© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Baytex Energy Corp. Second Quarter 2021 Financial and Operating Results Conference Call. The conference is being recorded. [Operator Instructions]I would now like to turn the conference over to Brian Ector, Vice President, Capital Markets. Please go ahead.
Good morning, ladies and gentlemen, and thank you for joining us today to us to discuss our second quarter 2021 financial and operating results. Today, I'm joined by Ed LaFehr, our President and Chief Executive Officer; Rod Gray, Executive VP and Chief Financial Officer; Chad Lundberg, Chief Operating and Sustainability Officer; Kendall Arthur, Vice President, Heavy Oil; Chad Kalmakoff, our Vice President, Finance; and Scott Lovett, our Vice President of Corporate Development.While listening, please keep in mind that some of our remarks will contain forward-looking statements within the meaning of applicable securities laws. I refer you to the advisories regarding forward-looking statements, oil and gas information and non-GAAP financial and capital management measures in yesterday's press release. All dollar amounts referenced in our remarks are in Canadian dollars unless otherwise specified.And with that, I would now like to turn the call over to Ed.
Thanks, Brian, and good morning, everyone. I'd like to welcome all of you to our second quarter 2021 conference call. I'm very pleased to highlight our strong operating and financial performance as we continue to build momentum following an increase in activity late last year. Our free cash flow profile continues to improve as we benefit from our diversified oil weighted portfolio and our commitment to allocate capital effectively. And we are taking proactive measures to reduce our net debt with the repurchase and cancellation of USD 106 million, representing approximately 25% of our outstanding long term notes due in 2024. At current commodity prices, we now expect to deliver over $350 million of free cash flow this year or $0.62 per basic share, which will accelerate our debt reduction efforts.During the second quarter, we delivered adjusted funds flow of $176 million or $0.31 per basic share. This resulted in substantial free cash flow of $112 million on the quarter, which along with Canadian dollar strengthening relative to the U.S. dollar contributed to $129 million reduction in our net debt. We realized an operating netback of $34 per boe, which is up from $30 per boe realized in the first quarter. Production during the second quarter averaged 81,200 BOEs per day, 81% oil and NGLs, up 3% as compared to 79,000 boes per day in Q1 2021. The increased production reflects the timing of completion activity in the Eagle Ford and a strong performance across our light and heavy oil assets in Canada. Exploration and development expenditures totaled $61 million and included the drilling of 19.7 net wells with a 100% success rate.As a result of our strong performance through the first half of 2021, we are increasing our production guidance to 79,000 to 80,000 boes per day, up from 77,000 to 79,000 boe per day previously. At the midpoint, this represents a 2% increase. There is no change to our capital guidance. We continue to forecast exploration and development expenditures of $285 million to $315 million for 2021.Last quarter, we highlighted the strategic agreement we executed in 2020 with the Peavine Metis settlement that covered 60 sections of land directly to the south of our existing Seal operations. At the time, we identified significant potential for this exploration play targeting the Spirit River formation, a Clearwater formation equivalent. Adding these 60 sections to our existing Seal acreage, we estimate over 100 sections of our lands are prospective for Clearwater development. As you will recall, our initial exploration well drilled on the Peavine lands during the first quarter delivered a 30-day initial production rate of 175 barrels per day from only 2 laterals. We have now followed up our initial success with 4 additional wells. The first of these follow-up appraisal wells is another 2 lateral well with a lower cost drilling mud. This well has also demonstrated a 30-day initial production rate of 175 barrels per day.We have also drilled 2 eight-lateral wells, which are showing promising early results. These 2 wells were brought on stream during the month of July, so we are not yet in a position to report 30-day initial production rates. We are currently drilling the fourth follow-up well, which is also an eight-lateral appraisal well located 3 miles to the East. In total, we plan to drill up to 7 net appraisal wells in 2021 across our Clearwater acreage with 5 of these wells on our Peavine lands. I am very excited to say that our appraisal program continues to yield encouraging results and pending continued success sets the stage for an increased activity program in 2022.We also introduced our 5-year outlook last quarter, which is grounded on a $55 WTI price. In our Investor Relations materials, we have updated year 1 of our 5-year outlook, in other words, 2021, to reflect year-to-date commodity prices and the forward strip for the balance of this year. The remaining years, 2022 to 2025, continue to be based on a constant USD 55 WTI price. Under the plan, we expect to generate over $1 billion of cumulative free cash flow as we target capital expenditures at less than 70% of our adjusted funds flow, while optimizing production in the 80,000 to 85,000 boe per day range.Based on a strong pricing environment and free cash flow forecast for 2021, we have accelerated our debt repayment strategy by approximately 1 year over the base plan presented last quarter. And for those with a more bullish outlook on oil, we provide a couple of sensitivities. Under constant USD 60 a barrel and USD 65 a barrel WTI pricing scenarios, we expect to generate in excess of 1.5 and $2 billion of cumulative free cash flow, respectively, over the planned period. In the context of our current $1.2 billion market capitalizing -- capitalization, this is pretty extraordinary.I will now turn the call over to Rod to discuss our balance sheet and risk management.
