Crescent Point Energy (NYSE:CPG) Q4 2017 Earnings Conference Call March 1, 2018 12:00 PM ET
Scott Saxberg - President and CEO
Neil Smith - COO
Ken Lamont - CFO
Ray Kwan - BMO Capital Markets
Good morning, ladies and gentlemen. My name is Brian, and I will be your conference operator today. At this time, I would like to welcome everyone to Crescent Point Energy year end 2017 conference call. 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 investment community. [Operator Instructions]
Thank you. This conference call is being recorded today and will also be webcast on Crescent Point's website, but may not be recorded or rebroadcast without the express consent of Crescent Point Energy.
All amounts discussed today are in Canadian dollars, unless otherwise stated. The complete financial statements and management's discussion and analysis for the period ending December 30, 2017, were announced this morning and are available on Crescent Point's website at www.crescentpointenergy.com and on SEDAR and EDGAR websites.
During the call, management may make projections or other forward-looking statements regarding the 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 Crescent Point's website, the SEDAR website, and EDGAR website 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 would now like to turn the call over to Mr. Scott Saxberg, President and CEO. Please go ahead, Mr. Saxberg.
Thank you, operator. I'd like to welcome everybody to our year end 2017 conference call. With me is Neil Smith, our Chief Operating Officer; Ken Lamont, our Chief Financial Officer; and Brad Borggard, Vice President of Corporate Planning and Investor Relations.
This morning, we released our year-end 2017 financial results and reserves, which highlight several of our achievements over the past year. Our team exceeded annual average production guidance, achieved exit production growth of 10% per share and reserve growth of over 4% per share. We increased our fourth quarter 2017 funds flow per share by 17% and reduced net debt in the quarter by 111 million.
We organically replaced 152% of our annual production with new reserve additions and achieved record reserves of over 1 billion BOEs and we enhanced the growth profile of our asset base with 1,000 new internally identified net risk drilling locations, which drove a 70% increase to our productive capacity. We achieved these results while remaining financially disciplined by layering on oil hedges to protect our future cash flows and disposing of non-core assets to maintain our financial flexibility.
During Q1 2018, we began a process of disposing larger non-core assets within our portfolio with proceeds being directed towards debt reduction. As this sale process is currently ongoing, we're holding off on any further comment until we have additional information to share.
Another measure of success we have had in creating value over this past year is the growth in our net asset value per share. Excluding any impact from changes in commodity prices, which are outside of our control, our 2P net asset value in 2017 grew by 5% versus 2016. This is in addition to our current dividend yield of approximately 4%. Our year end 2P net asset value further highlights the inherent value of our asset base.
Our current net asset value is over $24 per share, based on independent engineering escalated price forecast. But even under a flat price scenario of USD55 WTI, our year end net asset value is over $14 per share, significantly above our current valuation. This net asset value doesn't include -- incorporate unbooked locations in our inventory, which accounts for 57% of our 8100 internally identified net risk drilling locations.
We are very excited about our program in 2018 and remain focused on economic returns and maintaining a strong financial position. For example, over 75% of our 2018 drilling inventory is expected to pay out in two years or less or weighted average half cycle returns of 50%, which is driving attractive go-forward returns. Our 2018 guidance aligns cash, cash outflows with inflows and allows for additional balance sheet strength and debt reduction from potential non-core dispositions or excess cash flow realized from higher commodity prices.
I'd also like to highlight Crescent Point’s favorable market access position, we have minimal exposure to WCS medium gravity discount pricing as 80% of our production is light oil situated in the Williston and Uinta Basins, our Saskatchewan assets are also well positioned downstream of current apportionment points with multiple options to market our crude.
I will now turn it over to Neil to discuss our operational highlights and year end reserves in greater detail. Neil?
Okay. Great. Thanks, Scott. So 2017 was a record year operationally for Crescent Point. In addition to exceeding our production targets, we organically replaced 152% of our 2017 production. These reserve additions were our largest within a single year and reflect our success in new drilling and development, step out and down spacing programs and waterflood development. Excluding changes in future development capital, we generated 2P finding and development costs of $18.56 per BEO in a recycle ratio of 1.6 times.
Waterflood reserves accounted for 18% of total organic 2P additions in 2017 and supported low F&D costs of $10.24 per BOE in the Viewfield Bakken, our largest resource play currently under Waterflood. We believe these reserve additions are a leading indicator of lower corporate declines in F&D. In Flat Lake, we expanded the economic boundary of the Torquay/Three Forks resource play and executed a down spacing program in the Ratcliffe to 8 wells per section.
Our success in 2017 resulted in year-over-year reserves growth of 20% in the Torquay/Three Forks and Ratcliffe zones. In 2018, we plan to follow up on the success, including continued step out wells and the initiation of pad drilling in the Ratcliffe zone for improved efficiencies. We are currently adding new batteries and sales lines to accommodate the future growth expected in this multi zone resource play. In the Uinta basin, we progressed our completions to longer laterals, added higher tonnage per stage of completion and achieved successful results advancing new zones in the Wasatch and Uteland Butte.
