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Edited Transcript of CPG.TO earnings conference call or presentation 27-Apr-17 4:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Crescent Point Energy Corp Earnings Call

Calgary May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Crescent Point Energy Corp earnings conference call or presentation Thursday, April 27, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* C. Neil Smith

Crescent Point Energy Corp. - COO

* Kenneth R. Lamont

Crescent Point Energy Corp. - CFO

* Scott Saxberg

Crescent Point Energy Corp. - CEO, President and Director

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Conference Call Participants

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* Thomas Matthews

AltaCorp Capital Inc., Research Division - Analyst of Institutional Equity Research

* Travis Wood

National Bank Financial, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Crescent Point Energy First Quarter 2017 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Mr. Scott Saxberg, President and Chief Executive Officer. Sir, you may begin.

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Scott Saxberg, Crescent Point Energy Corp. - CEO, President and Director [2]

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Thank you, operator. I'd like to welcome everybody to our first quarter conference call for 2017. With me is Neil Smith, Chief Operating Officer; Ken Lamont, Chief Financial Officer; and Brad Borggard, Vice President of Corporate Planning, Investor Relations.

I'll start off with a quick overview of the quarter and outlook. Neil will discuss our operational highlights, followed by Ken, who will speak to our financial results.

Our first quarter marked a great start to 2017. We exceeded our production guidance by almost 2%, and we remained on track to meet or exceed our 2017 budget, which is expected to generate organic growth of 10% per share. Similar to prior years, we plan to revisit our annual guidance post spring breakup.

Our new play development continues to advance during first quarter, including the addition of 80 net new horizontal locations in our Uinta Basin resource play. These new Castle Peak zone locations provide significant productive capacity with a type curve that generates an IP 90 rate of over 650 BOEs per day. Our current inventory of Castle Peak horizontal wells is approximately 200 net locations based on a spacing of 4 wells per section.

Throughout 2017, we expect to prove up operational results within each of our resource plays. This includes our step-out programs, including further extension of the North Dakota Three Forks play in Canada, multiple down-spacing programs to add new locations, continued advancement of our extended reach horizontal program in the Viking, new completion methods in zones in the Uinta Basin and production results from our recent ICD installations.

Our 2017 budget expect to be funded within cash flow, generating a total payout of 91% at WTI prices of $55 per BOE -- or per barrel.

In our year-end conference call, I discussed potential disposition opportunities of non-operated assets. Recently, we successfully entered into an agreement to dispose of 1,100 BOEs per day of production in Manitoba for $93 million. These proceeds are being directed towards internally funding an acquisition of 8,500 net acres of undeveloped land in North Dakota for $100 million. These assets are contiguous to our current core acreage in Williams County and provide future development opportunities of approximately $250 million with approximately 50 net high-quality, low-risk drilling locations.

We remain the largest land owner in the Williston Basin with over 2.3 million net acres, the majority of which remain undeveloped.

We are very excited about the development opportunities with each of our resource plays and look forward to building on our first quarter success. We remain focused on executing our organic plan and exceeding our production -- exit production target of 183,000 BOEs per day.

I will now turn it over to Neil to discuss our operational highlights. Neil?

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C. Neil Smith, Crescent Point Energy Corp. - COO [3]

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Okay, great. Thanks, Scott. As Scott mentioned, Crescent Point achieved average production of over 173,000 BOEs a day, approximately 2% of our first quarter guidance of 170,000 BOEs a day. This compares to average production of 160,610 BOEs a day in third quarter of 2016 before the company accelerated its capital program as a result of the success of its new play development.

Our first quarter capital expenditures program totaled over $530 million, including $67 million spent on land, seismic and facilities. The company drilled 260 net wells during the quarter with a 100% success rate.

During first quarter, approximately $50 million was also spent on wells that were drilled but not yet completed. These wells were not reflected in our first quarter production results and are expected to be onstream during the second quarter. Drilling days in our core resource plays remained strong. These efficiencies are a continuation of the success our team realized during 2016, which resulted in an 11% improvement in our drilling days. Overall, drilling and completion costs remained relatively unchanged in relation to those at year-end 2016.

As Scott had stated earlier, we continued to build on our momentum in the Uinta Basin and expanded our horizontal inventory by internally identifying 80 net new Castle Peak locations. These new locations reflect strong production results, additional core work and refined mapping in the area. We continue to advance horizontal development of the basin through the testing of 2-mile lateral wells, increased stages and tonnage per stage, downspacing, and we're also looking at additional zones beyond the Castle Peak.

