Veren Inc (VRN) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Sonia, and I'll be your conference operator today. At this time, I would like to welcome everyone to Crescent Point Energy Third Quarter 2017 Conference Call. (Operator Instructions) This conference call is being recorded today and will also be webcast on Crescent Point's website, but not be recorded or rebroadcast without expressed 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 September 30, 2017, 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 to your attention to the Forward-looking Information and Non-GAAP Measure sections of the press release issued earlier today.

I'd like to turn the call over to Mr. Scott Saxberg, President and CEO. Please go ahead, Mr. Saxberg.

Thank you, operator. I'd like to welcome everybody to our third quarter 2017 conference call. With me is Neil Smith, Chief Operating Officer, who will discuss our operational highlights; Ken Lamont, our Chief Financial Officer, who will speak to our financial results; and Brad Borggard, Vice President of Corporate Planning and Investor Relations.

With another outstanding quarter and strong operational results, we achieved organic growth of 10% year-over-year or an increase of 15,000 BOEs per day. As a result of our ongoing operational outperformance, we have increased our 2017 average production guidance for the second consecutive quarter to 175,500 BOEs per day from 174,500 BOEs per day. As you will recall, our original production guidance at the beginning of the year was 172,000 BOEs per day.

We continue to expand our new play development in 2017 with successful horizontal development in the new zone within the Uinta Basin and a newly identified play targeting the Lodgepole zone within the Williston Basin. With our Uinta Basin program, we have proved a highly economic resource play with the Castle Peak and now completed 2 successful 1-mile horizontal wells targeting the Wasatch and Uteland Butte zones, further expanding the size of the resource.

During the second quarter, we highlighted the strong initial productivity of our Wasatch well. We have now achieved cumulative production of over 200,000 barrels or BOEs after just 125 days and are on trend to achieve total reserves of approximately 1 million BOEs.

During third quarter, we completed a successful 1-mile Uteland Butte well, which generated initial productivity of approximately 640 BOEs per day after initial 60-day period without the assistance of a pump. In the Williston Basin, we continued to expand our multizone Flat Lake resource play through our step-out drilling program. Step-out drilling delivered strong results in our Torquay and Ratcliffe zones and also helped identify new large oil-in-place resource targeting the Lodgepole. During 2017, we drilled several Lodgepole wells, which have proven oil productivity. We're currently working towards improving the overall economics of this play, which remain at the early stage of development.

We believe the Lodgepole zone provides significant resource potential within our existing core area. With the recent land sales and prior positions held by the company, Crescent Point now owns a significant position of approximately 380,000 net acres or 600 net sections targeting the Lodgepole zone at an average working interest of about 100%.

Our cost of entry into this large resource play was less than $40 per acre. In addition to increasing our production guidance, we have also increased our 2017 capital expenditure budget by $100 million to $1.55 billion. We've primarily allocated this capital to the new play development and expansion in the Uinta and Williston basins. Additional capital is being funded through our recent noncore dispositions of $190 million.

During third quarter 2017, we completed or entered into agreements to dispose of approximately 3,000 BOEs of additional noncore assets for an accretive sales metric approximately 64,000 per flowing BOE. This transaction brings total dispositions year-to-date to approximately $280 million. We plan also to market additional noncore assets during 2017, generating potential proceeds of $100 million to $200 million, further highlighting our focus on balancing our cash flows.

I now turn things over to Neil to discuss operational highlights. Neil?

Great. Thanks, Scott. During the third quarter, we achieved average production of 176,096 BOEs a day. This represents an increase of over 15,000 BOEs a day compared to third quarter 2016 and is driven by growth in each of the company's core resource plays. In third quarter, we spent approximately $424 million on drilling and development activities, drilling over 200 net wells. Our total capital expenditures, including land, seismic and facilities, were approximately $506 million. As Scott mentioned, we are achieving increased success in our Uinta horizontal program, where we've been targeting multiple zones. We also recently started drilling on our new operating lands on the western portion of the basin, where we are seeing encouraging results. We're also currently in the process of updating our Uinta horizontal inventory and expect to provide an update as part of our annual year-end process.

As a reminder, these horizontal wells contribute significant productive capacity to our overall corporate production. In the Castle Peak zone, we've advanced our completions with strong 2-mile well results and are now targeting 2-mile development in our new zones in the Wasatch and Uteland Butte.

During fourth quarter, we are increasing improved capital efficiencies by vertically stacking 3 2-mile wells and 1 DSU, targeting each of the Castle Peak, Uteland Butte and Wasatch zones. In the Williston Basin in Southwest Saskatchewan resource plays, we continue to implement our development strategy that includes a combination of low-risk, high-return infill development in step-out drilling programs to expand the economic boundaries and identify new plays as evidenced by our new Lodgepole zone. We are also advancing new technologies, including our waterflood strategy, which remains focused on moving forward our Injection Control Device, or ICD device system in the waterflood systems. At the end of third quarter, we had 46 ICD systems with encouraging results and remain on track to have a total of 50 systems installed by year-end.

