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Crescent Point Energy Corp (NYSE:CPG)
Q2 2021 Earnings Call
Jul 28, 2021, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning ladies and gentlemen. My name is Michelle, and I will be your operator for Crescent Point Energy's Second Quarter 2021 Conference Call. This conference call is being recorded today and will be webcast alongside 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, unless otherwise stated. The complete financial statements and Management's Discussion & Analysis for the period ending June 30, 2021, 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 investments 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 -- President & Chief Executive Officer

Thank you, operator. I'd like to welcome everyone to our Q2 2021 conference call. With me today are Ken Lamont, Chief Financial Officer; and Ryan Gritzfeldt, 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.

Before I jump into our Q2 results, I'd like to rewind a bit and set the table for today's call. Three years ago, we set in motion an ambitious plan to transform the company with a focus on strengthening the balance sheet and enhancing sustainability. Since then, we have successfully implemented a disciplined capital allocation framework to guide our decision making process and provide transparency to our investors, streamlined our asset base to build a portfolio of high return, long-life assets, and reduce our cost structure and decline rates to enhance our excess cash flow generation. Because we made these transformative improvements, we successfully met the challenges of the pandemic and capitalized on opportunities as commodity prices improved.

We believe that adhering to these principles will be equally important in times of more bullish outlooks, like we have seen recently. We've remained committed to our principles during this period of rising commodity prices, which has resulted in significant excess cash flow generation. Through our capital allocation framework, we have set clear priorities for how we intend to use the excess cash flow to enhance our balance sheet strength, while also looking to increase shareholder value.

At the beginning of the quarter, we closed our Kaybob acquisition which included a cash purchase price of approximately $670 million. Since the closing of this acquisition, we successfully reduced our net debt by approximately $360 million and plan to continue to prioritize debt reduction to achieve our optimum leverage targets. Assuming WTI prices of US$65 to US$75 per barrel for the remainder of the year, we expect to generate approximately $675 million to $775 million of excess cash flow in 2021. As we gain line of sight toward our leverage target of one times debt to cash flow, we plan to gradually increase our focus on returning additional capital to shareholders. We see great value in being transparent with the market about our capital allocation priorities and our overall framework, which we've laid out in detail in our corporate materials found in our website. We believe sharing this level of insight provides greater clarity and predictability to investors.

Similarly, we're also providing greater transparency into how we manage the risks and opportunities we face, including through the disclosures in our recently released Sustainability and TCFD reports. Our strong governance practices, progressive social initiatives, and ambitious environmental stewardship targets demonstrate our commitment to ESG performance. In fact, our progress has been noted externally with a recent improvement in MSCI ratings shifting from a BBB to an A. I'd also note that this improvement was issued prior to the release of our Sustainability Report, which included enhanced targets, compensation framework and capital allocation processes all centered around ESG.

Before I pass the call over to Ken, I'd like to make a quick comparison of how the business has significantly improved since 2018, which is the most recent period when WTI last averaged approximately US$65 per barrel. During that year, the company's reinvestment rate exceeded 100%, with no excess cash flow available to enhance shareholder value. However, through our teams' execution, and concerted efforts to enhance discipline, focus and cost structure, the business now generates significant excess cash flow at a similar price level with a reinvestment rate of just over 50%. This improvement highlights the cost savings we have delivered, the enhanced netbacks we have achieved through our A&D efforts and the positive impact from other efficiencies we have realized. We remain disciplined no matter the commodity price environment and will continue to move the business forward to further enhance our key pillars of balance sheet strength and sustainability.

I'll now turn the call over to Ken to discuss our financial results. Ken?

Ken Lamont -- Chief Financial Officer

Thanks, Craig. For the quarter ended June 30, 2021, adjusted funds flow totaled over $387 million or $0.66 per share fully diluted, driven by a strong operating netback of approximately $40 per BOE.

Our second quarter development capital expenditures totaled $88 million, resulting in significant excess cash flow generation. Net income totaled $2.1 billion for the quarter ended June 30, 2021, primarily resulting from a $1.9 billion after-tax reversal of a non-cash impairment due to an increase in forward commodity prices in the independent engineering price forecast. Our second quarter net income also included a gain on sale of over $70 million related to our previously announced disposition of our Southeast Saskatchewan assets.

Adjusted net earnings for the quarter were $118 million or $0.20 per share. Net debt as of June 30, 2021, was approximately $2.3 billion, including approximately $670 million of cash consideration paid for the acquisition of the Kaybob Duvernay assets, which closed on April 1. As Craig highlighted earlier, we successfully reduced our net debt after the closing of the Kaybob acquisition by approximately $360 million during the quarter or over a half the cash purchase price of the acquisition. We achieved this reduction through significant excess cash flow generation and from the proceeds of our previously announced disposition. Based on current commodity prices, we expect to pay off the balance of the cash purchase price through the remainder of the year.

