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Crescent Point Energy Trust Units (NYSE:CPG)
Q3 2019 Earnings Call
Oct 31, 2019, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, ladies and gentlemen. My name is Sylvie, and I will be your conference call operator for Crescent Point Energy Q3 2019 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 home page. The website 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 September 30, 2019, were announced this morning and are available on the Crescent Point, SEDAR and EDGAR website. [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 the 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 earlier today. I will now turn the call over to Brad Borggard, senior vice president, corporate planning, and capital markets. Please go ahead, sir.

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

Thank you, operator, and I'd like to welcome everyone to our third-quarter 2019 conference call. With me today are Craig Bryksa, president and chief executive officer; Ken Lamont, chief financial officer; and Ryan Gritzfeldt, chief operating officer. Other members of our senior leadership team are also present to 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 the call to Craig to provide an overview of Crescent Point's third-quarter 2019 results.

Craig Bryksa -- President and Chief Executive Officer

Thanks, Brad, and thank you, everyone, for joining us today. Crescent Point's third-quarter results demonstrate our continued commitment to strengthening our balance sheet, being disciplined in our capital allocation, and becoming an even more efficient company. Just over one year ago, we set a plan in motion to transform this company, and I am happy to report on our progress in delivering on each of our key value drivers. To strengthen our balance sheet, we committed to reducing our net debt and focusing on returns versus production volume growth, allowing for excess cash flow generation during the year.

By doing so, we reduced our net debt by approximately $650 million at the end of the third quarter, and we expect total reduction in net debt of over $1.2 billion by year-end 2019. By being disciplined, we have significantly strengthened our balance sheet, improved our financial flexibility during a period of volatile commodity prices. We have also committed to being disciplined in our capital allocation and focusing our asset base. We are continuing our work to reduce the number of areas in which we operate by shedding non-core assets where appropriate to create value for our shareholders.

I am pleased to report that as of October 30, we have completed approximately $950 million of asset sales and continue to work toward executing additional dispositions. Through these dispositions, we have further enhanced our sustainability by improving our corporate average netback, lowering our cost structure and royalties and reducing the capital we require to sustain our annual production. In addition to the benefits we are achieving by focusing our asset base, our team has driven internal cost efficiencies throughout the organization. As of the end of the third-quarter 2019, our operating expenses prior to dispositions were approximately 7% below our budget, and our capital costs were down 10% compared to the prior year.

These internal efficiencies further support excess cash flow generation and make the company more resilient to shifting commodity prices. We have also repurchased for cancellation approximately 13.8 million shares year to date under our NCIB, for total consideration of approximately $71 million. Our 2019 budget currently assumes a total of $125 million of share repurchases during the year. By continuing to execute on our strategy, we have placed the company in a much stronger position, allowing us to continue to generate shareholder value.

I will now hand the call over to Ken to discuss our third-quarter financial results.

Ken Lamont -- Chief Financial Officer

Thank you, Craig. During the third quarter of 2019, Crescent Point generated adjusted funds flow of approximately $389 million or $0.71 per share fully diluted. This performance was driven by strong -- a strong operating netback of approximately $31 per boe. Third-quarter capital expenditures totaled $365 million, of which approximately $337 million was spent on drilling and development to drill approximately 127 net wells.

During the quarter, we returned approximately $20 million of capital to shareholders through dividends and share repurchases, while also reducing our net debt by over $190 million. We recorded an after-tax net loss of $302 million during the quarter due to approximately $322 million of noncash charges resulting from our recent asset dispositions. On an adjusted basis, our net earnings during the quarter was approximately positive $33 million. We remain on track to meet our annual guidance and have narrowed our guidance range, reflecting our continued operational execution and capital discipline.

We are now guiding for an annual production range of 161,000 to 163,000 boe a day, with capital expenditures of $1.225 billion to $1.275 billion. Subsequent to the quarter, we extended the renewal date of our credit facilities to October 2023 and elected to reduce the size of the facilities from $3.6 billion to $3 billion. This reduced size saves us money while also providing significant flexibility to meet our post disposition needs. We are very pleased with this process as we receive strong renewal commitments from our syndicate of 14 banks under covenant terms that remain unchanged.