Our new technology initiatives also include piloting remote field monitoring and automation in our core areas. This entails adopting operating practices, such as electronic wellhead measurement and pump-off controllers, which are expected to reduce downtime, optimize wellbores and increase staff efficiency. During third quarter, we also began piloting solar power in Saskatchewan as part of our ongoing climate change initiatives, further highlighting the leading-edge technology culture within our organization.

Before I hand things over to Ken for our financial highlights, I wanted to commend all of our staff, including those in our fields, especially as we're going into the winter months, for their operational excellence and constant drive to improve efficiencies in our operations. Ken?

Thanks, Neil. During the third quarter, we generated funds flow from operations of $389 million. This represents an increase of approximately 6% from the third quarter of 2016, driven by increased production. Our adjusted net earnings from operations were $34 million, an increase from a loss of $22 million in the third quarter of 2016. This quarter, our adjusted net earnings exclude approximately $258 million of noncash after-tax impairment, resulting solely from changes in forecast commodity prices. These impairments represent less than 2% of our total assets and can be reversed in future periods if commodity prices recover.

During the third quarter, we improved our financial flexibility by layering additional oil hedges extending out to the second quarter of 2019. As a reminder, our near-term hedges protect 48% of our fourth quarter 2017 oil production and 25% of our first half of 2018 oil production at an average price of approximately CAD 70 per barrel. We continue to add to our longer-term hedges as opportunities present themselves.

Our third quarter operating expenses of $12.97 per BOE continue to include costs associated from seasonality and higher workover activity. We are budgeting operating costs of $12.35 per BOE for 2017.

As discussed in our last conference call, we remain focused on executing noncore asset dispositions to balance our cash outflows, including acquisitions. During the third quarter, we completed or entered into agreements to dispose of over $190 million of noncore assets to bring our total dispositions year-to-date to approximately $280 million.

Proceeds from our recent transactions are being directed towards funding our revised 2017 capital program, which is increasing from $1.45 billion to $1.55 billion. We are primarily directing this increased capital to new play development in both the Uinta and Williston basins, including our new Lodgepole discovery. Our financial flexibility continues to remain strong with liquidity of approximately $1.5 billion and no near-term debt maturities. At current strip prices and excluding the benefit from ongoing dispositions, we expect our debt to cash flow to be 2.3x for 2017.

I will now hand things back to Scott for some closing remarks.

Thanks, Ken. We're pleased with the third quarter results, which generated increased production and funds flow and reinforced our upwardly revised annual production guidance for the second consecutive quarter in 2017. Our current success and consistent outperformance reflect the quality of our asset base, focused on large oil-in-place resources and culture of developing assets with knowledge-first approach.

To recap, our highlights during the quarter include: continuing the expansion of our resource base through new play development, including successful horizontal wells and new zones in the Uinta Basin and new Lodgepole discovery in the Williston Basin; providing new horizontal locations, which, in Uinta alone, are expected to double the productivity capacity of the total corporate inventory; demonstrating our continued commitment to balancing cash flows through noncore dispositions; and advancing new technologies to further increase efficiencies across our asset base.

We remain on track to meet or exceed our revised 2017 guidance and plan to release our formal 2018 guidance in late fourth quarter 2017 or early 2018, similar to prior years.

Before opening up the line for questions, I'd like to thank all of our employees for their hard work, delivering another successful quarter and also, I'd like to thank our shareholders for their continued support.

At this point, we're ready to answer questions from the members of the investment community.

(Operator Instructions) Your first question comes from Travis Wood of National Bank.

Probably difficult to answer this, but just on the context of the shape of the forward curve largely from an oil perspective and kind of spending through 2017. Can you give us any line of sight to what next year could look like in terms of a growth perspective and what that means for capital?

Yes, good question, Travis. So we're just in the midst of our 2018 budget program. I would say at these production level or these price levels, our CapEx program would be in the similar range as this year, probably the $1.6 billion-ish range and slightly higher just because we've grown production. And so we would probably stick to that sort of level. With the high-end being probably $1.8 billion with the increase in commodity prices here over the next few months, we may bump that up. But we're effectively trying to stay within cash flow, within our budget heading into the new year.

Our next question comes from Michael Spohn of PMV Research.

Can you shed a little more tangible color on what's happening in your waterflood initiatives in terms of maybe ameliorating some of the decline rates? And then the second question is on the Uinta wells, what is your sort of average working interest? Is that kind of what the net gross well in your well count in the press release around 50% or so? When I look at that like 1,000 barrel per day sort of IP for some of these wells you'd get basically half of that.

So on the waterflood side, we've had some great success with our ICDs. We see that immediate 6-month response time. So in the past, with our older water injection schematics on the wells, they -- they were like a year to 18 months to 2-year waterflood response. And now with the ICDs, we're seeing a shorter response time, 6 to 12 months. So that's really worked out well, and we've continued to add ICDs in our field area, and we're just working on planning for the capital spend for next year on our waterfloods. So that technology continues to move forward. On the working interest for the Uinta, we're effectively 100% on the wells and we've been drilling out there. So when we talk to a 1,000 barrel a day IPs, those are gross, but also basically, we're a 100% in majority of the stuff we're drilling.