During the second quarter, we also repaid senior note maturities totaling approximately $185 million. Our next senior note maturities totaling $225 million, are not due until the second quarter of 2022, with significant liquidity in place through our current hedge or current credit facilities. We continue to be disciplined in our hedging strategy to protect against commodity price volatility. Over 40% of our oil and liquids production net of royalty interest is hedged through the second half of 2021. We also have approximately 20% of our 2022 production, currently hedged and will remain disciplined in our approach to layering on additional protection in the context of commodity prices.

I'll now turn things over to Ryan to provide some operational highlights. Ryan?

Ryan Gritzfeldt -- Chief Operating Officer

Thanks, Ken. Our second quarter production averaged 148,641 BOE per day, comprised of over 85% oil and liquids. And due to our strong second quarter production, second half 2021 reactivation volumes and some base operational performance, we are increasing our 2021 annual production guidance by 2,000 BOE per day to 130,000 to 134,000 BOE per day. This is the first quarter that reflects the impact of our recently acquired Kaybob Duvernay assets, and includes production from approximately 15 wells that were recently completed in the place. These wells continue to flow at significant initial production rates that are meeting or exceeding our internal type wells with the high liquids weighting of over 80%.

Based on Shell's capital costs, we expect these wells to generate competitive full cycle returns. And we are focused on further enhancing these returns by pursuing a conservative development plan, while also leveraging our operational expertise to optimize overall efficiencies. We are excited to mention that we recently commenced drilling our first five well pad in the Kaybob Duvernay with initial production rates expected at the end of this year. Within our southeast and southwest Saskatchewan resource plays, we continue to focus on low risk high return infield drilling, and the advancement of our decline mitigation programs to further enhance long-term excess cash flow and sustainability. During the first half of the year, we converted approximately 55 producing wells to water injection wells and remain on track with our plan to convert a total of over 135 wells to injection in 2021. We are also advancing other decline mitigation programs and enhanced oil recovery techniques, including the continued development of our polymer floods in southwest Saskatchewan.

Last month, we released our third annual Sustainability Report, outlining our latest progress and ongoing commitment to strong environmental, social and governance performance throughout our operations. The 2021 Sustainability Report highlights our increased target for emissions intensity reduction to 50% by 2025, as well as a 70% reduction in absolute methane emission in each case relative to our 2017 baseline. I'm proud to report that we remain on track to meet these targets, and continue to assess and pursue new opportunities to further reduce our emissions.

We also introduced the target to reduce our inactive well inventory by 30% over the next 10 years, excluding the impact of the previously announced disposition, which significantly reduced our inactive well inventory and lowered our corporate asset retirement obligations by over $220 million. To help achieve this target, we anticipate the safe retirement of approximately 400 wells this year. In addition, we will also announce the development of new freshwater use targets, which are expected to be released later this year. In order to support all of these initiatives, we have committed to allocate 3% to 5% of our annual capital budget to environmental stewardship moving forward.

Finally, again, I would like to commend our employees and specifically our field staff for their continued commitments and dedication to safe operations and even more specifically to our Kaybob field staff for a very safe and successful integration of the Duvernay assets into our organization.

I'll now pass it back to Craig for final remarks. Craig?

Craig Bryksa -- President & Chief Executive Officer

Thanks, Ryan. Our second quarter results continue to demonstrate our commitment to our core principles of balance sheet strength, and sustainability. Our recent strategic A&D activities are expected to deliver meaningful improvements to the business by enhancing our excess free cash flow generation, accelerating our deleveraging goals, improving our cost structure, increasing our overall scalability, and reducing future decommissioning liability.

As Ryan mentioned, based on our continued operational outperformance and the reactivation of some volumes that were previously shut-in during a lower price environment, we're increasing our 2021 annual average production guidance to 130,000 to 134,000 BOE per day. Our development capital expenditures remain unchanged within the range of our prior guidance, allowing us to maximize excess cash flow generation and further enhance shareholder value. We anticipate generating approximately $675 million to $775 million of excess cash flow in 2021 assuming WTI prices of US$65 to US$75 per barrel for the remainder of the year. We plan to continue allocating excess cash flow toward our balance sheet while also evaluating the return of additional capital to shareholders in the context of our capital allocation framework, and leverage targets. Following that, we will assess the allocation of any remaining excess cash flow to other value enhancing opportunities as per our capital allocation framework, including potential share buybacks, organic or inorganic growth opportunities, long-term initiatives or additional debt reduction.

I'd like to thank all our stakeholders for their continued support, and our employees for their hard work and execution of our business strategy. I'll now open the call for questions from the investment community.

Operator, please open the call.

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, good morning, everybody and congrats on what looks to be a good quarter. And Craig, you hit it on your opening remarks, congrats to you for the execution over the last several years. My question is around this kind of the capital or more so the free cash framework and you laid out in pretty good detail and have some slides highlighting exactly how you want to allocate the free cash but more specifically with this very much accelerated free cash profile with the help of the commodity, balance sheet compressing probably much quicker than you guys had expected. Could we see that return to shareholders whether it's dividend growth back into the equation, or a buyback, do we see that in 2021 or do you want to play more of a wait and see approach around how that free cash gets allocated?

