Crescent Point Energy Corp
TSX:CPG
Earnings Call Analysis
Q4-2023 Analysis
Crescent Point Energy Corp
The company has significantly transformed its portfolio, securing a robust footing in premium drilling locations, primarily in the Kaybob Duvernay play and the Alberta Montney region. This transformation has equipped the company with over 20 years of premium drilling inventory and created a strong platform for future growth and returns. Focused on oil and liquids-weighted assets, the company has oriented its portfolio toward assets that reinforce its long-term excess cash flow generation and shareholder capital return profile.
Financially, the company generated $980 million in excess cash flow in 2023. It returned $600 million to shareholders through dividends and share repurchases, adhering to a policy of allotting 60% of excess cash flow for shareholder returns. A notable move was the increase in the base dividend to $0.115 quarterly. The financial strategy hinges on a conservative budget, capable of being fully funded even with a $55 per barrel WTI oil price environment.
The company achieved significant reserve replacements and displayed a strong recycle ratio of 2.5x in the past year, extending the corporate reserve life index to approximately 16 years. They forecasted a production range of 198,000 to 206,000 BOE per day in 2024, with capital expenditures set between $1.4 billion and $1.5 billion. Operational focus points include drilling longer laterals in the Kaybob Duvernay and optimizing well design in the Alberta Montney.
The company has noted good performance from its wells, particularly mentioning a well pad in the northeastern position delivering around 1,450 BOE per day. Furthermore, new pads have delivered strong oil-weighted production, indicative of successful exploration and operational efficiency. There's optimism around the application of new well designs which is expected to yield results around mid-2023.
There was minor share repurchase activity in Q1, attributed to timing and cash flow allocation due to the ramp-up in production. The company's return of capital policy remains unchanged with a commitment to 60% excess cash flow return. Debt management is a priority with the company aiming to lower their debt, currently at $3.7 billion, by retaining 40% of excess cash flow for debt reduction and actively pursuing asset dispositions.
The hedging strategy ensures cash flow stability, with about 45% oil and 30% gas hedging into early 2025. This cushions the company against market volatility. They've shifted gas basis exposure to minimize risk, moving away from predominantly AECO exposure to diverse benchmarks such as NYMEX, Dawn, Malin, and Chicago area, bolstering profitability against gas price fluctuations.
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Good morning, ladies and gentlemen. My name is Lester, and I will be your operator for Crescent Point Energy's Fourth Quarter 2023 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 webcast may not be recorded or rebroadcast without the express consent of Crescent Point Energy. All amounts discussed today are in Canadian dollars, with the exception of West Texas Intermediate or WTI pricing, which is quoted in U.S. dollars. The complete financial statements and management's discussion and analysis for the period ending December 31, 2023, were announced this morning and are available on Crescent Point, 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 operation or financial results are included in Crescent Point's most recent annual information form, which may be accessed through 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 of Crescent Point. Please go ahead, Mr. Bryksa.
Thank you, operator. I'd like to welcome everyone to our fourth quarter 2023 conference call. With me today are Ken Lamont, our Chief Financial Officer; and Justin Foraie, our Vice President of Operations and Marketing. On today's call, I will first touch on a few of our key accomplishments in 2023 and will then provide some insight into our reserves and our 5-year outlook. Looking back at our Q4 results and our success through 2023, our most remarkable achievement has been how significantly we have transformed our portfolio and how it has materially strengthened Crescent Point's future outlook. These strategic steps were taken with purpose: to secure premium drilling inventory depth in world-class basins. In doing so, we focus on acquiring oil and liquids weighted assets that provide synergies to our existing business and also enhance our long-term excess cash flow generation and return of capital profile for our shareholders. Through our efforts, we have built a portfolio that now has over 20 years of premium drilling inventory. We also control the largest land position in both the condensate-rich Kaybob Duvernay play and the volatile oil window in the Alberta Montney. The portfolio we have built provides us with significant running room and growth potential in these plays, coupled with our high-netback, low-decline assets in Saskatchewan. In Kaybob, we continue to be impressed by the strong oil production and the consistent repeatable success we've achieved since entering the play in 2021. Similar to Kaybob, our well productivity in the Alberta Montney has been remarkable. We have achieved IP30 results that continually rank in the top 10 oil and liquids wells in the Western Canadian Sedimentary Basin. In fact, 25 of the top 30 oil wells in the Alberta Montney over the past year are now owned by Crescent Point. We're incredibly excited about the addition of this new