Baytex Energy Corp. (BTE) on Q3 2022 Results - Earnings Call Transcript
Operator: Thank you for standing by. This is the conference operator. Welcome to the Baytex Energy Third Quarter 2022 Financial Results and Operating Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Brian Ector, Vice President, Capital Markets. Please go ahead.
Brian Ector: Thank you, Gaylene. Good morning, ladies and gentlemen, and thank you for joining us to discuss our third quarter 2022 financial and operating results. Today's call is somewhat unique in that we are saying goodbye to Ed LaFehr, who has led our organization for the past 6 years, and we are welcoming Eric Greager as our new President and Chief Executive Officer. We will hear from both Ed and Eric today. And we are also joined by Rod Gray, Executive VP and Chief Financial Officer; and Chad Lundberg, our Chief Operating and Sustainability Officer. 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 yesterday'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.
Edward LaFehr: Thanks, Brian, and good morning, everyone. I'd like to welcome everybody to our third quarter 2022 conference call. And at the same time, I'm truly excited to welcome Eric to Baytex. Throughout his career, Eric has been focused on organic development and engaging and inspiring organizations to create value, key traits that I know will fit in well here. I will remain with Baytex in an advisory capacity until the end of January, at which point, my retirement will officially begin. Today is certainly a bittersweet moment for me. When I joined Baytex 6 years ago, I remember stating on my first quarterly earnings call how impressed I was with the Baytex team and how committed and focused they were on driving value. This was a strong team with high-quality assets that I knew could build a great future. 6 years and 24 conference calls later, the team and the portfolio are stronger than ever before. I am enormously proud of the entire Baytex team and our accomplishments. Together, we successfully repositioned Baytex through the downturn, strengthened our balance sheet, and we discovered one of the most exciting new Clearwater oil fields that our industry has ever seen. And we are progressively increasing direct returns to shareholders, something we are all immensely proud of. Before I turn the call over to Rod and Eric, let me review, for one last time, our quarterly results. During the third quarter, we delivered strong operating and financial results which has set the stage for continued momentum as we approach 2023. In addition, we advanced our Clearwater play at Peavine with results from our second half drilling program, continuing to deliver among the best wells drilled in the play. Production during the third quarter averaged over 83,000 BOEs per day and we generated quarterly free cash flow of $112 million, which brings our year-to-date free cash flow to $478 million. Capital expenditures totaled $167 million and we participated in the drilling of 86 gross or 72 net wells. Production in October increased to over 87,000 BOEs per day, which puts us on track to achieve our targeted exit rate of 87,000 to 88,000 BOEs per day. For 2022, we expect to average approximately 84,000 BOEs per day, which represents 5% annual production growth or 6% on a per share basis. We are now forecasting full year 2022 exploration and development expenditures of $515 million, up 3% from our previously targeted $500 million, which represented the high end of our prior guidance range. The incremental capital largely reflects the impact of a strengthening U.S. dollar relative to the Canadian dollar on our U.S. operations and further level loading of activity through year-end to maintain the efficiency of our operations. We remain intensely focused on capital discipline and maximizing free cash flow. Taking into account our year-to-date results and based on the forward strip for the fourth quarter, we expect to generate approximately $650 million or $1.16 per basic share of free cash flow this year. Operationally, the highlight of our business continues to be our Clearwater development at Peavine. This is an asset that at current commodity prices generates among the strongest economics within our portfolio and has the ability to grow organically while enhancing our free cash flow profile. During the third quarter, our Clearwater production averaged 8,200 barrels per day. And in October, we produced approximately 10,000 barrels per day from 24 producing wells. The first 4 wells from our second half 2022 drilling program generated average 30-day initial production rates of 1,100 barrels per day per well. Initial well performance continues to outperform type curve assumptions and we now hold 13 of the top 15 initial rate wells drilled across the play. Following further detailed reservoir and economic analysis of the Peavine Clearwater, our second half wells are all drilled at 40-meter interlateral spacing, whereas our initial wells were drilled at 50-meter interlateral spacing. This tighter spacing enables the drilling of 5 wells per section versus 4 wells per section and creates the potential for a 20% increase in our prospective drilling inventory, yielding meaningfully improved resource recovery and value. To date, we have derisked 50 sections of our 80-section Peavine land base and believe the lands hold the potential for greater than 250 locations with production increasing to approximately 15,000 barrels per day. When combined with our legacy acreage position in Northwest Alberta, we estimate that over 125 sections of our lands are highly prospective for Clearwater development. I want to now turn it over to Rod, who will provide a brief update on our liquidity and capital structure.
