Baytex Energy Corp. (NYSE:BTE) Peters & Co. Ltd. 2013 Energy Conference Call September 10, 2013 10:00 AM ET
James Bowzer – President and Chief Executive Officer
We will get started with our first presentation. Each presentation is about 20 minutes long and we’ll begin. So Jim Bowzer from Baytex will get us started.
All right, well, good morning everyone. And thanks Peters & Co. for hosting today, we certainly appreciate the ability to participate and ensure a story here. I am just going to provide an abbreviated overview of Baytex today and given the panel topic of profitable ore growth, we’ll get into three of our key oil plays in Peace River, Lloydminster and North Dakota. And before I begin, I’d like you to take note of our record setting three pages of advisory notes and oil and gas information.
There are three key components to Baytex’s business model, we are focused on oil growth, we pay a meaningful and significant dividend and maintain a conservative and strong balance sheet, when we talk about oil growth at Baytex we are an infrequent acquire of assets, so we mean organic growth. We have a well defined long range plan and are targeting growth in the range of 6% to 8% a year.
In addition to our organic growth, we do pay a meaningful dividend with an attractive yield and of course this growth and income model can only succeed if you have strong capital efficiencies, which is exactly what we feel we have at Baytex. And finally I mentioned our balance sheet is very strong with the debt-to-funds from operations ratio of about 1.2 times that we maintain a conservative payout ratio.
A quick snapshot here of Baytex, we’re listed on both the New York and Toronto Stock Exchanges. We have an enterprise value of about $6 billion and our monthly dividends sets at $0.22 per share and yield approximately 6.3%. Our reserve base is shown here, totaling $292 million BOE equivalent and we have a contingent resource base of approximately another 800 million barrels as well. Our operational execution is going very well this year and remains on track. In mid-August we announced our second quarter results. and with production results of just over 58,000 BOEs a day, which represents our highest quarterly production rate in company history.
We expect continued strong operating results from the second half of this year. In recognition of this we did tighten our production guidance for 2013 from what was previously announced 56,000 BOEs a day to 58,000 BOEs a day to 57,000 BOEs a day to 58,000 BOEs a day and our capital expenditures remain targeted at $520 million for the year.
This map shown here highlights key areas of operations in the three plays I referred to. The chart clearly illustrates our focus on oil. Approximately 89% of our projected 2013 production is oil and 93% of our reserve base is weighted to oil.
Heavy oil represents about 75% of our production mix. Our key heavy oil assets are in the Peace River region and in the Lloydminster area, which spread out to the Alberta, Saskatchewan border there. Significantly these two regions provide some of the highest rate of return projected in North America and North Florida. So little bit more in detail as I make my way through the presentation. Our key light oil play is shown at the southern portion of this slide, is the Bakken/Three Forks in North Dakota.
Before we get into those specifics, I want to start by highlighting a couple of slides that represents some independent research hardly enough by Peters & Co. The key point here is that as a company we are in some of the highest rate of return projects that you find in North America, highlighted in red are the plays [indiscernible] in. This chart is half cycle payout, and as you can see that our Peace River multilaterals payout in well under a year.
Our Lloyd program is under a year and a half and these fall in the top 10 of all oil plays an if you look at the details and freighting assumptions you could argue that our paybacks are really less than what’s represented on the slide, and our North Dakota play fares well as shown on the slide as well.
This is a continuation of that work, similar data on this chart, this time ranking on rate of return in our suite of heavy oil projects, stacks up very well, here on this metric and I think this validates some of the, what we believe are the some of the strongest rates of returns and a good opportunity set for the strong capital efficiencies that Baytex has in our portfolio.
I’ll now go through our key projects in a little more detail, we’ll first take a look at Peace River in North Central Alberta. This area is about 250 miles to the west of Fort McMurray and New Orleans [ph] identified here in brown. We have about 306 sections of land in the area, over 0.5 billion barrels of best estimate contingent resources in the region and Baytex produces approximately 23,000 BOEs a day here primarily through our cold horizontal multi lateral well developments.