asset to our portfolio and eager to report back as we further develop this world-class resource. With our successful portfolio transformation, our focus now turns to operational execution, enhancing our balance sheet strength, and increasing our return of capital to our shareholders. In 2023, we generated $980 million of excess cash flow, $600 million of which was returned directly to our shareholders through dividends and share repurchases. We remain committed to returning 60% of our excess cash flow to our shareholders and are pleased to raise our base dividend once again to $0.115 per quarter or $0.46 per share on an annualized basis. Even with this dividend increase, we maintain a very conservative budget that is fully funded at low commodity price of $55 per barrel WTI, assuming our current cost structure and capital expenditures guidance. The strength of our portfolio and our operational execution continue to generate significant value for our shareholders as demonstrated in our 2023 reserve metrics. Last year, we replaced over 900% of our 2023 production, including strategic A&D on a 2P reserve basis. We replaced 150% of our 2023 production organically, driven largely by increased reserve additions in our Kaybob Duvernay asset. By entering into the Alberta Montney, we added significant reserves in 2023, increasing our total corporate reserve life index to approximately 16 years. When factoring in our organic additions and strategic A&D, I'm pleased to report that our 2P finding, development and acquisition costs in 2023 generated a very strong recycle ratio of 2.5x, including change in future development capital. It's also worth highlighting that approximately 60% of our premium locations in the Kaybob Duvernay and over 70% of our inventory in the Alberta Montney remain unbooked at year-end 2023, allowing for future reserve additions. Looking ahead, we're forecasting production of 198,000 to 206,000 BOE per day with development capital expenditures of $1.4 billion to $1.5 billion in 2024. Operationally, we will continue to focus on enhancing efficiencies and returns, including drilling longer laterals in the Kaybob Duvernay and optimizing well design and inter-well spacing in the Alberta Montney. We have begun drilling on our recently acquired lands, utilizing our new well design and look forward to sharing our results in the second half of 2024. In Saskatchewan, we will continue to advance our defined mitigation programs and our open-hole multilateral development. We expect to generate significant excess cash flow of approximately $830 million under our 2024 budget, assuming a full year average WTI pricing of approximately $75 per barrel and AECO of $2.30 per Mcf. We continue to earmark 60% of our excess cash flow for shareholders, with approximately $500 million expected to be delivered this year through a combination of dividends and share repurchases. Our significant excess cash flow generation and return of capital in 2024 is further complemented by our 5-year plan, which is set to deliver excess cash flow per share growth on a compounded annual basis of approximately 10% at $70 per barrel WTI. In aggregate, we expect to generate cumulative excess cash flow of $4.7 billion under our 5-year plan. We believe our plan provides shareholders with a compelling combination of high netback production, strong excess cash flow generation, a significant return of capital in addition to organic per share growth. In closing, I'd like to reiterate just how excited we are about our transformed portfolio. We have significantly enhanced our 5-year outlook, and we're excited to further bolster our returns from each of our assets. I'd like to thank our shareholders for all their support and continued engagement as we transformed our business. We look forward to providing more details on our operational results and long-term development plan at our upcoming Investor Day on March 20. I'd also like to thank our staff who continue to demonstrate our commitment to operational excellence with yet another safest year on record. We'll now open the call to questions from the investment community, followed by questions from the webcast. Operator, please open the line.
[Operator Instructions] Your first question comes from Aaron Bilkoski from TD.
I have a couple of reserve-related questions. The first is related to the technical revisions. I was hoping you can provide some details on what drove the oil and NGL technical revisions in the probable category?
Yes. Thanks for the question, Aaron. So as far as reserves, really good numbers when you look at it this year. Like I had mentioned on the call, 2P FD&A recycle ratio of 2.5x, so really strong on those numbers. When you look at the technical revisions, we are somewhere in the neighborhood in and around that $13-ish million total on performance and then technicals on the negative side. About half of that, Aaron, is driven through op costs in more of our legacy assets in one of our Saskatchewan plays. And by definition, those are called technicals when you truncate the back end of the curve. And then the other half of that actually is a couple of the assets that we ended up moving off here over the last quarter, so when you look at Swan Hills and Turner Valley. So as far as the base business going forward, reserves look really good, really tight. Kaybob came in very strong for us this year. And then, of course, when you look at the Montney with us doing that -- those series of deals this year, those reserves came in under acquisitions. So you'll see a cleaner version of that as we roll into 2024.