Advancing technology is one of the tools we are using to generate organic growth in 2017. During first quarter, we met our goal of installing over 30 new ICD systems. This is in addition to several systems that were already installed late in fourth quarter 2016. We are monitoring results through the end of 2017 and expect to install several additional ICDs during second quarter.

Unitization of our original 4 units in the Bakken waterflood continues to move forward. We have also identified new areas that could potentially increase sections of land for unitization by approximately 70%. Full unitization will allow for accelerated waterflood development, helping manage pressure -- the pressure in a larger portion of the reservoir.

Our business strategy continues to focus on increasing recovery factors within our large oil-in-place resource base of over 23 billion barrels. During first quarter, we have been successful in each of our areas.

Our Williston Basin in Southwest Saskatchewan areas continued to benefit from high-return, low-risk infill wells, strong results from our step-out program and continued performance from our waterflood programs.

In Uinta, as we mentioned earlier, we are successfully advancing horizontal development in the basin, and we are generating strong production results to date.

We look forward to a successful 2017 and are on track to meet or exceed our annual targets.

Before handing things over to Ken, I wanted to recognize and thank all of our employees, and again, especially our field employees during the winter months for all their hard work in delivering another successful quarter.

Ken?

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Kenneth R. Lamont, Crescent Point Energy Corp. - CFO [4]

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Thanks, Neil. During the first quarter, we generated funds flow from operation of $427 million or $0.78 per share fully diluted. This represents a 13% increase in funds flow from the first quarter of 2016, supported by stronger netbacks from higher commodity prices.

Our net income during the first quarter totaled $119 million or $0.22 per share in comparison to a loss of approximately $88 million or $0.17 per share in the first quarter of 2016. This improvement represented higher year-over-year commodity pricing, strong netbacks of $31 per BOE and unrealized gains from our commodity hedge book.

We had an active capital program during the first quarter, which is typical [from our] perspective. Assuming a WTI price of USD 55 a barrel into 2017, our budget is expected to generate funds flow from operations in excess of our capital expenditures and dividend, resulting in a total payout ratio of 91%. This equates to excess free cash flow of approximately $175 million.

For the remainder of 2017, we continued to budget operating expenses of approximately $12 of BOE, oil differentials of 11.5% of WTI and royalties of approximately 15%.

Our financial flexibility remained strong with approximately $1.5 billion of unutilized credit capacity as of March 31, 2017. Based on our budget at an oil price of USD 55 a barrel, we expect to exit 2017 with net debt to funds flow of less than 2x.

Our net debt at quarter end includes our recent land acquisition in the Williston Basin of USD 100 million. However, it does not yet include our recent disposition of $93 million, which is expected to close during the second quarter. Our acquisition strategy remains focused on smaller tuck-in acquisitions, which we plan to fund through disposition.

As a part of our risk management program, we continued to layer in additional hedges. We hedged an additional 3.8 million barrels of oil during the first quarter. Currently, 41% of our remaining 2017 oil production is hedged at a weighted average price of approximately CAD 71 a barrel. For the first half of 2018, we currently have 13% of our oil hedged at approximately CAD 73 a barrel.

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

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Scott Saxberg, Crescent Point Energy Corp. - CEO, President and Director [5]

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Thanks, Ken. We are very pleased with our operational execution and results during first quarter. As Neil mentioned earlier, we are seeing success in each of our resource plays. We continued to generate strong results in infill wells, step-outs and waterflood programs. We look forward to a successful 2017 and remain on track to meet or exceed our annual targets.

As part of our effort to enhance investor communication, we are hosting a Technical Day for investors in early May. We expect this event will provide investors with greater insight to our 3 core areas, demonstrate the strength of our technical team and highlight our 5-year plan.

Before opening up the line for questions, I'd like to thank all of our employees for their hard work in helping deliver another successful quarter.

At this point, we're ready to answer questions from members of the investment community. And I'll turn it back to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Travis Wood from National Bank Financial.

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Travis Wood, National Bank Financial, Inc., Research Division - Analyst [2]

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Just some questions with respect to the U.S. First, for North Dakota. This asset has been sitting within the portfolio for a while. Haven't really heard too much about it. Now you've gone and consolidated some land, looks like you'll be spending some exploration money there. So what's changed over the last few years to get you more comfortable to go drill there and then start to consolidate parts of that play?