Thanks, Ed, and good morning, everyone. As Ed mentioned, we have taken proactive measures to reduce our debt levels. On May 4, we repurchased and canceled USD 5.8 million principal amount of 5.625% long term notes. And subsequent to the quarter, we used free cash flow generated in the first half of 2021 to repurchase and cancel an additional USD 100 million principal amount of the 5.625% long term notes at the call price of approximately 101 plus accrued interest. These measures demonstrate our commitment to reduce our leverage and drive our cost structure lower.Following these repurchases, we continue to maintain in excess of $400 million of liquidity. As of June 30, our net debt totaled $1.63 billion, down from $1.76 billion at March 31, 2021. We are currently targeting a net debt of $1 billion to $1.2 billion, which, under our base plan at USD 55 WTI, we will reach by the end of 2023. At higher commodity prices, the time frame to achieve our debt targets will be accelerated.Now turning to our risk management. We maintain a consistent approach to risk management and marketing, utilizing various financial derivative contracts and crude by rail to reduce the volatility in our adjusted funds flow. For the remainder of 2021, we have entered into hedges on approximately 45% of our net crude oil exposure, largely using -- utilizing a 3-way option structure that provides WTI price protection at USD 45 per barrel with upside participation to USD 52 per barrel. For 2022, we have entered into hedges on approximately 42% of our net crude oil exposure, utilizing a combination of swaptions at USD 53.50 per barrel and a 3-way option structure that provides price protection at USD 58 per barrel with upside participation to approximately USD 67.50 per barrel. For 2021 and 2022, we have also entered hedges on our Canadian light and heavy oil differential exposure. Full details of our hedge program can be found in our Q2 financial statements and are available on our website.And with that, I'll turn the call back to Ed.
Thanks, Rod. I would like to also highlight our just released 2020 environment, social and governance report. This is our fifth biannual report and demonstrates our commitment to transparency and accountability and our progress in managing the environment and social impacts of our business.I'm also pleased to announce the appointment of Chad Lundberg as Chief Operating and Sustainability Officer. Chad will retain his existing responsibilities as Head of the Light Oil business and will spend more time explicitly linking our sustainability priorities and efforts to our capital allocation and strategic planning processes. We know that our ESG efforts are essential to our long term viability and relevance. As we plan for the future, we have set the bar higher by setting new goals. Having surpassed our first GHG reduction target, we want to further decarbonize our operations, and we have committed to reduce our GHG intensity by 65% from our 2018 baseline.Additionally, to reduce the environmental footprint of our operations, we have set a bold new target to reduce our inactive well count of 4,500 wells to 0 by 2040. And we're also evaluating and testing methods to reduce our freshwater intensity. Our ESG report is available on our website, and I would encourage all investors to review the report and reach out if you have any questions.And with that, I will close with this key message, our business is strong, and we have a robust plan in place to deliver meaningful free cash flow. We will continue to monitor our leverage position and assess market conditions to determine the best methods or combination thereof to enhance shareholder returns. These could include share buybacks, a dividend and/or reinvesting for organic growth. We are off to a great start 2021, and we look forward to continuing to communicate with you as we execute on our plans for value creation.And with that, I will ask the operator to please open the call for questions.
[Operator Instructions] Our first caller is Phil Skolnick with Eight Capital.
Just had questions on the Clearwater. I mean, I know it's only 2 wells, but you're using -- in terms of 2 laterals, you're getting better results than maybe we're seeing with -- you're seeing with some of your peers in other parts of Clearwater. Is that repeatable, do you think? I mean, what do you think is kind of differentiating where you are in the Clearwater versus maybe where others are?