That's helpful. If I could follow it up with another question on the FDC. When I look at the FDC in the reserve report, it looks like capital expenditures are growing to a little over $1.7 billion by 2027. How should I reconcile that against your corporate 5-year plan that has corporate CapEx hovering around that $1.45 billion range over that period?
Yes. So when you look at our development plan within our reserves, 1 thing that we really like about it is our FDC fairly tightly follows our 5-year plan here in the near term. And then more importantly, we only have roughly, call it, 6.5 years of our inventory booked, and that ties into what you're seeing on that FDC. So for us, it's tough, Aaron, to get them exact between the independents and how we see our budget, but fairly tight when you look at it here in the near term in the 5 years, and then again, roughly only about a 6.5-year FDC outlook or profile going forward is how we've got it. So what that really speaks to is what I mentioned on the call. So you've only got, call it, 30% -- or sorry, 25% to 30% of the Montney locations booked and then only about 40% of the Duvernay locations booked. So that really speaks to how we're going to be able to add reserves organically as we move the business forward here throughout the year. So I guess it's my long way of saying, Aaron, it's really tough to get those exact between the 2 firms, but we feel really good about how they line up in the 5 years. And then more importantly, if you double back, Aaron and get a look at the production profile, the independents have, both on a 1P and 2P basis, it's pretty tight to what we're showing in the 5-year plan.
Your next question comes from Travis Wood from National Bank Financial.
Wanted to touch on M&A. You have some ongoing divestiture processes in the works, and at the same time, there's some opportunities to continue to consolidate your core areas, specifically across the Duvernay with some asset packages out for sale from others. So how are you thinking about M&A now? And why not use this kind of opportunity to continue to buy some inventory while it's on sale?
Travis, thanks for the question. So very active on that front over the last year. I think we're extremely happy with how our portfolio has come together and really the transformation of the portfolio. More importantly, for us, when you look at not only our 5- but our 10-year plan, how that looks moving forward and then again, now on the back end of the latest transaction, we've got 20 years of premium drilling inventory in front of us, Travis. And it looks really good for us into the future. As far as acquisitions, we're not going to be doing anything on that front. So on the acquisitions, I would say no. As far as the dispositions, we've got a couple of smaller things that we're working through as we continue to focus in our asset base into what we're really looking for on that front. So there's a couple of things out there that we're working through. I would tell you we're in the middle of the process on that. And as we get some clarity on how that's going to play out, we'll give the market an update around that. But that will be it for us here this year, the focus on some of these dispos and nothing on the acquisition front. The other thing I'd highlight for you, too, Travis, is it's not only a couple of the asset packages we're looking at but we are starting to think through potential on infrastructure and what does that mean for us going forward as well, too.
Okay, great. And good color on that, Craig. A painful question but I need to ask it. Any dialogue with Riverstone and kind of how they're potentially thinking about their equity stake? I know since the deal, they're a bit underwater on it by 10% or so. But have you had any dialogue with them in terms of how we should think about that block that's out there potentially?
Yes. So it is a painful question, Travis, and you do have to ask it so we absolutely get it. And like you mentioned, on the back end of that deal, part of the deal, which was, again, a very strategic deal for us and made a lot of sense when you think of the long-term business of Crescent Point, so on the back end of the deal, part of the consideration was moving equity into Riverstone as they were the major shareholder, like you mentioned, of Hammerhead, to the tune of around 40-ish million shares, Travis, of which you have lockups for split 50% for a 3- and 6-month period. So the first lockup is after the first 3 months and then that remainder is after the second. That being said, we've -- I've had conversations with Riverstone, both Ken and I. Right now, they are extremely happy shareholders and things are going well. We'll see how this ends up playing out for them and how long they're looking at holding. But with us right now, good conversation, good dialogue, very happy shareholders. And then we'll see how this ends up playing out. I don't expect anything material here to work through that over the next little bit, Travis. But we're, again, in dialogue and working through with them.
Okay, thanks for humoring me there.
Yes. Thanks, Travis.
Turning now over to Shant Madian for web questions.
Okay. Shant?
Yes. Thanks, operator. There was a couple of questions there on A&D, which I think you've answered through Travis' question. A question here on Kaybob. Any follow-up well results that you can speak to that continue to give you a little more comfort as you step out across the land base?