We’ve drilled 17 of these multi lateral wells at Peace River during the second quarter, bringing the year-to-date results that are to 23 wells and from this year’s production from the program we’ve averaged 30 day, peak rates of approximately 700 barrels a day which is at the top end of our type curves and needless to say we are very excited about what we’re seeing from this years program.
This gives you a little example of how we drill these wells, the picture on the left, depicts our typical well design of 8 or 10 mile long lateral curve vertical well and then sometime we augment these with several shorter laterals to fill out the spacing unit or the geometry associated with the spacing unit. We do target the Bluesky formation here at relatively shallow depths of 600 to 700 meters. In this lateral design has changed very much over time and led to significant improvement in production rates and capital efficiencies.
Depending on the region of Peace River that we are drilling we see cost ranges ranging from $2.6 million to $3.4 million per well and as you can see on the right of the chart there are associated EURs per well, which lead to some of the highest capital efficiencies all under $10,000 per day barrel. For this year we’ll complete the program and think we’ll end up right around 37 wells for the year.
In addition in Peace River, our multi-lateral work, we have begun thermal operations on the eastern portion of our lands and area we talk Cliffdale. We expect to improve the recoveries from the coal development, which are around 5% to 7% of the original oil in place to about 30% using cyclic steam technology.
In the past year we completed the drilling and commission the facilities on our first 10 well cyclic steam modular or CSS module as we call it. It really consists of three stages. First we inject steam into the reservoir. We then allow that to soak where the steam condenses and transfers the heat to the rock and therefore the crude and finally in the production stage where the heated oil and water return to production.
Capital efficiencies for thermal development are projected to be attractive with S&P cost around $7 a barrel and although we are still in the incipient stages of production here we are pleased with the results.
As we move over and take a little more detail, our successful operations continued during the quarter on our 10 well cyclic steam module with Q2 production averaging about 400 barrels a day. Our current production from the Cliffdale CSS 10-well module is right at 700 barrels a day and shown on those red lines there is the new module that is under construction. It is a 15-well CSS module and we’ve commenced drilling operations.
We have 11 of the 15 wells in the ground and we expect to complete construction of the plant and commence coal production on the wells late in the fourth quarter with steaming expected to begin operations in the first half of 2014.
Moving to the second play, one of the highlight today, this is the greater Lloydminster. We produce here about 20,000 BOEs per day. It straddles the Alberta-Saskatchewan border and is comprised of a verity of heavy crudes in the 11 to 18 degree range. In 2013 our plans included 113 net wells here, about half of which are horizontal. The remainder are vertical.
We are also continuing work on our Gemini SAGD project at Cold Lake. We have commenced construction of those facilities at the SAGD pilot. Although the full scale project has not been sanctioned at this time and is certainly contingent on our pilot we ultimately see this as being a 500 barrel a day flat life development over the coming years. Our teams continue to work the acquired lands that we picked up in this area and seek out additional opportunities beyond this already approved project.
This slide depicts the stacked pay characteristics of the Lloydminster region, which we successfully developed through a combination of vertical drilling, horizontal drilling, water fluid application and as I just mentioned some SAGD. I’ve talked about the capital efficiencies we have at Peace River. In addition, here we see very strong capital efficiencies as well with vertical wells averaging around $11,000 per day barrel and our horizontals at about $13,000 per day barrel.
Our drilling inventory continues to grow in this region, especially as we expand our horizontal applications to other zones that historically haven’t been productive through the use of vertical drilling. With an inventory of approximately six years, we certainly expect this to be stable in the coming years in terms of productions.
In the last key play, I’ll highlight is in North Dakota. The Bakken/Three Forks development is also in Southern Saskatchewan. We’ve got a pretty nice contiguous land position here, totally approximately 126 net sections of land. We produced about 3,100 barrels a day from this play and we do see good capital efficiencies here at $20,000 per day barrel with development cost ranging in the $16 to $17 per barrel range.
And again a little graphic for you is depicted on this slide. Nearly all of our development is targeted at the Three Forks at this point with the middle Bakken presenting itself as a future potential target and as you can see at the bottom of the slide, illustrates our capital efficiencies continue to improve as our drilling performance and costs have come down in this area. As illustrated on the left you can see that generally going forward we are drilling the 1,280 acre spacing 2 mile long horizontals with 30 to 36 stages multistage frac on those wells.
