Crescent Point Energy Trust Units (CPG) Q4 2018 Earnings Conference Call Transcript

Crescent Point Energy Trust Units (CPG -0.11%)
Q4 2018 Earnings Conference Call
March 7, 2019 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  

  See all our earnings call transcripts.

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. My name is Jessica, and I will be your call conference operator for Crescent Point Energy's year-end 2018 conference call. This conference call is being recorded today and will be webcast along with the slide deck, which can be found on Crescent Point's website home page. The webcast 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 December 31, 2018, were announced this morning and are available on Crescent Point's website and on the SEDAR and EDGAR websites. [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 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 measure sections of the press release issued earlier today. I will now turn the call over to the Brad Borggard, senior vice President, corporate planning and capital markets. Please go ahead, Mr.

Borggard.

Brad Borggard -- Senior Vice President, Corporate Planning and Capital Markets

Thank you, operator. I'd like to welcome everyone to our year-end 2018 conference call. With me are Craig Bryksa, president and chief executive officer; Ken Lamont, chief financial officer; and Ryan Gritzfeldt, chief operating officer. We are also joined today by other members of our senior leadership team who may provide additional insight during the question-and-answer period at the end of the call.

As the operator highlighted, this conference call is being webcast along with a slide deck, which can be found on Crescent Point's website. I'll now pass things over to Craig to give us an overview of Crescent Point's activities and results in 2018.

Craig Bryksa -- President and Chief Executive Officer

Thanks, Brad, and thank you, everyone, for joining us today. As we look back at our 2018 results, we have several achievements to note during a year of transition from management-strategy-and-board perspective. For those who are new to the Crescent Point story, we initiated a transition plan this past year that centered around our key value drivers of disciplined capital allocation, cost reductions and balance sheet improvement. By focusing on our operational efficiencies and improving our capital allocation process, we executed our 2018 program 38 million under budget, while still exceeding our annual production targets.

During the year, our team disposed approximately 7,000 BOE per day at attractive metrics for proceeds of over 355 million. We are currently marketing additional assets for sale, including our high-quality South East Saskatchewan conventional properties, and are progressing the monetization of certain infrastructure assets, which we expect to be in the market very shortly. On a reserve front, we organically increased reserves and grew our overall net asset value per share by 4%, excluding the contributions from dividends paid during the year. As part of our transition plan, we directed our focus toward returns versus simple volume growth.

This shift has enhanced our capital allocation process, which is based on a bottom-up well-by-well analysis, with each area competing for capital based on risk-adjusted returns and our long-term development goals. In our 2019 budget, we allocated additional capital to our key focus areas, identified cost reductions and our general administrative operating and capital costs. As a result of these changes, we now expect to generate capital efficiencies and full-cycle returns that are approximately 15% to 20% stronger than the prior year. Our 2019 budget is also now expected to generate over 400 million of excess cash flow at current strip prices, which we plan to direct toward net debt reduction and accretive share repurchases.

Since receiving approval for our normal course issuer bid in late January, we have repurchased approximately 1.3 million shares at an average cost of $3.89 per share, and will continue to be active on this program as we generate free cash flow during the year. I will now pass the call over to Ken to discuss our financial results.

Ken Lamont -- Chief Financial Officer

Thank you, Craig. During the fourth quarter of 2018, we reported adjusted funds flow of $337 million or $0.61 per share fully diluted and total capital expenditures of approximately $302 million. During the year, our capital expenditures on drilling and development, facilities and seismic totaled over $1.7 billion or $38 million below our annual guidance. For the year ended 2018, Crescent Point incurred a net loss of approximately $2.6 billion, including a noncash after-tax impairment of approximately $2.7 billion.

Excluding this impairment, adjusted net earnings was a positive $235 million or $0.43 per share fully diluted, up from the $100 million or $0.18 per share in the prior year. Our balance sheet now better reflects an approximation of the fair value of our assets in the current environment and incorporates a higher cost of capital. The charge was not related to an underlying asset performance and does not impact the company's adjusted funds flow or the amount of credit available under its bank credit facilities. Our net debt-to-adjusted funds flow at year-end 2018 was 2.3 times.

