CA - Crescent Point Energy Corp. (CPG) Q3 2022 Earnings Call Transcript

Crescent Point Energy Corp. (CPG)

Q3 2022 Earnings Conference Call

October 26, 2022 12:00 PM ET

Company Participants

Craig Bryksa - President and CEO

Ken Lamont - CFO

Ryan Gritzfeldt - COO

Conference Call Participants

Michael Harvey - RBC Capital Markets

Travis Wood - National Bank Financial

Patrick O'Rourke - ATB Capital Markets

Chris Sakai - Singular Research

Presentation

Operator

Good morning, ladies and gentlemen. My name is Joanna and I will be your operator for Crescent Point Energy's Third Quarter 2022 Conference Call. This conference call is being recorded today and will be webcast along with a slide deck, which can be found on Crescent Point's website homepage. The webcast may not be recorded or rebroadcast without the expressed consent of Crescent Point Energy.

All amounts discussed today are in Canadian dollars, with the exception of West Texas Intermediate, or WTI pricing, which is quoted in U.S. dollars. The complete financial statements, and management's discussion and analysis for the period ending September 30, 2022 were announced this morning and are available on the Crescent Point, SEDAR and EDGAR websites.

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]

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 the Crescent Point, SEDAR or EDGAR websites 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 will now turn the call over to Craig Bryksa, President and Chief Executive Officer at Crescent Point. Please go ahead, Mr. Bryksa.

Craig Bryksa

Thank you, operator. I'd like to welcome everyone to our third quarter 2022 conference call. With me today are Ken Lamont, our Chief Financial Officer; and Ryan Gritzfeldt, our Chief Operating Officer. As the operator highlighted, this conference call is being webcast along with a slide deck, which can be found on our website.

Our third quarter results once again demonstrate how our continued focus on balance sheet strength and sustainability delivers value, returns for our shareholders. In July, we successfully reached our near-term debt target and released our updated return of capital framework. This framework targets returning up to 50% of our discretionary excess cash flow in addition to base dividends. As a result of our continued operational execution and financial success, we are delivering on that promise. For the third quarter, we are returning 50% of our discretionary excess cash flow through share repurchases and special dividends. Excluding our base dividend, our total return of capital for the quarter is about $140 million. Our return on capital framework is only part of our overall shareholder value proposition. We also have built a strong balance sheet and continue to enhance the sustainability of our business.

In the third quarter, we reduced our debt by an additional $270 million and further optimized our asset portfolio. We disposed of certain noncore assets that had limited scalability and higher decline and emissions intensity profiles. In addition to using the proceeds from this disposition to strengthen our balance sheet, we also expanded our proposition in the Kaybob Duvernay play by adding 80 net sections of undeveloped land and a considerable number of drilling locations for $87 million. We remain very excited about this play which continues to generate attractive asset level returns within our portfolio alongside significant well results.

As part of today's release, we are pleased to announce our formal 2023 guidance. We expect to generate significant excess cash flow of $1.1 billion to $1.5 billion at $75 to $85 per barrel WTI pricing. This budget is fully funded at less than $50 per barrel WTI including our base dividend. Our guidance anticipates delivering significant shareholder returns while producing between 134,000 to 138,000 boe per day, with development capital expenditures of $1 billion to $1.1 billion. In the current price environment, we expect to attain this production guidance while spending at the lower end of this guidance range.

Under this budget, we expect to achieve a year end 2023 leverage ratio of less than 0.3x at US$75 per barrel WTI, providing us with significant financial flexibility. We will stay disciplined in our capital allocation and remain committed to our key pillars of balance sheet strength and sustainability.

Before moving on, I'd like to thank our employees for their continued hard work and execution during the quarter and throughout the year.

With that, I'll now turn the call over to Ken to discuss our financial results.