Yes. So one of the things we love about Kaybob is just how consistent and repeatable it's been for us here since we entered the play in March 2021. We most recently brought on another pad that is pushing to the east and to the south of the play. It is in the volatile oil window. And it's in an area where the previous operator had some, what I would describe as more challenging results. So this really offsets, if you remember, our [ FC 806 ] pad this year came online within and around that area, in and around that 1,500-ish BOE per day. On average, well on that pad is around 75-ish percent liquids. I'm happy to tell you that, that second pad we just brought on is in and around that range. So it's been on for a little over 30 days. Flowing out is very strong, in and around 1,500 BOE per day per well and right around that 75% liquid. So it's a good follow-up to a good result this year in an area where the previous operator had some challenging results and it really pushes to the south and the east. So excited about that one.
Similar on the Kaybob, another follow-up there with respect to the development plans within the phase window. So when you look at the location count that we have between the volatile oil window and the liquids-rich, within our 10-year plan, how do you think about the lean gas development within there over that period?
Yes. So for us being a liquids company, we're going to zero in and focus on both the volatile oil window and the liquids-rich window here in the near term over the next both 5 and 10 years. And then as we slowly press to the south and a little bit to the west, you start to get more into that leaner gas, which again still has a decent amount of liquids coming with it as well. So for us, both the 5- and 10-year plans really zero in on the volatile oil and liquids-rich window. And then beyond 10 years is how we start to look as we push into the south and the west. And again, inventory supports that so no reason to advance any faster.
Thanks for that. Moving to the Montney question here. When we should expect to see results on CPG's optimal well design on the newly acquired Hammerhead lands? And any other additional follow-up on well results that you could speak to as well from our recent program?
Sure. So everyone's aware, that deal closed in December 21 of last year. We picked up operations, have been running since then. We are on our first pads right now that are under that new Crescent Point design. We're drilling away. I would say operations are going really strong for us on that front, so things look good. That first pad that will get done and completed under our new well design, so again, remember, that's slightly wider spacing, slightly different completion techniques. Will be probably mid-June by the time the pad is completed and online. And then by the time we have results, I would expect some potentially around that Q2 press release, so at the end of July, early August timing on that front. So excited about it, though operations have been going pretty good. And then as far as follow-up results, we've had a few good ones here come on when you look at the Montney position that we picked up and really across the place, so both from the eastern side moving to the west and then pushing down south. So if you think of there's a 605 pad that has come on over the last 80 days, it's been online, which is east to the north -- sorry, the northeastern position of our land. Those results have been coming in pretty well in and around that 1,450 BOE per day. It's a little bit gassier over on that side at around 45% liquids. But again, good strong flowing production results on the pad, on average, the wells on that. When you look at Gold Creek West, where if everybody is familiar, that's where when we did the original Spartan Delta transaction, Spartan Delta had brought on that original [ 209 ] well that was in that 2,000-ish BOE per day and 90% oil. We've offset that pad here and have had that new pad for us come online over the last -- it's pretty early. These are early results in that last 10, 15 days. And on average, we're in that, call it, 1,800 to 2,200 BOE per day and in and around that 90% oil. So good strong results from that pad. And keep in mind that is a 4-well pad so it's really been coming at us strong. And then again, if you push down south, on the Hammerhead position, I would highlight that maybe even a couple of the analysts know it's picked up on a couple of the wells on that 511 pad that Hammerhead had been drilling right as we took over. Those wells are online, some good early results in there. But I would also put a caveat in there that keep in mind, we were bringing that new battery on online during that period so that the chatter of operations obviously occurs, so you get some chatter in those hours. They get the kinks worked out of that battery. But wells are online, seem to be doing pretty good but we'll continue to monitor that and see how it goes.
Thanks for that, Craig. Maybe shifting here to you, Ken, this is a return of capital question. It looks like buyback activity has been a little quiet here in Q1 to date. Can you just explain any rationale behind that? And at the same time, what should we expect going forward as preference between buybacks and dividends? And has anything changed as far as our return of capital framework?
Sure. So maybe I'll start with that part of the question. No, we're -- haven't changed anything as far as our return of capital policy goes. We are going to return 60% of our excess cash-based dividend. The preference over and above the base dividend will be share repurchases only, so expect that. With respect to the share repurchase and the lack of activity in January, that's just really a timing issue. As everyone knows on the call here, we added a second rig into the Duvernay in the fall of this year, and we're on a bit of a growth ramp as you look at the production profile within 2024. So there's a little less free cash here in Q1. And so obviously, we just manage our buybacks in accordance with when our free cash is being generated. And so that's why you see a little lack of activity in January. But expect as we grow our production, grow our free cash flow during this year, that activity will commensurate increase with that. So it's just a timing issue. Nothing else, the policy hasn't changed.