Rodney Gray: Thanks, Ed, and good morning, everyone. Our liquidity and capital structure have never been stronger. And with the established debt targets we now have in place, we are building a business that will be resilient throughout the commodity price cycles. Our net debt, which includes our credit facilities, long-term notes and working capital, totaled $1.1 billion at September 30, 2022, down from $1.4 billion at December 31, 2021. We expect to exit 2022 with net debt of under $1 billion. Our net debt was largely unchanged from the second quarter due to our active share buyback program and the impact of a strengthening U.S. dollar relative to the Canadian dollar on our U.S. dollar-denominated debt. The change in the Canadian U.S. exchange rate from June 30 to September 30 impacted our net debt in Canadian dollar terms by approximately $50 million during the quarter. During the third quarter, we also repurchased and canceled USD 27 million of the 8.75% long-term notes due 2027, bringing the principal amount outstanding to USD 473 million. As of September 30, 2022, we had about $714 million of undrawn capacity on our credit facilities, resulting in liquidity net of working capital of $699 million. This improved financial position has enabled us to implement the second phase of our enhanced shareholder return framework in May of this year. We are now allocating 25% of our annual free cash flow to a share buyback program. Through September, we repurchased 21.6 million common shares for $141 million, representing 3.8% of our shares outstanding at an average price of $6.53 per share. During the month of October, we were subject to a special blackout given the pending announcement of Eric joining Baytex. And as a result, our buybacks were limited during the month. For November and December, we expect to resume buying back our shares as we target 25% of our annual free cash flow for this activity. And now I'd like to turn the call over to Eric and officially introduce him to our analysts and shareholders on the call today.
Eric Greager: Thanks, Rod, and thanks, Ed, for your opening remarks as well. And good morning, everyone. I'm excited to be joining Baytex. I've already had the opportunity to engage with the executive team and meet many employees, including the Peace River, Viking and Duvernay teams. And I can't wait to get out to the field in a couple of weeks. I've been impressed with the quality of the assets and the people here at Baytex. I've also spoken with our top shareholders, and I can tell you that we are well aligned on driving returns in the business. Baytex has in place a strong shareholder return framework that is focused on continued deleveraging and over time, as our debt targets are achieved, increasing the allocation of free cash flow to direct shareholder returns. I'm very pleased to confirm at this time that upon hitting our ultimate debt target of $400 million, we will increase direct shareholder returns to 75% of our free cash flow. We've laid out a detailed summary of this updated shareholder return framework in our November Investor Relations presentation, which is available on our website and includes a slide showing $3.2 billion of free cash flow generation, returning $1.8 billion to shareholders over our 5-year plan period at USD 80 WTI. I'm very excited to get started. Ed, thank you for your leadership and support through this transition. It is greatly appreciated. You've had a tremendous career and I know everyone at Baytex, including myself, wish you all the best in retirement. And now operator, we are ready to open the call for questions.
Operator: [Operator Instructions]. Our first question is from Patrick O'Rourke with ATB Capital Markets.
Operator: The next question is from Menno Hulshof with TD Securities.
Operator: The next question is from Dennis Fong with CIBC World Markets.
Operator: This concludes the question-and-answer session. I'd like to turn the conference back over to Brian Ector for any closing remarks.
Brian Ector: All right. Thanks, operator. Thanks, everyone, for participating in our third quarter 2022 conference call. Have a great day.
Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
