Crescent Point Energy Corp (CPG) CEO Craig Bryksa on Q4 2021 Results - Earnings Call Transcript

Crescent Point Energy Corp (NYSE:CPG) Q4 2021 Earnings Conference Call March 2, 2022 12:00 PM ET

Company Participants

Craig Bryksa - President, CEO & Director

Kenneth Lamont - CFO

Ryan Gritzfeldt - COO

Conference Call Participants

Patrick O'Rourke - ATB Capital Markets

Aaron Bilkoski - TD Securities

Operator

Good morning, ladies and gentlemen. My name is Grent, and I'll be the operator for Crescent Point Energy's Fourth Quarter and Year-end 2021 Conference Call. This conference call is being recorded today and will be webcast along with the slide deck, which can be found on Crescent Point's website home page.

The webcast may not be recorded or rebroadcasted at 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 analysis for period ending December 31, 2021, 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 operations or financial results are included in Crescent Point's most recent annual information form, which may be accessed through the 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 Operation -- Chief Executive Officer at Crescent Point. Please go ahead, Mr. Bryksa.

Craig Bryksa

Thank you, operator. I'd like to welcome everyone to our fourth quarter and year-end 2021 conference call. With me today are Ken Lamont, our Chief Financial Officer; and Ryan Gritzfeldt, our Chief Operating Officer.

As the operator highlighted, this conference call is being webcast along with the slide deck, which can be found on our website. I'd like to start today's call by briefly highlighting some key accomplishments that led to a very successful year at Crescent Point.

In 2021, we continue to build on our key pillars of balance sheet strength and sustainability. We successfully executed our A&D strategy to enhance our asset portfolio, notably through our accretive Kaybob Duvernay acquisition and through the sale of noncore assets. We demonstrated discipline by keeping our capital expenditures in line with our guidance. We generated over $785 million of excess cash flow. We continued our operational excellence by realizing efficiencies and we made great ESG progress in reducing both our emissions and our asset retirement obligations.

Through these successes, we further rewarded our shareholders by fully repaying $670 million of debt incurred from our Kaybob acquisition, in addition to reducing our total net debt by approximately $144 million and significantly increasing our return of capital offering through multiple dividend increases and share buybacks.

I'm happy to report that we have increased our planned share repurchases from $100 million to $150 million, which is expected to be executed by midyear. This increase reflects the continued improvement in our financial outlook and our commitment to returning capital to our shareholders. Our progress in 2021 was a direct result of our continued discipline and execution over the last several years. A key element of our improved outlook is our new Kaybob Duvernay asset, which has fundamentally enhanced both our excess cash flow generation and sustainability by adding substantial inventory of high-return drilling locations.

The full cycle returns we expect to generate from this asset has improved significantly since our initial acquisition. This improvement has been driven by our success in reducing well costs and commodity price strength. Since entering the play, we have already reduced full cycle well costs by approximately $2 million or 20%. We expect to achieve additional efficiencies over time as we gain further operational momentum in the plate. I'd note that we achieved these cost savings while also deploying a larger frac design than the prior operator. We believe this design will help us further enhance our ultimate recoveries and overall returns.

I'd also like to highlight that we recently brought onstream our first fully operated multi-well pad in the Kaybob Duvernay. Our initial well results are currently exceeding our 2P booked type well expectations.

Ryan will speak to these results in more detail later in the call. We will continue to demonstrate our operational excellence in this play, and we are excited to share our future successes as we further develop the asset. I'd like to thank our employees for their hard work and contributions towards a great year at Crescent Point. I'll now turn the call over to Ken to discuss our financial results. Ken?

Kenneth Lamont

Great. Thanks, Craig. For the year ended December 31, 2021, adjusted funds flow totaled $1.48 billion or $2.57 per share diluted, up from $874 million or $1.64 per share in the prior year. Our annual development capital expenditures totaled $624 million. This is in line with our annual guidance.

In 2021, we continue to strengthen our balance sheet by fully repaying the $670 million of debt to acquire the Kaybob Duvernay assets in addition to reducing our net debt by $144 million compared to the prior year.

As a part of our commitment to balance sheet strength, we successfully renewed and extended our credit facilities to 2025 and retain significant unutilized credit capacity of approximately $2 billion at year-end 2021.

Throughout the past year, we allocated most of our excess cash flow to our balance sheet. As a result, we have been moving quickly towards meeting our near-term leverage target of $1.3 billion to $1.4 billion in absolute net debt.

As the year progressed and we closed in on reaching our leverage target, we began to increase our capital returns to shareholders. We delivered these additional returns to record dividend increases and share repurchases. Our current quarterly dividend of $0.045 per quarter or $0.18 annualized equates to a conservative payout ratio of 7% of adjusted funds flow at $50 WTI.

We believe this payout ratio is both sustainable and allows for dividend growth over time. In addition to increasing our core dividend, we are also planning to repurchase up to $150 million shares under our NCIB by mid-2022, a $50 million increase from our previous plans.

Since our December announcement that we would start buying back shares, we've repurchased and canceled approximately 8.1 million shares for a total consideration of $60 million. We have also filed notice to the Toronto Stock Exchange disclosing our intention to renew our NCIB, which expires on March 8, 2022.

Most of our excess cash flow in the first half of 2022 remains earmarked for additional debt reduction. By doing so, we expect to obtain our near-term leverage targets over the next 6 months at current commodity prices.

We plan to return additional capital to shareholders as we further strengthen our balance sheet and will provide the investment community with a more formal return of capital framework. I will now turn things over to Ryan to speak to our operational and reserves highlights. Ryan?

Ryan Gritzfeldt

Thanks, Ken. Our annual average production in 2021 was 132,683 BOE per day, comprised of over 80% oil and liquids and in line with our annual guidance. Our development program remains focused on low-risk, high-return projects, including infill wells and decline mitigation programs in Saskatchewan, alongside larger multi-well pads in Kaybob in North Dakota.

We continue to achieve operational success in our newest area, the Kaybob Duvernay. We have seen this success demonstrated through cost reductions, fewer drilling days and strong production results. In terms of full cycle unit costs, our Kaybob wells have trended closer to $8.25 million per well, a reduction of approximately $2 million per well or 20% since we entered the play in second quarter of 2021.

This is a great achievement that we have delivered in a very short period of time and that we will be sure to build on moving forward. At current commodity prices and based on our budgeted cost inflation assumptions, these wells are now expected to generate very strong full cycle returns of over 120% and are also expected to pay out in less than a year.

I'd also note that these returns do not assume any increase in recoverable reserves that we may achieve through our optimized frac design. Given these strong returns, we have made the Kaybob Duvernay, our largest focus area in our 2022 capital budget.

Although we expect some cost pressures in the current commodity price environment, I would point out that we have reduced our days on site in recent Kaybob drills, highlighting our ongoing wins -- and in a similar fashion, we also reduced our drilling days in our Viewfield, Shaunavon and North Dakota resource plays by 10% to 15% during 2021.

In terms of production results, our first operated five-well pad in Kaybob came on stream at the beginning of February with an average initial production rate per well of over 825 BOE per day for approximately 30 days exceeding our booked 2P type well expectations.

Approximately 80% of this production is condensate and liquids. We also completed and brought on stream 2 additional 50% working interest pads in late 2021 and early 2022 as part of our farm-in agreement with another Kaybob operator. These wells also generated significant IP30 rates.

Overall, the combined 30-day initial production net to Crescent Point from these 3 pads is over 11,000 BOE per day, further highlighting the high-impact nature of this play for us. Our Kaybob acquisition also had a positive impact on our overall year-end reserves and F&D metrics. We increased our PDP reserves by 17% with a strong FD&A recycle ratio of 2.7x, including change in FDC.

We also grew our PDP net asset value on a per share basis by approximately 15% adjusting for changes in year-over-year pricing and excluding land and seismic.

On a 2P basis, we reported reserves of 712 million BOE, of which 84% are liquids for a reserve life index of approximately 15 years. We added over 95 million BOE of 2P reserves, replacing approximately 200% of our annual production and generated a strong 2P FD&A recycle ratio of 2.2x, including change in FDC.

Our 2P future development capital increased by approximately 10%, primarily driven by location additions from our new Kaybob play. This conservative development plan is based on future capital expenditures approximately $4.6 billion, which is aligned with our 5-year plan.

For more information on our 2021 reserves, I encourage people to read our annual information form which was filed in conjunction with our results earlier today. Before I hand it back to Craig for some closing comments, I would again like to thank our employees and especially our field staff for all their hard work persistent dedication and continued focus on safe operations throughout 2021.

These efforts made us have the safest year on record in the history of Crescent Point. I'll now pass it back to Craig for final remarks.

Craig Bryksa

Thanks, Ryan. As you can see, we had a very successful 2021 and our strategy for 2022 builds on our achievements over the past year. We will continue to be disciplined, and we reiterate our 2022 capital expenditures guidance of $825 million to $900 million. We will continue to focus our free cash flow generation and creating value for our shareholders. Our capital expenditures guidance remains unchanged despite current cost inflation pressures, thanks to our ongoing efforts to realize internal efficiencies and manage our supply chain.