Okay. Maybe another question for you just around debt management strategy. What are some of the tools in the toolkit and things that we're working towards to try and get towards our lower targets at 1x at lower commodity prices?
Sure. So obviously, on the back end of the Hammerhead transaction, our debt did increase to $3.7 billion. And so this has been outside of operations this year. Our next priority is obviously balance sheet. And the tools in the toolkit, first thing is we do generate significant excess cash flow, and we do retain 40% of that. And so that's really the first weapon that's always in the background is paying down your debt as you go. So we do generate really good excess cash and we'll dedicate that retained portion to the balance sheet only. I would say, secondly, we've talked about the disposition. We obviously and did talk about no acquisitions right now, but we are looking and active on the disposition front. And I would say you saw us being very active in Q4 with a couple of Alberta properties. We've announced that. So we've had those processes go by. We are looking at some other noncore smaller dispositions here. We've got 2 formal processes. We also are running a few informal processes here as well, too. As Craig alluded to, it can be upstream, looking at other things as well, too, in that infrastructure goals, things like that. So I think we have a lot of tools in the toolkit and I just want to make clear that this is a priority for us, and outside of free cash flow, we are going to make some dispositions and get our debt down.
Probably also worth mentioning the hedges that we have in place and continue to protect on the downside.
Yes, it's a fair comment. We're about 45% hedged on the oil side and 30% hedged on the gas side. So obviously, we've layered on significant protection of that free cash flow as we look out this year and into early 2025. So very solid on that front, and that will help take the volatility of our excess cash out of the equation as well.
I mentioned the gas because there -- or the hedges because there are 2 additional questions related to that. First on the gas side. The question is given the collapse in gas prices, how is CPG managing its gas exposure to ensure profitability of some of its newer assets?
Sure. So maybe I'll just start a little bit on the hedge side. Obviously, cost and cost control comes into play as well, too. But from a hedge perspective, we do have 30% of our gas fixed price hedged out over 2 years, so 2024 and 2025. You'll see that in our corporate presentation. These are at $4 a GJ and above, so very strong hedge book on the gas side. Secondly, you'll see in our disclosure as well, too, that we've also moved our basis exposure away from AECO. We're now kind of in that 20% exposed to AECO, and we've diversified that away to various points being NYMEX, Dawn, Malin, and the Chicago area. So not only from a fixed price perspective, we removed some risk on gas but also from a basis perspective, we've done that as well.
And the other side of that, on the oil side, can you discuss your hedging strategy perhaps for the remainder of 2024 and maybe looking at 2025 as prices continue to move higher here?
Yes. So we obviously are hedgers and we'll continue to hedge. I would say 45% for 2024 feels like a good level. So I think that makes a lot of sense for us. And just given that we're still active and trying to deleverage, as that balance sheet gets more into shape, we can look at the hedge percentage a little bit as we go forward as to what levels that we're looking for. As you saw in the past when we were a little lighter on the leverage side and on the debt side, we were kind of in that 20% hedged range. So I would say look for that. Look for us to take advantages as the back end of the curve hopefully does move up in 2025, then we'll tick away there and secure at least a year out and looking just maybe slightly beyond that to where we can.
Another question coming back on the return of capital. We've stated our intention to increase the return of capital to shareholders over time. Can you provide any specifics on what that may entail?
Sure. And so Craig, do you want me to take this?
Yes, go ahead.
So yes, I would say that as far as our priorities right now, priority is, obviously, operational execution. The next 1 is our balance sheet. The third 1 is increasing our return of capital, and we've kind of stated that very clearly in all our literature. With respect to that, we really do need to see our -- to get our balance sheet paid down. That will be the priority. So look for us to have a target here of about $1.5 billion over the next couple of years getting our balance sheet down. When we're in that position, that's when we would look to potentially increase our return of capital proposition. And that's really how we're thinking about that. So yes, I believe that answers the question.
Yes. I think at this time, there are no additional questions from those listening on the line. Thanks to everyone for joining our call today. And if you have any other additional questions that weren't answered, please call our Investor Relations team at your convenience.
Thanks, everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect.