Baytex Energy Corp (NYSE:BTE) Q3 2019 Earnings Conference Call November 1, 2019 11:00 AM ET
Brian Ector - SVP, Capital Markets & Public Affairs
Edward LaFehr - President, CEO & Director
Rodney Gray - EVP & CFO
Conference Call Participants
Philip Skolnick - Eight Capital
Tom Callaghan - RBC Capital Markets
Thank you for standing by. This is the conference operator. Welcome to the Baytex Energy Corp. Third Quarter 2019 Conference Call and Webcast. [Operator Instructions].
I would now like to turn the conference over to Brian Ector, Vice President, Capital Markets. Please go ahead, sir.
Thank you, Savi. Good morning, ladies and gentlemen, and thank you for joining us today to discuss our third quarter 2019 financial and operating results. With me today are Ed LaFehr, our President and Chief Executive Officer; Rod Gray, our Executive Vice President and Chief Financial Officer; Kendall Arthur, Vice President, Heavy Oil; and Chad Anberg, Vice President, Light Oil. 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 today'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 everybody to our third quarter 2019 conference call. I'm very pleased with our strong operating performance, which continued across our asset base during the third quarter. And I'm excited to announce that given our year-to-date results, we now expect to exceed our 2019 full year annual production guidance of 97,000 BOEs per day with exploration and development capital expenditures of approximately $560 million. This level of capital spending is at the low end of our original guidance range and reflects our continued commitment to driving cost and capital efficiencies.
And for the third consecutive quarter, we are delivering substantial free cash flow. In Q3, this amounted to $74 million, and brings the free cash flow generated year-to-date to $271 million. This strong free cash flow has contributed to a 13% reduction in our net debt this year, including the redemption of our USD 150 million of long-term bonds during the third quarter.
Our commitment remains to generate free cash flow and further improve our balance sheet. We maintained strong financial liquidity with our credit facilities, approximately 50% undrawn. For the quarter, we generated production of 95,000 BOEs per day, which brings production for the first 9 months of the year to 98,000 BOEs per day. These results are consistent with our expectations and reflect the timing of our 2019 development program in Canada and the Eagle Ford and the impact of our third-party facility turnaround at Peace River.
There is no change to our 2019 exit production rate forecast of 95,000 to 97,000 BOEs per day. We delivered adjusted funds flow of $213 million or $0.38 per basic share and $670 million or $1.20 per basic share for the first 9 months of 2019. And our exploration and development capital expenditures totaled $139 million, bringing aggregate spending year-to-date to $399 million.
Our diversified oil portfolio generated a corporate level operating netback, including hedging, of $29 per BOE, which is among our highest since 2014. Our Canadian operations generated an operating netback of $25 per BOE, while our Eagle Ford asset generated an approximate operating netback of $28 per BOE. During the third quarter, Canadian differentials remain tight, which contributes to strong price realizations. We also published our fourth corporate sustainability report this quarter, demonstrating our commitment to transparency and accountability and our progress in managing the environmental and social impacts of our business.
Over the past 5 years, we have reduced spill volumes by 76%. And this year, we established a greenhouse gas emissions reduction target with an objective of reducing our corporate emissions intensity by 30% by 2021. I am incredibly proud of the work our teams are doing on the safety and environmental front.
Let's turn our attention now to our operations, beginning with our light oil Eagle Ford and Viking assets. In the Eagle Ford, production averaged 37,000 BOEs per day, 77% liquids, during Q3 2019. We commenced production from 20 wells as compared to 29 wells during the second quarter. These wells generated an average 30-day initial production rate of approximately 2,100 BOEs per day per well, which represents a 20% improvement over wells brought on stream in 2018.
In the Viking, production averaged just over 22,000 BOEs per day with an operating netback of $41.6 per BOE, the highest in our company. We maintained an active pace of development during the third quarter with 72.5 net wells drilled and 49.4 net wells brought on production. We currently have 3 drilling rigs and 2 frac crews executing our program, and expect to drill approximately 245 net wells this year.
As with all of our core plays, inventory enhancement continues to be a priority. We have completed multiple deals and swaps year-to-date, adding 220 net unbooked drilling opportunities.
Moving to our heavy oil assets in Canada. Peace River and Lloydminster produced a combined 28,500 BOEs per day during the third quarter. In Q3, we drilled 20 net heavy oil wells, including 4 net multilateral horizontal wells at Peace River. Our 2019 development program is strongly weighted, about 80%, to the second half of the year. As a result, heavy oil production is expected to increase to more than 30,000 BOEs per day during the fourth quarter due to the new well completions and the expansion of our Kerrobert thermal project.
Finally, in the east Duvernay Shale, we continue to advance the delineation of this early stage, high netback light oil resource play. To date, we have drilled 7 wells at Pembina, which confirms the prospectivity of our acreage. Two wells brought on stream in 2019 generated an average 30-day initial production rate of approximately 1,050 BOEs per day per well at 75% liquids, and are in the top 15% of all wells drilled in the play.
The success of our drilling program in the Pembina area has significantly derisked our approximately 38-kilometer long acreage fairway, where we hold 275 sections of 100% working interest Duvernay lands.