Craig Bryksa -- President & Chief Executive Officer

Hey, Travis, and thanks for the question. So it's Craig here. One of the things we're really excited to get out to the market last year was our capital allocation framework. And to your point, it's a very transparent view of how the management team and the board at Crescent Point think of allocating capital. So the first step that you see within that framework is our maintenance capital budget. And as we go through our budgeting process here, we'll provide some color on what 2022 looks like later, later in the year. And then the next priority down on that framework, our balance sheet strength and bringing back that base level dividend. The other thing I would say is, we've been very transparent with the market to what our overall leverage targets are. We want to be one-time debt to cash flow at $55. So that would imply at the current company size that would imply absolute debt somewhere in that range of $1.3 billion to $1.4 billion. However, Travis, keep in mind that we don't absolutely need to be at that leverage target before we bring back a dividend. But we certainly need to have some sightlines into that. So, as far as the exact timing of how things on that front will play out, I can't comment on that, but look for us to stay very disciplined toward that framework.

And then, if you look beyond like I've said before, balance sheet strength and core dividend, then look for us to allocate based on other priorities again, all returns based off competing on returns, and whether that's share repurchases or inorganic or organic growth or further debt repayment, that's how we think through things. So I don't know if Ken or Ryan if you had anything else. Thanks for the question, Travis.

Travis Wood -- National Bank Financial -- Analyst

Okay. That sounds great.

Operator

Your next question comes from Jeremy Mccrea of Raymond James. Please go ahead.

Jeremy Mccrea -- Raymond James -- Analyst

Well, hi, guys, I got a couple questions here. The first one is just it's been a busy year with you guys with M&A. And I'm wondering if you're probably done for the meantime, or if you're still seeing lots of deals come through the office here versus last year? And maybe what you're looking for in terms of different M&A deals? And the second question is just in terms of the reactivation of some wells and bring on more production, is there more reactivations to possibly bring on as well, even as prices continue to hold at these prices?

Craig Bryksa -- President & Chief Executive Officer

Thanks for the question, Jeremy, maybe what we'll do is I'll take the first one, and then Ryan can give you some color on reactivations on the second one. As far as A&D, if on the D side, I think we've had a good strategic disposition here, it made a lot of sense for us to move that off an asset that really doesn't fit in what we're trying to build. And at the end of the day, really clean up above 25% of our ARO liabilities on that disposition. As far as acquisitions, if there are things that come in front of us, that make sense within the portfolio, that we're assembling and they improve us in the context of one of those key pillars of our strategy that we've talked to you about, over the last few years, one being balance sheet strength, or the other being sustainability. If it improves us in the context of one or the other, there was uncertainty; we would look at layering that in to our organization. So we'll continue to evaluate those on a one-off basis as they present themselves.

And then, as far as dispositions, I would say we'll always look to optimize the bottom end of our portfolio. I think what we did here with the southeast staff disposition was a good example of that. That being said, don't expect us Jeremy to get any smaller here than where we're at the current 130,000 BOE per day. And then, as far as -- go ahead.

Jeremy Mccrea -- Raymond James -- Analyst

So, I guess just kind of the follow-up you've been talking about those two pillars here. Are you seeing just as much opportunity still in the current market in terms of Kaybob Duvernay opportunity came about? Are you still seeing just as many things come through the door that potentially looks exciting for you guys? Or is it still just kind of one-offs very, there's one-offs I guess?

Craig Bryksa -- President & Chief Executive Officer

So Jeremy, there's certainly things out there. I would say there's things out on the market now that we'll certainly we will look through and revisit and if it makes sense for us to do then we would act on that. Again, it's going to improve us in the context of one of those. So we'll see how they come off again individually.

As far as the second question, I don't know, Ryan, do you want to add some color on that question?

Ryan Gritzfeldt -- Chief Operating Officer

Yes. Hi, Jeremy. Yes, we've pretty much brought all of our shut-in volumes back on, like we communicated in the past we kind of wanted to see sustained higher level commodity prices, which we have here. So we made the call to bring back on pretty much all of our previously shut-in volumes. If we see sustained higher pricing again, there might be a few more barrels to bring back on, but very insignificant compared to our total production base.

Operator

Ladies and gentlemen, at this time, I will now turn the conference back over to Craig Bryksa. Please go ahead sir.

Craig Bryksa -- President & Chief Executive Officer

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

Operator

Crescent Point's Investor Relations department can be reached at 1-855-767-6923. Thank you and have a good day.

Duration: 32 minutes

Call participants:

Craig Bryksa -- President & Chief Executive Officer

Ken Lamont -- Chief Financial Officer

Ryan Gritzfeldt -- Chief Operating Officer

Travis Wood -- National Bank Financial -- Analyst

Jeremy Mccrea -- Raymond James -- Analyst

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