For this year, we plan to spend about $75 million in the region for a total of about nine net wells. So that gives you a snapshot of what Baytex has in its portfolio, because we are heavy oil producer, I did want to spend a few minutes to talk about marketing.
This slide depicts Maya versus WTI in that brown curve, and WCS versus WTI the differentials there. And as you can see that historically those crudes traded very well together overtime infill about 2010, we are in transportation bottlenecks developed. At that point in time it was difficult to get Western Canadian selects specifically into the Gulf Coast, the demand for Maya came up dramatically and it actually has been trading over WTI to the tune of almost $10 a barrel and as WCS struggled to get to with transportation bottlenecks of the Gulf Coast there were some significant blowouts in that differential over time.
There has been much made of that talk of rail rapidly changing this, I want to here to tell you that it’s more than talk, there has been significant expansion in the rail capacity for all crudes really north of Cushing. This isn’t just hasn’t been a Western Canadian Select problem and with that you’ve seen that, now that the transportation network is much more robust the Western Canadian Select is getting into the Gulf Coast and bringing down the price of Maya with it and right now those two are trading on par about with the transportation differential and we expect to see that continue we have full projection on there. PIRA the research group out at New York that’s their projection for the next few years of what they expect WCF versus Maya and we certainly agree with that, if you take a look at our marketing portfolio, we’ve been a participant in rail, the slide on the left hand side of this chart breaks down our heavy oil sales portfolio for you.
The key takeaway here is really we have used a portfolio approach managing our exposure to differentials during the second half of 2013 approximately 44% of our heavy oil production is being rail to higher net back markets through both term and spot deals essentially a forward sale.
Our WTI hedging is shown on the right hand side of this slide and for the second half we have entered in the hedges on approximately two-thirds of our WTI exposure, actually a little higher than that weighted just around or above $99 a barrel. We’ll continue to seek out a balance here as we move forward and capture additional opportunities in rail as time goes on if they present themselves.
The next slide I’ve got is just a summary of our balance sheet as part of our growth and income business model. It is important that we ensure we maintain a strong balance sheet at the end of the second quarter, we have about $625 million or 75% of our $850 million credit facility undrawn. We have two series of debentures outstanding totaling $460 million and our debt to Q2 annualized funds from operation ratio is strong at 1.2 times. This degree of financial flexibility does allow us to fund our growth organically and supplement small bolt-on acquisition using bank debt.
I’ll just wrap things up here, with a reiteration of our corporate growth strategy and focus on a couple of key points. That really starts with our plans for 2013. We are investing capital not only to grow our volumes in 2013 but as well as we have talked about, we are also investing in two significant long-term enhanced oil recovery projects.
As I mentioned, our CSS development at Peace River and our SAGD project at Cold Lake. And as I talked on the outset, we are very pleased with the execution of our capital program through the first six months of this year. We’ve completed 23 of some of the best multi lateral wells with over 200 laterals being drilled out of those 23 wellbores in Peace River with great rates and in addition, we’ve had 63 wells with 98% success ratio in our Lloydminster area. Our capital budget as I said before remains at $520 million and will include the total of about 200 wells this year as we move forward.
Taking a look out a little longer range beyond 2013, you heard about our portfolio of organic growth. We feel we have a very well defined long range plan with targeted production growth in the 6% range on a BOE basis and 8% range on an oil basis and ultimately through a combination of organic oil growth and what we see going forward as very strong pricing environment with improvements in differentials largely being fixed with additional transportation solutions, the potential certainly exists for growth in our funds from operations.
So in summary, I’d like to leave you with three key takeaways about Baytex; first, we’ve got a solid asset base with exceptional capital efficiencies, significant resource potential, all oil focused and a well defined long range plan for development; second, we are committed to maintaining a meaningful dividend to our shareholders and third we have a long-term track record of value creation, a strong balance sheet and a conservative payout ratio.
And with that I’ll turn it over to the next speaker, I’d like to thank you for you attention for my presentation.
[No Q&A session for this event]
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