At $80 per barrel WTI, we anticipate generating free cash flow of approximately $1.1 billion in 2022 and expect to attain our near-term leverage targets over the following 6 months at current commodity prices. To further enhance our financial position, we are currently exploring disposition opportunities for certain noncore assets that are not material to our company.

This is normal course of our business and as part of our ongoing portfolio review process we plan to update the market in due course, if necessary. In addition to our improving financial outlook and our return proposition for shareholders, we have continued to enhance our ESG profile.

We are currently on track to meet or exceed our existing emissions targets before 2025 and plan to revisit these goals in our upcoming sustainability report later this year. We're excited about our current outlook for '22 -- 2022 and the opportunity to create further value for our shareholders. As always, we appreciate your ongoing support. I'll now open the call for questions from the investment community. Operator, please open the call.

Question-and-Answer Session

Operator

[Operator Instructions]. Patrick O'Rourke, you may begin with the first question.

Patrick O'Rourke

I guess just to start off here, wondering you have the $2 billion in NCLs. You have some U.S. tax pools as well, where current strip is, can you give us a little bit of an update on your view of the outlook for cash taxability and the time horizon there?

Kenneth Lamont

Sure. It's -- Patrick. It's Ken here. We're not expecting to pay any cash taxes in the next couple of years. So I would say we're good for there. And then after that, obviously, the amount of tools that we've got, it's going to generate significant kind of shelter as we go forward. So again, our effective tax rate should be pretty low. And that's at current strip I'm talking right now. So it depends really on where WTI goes here. So.

Patrick O'Rourke

Okay. And in terms of the cash return to shareholders and the mechanism here, obviously, a move to share buybacks. But thinking about stress testing -- dividend and potential cadence and gearing in terms of growth trajectory there, you have it at 4% at a $50 deck. I think -- probably 7% at a $50 deck, 4% at strip.

How do you think about kind of managing those levels there? Is sort of dividend growth going to be a function of where you think sort of the lower case for WTI is? Or how would investors kind of forecast that going forward?

Craig Bryksa

Yes. Thanks for that question, Patrick. It's Craig, here. So we reintroduced that base level dividend last September, if you remember, and we gradually increased it again here in December. As we do get closer to our near-term debt targets, like we've talked about in the past, that got $1.3 billion of absolute debt. But for us to put out a little bit more of a formalized framework on how you can expect us to return capital to shareholders.

Your question around base level dividend. So like you said, right now, we're sitting at about a 7% simple payout at a $50 price deck. That speaks to 2 things, Patrick. That speaks to the sustainability of that base level dividend, and it also speaks to how that dividend can continue to grow over time as we simply grow that simple payout.

So again, as our financial outlook improves. And in this environment, it's improving very rapidly, you can expect more of a formalized framework on return of capital to shareholders. And through that, the key priorities for us right now are base level dividend growth and continuing to grow that and at the same time, share repurchases.

Operator

Your next question comes from Aaron Bilkoski from TD.

Aaron Bilkoski

So I guess my question is now that you have some real Duvernay production results with some real capital costs on the books. How do you see Duvernay spending as a proportion of total capital spending trending over the next several years?

Craig Bryksa

Aaron, thanks for the question. It's Craig here. So if you look at our budget this year, of the $825 million to $900 million, about 26% of that budget is being allocated to the Duvernay. And then when you look at us in our 5-year plan, it's roughly the same as that. I would say our 5-year plan really mirrors 2022.

So when you look at it out that way, it's in that, call it, 26% to 28% spending. So a significant portion of our overall capital allocation.

Aaron Bilkoski

Okay. Can I just ask one more follow-up question? Could you remind me what you see for future drilling inventory in the Kaybob Duvernay area?

Craig Bryksa

Yes. So for us, if you remember when we did that acquisition, Aaron, we let the market know that we see around, call it, 200 wells, so just over a 10-year drilling inventory. And keep in mind, though, too, Aaron, that that's at a very conservative well spacing. We've got our well spacing in their set at around 600 meters. As we continue to develop the asset, we'll continue to reevaluate whether that spacing is, in fact, correct.

And maybe through that, we pick up a few more in inventory if we go on to the, call it, that 500 meters or so. And then at the same time, as we move east and west, delineate even more, the plan as our competitors continue to delineate the play that will allow for some inventory expansion as well.

Operator

[Operator Instructions]. Okay. There are no further questions at this time. Please proceed.

Craig Bryksa

Thanks, everyone, for joining our call today. If you have any questions that were not answered, please call our Investor Relations team at your convenience. Thanks, everyone.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.