Following our successful one mile Wasatch well drilled earlier in 2017, which has already produced over 300,000 BOEs in only 245 days, we completed a second one mile Wasatch well in Q4, which had an impressive flow rate of over 1350 BOEs a day after an initial 30-day period. Similar to all of our Uinta horizontal wells, this well was a high liquids cut at 90% oil and liquids.
Our achievements in Uinta during 2017 resulted in both horizontal drilling locations, increasing from 120 net risked locations to 850 net risked locations and reserves growth of 40% in comparison to prior years. Since entering the basin at the end of 2012, we've increased reserves by 140% through technical revisions and additions. In 2018, we plan to focus on two mile development and multi-well pad drilling across multiple zones in Uinta for increased efficiencies along with continued delineations of our Western lands.
We've also been active on implementing new technologies as part of our climate change initiatives. According to data from the NEB, we have 40% less emissions than our Canadian peers, which speaks to our ongoing investments and the cultural mindset of our company. Examples include solar power pilots, field automation and reduction of fresh water usage. We are following up on this success in 2018 and have already initiated another solar power pilot for our field office in Saskatchewan.
Before I close, I'd like to thank again all of our employees and especially our field staff who are outside in the winter for another safe and successful year. Ken?
Thanks, Neil. For the year ended 2017, we generated funds flow of 1.73 billion or $3.16 per fully diluted share. Our development capital expenditures were 1.63 billion, excluding land. Land expenditures during 2017 totaled 187 million with funding provided by the company’s non-core asset disposition program, which has totaled over 320 million since the beginning of 2017. Our non-core dispositions during the fourth quarter also allowed us to reduce our total net debt by 111 million.
During the fourth quarter, we generated funds flow from operations of 494.7 million. This represents an increase of 17% per share from the fourth quarter of 2016 and highlight the company's strong netbacks of $34.43 per BOE. Given our light oil weighted asset base, which represents 80% of our production, we expect to generate strong netbacks and cash flows in 2018 with limited impact from the recent widening of WCS differentials.
While we are considering reducing our capital expenditure plans by $50 million, given our outperformance year to date, our 2018 guidance remains unchanged with capital expenditures of 1.8 billion, excluding land acquisitions, annual average production guidance of 183,500 BOE a day and exit production of 195,000 BOE a day, representing a year-over-year growth of 7%. We expect to direct any excess funds flow from operations realized from higher commodity prices in 2018 or proceeds from asset dispositions towards additional debt reduction.
Our 2018 cash flows are also protected by our increased hedge volumes. For 2018, 45% of our annual liquids production is hedged at a weighted average market value price of CAD73. We also have 17% of our first half 2019 production hedged at CAD72 and are opportunistically layering in new contracts. Crescent Point retains a significant amount of liquidity with no material near term debt maturities. As at December 31, 2017, our total liquidity of cash and unutilized credit capacity was 1.5 billion.
I will now hand things back over to Scott for some closing remarks.
Great. Thanks, Ken. We had a strong start to our operation year in 2018 and our budget this year is expected to generate low risk economic growth within cash flow to 195,000 BOEs per day, an increase of 7% year-over-year before dividends. And I think I’d like to highlight just another key point that Ken made of our capital expenditures. So this year, we spent 1.58 billion in capital spend, up against our 1.55 billion capital budget and 50 million where we started the year a little bit early in the middle of December and so that would reflect more of a 1.75 billion spending out into the year. And as a company, we remain committed to be financially disciplined, lower debt and protect our balance sheet.
Before opening up things up for questions, I’d like to thank all of our employees for their hard work, delivering another successful quarter. I’d also thank our shareholders for the continued support. At this point, I'd like to pass it over for -- to the members of our investment community for questions. Thanks.
[Operator Instructions] And our first question comes from the line of Ray Kwan from BMO Capital Markets.
Yeah. I just have a quick question. It’s just in regards to the land spending, the $187 million. Per the AIF that you guys released today like the Alberta land position increased about 90% year-over-year, so about 356,000 acres of land. Can I assume the majority of the land spending for last year was directed to Alberta? I know, there was close to 500 sections of land purchased in the large pull though, but just want to get a sense in terms of what percentage was spent in Alberta?
I don't have that number exactly on the top of my head, but I would say that 187 also includes lands that we acquired in Utah and in North Dakota and in the larger land sale combined with some other Torquay land sales throughout the year. So I would say half.
And can I assume all that land in Alberta is for one play then?
We don't really speak to that kind of detail I guess at the stage.
Okay. And then I'll just ask for 2018, like I know it's hard to forecast in terms of land spending for this year, because it could come up at any time, but do you expect the same level or a much lower level of spending in terms of land for this year versus 2017?
I would say 2018 would be more like a normal land expenditure. So, it would be relatively small – well, significantly smaller than last year. Last year was a bit of an anomaly with our new play development and land capture and so I would say ’18, it'll fit within our cash flow. We will cut capital to fit within that. So, it's not significant.
And I'm currently seeing no further questions. I would now like to turn the call back to Scott Saxberg for any closing remarks.
Great. Well, thank you very much for listening to our 2017 conference call. Thank you.
Thank you ladies and gentleman for participating in Crescent Point Energy’s year end 2017 conference call. If you have more questions, you can call Crescent Point's Investor Relations department at 1 (855) 767-6923. Once again, that’s 1 (855) 767-6923. Thank you and have a good day.