Based on current strip prices and our 2019 guidance, our net debt-to-adjusted funds flow is expected to improve to 2.0 times, excluding any proceeds from dispositions. Our cash and unutilized credit capacity as of December 31, 2018 was approximately $1.6 billion, with no material near-term maturity. During the fourth quarter, our oil differentials in Canadian dollars widened to CAD 23.34 a barrel, up from CAD 10.74 a barrel in the third quarter, and this was over $11 a barrel stronger than Edmonton power prices. Based on realized pricing to date and the forward curve, we expect to -- we expect our corporate oil differential to improve in the first quarter of 2019 to approximately $8.75 a barrel.

We expect this to drive a 15% improvement in our realized oil price versus the fourth quarter of 2018, despite a lower WTI price environment. I would also add that given the minimal size of our operations in Alberta, Crescent Point remains unaffected by the provincial government's recent protection curtailment. We believe our oil production will continue to receive a premium during these periods of increase, market access constraints in Canada, due to a significant portion of our assets located either downstream, at recent apportionment points, or in the United States. We have multiple takeaway options for our crude, and we are currently exploring new solution to further enhance overall realized price.

Subsequent to the fourth quarter, we resolved a National Energy Board complaint and legal action that resulted in a settlement in favor of Crescent Point. This agreement includes a revised tariff that's expected to improve our netbacks for oil production transported in Saskatchewan pipeline system and a cash settlement payable to Crescent Point. We expect the improved netback results from this agreement to contribute to our financial results starting in the second quarter of 2019. Before I pass the call over to Ryan to provide an update on our reserves and operations, I'd like to highlight our current commodity hedges as a part of our overall risk management program.

As of March 1, over 40% of our oil and liquids production, net of royalty interest, was hedged throughout 2019, and we are currently active in layering on new oil hedges extending through to the third quarter of 2020. Ryan?

Ryan Gritzfeldt -- Chief Operating Officer

Thanks, Ken. On a proved plus probable basis, Crescent Point organically replaced 142% of its 2018 production and achieved 2P reserves of 987.6 million BOE. Excluding acquisitions and dispositions, Crescent Point added over 92 million BOE of 2P reserves in 2018, generating a 2P funding and development costs of $19.20 per BOE, excluding changes in future development capital or FDC. This resulted in a recycle ratio of 1.9 times supported by our strong operating netback of approximately $35.50 per BOE.

Including changes in FDC, our 2P recycle ratio was 1.4 times. On a PDP basis, we replaced 115% of production with the recycle ratio of 1.5 times, both including and excluding changes in FDC. We did realize net technical revisions of negative 40.6 million BOE during the year, which include a reduction of vertical drilling locations in the Uinta Basin as part of the company's asset review and increased focus on horizontal development. These technical revisions were more than offset by approximately 132 million BOE of new reserves assigned to extension and improved recoveries, including our waterflood activities.

Waterflood additions continued to grow as a portion of our overall reserves and accounted for 21.5 million BOE or over 23% of our total 2P organic reserve additions. Since 2013, independent evaluators have assigned over 60 million BOE of low decline 2P waterflood reserves across our operations. A key highlight in our reserves update is from our largest waterflood program in the Viewfield Bakken, where we have generated a funding and development costs in 2018 of less than $9 per BOE, and an estimated base decline rate of approximately 25% in 2019. Our transition plan is focused on consistently advancing decline mitigation techniques with approximately 145 new waterflood injectors budgeted in 2019, up from 79 completed in 2018.

Crescent Point's reserve additions in 2018 allowed us to increase our net asset value per share by approximately 4% based on a conservative flat price deck of $55 per barrel U.S., and excluding any value for land and seismic. At $55 WTI, our total 2P NAV at year-end 2018 was $13.38 per share, which includes a blowdown value for developed producing reserves of $6.01 per share, not giving any value to our land and seismic. As I close, I'd like to thank our field employees and contractors for their hard work and dedication over an extraordinarily long and cold winter. I'll now turn it over to Craig for closing remarks.

Craig Bryksa -- President and Chief Executive Officer

Thanks, Ryan. We are on track and committed to our transition plan and have made important changes within Crescent Point that have positively impacted our costs, returns and overall free cash flow generation. We expect to realize further improvements in our overall efficiencies as we continue to focus our asset base through a disciplined and flexible disposition process. Our team continues to advance our core areas and is on track with our 2019 budget, which remains unchanged with an annual average production of 170,000 to 174,000 BOE per day and capital expenditures of $1.2 billion to $1.3 billion.