Ken Lamont

Thanks, Craig. For the quarter ended September 30th, adjusted funds flow totaled $577 million, or $1.02 per share fully diluted, driven by a strong operating netback of over $59 per boe. Our net income for the quarter was $466 million or $0.82 per share. Development capital expenditures, which include drilling and development facilities and seismic totaled $309 million, resulting in excess cash flow generation of $234 million in the quarter.

Our discretionary excess cash or excess cash less our base dividend totaled $189 million of which 50% is being returned to shareholders through our buyback program and a special dividend. During the third quarter, we repurchased 8.2 million shares at an average price of $9.16 per share. And we have declared a special dividend for $0.035 per share payable on November 14, 2022. We remain active on our buyback program given the underlying value of our shares and have already repurchased 3 million shares during the month of October and an average price of $9.80 per share.

In addition to the return of capital offering, we continue to direct a portion of our excess cash to our balance sheet. As of September 30, 2022, our net debt was $1.2 billion, reflecting approximately $270 million of debt reduction in the quarter. We remain disciplined in our hedging strategy in the context of market conditions. For 2023, we have hedged approximately 15% of our total production, including over 20% in the first half of the year.

I will now turn the call over to Ryan as he speaks to our operations highlights. Ryan?

Ryan Gritzfeldt

Thanks Ken. We continue to achieve strong operational success across our asset base in third quarter. Our Q3 average production was 133,019 boe per day comprised of over 80% oil and liquids. In our Kaybob Duvernay play, we continued our strong operational execution with exciting well results and an efficient drilling program. We recently brought on stream our third fully operated multi-well pad and the Duvernay. This pad had an average IP30 rate of approximately 900 boe per day per well with over 85% liquids, providing attractive returns in a payout period of approximately six months from the initial onstream date at current commodity prices.

Our drilling efficiency also remains impressive, averaging only 14 days per well in our most recent operated pad, which we believe makes us a pacesetter in the basin. As Craig mentioned, we acquired 80 net sections of land in Kaybob, which further enhances our drilling inventory in the play. And our current plans have us drilling a pad on these lands later in 2023. Based on our continued execution, the attractive returns we have achieved and significant running room to develop our assets, we now expect to grow our Kaybob production in a disciplined manner from approximately 35,000 boe per day in 2022 to over 50,000 boe per day by 2027 subject to commodity prices.

Our continued success and ongoing innovation in Kaybob is emblematic of the knowledge transfer, corporate culture and can-do attitude that our employees apply across all of our plays. Our operating teams strongly believe that there's always further value to unlock, and efficiencies to be gained even in our more mature plays.

For example, in our Viewfield Bakken play, we drilled our first multi-lateral open hole horizontal well, and are now drilling a second based on the success of the first. By adopting a new well design, we have removed the need for fracture stimulation in these multi-lateral horizontals, expanding the economic boundaries of the play.

We also continue advancing our decline mitigation projects throughout our Saskatchewan operations to enhance secondary recoveries and moderate future capital requirements. In third quarter, we initiated a polymer flood as a tertiary form of recovery within a unit of our Shaunavon play and are encouraged by early results. For the fiscal year 2022, we are on track to achieve annual production guidance at the midpoint of our range of 132,000 boe per day.

We have revised our 2022 capital expenditures guidance to $950 million from our prior range of $875 million to $900 million. The revision reflects the higher inflationary environment and our decision to maintain an active drilling rig in our Duvernay and North Dakota plays where we are currently ahead of our drill schedule, thanks to efficiencies we've achieved.

As Craig highlighted, we continue to allocate capital in our 2023 budget based on risk adjusted returns and sustainability. The budget focuses on the company's four major operating areas, with approximately 15% directed to long-term projects such as various decline mitigation programs, and environmental initiatives. Our ESG approach is engrained into everything we do at Crescent Point, and our continued efforts are being positively recognized and showcase the tangible progress we are making.

In third quarter, we received an upgraded MSCI rating of AA, which is the second consecutive year that we've received an increase in our ESG ratings assessment. I'd like to thank all of our teams for their commitment to our success, and in particular, thanks to our field staff for all their hard work in safely achieving our goals.

