of those three pieces combined and the accretion of that and the growth of our cash flow per share will give us a greater opportunity to increase our dividend in the long run through all those internally generated cash flow usage.

And so I think that's really our highlight. And I think it's again, it's a majority of our Company and the growth of our Company and just the scale, the size of our Company. We could see CAD1 billion of excess cash flow pretty quickly at CAD70 to CAD80 price environment and significant access to internal cash flow to grow our business, which we did.

So there's no hard number that you're monitoring in terms of where you start to get comfortable to parade of outcomes?

Like I said, I think the priority is -- are going to be capital, paying down debt, getting our -- I think before and I'll just say our continued view is keeping the debt to cash flow around 1 times at those higher commodity price environments, and well hedged and a low payout and staying within cash flow are the priorities to get us to where we would then start to consider dividend.

So I think we're -- we've got a lot of tools now with that excess cash flow that is going to hopefully come to us with increase and improvement in commodity prices. And I think further protected ourselves with this dividend in a continued downward scenario here. We've got some flexibility there with where we're at with our dividend.

Okay. Thank you. That's everything for me.

Thank you, Travis.

(Operator Instructions)

Michael Rimell from UBS Securities.

My questions have been answered. Thank you very much.

Thank you, Mike.

Sean Polczer for Mergermarket.

Hi. Given the acquisitions that you guys have made in the past year or so, I'm just wondering if you would still be considering acquisitions or if there's anything on the radar that you'd be interested in? And if so, what kind of assets would you be looking for?

Yes I think when you look at our history, obviously we've been very inquisitive over the last 15 years, and we just completed two acquisitions. We're in the phase right now I think of consolidating those acquisitions. Again, we're going to be very patient in this market and into the next while here and look to try to fund those -- any kind of future acquisitions through internal cash.

And so at this stage, we don't really see a lot of opportunity. I don't think there's a lot of sellers in this market at this stage, and I think that's going to be a while through Q4 and into next year.

And I think if you look at the last few years of us, we've been kind of a year -- we went a year or more without a transaction, and then this last year it was another almost nine months to a year between transactions. And I think when you look at our internally -- our internal cash flow models and where prices go, we're going to accumulate some excess cash and put ourselves in a position to internally fund acquisitions and our capital programs and focus on cutting costs in our capital programs through this time period this next little while. And focus on consolidating the acquisitions we just did a couple months ago. So at this stage, we don't see anything that compelling.

Would you be -- alternatively, would you consider selling any assets or rationalizing?

We're a very focused Company and I don't think at this stage there's really any assets that we -- we're not sellers typically. We haven't sold a lot of production.

We've done and looked at the smaller side of spinning out assets to smaller entities and private cos and things like that, that are just small or normal course type of business. But we don't see any need to sell any assets. Our balance sheet is strong and we want to -- we've got a very focused asset base as it is.

Okay. Thank you very much.

Thank you, Sean.

This concludes our question-and-answer session. I would now to turn the call over to Mr. Scott Saxberg.

Great. Thank you very much and thank you for participating in our second-quarter conference call.

Again, we believe this lower dividend is the right decision. It protects ourselves, protects our balance sheet, puts us in a better position when things turn around, and we will have more access to internal capital. And again, we have a strong asset base, high-quality reserve base with a significant amount of upside, over 7,000 drilling locations, CAD15 billion of inventory to access here and grow our business and grow our per share of metrics. And so we're positive for the future and hopefully we can see some improvements in commodity prices.

Thank you again, and have a good morning.

Thank you, ladies and gentlemen, for participating in Crescent Point Energy's second-quarter 2015 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.