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Scott Saxberg, Crescent Point Energy Corp. - CEO, President and Director [3]

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In North Dakota specifically, we've seen costs obviously come down dramatically from 2014 to today. And we've been drilling consistently there year-over-year, firming up our -- what we call our Alamo play in Williams County. And it's essentially about or close to 2 townships of land, and this land was contiguous with it. Over the last, I'd say, 2 to 3 years, we've been continually consolidating that large land block on taking our interest from 75% to 80% to 90% to 100%. And this is just to continue small acquisition along that extent, to build that block into a solid 100% owned and operated block that then we could apply waterflood technology down the road to on a strategic long-term basis. And so that's where that -- the rationale behind that transaction.

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Travis Wood, National Bank Financial, Inc., Research Division - Analyst [4]

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Okay. And in going into Utah, you talked about kind of the changes in drilling techniques, pushing longer laterals and testing that. What has been the biggest change over the last 2 years that you guys have found to start to edge at least the IP 90s higher?

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Scott Saxberg, Crescent Point Energy Corp. - CEO, President and Director [5]

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Well, this play is super new, really, in the last -- I'd say this time last year. We went to the larger 1,700 pounds-per-foot-sized fracs, typical to the STACK, SCOOP and Permian plays. And that really opened up this Castle Peak zone and the play and the IP rates and reserves and productivity. And then we further now -- I think we're at 2,500 pounds per square foot on these latest ones, and then we've gone from 1 mile to 1.5 to now 2 miles. We've put our first 2-mile horizontal well on the beginning of this week, so very early stage production there. But -- so we're pretty excited about how quickly we've developed that play, and then we've proved up a large area.

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C. Neil Smith, Crescent Point Energy Corp. - COO [6]

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And I think the other thing, Travis, to remember to, I'd been telling people, is that a year later, this is a different play. I mean, Scott's chatted, we've shot 3D seismic. We've been doing core work petrophysics. The other thing to remember is that the economic environment is a lot different. We've dropped capital costs by over 40% from what they were 2 years ago. The capital costs are down. The operating costs are almost half of what they were before, and the other thing now that there's a fair amount of excess capacity at the refineries. We were in the low 80% of TI for the prices we were receiving for the paraffinic crude. We're now in the mid-90s, so the economics are vastly different. And in hand with that, we're getting much better IPs and ultimate recoveries with our new techniques. So it's really advanced a lot in the last couple of years that we've been spending time on this.

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Scott Saxberg, Crescent Point Energy Corp. - CEO, President and Director [7]

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Yes. And we've collected a lot of data over the last (inaudible) -- through 3D seismic. Core data equivalent to something like 70 vertical core data points to prove up this play. So combined with our completion techniques and production results, we're continually progressing the play very positively. So...

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Operator [8]

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(Operator Instructions) And our next question comes from Thomas Matthews from AltaCorp Capital.

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Thomas Matthews, AltaCorp Capital Inc., Research Division - Analyst of Institutional Equity Research [9]

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Just a quick question on those 50 locations that you acquired in North Dakota. Just wondering at what stage of evaluation those 50 locations are acknowledged? And will there be more 3D seismic collected core data, that sort of thing, like you've been doing in Uinta? Just trying to get a sense of how -- what the potential number of locations are? Or I guess at what point in the life cycle are those locations identified?

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Scott Saxberg, Crescent Point Energy Corp. - CEO, President and Director [10]

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Yes. So these lands are south and more central into the basin from our Alamo lands, so they're higher quality. Every section has a well on it that's been drilled and completed, so it's HBP -- held. So this is super low-risk infill drilling, higher rates and reserves per well even than our Alamo lands, because where it -- the lands are south and southeast from those lands into the center of the basin. So they're pretty low risk.

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Thomas Matthews, AltaCorp Capital Inc., Research Division - Analyst of Institutional Equity Research [11]

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I guess the 50 locations, does that have room to grow as far as the number of locations? Or is that your initial take on it? Or is that kind of the -- what you see as being a development potential there?

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Scott Saxberg, Crescent Point Energy Corp. - CEO, President and Director [12]

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Yes. I think there's other benches. And whether we can infill drill further beyond that, there's obviously potential beyond that. These are risked [out].

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Operator [13]

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And at this time, I'm showing no further questions.

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Scott Saxberg, Crescent Point Energy Corp. - CEO, President and Director [14]

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Great. Well, thank you very much, everybody, and thank you for attending our first quarter conference call.

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Operator [15]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.