Baytex Energy Corp. (BTE) Q1 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the Baytex Energy Corp's First Quarter Results Conference Call. Please be advised that this call is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Brian Aster, Senior Vice President, Capital Markets and Public Affairs. Please go ahead, Mr. Aster.

Thank you, Melanie. Good morning ladies and gentlemen and thank you for joining us today to discuss our 2016 first quarter financial and operating results. With me today are Jim Bowzer, our President and Chief Executive Officer; Rod Gray our Chief Financial Officer; and Rick Ramsay our Chief Operating Officer. While listening, please keep in mind that some of our remarks will contain forward looking statements within the meeting of applicable security laws. I refer you to our advisors regarding forward looking statements, non-GAAP financial measures, and all gap information contained in today's press release. Although our financial reference remarks are in Canadian dollars unless otherwise specified and I would now like to turn the call over to Jim.

Thanks, Brian and good morning everyone. Today I will discuss our results for the first quarter of 2016 and how we will continue to meet the challenges brought on by this low price environment. I will also discuss how we will remain focused on prudently managing our operations to maintain strong levels of financial liquidity. I will break my comments in four parts for you today. First I will talk about our first quarter operating financial results. Second I'll provide an update on our balance sheet and financial liquidity. Third I will provide an update on our marketing and lastly I will review our plans for 2016. Our operating results for the first quarter were consistent with our expectations and reflect a reduced pace of drilling activity. Production averaged approximately 75,800 BOEs per day during the first quarter as compared to 81,000 BOEs per day in the fourth quarter of 2015. This rate was slightly ahead of our Q1 guidance of 73,000 BOE to 75,000 BOEs per day, which is largely attributable to our continued strong drilling results in the Eagle Ford. Capital expenditures for exploration and development activities totaled $82 million, and we participated in the drilling of 13.5 net wells with 100% success rate. As we had previously indicated, we proactively shut in approximately 7500 BOEs per day for predominantly low or negative margin oil production during the quarter in order to optimize the value of our resource base and maximize our funds from operation. In the Eagle Ford we produced just over 41,000 BOEs per day during the first quarter, and increased up 2% from the fourth quarter of 2015 and up 5% from the third quarter of 2015. Our pace of development in the Eagle Ford was largely unchanged during the first quarter with approximately 6 rigs and one tractor working on our lands. During the quarter we commenced production on 34 wells in the Eagle Ford of which 19 wells established an average 30 day initial production rate of 1300 BOEs per day. On the capital side, we've now achieved an approximate 32% reduction in the well costs in the Eagle Ford with wells now being drilled and completed and equipped for about US $5.6 million, as compared to $8.2 million in late 2014. We continue making significant advancements in delineating the multi zones development potential of our sugarcane acreage. We have implemented stack across pilots which target up to three zones in the Eagle Ford formation in addition to the overlying knots and chalk formation, and we currently have 13 of these multi zone projects in various stages of execution and production. In Canada, our production averaged approximately 35,000 BOEs per day in the first quarter, as compared to about 41,000 BOEs per day in the fourth quarter. The reduced volumes in Canada reflect the impact of the production that was shut in and the fact that there has been no heavy oil drilling since the third quarter of 2015. We generated funds from operations of $56 million or $0.22 per share during the first quarter; excuse me, $46 million. I think everyone on the line today is very well aware of the difficult pricing environment we faced during the first quarter and this is reflected in our first quarter netbacks. On corporate basis, our operating netbacks in the first quarter was $5.82 per BOE, or $12.29 per BOE including financial derivative gains. With our exposure to heavy oil, our Canadian operations generated an operating loss of $0.77 per BOE, while the Eagle Ford generated an operating netback of $0.1141 per BOE. During this quarter we continue to focus on cost production initiatives across all of our operations. Operating expenses in Canada decreased 19% on a current BOE basis as compared to the first quarter of 2015, despite the impact of fixed costs on lower production values. Transportation expenses in Canada have been reduced by 40% on a per BOE basis as compared to the first quarter of 2015, due to the ongoing optimization within our current trucking division and decreased fuel costs. On the corporate side, our G&A was $14.2 million in the quarter as compared to $17.1 million in the first quarter of 2015. This decrease is primarily a result of cost reductions to staffing levels to coincide with lower levels of activity combined with reductions in discretionary spending. As a continued cost control measure, all full-time employees' salaries and all annual retainers paid to our directors will reduce by 10%, effective March 1, 2016. And now for a little more color on our financial liquidity, total long term debt at the end of the quarter was $1.83 billion down from $1.88 billion at December 31, 2015. Our long-term debt is comprised of a bank loan of $290 million and senior unsecured notes of $1.54 billion. On March 31, we announced amendments to our bank credit facilities that would provide us with increased financial flexibility. The amendments included reducing our credit facilities to US $575 million, renting our bank lending syndicate first priority security with respect to our assets and restructuring our financial cover. It is important to note these facilities are not borrowing based facilities and do not require annual or semi-annual views. There are no mandatory principal payments prior to maturity in June of 2019 and the maturity date can be further extended with the consent of our banking syndicate. With this revised agreement, we expect to realize savings of approximately $8 million in 2016 from lower interest expense and standby fees. As at March 31, 2016, our senior secured debt to bank ratio was 0.6:1 and our interest coverage ratio was 0.48:1 on a trailing 12-months basis, both ratios well within the allowable range. With these amendments to our bank facilities we expect to have adequate liquidity and financial flexibility to execute our business plan. Now with respect to our marketing efforts, for the balance of 2016 we have entered into hedges on approximately 44% of our net WTI exposure, with 17% fixed at approximately US $62 per barrel and 27% hedge using a three-way-option structure. We have also entered into hedges on approximately 38% of our net heavy oil differential exposure and 58% of our natural gas exposure. For 2017 we have entered into hedges on approximately 28% of WTI exposure, utilizing a 3-way-option structure. We have also entered into hedges on approximately 8% of our net heavy oil differential exposure and 32% of our net natural gas exposure. You can find the details around our hedging programs in today's press release, the unrealized financial derivative gain with respect to our hedges as of April 26, 2016, was approximately $54 million. So in summary, during the quarter we continued to meet the challenges brought on by this low oil price environment. We announced amendments to our bank credit facilities that provide us with increased financial flexibility, and we shut in our low or negative margin heavy oil production. Importantly, we continue to direct the vast majority of our exploration and development dollars to the Eagle Ford which generates the highest rates return and the highest netbacks from our portfolio. Our operating results in the eagle port were stronger in the quarter with production of 2% over the fourth quarter of 2015, and well costs continuing to decline. Our 2016 production guidance is unchanged, at 68,000 to 72,000 BOEs per day, with budgeted exploration and development expenditures at $225 million to $265 million. In 2016 we are targeting capital expenditure to approximate funds for operations in order to minimize additional bank borrowing. Our 2015 program will remain flexible and allows for adjustments to spending based on changes in the commodity price environment. We remain well positioned to benefit from an oil price recovery as our as our three-core-play provides some of the strongest capital efficiencies in North America. And with that I will conclude my formal remarks and ask the operator to please open the call for questions.