I'll now turn it back to Craig for some closing comments.

Craig Bryksa

Thanks, Ryan. At Crescent Point, we take great pride in our operational excellence, in creating outstanding value for our shareholders. Our 2023 budget reflects our disciplined capital allocation and commitment to generating excess cash flow and delivering meaningful returns to our shareholders. In addition to setting our 2023 budget, we have also updated our five-year outlook where we expect to generate up to $6 billion of cumulative after-tax excess cash flow at $85 per barrel WTI pricing.

Our disciplined five-year plan assumes production growth to approximately 145,000 boe per day by 2027, subject to commodity prices with a continued focus on returns and sustainability. Our growth is expected to be driven by our Kaybob Duvernay asset, where our returns continue to rank in the top quartile across our asset portfolio. Our teams remain focused on further enhancing these returns with ongoing efficiencies and optimization.

Before taking questions, I'd like to thank our shareholders for all their support and continued engagement.

Operator, you can now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] First question comes from Michael Harvey at RBC Capital Markets.

Michael Harvey

So just a quick one for me on that multi-lateral area of the Viewfield. Is there any other color you can help folks with on that? I know you mentioned strong performance, but anything like early production rates, well costs, that type of thing? And then just do you see that technology being applied across other lands, new field, elsewhere, or is it just kind of a science experiment for now? Any color, much appreciated.

Craig Bryksa

Yes, thanks for the question, Michael. Yes, so this is something that our teams have been looking at trying to figure out how to expand the economic boundaries of the play, as you step out from the core. So, with this, I think the drilling technology has gotten so good that it's a little bit cheaper now to attack some of the areas in this play with just drilling instead of having to frac. So these multi-laterals are obviously tighter space than our fracked wells. And if you look at total recovery and initial production from a section, under these multi-lateral wells versus our conventional fracked wells, you get higher production and higher reserves, potentially for lower capital. So, we're pretty excited about it. It's early days, 125 plus boe out per day per well. And if our production hangs in and it hits our EUR estimates, we probably have over 100 more locations to go and incorporate that into our five-year plan in Viewfield. And we are looking at other areas in our portfolio, i.e. like Shaunavon. Obviously, this area in Viewfield has a little bit better porosity, permeability, maybe than say Shaunavon does. So early days still, but we will look to see if we can apply it throughout our other assets.

Operator

Next question comes from Travis Wood at National Bank.

Travis Wood

Two questions for you. First, on just kind of broader themes around inflation, obviously kicked up 2022 a bit. What type of inflation are you baking in the '23 program? And any kind of specific color you can share in terms of where you're seeing most kind of that inflationary pressure? And are you seeing that also in the Duvernay, where you've made some pretty big strides on the efficiency gain? But are you getting some pressure from the service side in that play, specifically, as well?

Ken Lamont

Yes. So our new 2022 guidance of $950 million, Travis, is a 7% bump from our previous midpoint and really only a modest 10% bump from the original midpoint way back at the start of the year. So, we had to bump here, obviously, some inflationary costs. And we've been drilling a little bit faster in Kaybob and North Dakota, like I mentioned. So wanted to keep those rigs warm and keep the momentum going into 2023. So added a few wells in those plays.

So what we're forecasting for 2023 is essentially the costs we're seeing right now will stay in the $85 WTI environment, which I think is a good forecast. Overall, I think costs, we've seen a little bit of bump in drilling day, or drilling rig dayrates. Cacing is starting to flatten out a little bit, though, obviously, that was a big cost that hit us on the inflation side. And obviously plays into it a little bit deeper like Kaybob, North Dakota, that requires more casing, more fracking. Obviously, fuel costs hit us. So I think those were the areas where we saw some increases. But I think using these costs right now at an $85 WTI world for next year is where we're forecasting our costs at.

Craig Bryksa

And then -- so Travis, it's Craig here. And thanks for the question. Just to add on that. So when you look at our 2023 guidance, we're in that 134,000 to 138,000 boe a per day range. We're going to spend in the neighborhood of about 1.1 -- or sorry, $1 billion to $1.1 billion. And keep in mind, we built in all those inflation assumptions, and are trending towards the lower end of that right now as things are looking out. And then the highlight for that is if you apply an $85 price tag to that, it's $1.5 billion of excess cash flow. So, we're feeling really good with how things are setting up into 2023 on the back end of coming out of a strong 2022.

Travis Wood

And then last question separately, the return of capital framework. I think we ask this question every quarter. But just in terms of, how should we think about how active you'll be with the NCIB just as we can try to telegraph the impact of that variable going forward? And should we just assume that the full 10% of the NCIB gets done on kind of that 12 month rolling basis? Just broadly how are you thinking about the balance of those two?

Ken Lamont

Yes. So thanks for the question, Travis. So one of the things we were really happy to put on July was that return of capital framework, and getting that out to the market. And then in Q3, it's nice to be executing against that and demonstrate to the market, hey, we said this, now we're doing it. For us, when you look into Q4 and beyond, we were applying that 50% of excess discretionary cash flow being returned to shareholders. And I would say Travis, the bulk of that is in this environment with our shares trading, how they trade is being targeted towards share repurchases and buybacks. And then there is going to be some of that, that does come out in a special dividend.

Keep in mind, we're navigating a quarter live. We're actively in the market buying back shares every day, but you've got some volatilities in the commodity price on that you're working through when you're trying to hit that 50%. So, for us, we target the bulk of it towards the share repurchases. And then to ensure that we hit that 50% at the end of the quarter, we use the difference there has been cleaned up with that special. So look, for Q4 to be very similar, and then look for us to behave very similar as we get into 2023 on that. Ken, I don’t know if you have...

Travis Wood

And then maybe just one follow-on there, if I may. The 50%, like as you -- seems rapidly get to the debt target. Do you see a scenario where that 50% starts to be expanded out?

Ken Lamont

Actually, that’s a good question, Travis. I think when you look at our total return proposition to shareholders, we're above the 50% if you layer in the base dividend, right? And ideally, we continue to grow that base dividend over time as our balance sheet gets stronger and stronger, and we continue to grow our cash flow per share. And keep in mind, our base dividend is very sustainable. It's only a 15% simple payout at $50. So it does speak to the sustainability and the ability to continue to grow that.

So for us, I think and we think as the management team and the Board here at Crescent Point that 50% is a very compelling strong return on that discretionary funds flow, especially when you add in the base dividend and then that other 50% is going to stay internal here for us to continue to reinvest in the business and whether that's some type of organic growth, lay on a bit more capital here and do a bit of organic growth or in the event of an acquisition where maybe it's some inorganic growth. And then at the same time, there's also continuing to strengthen that balance sheet and deleverage even further. So, what -- I never say never Travis but, for us the 15% to reinvest in the business for us right now seems to make sense.

Operator

Next question comes from Patrick Rourke from ATB Capital Markets.

Patrick O'Rourke

Sharp question from Travis, that's kind of what I was going to ask and allude to here with the balance sheet looking to sort of extinguish the debt in 2024. Just wondering -- you mentioned not going above the 50% excess cash flow distribution to shareholders. Wondering how you think about managing the base level of debt for the business? Is the goal to extinguish it completely? Or is there an ideal amount of leverage that you would like in the capital structure here?

Ken Lamont

Sure, it's Ken, here. I'll take that question. So yes, we do have a bit of an ideal or target leverage that we're shooting for. And I would say it's kind of a 1x debt-to-cash flow in that $45 to $50 WTI range. And that's really in the long run what we're shooting for as far as the target. There will be periods of time where we potentially are under that ideal or target leverage, maybe as commodities run up, things like that. But there may be also times where we're slightly above that. And it sort of goes back to Craig's comments earlier around the cash that we’re retaining in the business. I mean, obviously, that's balance sheet strengthening, but there's opportunities on both the organic side with our plays, as well on the inorganic side. And so, we think this is a prudent way to run the business and a sustainable way to run the business. And so that's a bit of a target and how we'll look to operate. But obviously, we're not going to -- that's -- it's more of a target level. And as I said, sometimes you need to be above, sometimes maybe be below that target. But that's how we're looking to manage it.