Based on our expected net debt at year-end 2019, including previously announced dispositions and budgeted share repurchases, our unutilized credit capacity is expected to provide approximately $2 billion of liquidity. We have no material near-term senior note maturities, and we'll continue to evaluate opportunities to term out any remaining bank debt, similar to prior years. We remain focused on debt reduction in our capital allocation process. As we complete additional dispositions, we will seek opportunities to further enhance our balance sheet strength and allocate capital to incremental share repurchases.

Our hedging program provides us with additional financial flexibility. As of October 25, 2019, approximately 49% of our fourth-quarter oil and liquids production was hedged at an average price of approximately CAD 79 per barrel. For 2020, more than 35% of our production is hedged at approximately CAD 77 per barrel in excess of current forward strip prices. I will now pass the call to Ryan to discuss our operating results.

Ryan?

Ryan Gritzfeldt -- Chief Operating Officer

Thanks, Ken. Crescent Point's average production in third quarter of 155,708 boe per day was comprised of approximately 90% oil and liquids and was net of dispositions completed during the quarter. Within our key focus areas, we continue to advance our infill and waterflood development programs and move toward two-mile horizontal wells within the Flat Lake play. We expect that our fourth-quarter production will benefit from the completion of our multi-well pad drilling program in North Dakota, which should also result in an increase to our oil weighting relative to third quarter.

Our operating cost savings to date have amounted to approximately 7% prior to the impact of dispositions. We have achieved these efficiencies by implementing new workflows and advancing automation within our field operations. By year-end, we expect to have installed remote monitoring tools in approximately 50% of our operations within our key focus areas, with additional installations expected in the coming year. We are using this technology to enhance the benefits of our new workflows, which ultimately generates lower costs and better run time on our overall operations.

We have also continued to improve our capital costs through gains made by our supply chain and joint completions and facility teams, who have been diligent in optimizing our processes and identifying internal efficiencies. Year to date, these teams have realized over $90 million in capital efficiencies relative to the prior-year's cost structure, and we remain on track to meet our 2019 capital expenditures guidance. Similarly, we have improved our decline mitigation through our waterflood programs. To date, we have converted approximately 150 net wells to waterflood injectors and remain on track with our budget of 175 to 200 conversions for 2019.

We continue to progress the monetization of our gas infrastructure assets in Saskatchewan, and have been pleased with how this process has developed to date. We continue to expect to finalize this disposition in the fourth quarter of this year. I want to acknowledge our operations team and field staff who have played key roles in making our organization more efficient. I'd like to thank them for their hard work, dedication and continued focus on safe operations.

I will now hand the call back to Craig for closing remarks.

Craig Bryksa -- President and Chief Executive Officer

Thanks, Ryan. In closing, I want to reinforce our commitment to our key value drivers of strengthening our balance sheet, being disciplined in our capital allocation and enhancing efficiencies across the company. Collectively, these transformative changes will result in a more sustainable, financially strong, resilient company that will continue to generate shareholder value. We are currently in the process of establishing our budget for 2020, which we expect to release early in the new year.

We plan to maintain our focus on returns versus production growth, free cash flow generation, balance sheet strength and returning capital to shareholders in an accretive manner. I'd like to thank our shareholders and employees for their continued support and engagement. I would also like to extend a special thanks to Bob Heinemann, who is retiring from our board for personal reasons. Bob has served on our board for the past six years, most recently as Chair.

He is a firm believer in the positive changes we are making, and I'd like to thank him for his guidance. We wish you all the best. Succeeding Bob as chair of Crescent Point's board will be Barbara Munroe, effective immediately. The transition will be seamless due to Barbara's wealth of experience and her leadership on the board since she joined in 2016.

I will now open the call for questions from the investment community. Operator, please open the line for questions.