[Operator Instructions] The first question is from Greg Pardy of RBC Capital Markets. Please go ahead.

Thanks. Good morning. Jim the 5.6 million DNC costs that you mentioned, how much of that would be equipping?

Oh, very little probably 400,000 to 500,000 of that is equipment about 5% of the overall costs. About 55% completions and 5% equipping of the five six, and the remainder, roughly 40 is drilling costs. A very small amount Greg, but those are approximate estimates.

Okay, perfect. Because there were some ridiculously low numbers that were strung out a little earlier today so it's just interesting to compare. Just with the Eagle's Ford then, is your sense that you'll just kind of maintain flat oil liquid productions generally this year just given the program that you've got in place? I mean on a quarter - quarter basis.

Greg, it does come off a little bit, we'll be at a little bit more of a reduced pace throughout the rest of the year. We came into the year with completions that were based on the kind of the sixth rig that we were running through the last quarter, and the latter part of last year. That number has probably come down to five if we move in and maybe even four throughout the second/third quarters as prices got softer in the first quarter. So it might come off a little bit. And we did have some extremely good wells. Our average production rates were kind of in the 1000 to 1100 BOEs a day range and these wells were, you know, around 1300 or a little better than that. In particular we brought on one pad, the foster pad and that averaged over 1350 BOEs per day per well which was pretty good. So I wouldn't look to have it be quite as high as it was this quarter.

Okay, thanks for that. And then you've just flagged in the release that there's been a little bit of an alteration just in terms of the processing agreement, I think, where you're getting a better realization but essentially it's just setting off backs. Could you talk a little about that?

Yes, it's really just a change in the procedure of a palate being handled with about a dollar increase overall impact on revenues and about a dollar increase impact on operating expense. So it's a net wash.

Okay, great. What does the spending profile then look through the balance 2Q, 3Q and 4Q? Just trying to get an understanding of what that might look like.