There's some -- there's some nonoperated. That's what brings the average down. But what we operate close to 100%.

Yes, so there is non-op that we have with new field and some others in the area that we, obviously, get some good well information from. But by and large, everything that we are drilling is close to 100%.

(Operator Instructions) Our next question comes from Ray Kwan of BMO Capital Markets.

I just have a question regards to the Lodgepole. Can you -- I know it's still early days, but do you mind sharing us what kind of the opportunities of this play is in terms of oil in place and potential? And as well as some of the risks associated with this play too?

Yes, so a great success there this year in developing that play. So we've been working on this play for a couple of years now. And we saw, as we drilled through to the Torquay -- sorry, Torquay and Ratcliffe zones that we were hitting this oil-charge zone in the Lodgepole, and we're getting oil over the shaker as we drill through the rock. And so couple of years ago, we started the process of collecting core data, mapping out that zone, testing the rock properties, comparing it to the other zones and the productivity and we're able to map out this resource effectively from the border all the way to the north part of the extension of the land sales that we just acquired. And so this resource is well over 600 square miles in size and stretches from the south part of the border all the way to, I said, the extension of our land sales. And we've effectively -- our strategy this year was to drill 4 to 5 exploration wells all along the trend to prove up oil productivity along that trend. And so we did that effectively from early this year. Our first well was just at the end of Q1 and into Q2. We saw the productivity there and then followed it up with 3 more wells along that trend and got oil productivity across those 3 wells and -- which led us into -- and so we obviously, posted those lands back in April of this year with that strategy. And part of the rationale for posting such a large block was there is TLE claims, which are native indigenous claims on lands out there if -- under the Saskatchewan program they have. And so we wanted to prevent those claims from happening and so we posted all that land in a large block as well strategically to capture that land without any competition. And so early in the middle of the year, we had a small land sale that we purposefully set up to target that land sale, then followed it up with a second land sale and it was able for us to capture that land at $40 an acre, which, when you look at the full cycle of this large resource, if it works out the way that we think, it will be a very strong full cycle economics. And it's still early days. The completion techniques that we used, we don't think we're perfect and proper. So we're going to follow up into the new year with some testing on the types of completions to optimize it. But the exciting part and basically, we're trying to target similar reserves, productivity as the Torquay.

And just off the back of that and especially with the strong results coming out of the Uinta basin there, like how do you think about capital allocation to the different areas in 2018?

Yes, so we're working through that. As I said, typically in the previous years, we've been very balanced in our approach to capital allocation. And so we've tried to balance off -- because of the economics and each of our plays are very competitive to each other. And with the Uinta, the economics are very competitive, obviously, to our Saskatchewan royalty stuff. So we're balancing that out, and we're just putting that together. Neil, I don't know if you want to comment more on the allocation, or Brad?

Yes, I mean, it's going to be similar there. A lot of it's going to be continuing, as Scott had said. I think we're having tremendous success. Everywhere we're drilling, we're hitting oil and getting 1,000, 650 barrel a day wells. We have a ton of running room and a ton of ideas. So there's going to be some production adds, but there's going to be a lot of continuing to delineate the pools here. And again, we're not on 1 zone anymore. We have 6 or 7 different zones that we're able to play. So the longer-term upside here is significant.

But is that thinking now just more capital to Uinta probably into '18 versus what you guys had previously? Or is it still to be determined(inaudible)?

Yes, I think we're working through that. Some of the things we're working on are on the pad drilling, the multi -- we're doing 2 wells per zone, and some of those things are tied to the timing of that capital and when we want to have that on stream. So those are some of the things that we're working towards. Obviously, with the refining -- the refiner capacity out there and rail -- railing of crude, so we're also working towards that as well and figuring out the capacity that we want to grow too. Right now, in our model for our 5-year plan, it's sort of 20% year-over-year growth. So at this stage, that's kind of the numbers that are being allocated right now. That -- because of the IP rates and the economics of that play, we don't necessarily have to expand our capital to get those kind of growth rates in that play. So that's kind of the math that we're working through and...

Next question from the line of Arthur Grayfer of CIBC.

Just a quick question on the Lodgepole. Is the opportunity the smaller discrete pools or you mentioned, it's quite fairly extensive. But are we looking at something that's a large resource opportunity that stratigraphically like wide? Or is it just smaller discrete opportunities?

Yes, it's a full mappable from -- like I said, the border, all the way north to the northwest corner of the lands that we acquired in the land sale. And it's geologically, because there is enough penetrations of horizontals and verticals over the last whatever 50 years out there, it's fully mappable from north to south. And yes, it's a large resource that we would -- we're anticipating would have similar type economics to Torquay play. Definitely a consistent trend.

And this does conclude our question-answer session. I would now like to turn the call back over to Mr. Scott Saxberg.

Great. Thank you, operator, and thank you, everybody, for participating in our 2017 third quarter conference call. Thank you.

Thank you, ladies and gentlemen, for participating in Crescent Point Energy's 2017 Third 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.