In closing, and on behalf of Crescent Point, I would like to thank Rene Amirault for his contributions during his tenure with our board of directors. Our company and shareholders have benefited from Rene's focus on capital discipline, strategy and along with strong governance as the chair of our Environmental Health and Safety Committee. As we move forward with our continued board renewal, I would also like to take this opportunity to welcome John Dielwart as a new Independent Director. I'm sure many of you know John and are aware of his successes and significant oil and gas experience, including those as one of the founders and past CEO at ARC Resources.

Finally, before opening the line to questions, I would like to thank our shareholders for their support during this transition. I'll now turn it back to the operator. 

Questions and Answers:

Operator

[Operator instructions] Your first question comes from Travis Wood of National Bank Financial. Please go ahead.

Travis Wood -- National Bank Financial -- Analyst

Yes. Thanks and good morning, everybody. I wanted to -- I have two questions for you this morning. The first, you've been marginally active on the buyback that was instituted later last year.

So with cash flow, in our numbers, we have around $300 million. I think you guys have talked about something around $400 million. And so with that free cash flow for the year, how would you rank the use of that as we consider future buybacks, dividends or, in a crazy world, dividends -- or sorry, debt buybacks, and then, in a different world, dividend growth?

Craig Bryksa -- President and Chief Executive Officer

Travis, it's Craig here. Thanks for the question. It's actually nice to be not talking to that script. But the way we're looking at things and what we've messaged in the past is we've targeted a payout ratio of 85% to 95%, all in including our share buybacks.

Right now we're generating in our -- with strip prices, we're generating $400 million of excess cash. Debt reduction is a pillar of our strategy, and is something that we are very committed to, so we targeted, of that $400 million, we've targeted about 70% to 80% of that toward debt reduction, with the remainder then going to share buybacks. And then, any additional proceeds that we receive that come in the door through our disposition process on both the infrastructure and the assets, we'll reassess those at that time as well.

Travis Wood -- National Bank Financial -- Analyst

OK. Thank you. And then another question if I can around the reserves. Looking through the rec, there's about 41 million BOEs that have been technical revisions on the downside, but you've had some incremental gains somewhere in the magnitude of $130 million.

Can you help us understand, or if possible, provide us kind of some asset commentary around both the technical revision as well as the extensions?

Craig Bryksa -- President and Chief Executive Officer

Sure. So one thing I'd like to stress to you, Travis, is keep in mind, we're really a new team, a new team in place in September. We recognized early on there's a few things we want to get behind us and start moving forward. And I think as we -- what we've laid out today in the press release as a good step in that direction I think everything on -- that we've looked at over the last, call it, six to nine months is now behind us.

And I think everything that we're looking to do moving forward is going to really increase the valuation going forward. So with the question on the technical reserves, maybe I'll pass that to Ryan and he can speak to that.

Ryan Gritzfeldt -- Chief Operating Officer

Yes. On the technical revision, so as mentioned, the reduction in Utah future vertical drilling locations was a significant portion of our total negative technical revisions as we're shifting our focus more on horizontal well development in Utah as part of our asset review. And there can be noise around locations. Again, as part of our asset review, if some older, stale locations are removed, they are classified as a negative technical revision.

But then, if you add new locations, even if they are in the same area, they get classified under extensions and improved recovery. And kind of in a similar regard on well by well-performance, we have some negative technical revisions spread across our areas on a well-by-well basis. But waterflood reserve adds do not offset those in the reserves rec table, they're showed up as extensions and improved recoveries. So oftentimes, you have to look at the technical revisions and the extensions and improved recovery categories in the rec table as a whole.

Travis Wood -- National Bank Financial -- Analyst

OK. So fair to say net-net as locations are being reclassified among the asset portfolio, net-net, a positive readthrough as you guys are seeing it, from the engineers perspective?

Craig Bryksa -- President and Chief Executive Officer

Yes. I would say so. $132 million of extensions and improved recovery versus negative technicals of minus $40 million.

Ryan Gritzfeldt -- Chief Operating Officer

OK. Thank you for that.