Greg, repeat the question again, we were breaking up just a little bit.

Sorry Jim. I'm just trying to get a sense as to how your camp x program looks like through the second, third and fourth quarter.

You know it's probably going to step down a little bit as we lower the pace just a little bit from the first quarter and we have a few more completions tailing in from the fourth quarter. So I would imagine it would step down. So if you take our actual that we spend here and use kind of the midpoint of our overall range, you come up with a lower average for the three quarters. And a pretty balanced Q2 through Q4.

Okay, perfect. And last two from me, maybe just a question to Rod. What is your thinking just around cash taxes this year?

Barely minimal actually; we're looking at recovering some of taxes that we did pay in 2015 so looking for recovery of about $7 million to $10 million for the year.

Okay, great. And last one is just in the release you've just flagged, some minor asset dispositions. Is there anything in any way you know, day rigs, or is that to come?

Well, we really don't have anything that's coming out right away, you know. We have continued to look at potential sales of some minor non-core properties throughout time and we'll probably continue to do that. It's a pretty bad market right now to be in, Greg, and I really don't want to speculate on what I've already said.

Okay, that's perfect. Thanks very much guys.

Okay Greg, thank you.

Thank you. The following question is from Dennis Fong of Canaccord. Please go ahead.

Alright, good morning, gentlemen. I just had a quick question on the shut in volumes. As I recall at the last quarter you were expecting to bring some of the volumes down partway through the year. Now that we've seen a little bit of a recovery in the oil prices environment, is that sort of a plan and are there any changes to production guidelines? Thanks.

Yes, Dennis our overall production guidance hasn't changed for the year. Having said that, we are looking at bringing on some of the heavy oil production that was shut in is as we're off substantially from where we were in the first quarter. You know the first quarter averaged $33 WTI US and we're setting today at about $43 to $45 per BOE. So we're taking a look at it right now and probably there'll be some moderate acceleration in when we bring that back online if prices hold in here. We would look to target the most profitable first as you could expect so we probably be staggered in here throughout the next couple of months if prices hold up. And I would expect to have most of it back online by the beginning of July with some of it possibly coming online in May.

Most of the 7500 BVs a day or as I recall there was a little bit associated with Gemini which wasn't coming back on stream?

No, no. Gemini was shut in last year, that's not in the 7500 -- got that wrong, Dennis.

Alright, thank you.

Thank you. The following question is from Patrick Bryden of Scotia Bank. Please go ahead.

Morning gentlemen thanks for taking my call. Just a couple of quick ones for me; we tried to think about the down facing of the inventory from 80s to 60s to 40s. Maybe just elaborate for us how you're seeing differences between the incremental verses the acceleration

Yes, Pat, we're really looking at it differently than the original plan as of a couple of years ago. Because these other layers that we hadn't anticipated have developed in the upper Eagle Ford, the upper portion of the lower, we thought there might be some potential in the chalk, it turns out there's quite a bit of potential in the chalk. So the down spacing is happening vertically as well as well as horizontally. So I'd almost need a little bit of time in taking you through the session and get into the details. But suffice it to say if you look at our reserve disclosure over the total number of potential locations that are you add up in 3P, 2P and the contingence is upwards of 600 remaining locations between all those categories when we originally purchased this we thought it might stretch the 250 remaining locations across all those categories so. We'll spend some time and get into the spacing because it's not just happening on drilling in between wells, we're drilling above the existing wells in what we believe are shale or ash barriers to find virgin portions of the reservoir. That's really how we're conducting it as we move forward.

Great, appreciate that. And then maybe if you could just elaborate for our benefit, on some of the latest innovations you've seen on completions of the Eagle Ford. I understand there's fiber-fracks and soluble wormhole hydrocarbon any thoughts?

Yes, we're implementing those, and have been using fiber fracks for quite a while, and so those of you that may be listening that don't know, the intent of it is it lowers the overall liquid volume that you put in and the sand volume because the fiber dissolves in the frack that is held open by the profin and the dissolved portion leaves what are believed to be open stairways out in the reservoir down through the fractures to the well bore and enhances productivity. And we continue to use that across quite a few of our fracturing treatments as we continue to develop it. And we're continuing to run temps on it as well.

Great, appreciate that. And this last question is always hard to see where the commodity is going to go. We see buoyancy down the piece here. At what point do you bring the points to shut in volumes back and at what point to you start investing in Lloyd to seal in the points again?