Yes. Very good question. We've had a lot of interest in what we're doing in the Clearwater. And let me take a step back before I answer the question, Phil. The first thing I would say is we've been evaluating this play for a couple of years, and we landed the deal with the Peavine Metis settlement a year ago -- 1.25 years ago. And also, I want to give a big shout out or support to the Peavine Metis settlement, who are doing a great job integrating with us and working with us to do what we're doing out there. We are a multi-lateral exploration and development company. Everybody knows that we run this probably as well or better than anyone. So we are actually drilling our fifth well right now in the Peavine settlement, and it's further to the east. All results so far, I would say, are generally confirming the mapping, the geology and the reservoir that the team had anticipated through the course of the last couple of years. So it's just -- this is not a big surprise to us. We are pleasantly surprised, I think, with some of the results, but in general, we're confirming expectations. And so we announced the 175 barrel a day 2 lateral discovery well in Q1. We're now saying we've got a second drilled on a water-based, a cheaper, less expensive water-based mud system at the same level of 175 barrels per day. We've got 2 eight-leg multi-laterals that you can see in the press release, which you're referring to, I think, Phil, that were brought online in July. And the one that was brought on July 10, had about 10 days of oil-based mud flowback and is now in its roughly its 10th day of initial production. And I can tell you right now, it's very early. We don't know for sure what the IP30 will be. But our 10-day early initial results are greater than 500 barrels a day. So that's kind of where we're sitting. It will be variable across this reservoir, like all of these things are in cold-flow, and it will depend where we are. The second eight-legger is still producing back the drilling mud, and we don't have any early results on that to report. But all is going according to plan. And we're sitting now drilling in the third or fourth leg of the next eight-leg well out to the east, and that's another important test. So these are all important tests. It's just a step in the process of us appraising and developing these lands. But we're very encouraged, we're very excited, Phil. And hopefully, that -- as I said in the script, that would lead to increased activity next year. But let's see where we get around September timing.
Yes, for sure. And you just -- you mentioned that the east one is another important test. I mean, what exactly are you testing and expecting to see out there?
Yes. Well, we knew we were drilling this first well down -- the discovery well is downdip, has further risks associated with us, and that's when we got 175 barrels a day. We're on that pad now with 4 producing wells. The fifth well is I said is 3 miles to the east. So what we believe happens out there is that the structure moves updip and we're seeing that from the laterals we're drilling off of the discovery pad that extends to the east. So it's confirming our view of structure. As we move up structure, there's a potential for lighter oil. And as you see lighter oils, mobility is improved. So it's a little bit closer to the settlement, and we've -- we're managing that with the logistics of our trucks and rigs and supply equipment. But everything is going well so far. But that's really what we're testing is further acreage to the east, up structure and hopefully, some lighter fluids, but we will see.
The next question is from Jeremy McCrea from Raymond James.
This is a bit of a follow-up from Phil's question there, too. Like what are you guys wanting to see from the Clearwater before you really start putting some more capital into the play and just directing capital from other areas? And where does -- where do you see this Clearwater play going into over the next 2, 3, 4, 5 years here? Like how does this play, interact with your 5-year plan here, just given these initial results at 500 barrels a day here for the first 10 days there?
Yes. Well, we've got about 100 sections of prospective land in the Clearwater, and about 60 of that is in the Peavine, as I said. So 40 sections to the north in our Seal main and beyond area. So that's kind of the scope of the play. If we've got 4 wells a section, that's quite a lot of inventory. So what I would do is risk weight that, which we've done and 50 sections work at 4 wells a section, that's a couple of hundred wells. If we've got -- on 1 rig year, we can drill 18 to 20 wells per year. So that's about a 10-year inventory of prospect inventory. So the beauty of this is, if it's what we think it is and benchmarks to similar areas, we believe it grows within its own cash flow. And that's the beauty of Clearwater that very few other places can do. And if it does, then it doesn't put a burden on the Corporation as we go into development mode. The economics are very strong, they're 100% to 200% returns, less than a year paybacks, 2 to 3x recycle ratios. So at our base, our IP expectation was about 300 barrels a day, IP30, and 150,000 to 170,000 barrel EURS, we would expect to generate those economic results and to grow it. So what could it mean? I think, I kind of subtly alluded to, it would be very straightforward to -- if we have success on this program, into September, we will know the answer to that. I could see us very clearly going to a rig year program in that 18 to 20 well level for next year. But we've got to make those calls in the fall as we set up the 2022 budget and move on from there. We're thinking about that quite hard.
This concludes the question-and-answer session. I'd like to turn the conference back over to Brian Ector for any closing remarks.
All right. Thanks, Gaelyn. Thanks, everyone, for participating in our second quarter conference call. Have a great day.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.