Craig Bryksa -- President and Chief Executive Officer

You bet.

Operator

Your next question comes from Juan Jarrah of TD Securities. Please go ahead.

Juan Jarrah -- TD Securities -- Analyst

Thanks, guys. Good morning, everyone. Just to follow-up on Travis' question. Was curious, with the successful dispositions this year, and obviously the free cash flow that you're generating, and not to mention the cash that you generated from those divestitures, would you look to accelerate capex to replace some of those volumes that you would have divested?

Craig Bryksa -- President and Chief Executive Officer

Right now -- so that, JJ, that's a good question. It's one we get quite a bit on the road. But right now we are definitely committed to the budget that we've laid out as dispositions are executed, we'll look to take that capital. For the most part, take that capital out of the program, with the focus being on the balance sheet and debt reduction.

So you don't look for us to go in and accelerate any growth on the back end of a disposition. We're going to stay extremely disciplined and committed to what we've laid out in the past. So there'll be more of a focus around returns in the balance sheet.

Juan Jarrah -- TD Securities -- Analyst

Thanks, Craig. And looking into 2020, would you employ a similar mentality in terms of spending 85% to 90% of your cash flow? Or how would you think about that?

Craig Bryksa -- President and Chief Executive Officer

Yes. So we'll see how the dispositions on that front shake out, JJ. I mean, over time, we've got a lot here in the offer right now. We've got the 21,000 BOE per day of the unconventional assets out there.

We're going to have infrastructure rolling out the door here shortly, which is something that we're excited about. At the same time, we've got some irons in the fire on the back end and some other things. So we'll see how that all plays out. With the target though, and the new team remaining committed and disciplined to living within cash and focus mainly on that all -- everything we do, do, JJ, though, will still be based on returns and driven on returns.

Juan Jarrah -- TD Securities -- Analyst

So that makes sense. And then, the last question for me is maybe some commentary on declines. Clearly, your having success in the Viewfield Bakken with declines of 25%. Just curious where your declines are for this year? Maybe where you expect to exit this year? And how dispositions might impact that decline?

Craig Bryksa -- President and Chief Executive Officer

So right now, our corporate decline is around that 30%. Dispositions and how we feel it will be throughout the year will be relatively unchanged. I'd say it's probably going to be fairly static at that. Obviously, that depends on what assets that do move out the door and what stay in the door.

But we've messaged this in the past, where if we were to take that 50,000 barrels a day that we have identified and did that -- all that transaction all at once, it would only move our corporate decline by 2%. So either way, we're going to be in and around that 30 start kind of end of the year. Does that make sense?

Juan Jarrah -- TD Securities -- Analyst

Yes. It does. 2%, which way?

Craig Bryksa -- President and Chief Executive Officer

If everything at once, it will be 2% the other way, up.

Juan Jarrah -- TD Securities -- Analyst

Up. OK. That's all. Thanks, guys.

Operator

Your next question comes from Brian Kristjansen of Macquarie. Please go ahead.

Brian Kristjansen -- Macquarie Capital -- Analyst

Craig, is there a firm bid they did do on the South East Sask package? Or is that going to stay open-ended?

Craig Bryksa -- President and Chief Executive Officer

I wouldn't say it's firm, Brian. We've got a date in mind that we're just going to lay out here shortly to all the parties that are in the data room right now, but it's Q1 timing on bid deadlines.

Operator

Thank you. [Operator Instructions] There are no further questions at this time. Please proceed.

Craig Bryksa -- President and Chief Executive Officer

I'd like to thank everybody for joining the call today. If you have any further questions, please reach out to our IR group. The phones are always on. Thanks, everybody.

Operator

Crescent Point's Investor Relations department can be reached at 1 (855) 767-6923. Thank you. [Operator signoff]

Duration: 27 minutes

Call Participants:

Brad Borggard -- Senior Vice President, Corporate Planning and Capital Markets

Craig Bryksa -- President and Chief Executive Officer

Ken Lamont -- Chief Financial Officer

Ryan Gritzfeldt -- Chief Operating Officer

Travis Wood -- National Bank Financial -- Analyst

Juan Jarrah -- TD Securities -- Analyst

Brian Kristjansen -- Macquarie Capital -- Analyst

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