In terms of bringing things back, like I just mentioned to the previous question, we are looking at it right now, we're at the point where some of the most lower offsets production that was shut in is clearly viable at these levels above $40 a barrel. So we'll be bringing on about 10% of that production here probably in May and on into the rest of the -- before we get into the third quarter.

Great, thank you.

Thank you. The following question is from Sean Sneeden of Oppenheimer. Please go ahead.

Hi, good morning, thank you for taking the questions. I guess some of your infuse from North America have actually been raising the equity in order to fund case x and deal over the balance sheet. Just given the rise in oil prices, how are you guys thinking about that as potential tool in your toolbox to try to deal with your balance as you go through the year?

Sean, the stages where we are today we don't see that as an option for us at this time. So I don't want to get into speculation of what it would or wouldn't be but we don't see it at this time.

Okay, that's fair enough. Maybe thinking back, do you have a chance in a different light given that some of your bots are trading decent discount would you ever want to repurchase any them in the open market or are you relatively comfortable with your leverage profile as we go along here?

We're comfortable with our leverage profile where we're at today Sean. So we don't have any current plans for that either.

Okay. Maybe just lastly, what do you think about, or what do you need to see in the forthcoming year before you start layering additional hedges against more so for specific price point or anything like that, what are you guys really thinking about or what do you want to see first?

Sean, we can hardly hear you. Were you asking about when we would start layering in hedges?

Yes, that's right. I guess in particular, price points that you guys are looking for, especially for 17 that you feel comfortable layering in additional hedges at this point?

Yes, you can take a look at -- the best example I can give you is if you take a look at where we were as we reported our fourth quarter results to where we are today, we have layered additional 17 and we're kind of targeting at that range using three way so we can participate in upside to about $55 and we're almost near $60, so all of our three-ways next year allow that and kind of set it for prices above $35 or at around $40 to $45 a barrel. That change in the additional heads we've laid on kind of lays out the plan when we're doing that. So it's kind of a target of trying to participate in upside $60 while providing some protection in the mid-40's range is really what we've been doing. And so as we've had these barriers, increases in price at it spiked and those that are allowable to be put on, we'll put a few more on as we continue to go through the year. And of course if it moves up to where we might let's say we got fourth quarter towards what we can do, $40, $50, $60 or $45, $55, $65 or something like that, you'd want to try to push those upwards as you try to go forward as well.

Okay, that's helpful. Thank you very much.

Thank you. The following question is from Gary Stromberg from Barclays. Please go ahead.

Hi, good morning.

Morning, Gary

Two questions, one on G&A. Are there any non-recurring charges on the first quarter, it's at $14.2 million in cash, do you have any good numbers going forward? That would be a good number to use.

Effective march we did have a 10% reduction in salaries and board retainer fees. So probably a little off that, Gary as we go forward.

Okay, helpful. And then can you give a sense on maintenance capital, how you think about holding 41,000 barrels a day at Eagles Ford, and then I guess it's 35,000 barrels a day in Canada production plan?

Yeah, we've talked about that in the past and we're probably not far off in the capital that we're spending today. In the Eagle Ford, it will vary and will be very lumpy because we bring on large pads, so there's periods where you have a month or so that you don't have any wells come online and then you bring an entire pad on. But throughout the year it's close to that you know, 200 plus range just in the Eagle Ford. And then if you look at Canada, you know, we take you through the math if you want to get with Brian and ask him Gary. But in general, we think about 100 million a year would keep Canada flat. You can balance it the two differently, you can also spend less in Canada and more in the Eagle Ford. But you'll probably that kind of a range close to about capital efficiency if you did the math off of our published material, to get you into that range of about $300 million.

Okay, that's helpful. And then final one for me is level of oil price you'd need to see to return the shut in production?

Gary, it would get into that level now. So we're investigating right now. On average as we've said when we shut it in, was low margin or negative margin, and of course we only average 33 bucks WTI in the first quarter and that was about close to break even with the entire mix that we had. And so as we get north of $35 to $38 a barrel, it's probably breakeven but it costs a little bit to bring it on. You want to feel comfortable prices aren't going to drop back to the low 30s again. So we've kind of said, once we get into above $40 and we think it might be sustained, and here towards $43 or $44, we're taking a good hard look at it right now and have intentions to start bringing some of the most profitable back on in May with tapering more in June if things hold.

Okay, great, thank you.

Thanks, Gary.

Thank you. There are no further questions registered at this time. I will turn over the meeting back to Mr. Aster.

Okay, thank you Melanie. And thanks everybody for participating in our first quarter conference call. Have a great day

Thank you.