Let's turn to risk management. We continue to manage our commodity price risk through an active hedging program. In the third quarter, we realized a financial derivatives gain of $21 million. For the fourth quarter of 2019, we have hedged approximately 53% of our net crude oil exposure at pricing in the mid-$60 range for WTI.
For 2020, we have hedges on approximately 33% of our net crude oil exposure, largely utilizing costless 3-way option structures that when WTI is between $51 and $58 per barrel, we received $58 per barrel. And the contracts also provide upside participation to nearly $64 per barrel. Our hedges also include WTI-based fixed price swaps for 4,000 barrels per day at approximately $56 per barrel for the first quarter. Additionally, crude by rail is an integral part of our egress and marketing strategy for heavy oil. For Q4 '19, we expect to deliver 11,500 barrels per day, approximately 40% of our heavy oil volumes to market by rail. For 2020, our crude by rail volumes are currently contracted at 7,500 barrels per day.
Full details of our hedge program can be found in our Q3 financial statements. So now, let me conclude by saying we are well positioned to execute our business plan focused on free cash flow generation. As I mentioned at the outset, given our strong operating performance, we now expect to exceed our 2019 annual production guidance of 97,000 BOEs per day. Based on the forward strip for the balance of 2019, we are forecasting adjusted funds flow of approximately $875 million, and we expect to generate approximately $300 million of free cash flow, which supports our deleveraging strategy. Over the longer term, as we continue to drive debt levels down, we believe we will be positioned to offer returns through a combination of per share growth, share buybacks and/or dividends.
And lastly, I would point out that we are in the process of setting our 2020 capital budget. The details of which are expected to be released in early December following approval by our Board of Directors.
And with that, I will ask the operator to please open the call for questions.
[Operator Instructions]. Our first question comes from Phil Skolnick with Eight Capital.
A couple of questions. First, just in terms of the Alberta government's announcement yesterday with curtailment relief for rail ramp and -- does that -- should we think of that impacting Baytex at all? And if so, by how much? And how do we think about that?
Yes, on that question, Phil. Curtailment relief has been discussed quite openly with ourselves and the government and had been signaled now for months. And we believe that the differential has reflected that. So the differential move from where it was in 3Q, around $13 a barrel. It's moved up steadily, sitting at $16, $17 a barrel. And now with Keystone if December has widened out to '19 or '20. But the point here is that with the announcement in that discussion, we're now sitting at a point where heavy oil differentials are at the full cost of rail. So while we're not expecting to participate in the government program, reason being we continue to rail, 40% of our crude. We were doing that in Q1, all last year and throughout this year, a dominant majority of those barrels move to the Gulf Coast on advantaged pricing for us so we don't need to move more rail. But with the differential now move to the full cost of rail, we think that will incentivize quite a bit more rail, and that's going to be good for the industry and good for business.
Yes, sure. And then in terms of free cash flow, given how robust it is for you guys. How should we think about the priorities of that? And what are the certain levers that you could pull in terms of on production side of things?
Yes. Well, as you can see, first half of the year was quite strong and production, activity was ramped down in 3Q, our exit rate is projected 95,000 to 97,000 barrels a day, we're pointing towards the high end of that. So these assets want to grow on $560 million of capital where -- or at least on our old capital range. So our capital efficiencies are incredibly strong, we'll point to a budget next year, though, that continues to drive free cash flow through these strong capital efficiencies and our strong cost structure that we've delivered. And the reason we'll do that is the number one priority in the company remains to delever our balance sheet and get that part done. And then we'll get to the point where we can talk about more shareholder-friendly initiatives, such as share buybacks at this point in time with our shares trading where they are. But we need to take another step on the debt first with that free cash flow.
Okay. And would share buybacks be more desirable than a dividend?
I think at this point, with where our share price is trading, I would say, yes, that would be behind -- second priority behind the deleveraging in terms of capital allocation, that's always a board discussion, though, and one that we're having every quarter now.
[Operator Instructions]. Our next question comes from Tom Callahan with RBC Capital Markets.
Just a follow-up on Phil's question there. Given that reduction the priority. Wondering if you guys could talk a little bit about your plans with respect to funding or refinancing your long-term notes as they begin to come due there in 2020?
Well, let me just say something very briefly on that and pass it over to our CFO, Rod Gray, but the two fundamental points that underpin our ability to delever our number one free cash flow; and number two, having strong liquidity on our revolving credit facility. And fortunately, both of those are very healthy, and they're very healthy at $50 oil prices. So with that as a backdrop, and what I said previously about deleveraging, I'll leave the specifics to Rod.
Yes. Tom, more just to carry on what Ed had alluded to. So the bond maturity isn't until June of 2021. We just, in September, redeemed USD 150 million, and continue to have post that redemption, over $500 million of credit capacity on our revolving credit facilities. As Ed mentioned, we're in debt reduction mode. Our intention to maintain the business in this commodity price environment and maximize free cash flow, which will be directed towards debt repayment. It might also be helpful to point out that we've managed the business within funds flow for the last 5 years in a very volatile commodity price environment. And so maybe to summarize, I think we have time and options to kind of deal with the upcoming maturities, and we're evaluating all options going forward..
This concludes the question-and-answer session. I would like to turn the conference back over to Brian Ector for any closing remarks.
All right. Thank you, Savi. Thanks, everyone, for participating in our third 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.