Patrick O'Rourke

So if we just kind of take flat base case assumptions here, that puts us into a range of somewhere between, say, $400 million and $600 million in excess cash flow not needed for the balance sheet in 2024. Do you see a greater opportunity set for organic growth within the portfolio now? Or is it sort of deploy that and be acquisitive and use that cash to enhance per share returns?

Ken Lamont

Yes, I think what you're seeing from us now, Patrick, on the 2023 budget, it’s pretty much set right at that 134,000 to 138,000 boe per day. That excess cash flow that comes in or the 50% of the discretionary cash flow that we're keeping internally, that'll be to continue to strengthen the balance sheet during that time period. And then again, as you look out into the five-year plan, which we put out, we see the business grow into that call it approximately 147,000 or 145,000 boe per day over the next five years. And that is what I would describe as disciplined managed growth over that time period. But again, the focus on that free cash flow generation. So that excess amount we'll use in the organization to look towards maybe some inorganic growth, maybe some organic growth through. Then again, this further strengthen that balance sheet.

Operator

Next question comes from Chris Sakai from Singular Research.

Chris Sakai

I just had a question on the company's hedging strategy for 2023. It looks like 15% of total production is hedged. Can you provide some color on that and would that increase or decrease going into the fourth quarter?

Craig Bryksa

If you look at Crescent Point, historically, we've always been hedgers, Chris. So we do have a little bit of the hedge book being built out. And it really protects our fixed costs and our base level dividend in a downward commodity environment. What you've seen from us in the past has typically been somewhere around that 40% to 50% of our base production hedged out. For us, as we look forward into 2023 and our balance sheet being significantly improved and our financial position being significantly improved, we don't feel we need to go to those levels of 40 or 50.

So look, for us to carry a bit of a hedge book, we will, I'd look for it to be in that range of call it 20% to 25%-ish. And right now we're looking at generally going about 12 months out. So right now we're looking into Q3 and into Q4 and slowly building up that book. We do have targets in the market. And as the market moves into those levels, we bumped into it daily to get towards those levels. So you can look for us next year on average to carry somewhere in that 20%-ish range.

The other thing I'd say to you, Chris, is to a choice right now has been collars where you have the absolute protection in a downward commodity price environment, at the same time it allows you to participate in some of that upside. So we will have a book, it'll probably be in that caught 20%-ish range, mainly using collars right now and then looking out roughly 12 months because you've got some pretty significant backwardation in that curve.

Chris Sakai

And then you talk about Kaybob Duvernay expansion, you guys bought, what, $87 million of land? Is there any plans in the future for buying more -- even more land?

Craig Bryksa

Yes. So during the quarter, we did do a small deal with another producer in the area. We picked up 80 net sections for right around that $87 million and we're excited about it. It fits right in with our asset base or our land position right in there. So, it adds kind of that three to four years of drilling inventory. So for us, it's a good addition for what we see is a very reasonable price.

That being said, Chris, if there's other things out there that makes sense for us to look at, we certainly would, whether it's an acquisition or a bit of a land pick-up here and there, we certainly would. And that gets back to the question earlier there on Patrick with us maintain that 50% of that discretionary cash flow, it gives us the ability to then invest within the business and into that organic or inorganic. So certainly we would. But very happy to have executed on that one in the quarter.

Operator

There are no further questions at this time. I'll turn the call back over to Craig Bryksa for closing comments.

Craig Bryksa

Thanks, everyone, for joining our call today. If you have any questions that were not answered, please call our Investor Relations team at your convenience. Thanks, again, everyone.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.

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