Questions & Answers:


Operator

[Operator instructions] And your first question will be from Travis Wood at National Bank. Please go ahead.

Travis Wood -- National Bank

Yeah, this question might be for Ken. Just looking at a couple of the items within the balance sheet. And I noticed some of the value that are attached to the infrastructure, you've classified them now as held for sale, and there's about $200 million there that's held for sale within that category. Maybe could you talk about that as it relates to possible market value? And that number just seems a lot lower than what I would have been expecting for as we think about a potential transaction?

Craig Bryksa -- President and Chief Executive Officer

Thanks, Travis. I'll maybe pass that to Ken.

Ken Lamont -- Chief Financial Officer

Great, Travis. Yeah, I can confirm that that is the historic book value. And that's been depreciated, obviously, through time. So that's not representative of the proceeds that we'd be expecting on the transaction.

So that's kind of the way the accounting works. And then, obviously, as we move forward to the extent that we close the deal, that's when we'd recognize gain if the proceeds, obviously, are in excess of that book value. So it's just the historic book value that we've moved over for accounting purposes and the assets held for sale.

Travis Wood -- National Bank

OK. And then not to put you on the spot, but kind of any update in terms of that process and how that -- those discussions continue to go?

Ken Lamont -- Chief Financial Officer

Sure. I mean, obviously, there's a strong indication of where we're at in the process given that we've now moved these assets into assets held for sale. So we're continuing along in that process. And nothing has really changed as far as our previous guidance to you on that disposition.

Travis Wood -- National Bank

OK. That's all for me. Thank you.

Ken Lamont -- Chief Financial Officer

Thanks.

Operator

[Operator instructions] And your next question will be from Amir Arif at Cormark. Please go ahead.

Amir Arif -- Cormack Securities -- Analyst

Thanks. Good morning, guys. I understand you won't be putting out your capital budget until early next year, but I was just curious if you can give us some goal post for us to think about in terms of at what oil price you would start with? Like production growth becomes more important? Or at what price? Any additional debt reduction that is required? I mean even though your leverage has been cleaned up quite a bit at current strip prices.

Craig Bryksa -- President and Chief Executive Officer

Thanks, Amir. It's Craig here. So we'll put our budget out early in the new year, so look for us to be fairly similar to where we are this year. Like we've mentioned in the past, of course it will be around returns and free cash flow generation.

There won't be any real absolute growth in that budget is the way we're looking at it now. And then when you mention our debt reduction, we've got target levered out there, I'd say a high commodity price environment and high, I would say, $60. We'd like to be about one times. And then we've also mentioned in the past that at a low commodity price environment, call that $45, $50, we'd like to be about two times.

So those levered measures for us haven't changed. So look for us to stay fairly consistent to that in next year's forecast as well.

Amir Arif -- Cormack Securities -- Analyst

OK. And is there any operational update on the East Shale Duvernay play, in terms of your own activities or Flat Lake?

Craig Bryksa -- President and Chief Executive Officer

As far as East Shale with Duvernay goes, we're just in the process of completing our second well here. So we'll have results over the next few months on that, and we'll see how that plays out. Obviously, it's exciting for us as well. And then as far as Flat Lake goes, it's been a steady, consistent program in there this year.

Very pleased with the results. We're drilling more two-mile wells now than we had in the past, so things on that front look relatively good. And that's an area where we've seen -- been able to see a significant amount of cost savings and efficiencies over the last year. So I'm really pleased with what the operations team has done on that.

When you look at that area, our costs are down in that 13% range year over year. So it's actually been quite exciting for us this year.

Amir Arif -- Cormack Securities -- Analyst

Thank you.

Operator

[Operator instructions] And at this time, I would like to turn the call back to our host.

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

Thank you for taking the time to join our call today. If you have any questions that were not answered, you can call our Investor Relations team at your convenience. Thanks, everyone.

Operator

[Operator signoff]

Duration: 18 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

Amir Arif -- Cormack Securities -- Analyst

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