Baytex Energy Corp. (BTE) on Q1 2022 Results - Earnings Call Transcript
Operator: Thank you for standing by. This is the conference operator. Welcome to the Baytex Energy Corp. First Quarter 2022 Financial 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, Shareese. Good morning, ladies and gentlemen, and thank you for joining us to discuss our first quarter 2022 financial and operating results. Today, I am joined by Ed LaFehr, our President and Chief Executive Officer; Rod Gray, our 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 today 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 first quarter 2022 conference call. During the first quarter, we remained focused on capital discipline, generating free cash flow and reducing debt. We delivered strong operating and financial results with production of almost 81,000 BOEs per day, free cash flow of $121 million and a 10% reduction in our net debt to $1.28 billion. I'm very pleased to announce that given the strength of our balance sheet and consistent with our desire to offer direct shareholder returns, the Board of Directors has approved the filing of a normal course issuer bid application with the Toronto Stock Exchange for a share buyback program of up to 56 million common shares, representing 10% of our public float. We expect to commence the buyback program in May, which is consistent with the shareholder return framework we discussed last quarter. These are exciting times for Baytex. In addition to the share buyback announcement, we have a number of positive developments to share with you today. First is the success of our Clearwater development at Peavine, second is our increased 2022 guidance, and third is the update we've made to our 5-year plan. Let's start with our Clearwater results. We followed up our 2021 Appraisal Program on our Peavine acreage with exceptional Q1 2022 drilling program. We have now started up all 10 wells drilled during the first quarter and production has increased from 0 at the beginning of 2021 to approximately 8,000 barrels per day today. During the first quarter, we successfully executed our first 6 extended reach horizontal wells, which are utilized to provide appropriate setbacks to residents and environmentally sensitive areas. These ERH wells are among the first of their type to be drilled in Western Canada and consist of 4 2-mile long laterals versus a more traditional well design comprised of 8 1-mile laterals. Our first 3 ERH wells on the 4-25 pad have established average 30-day initial production rates of approximately 1,100 barrels per day per well and are the strongest wells ever drilled in the Clearwater play. In addition, 4 wells on the 5-33 pad were brought on stream in March, April and are expected to generate 30-day initial production rates of 300 to 400 barrels per day per well. Initial well performance continues to outperform our type curve assumptions, and we now have 7 of the top 10 initial rate wells drilled to date across the Clearwater play. As we continue to progress our development plan, we have committed to drill 6 additional Clearwater wells during the fourth quarter. We now intend to run a full 1 rig program at Peavine through year-end. As a result, we expect to drill 24 net wells in 2022, up from our original budget of 18 net wells. Maintaining a consistent 1-rig program level loading activity in the second half of 2022 will drive further efficiencies and set the stage for continued strong operating momentum heading into 2023. At current commodity prices, the Clearwater generates among the strongest economics within our portfolio with payouts of less than 3 months and has the ability to grow organically while enhancing our free cash flow profile. To date, we have derisked 50 sections of our 80 section Peavine land base, and our updated plans include the drilling of approximately 120 net wells through 2026. When combined with our legacy acreage position in Northwest Alberta, we estimate that over 125 sections are highly prospective for Clearwater development. With this updated view of our land base, we expect Clearwater production to increase to approximately 10,000 barrels per day during our 5-year plan period, while generating over $400 million of cumulative free cash flow. With continued success, we believe the play ultimately holds the potential for over 200 drilling locations that could support production increasing to over 15,000 barrels per day. We are very excited with the Q1 program and what it means for our business going forward. I will now turn to our 2022 outlook and guidance update. With continued strong operating momentum and production growth on our Clearwater lands, we are increasing our production guidance for 2022 to 83,000 to 85,000 BOE per day, up from 80,000 to 83,000 BOE per day previously. And we expect to exit 2022 producing approximately 87,000 to 88,000 BOE per day. Based on the forward strip, we now expect to generate approximately $700 million or $1.25 per basic share of free cash flow this year. As part of our previously announced return of capital framework, we expect to allocate approximately 25% of our annual free cash flow to direct shareholder returns through the share buyback program I mentioned earlier. The remainder of our free cash flow will continue to be allocated to debt reduction until we achieve a net debt level of $800 million, which represents an expected net debt-to-EBITDA ratio of 1x at a USD 55 WTI price. This level of net debt will provide us with flexibility to run our business through the commodity price cycles and generate meaningful returns to our shareholders. At current prices, we expect to achieve this net debt level in early 2023. At which point, we will consider steps to further enhance shareholder returns. Our operational success, the continued strong economics of our drilling program and the inflationary pressures being experienced throughout our industry caused us to review our capital program for the year. We are now forecasting 2022 exploration and development expenditures of $450 million to $500 million, up from $400 million to $450 million, which was set in a USD 65 pricing environment. The incremental capital reflects the additional activity on our Clearwater lands and 2 to 3 net incremental wells in the Eagle Ford. This increased activity set will result a $30 million of incremental exploration and development expenditures, which is offset by approximately $10 million of reduced light oil activity. We also updated our 2022 plan to reflect an incremental 8% expected capital cost inflation, which increases our exploration and development expenditures by approximately $30 million. This reflects industry cost pressures related to labor, logistics, fuel, and tangible items such as steel, frac, sand and chemicals. In aggregate, we are now assuming 18% capital cost inflation in 2022 as compared to 2021. Lastly, we have fine-tuned several of our cost assumptions to reflect increased royalties due to higher commodity prices, inflationary pressures and inflationary pressures on operating and transportation expenses. Offsetting these cost pressures to a certain extent is increased production and a reduced -- a reduction in our interest expense and our net debt is reduced. With a strong outlook for 2022 unfolding, I want to now turn it over to Rod, who will provide a brief update on our 5-year plan and liquidity and capital structure.
Rodney Gray: Thanks, Ed, and good morning, everyone. We introduced our 5-year plan 1 year ago in April 2021 to highlight our financial and operational sustainability and our ability to generate meaningful free cash flow. We continue to benchmark our results to this 5-year plan and intend to update as warranted based on the macro environment, drilling results and activity across our land base. We are now rolling our 5-year plan forward to capture the period 2022 to 2026. Through this planned period, we are committed to a disciplined returns-based capital allocation philosophy, targeting exploration and development expenditures at less than 50% of our adjusted funds flow. We expect to generate annual production growth of 2% to 4%, with production reaching approximately 95,000 BOE a day in 2026. Year 1 of the 5-year plan is based on our 2022 guidance and the forward strip commodity prices. And years 2 through 5, 2023 to 2026, are based on a constant USD 75 WTI price. Our focus on delivering free cash flow is unchanged. Under these pricing assumptions, we expect to generate approximately $3 billion of cumulative free cash flow during the planned period. In our May Investor Relations presentation, available on our website, you'll find more details regarding our 5-year plan, including free cash flow sensitivities at USD 85 and USD 95 WTI prices. Turning to our liquidity position at March 31. We had approximately $600 million of liquidity on hand at March 31. On April 1, we announced that we received strong support from our lending syndicate to extend and amend our bank credit facilities. The revolving credit facilities have been extended by 2 years from April 2024 to April 2026 and have been increased modestly from approximately USD 815 million to USD 850 million. The revolving credit facilities are not borrowing base facilities and do not require annual or semiannual reviews. Our net debt, which includes our credit facilities, long-term notes and working capital, totaled $1.28 billion at March 31, 2022, down from $1.41 billion at December 31, 2021. At current prices, we expect to exit 2022 with net debt of less than $900 million. We also intend to repurchase and cancel the remaining USD 200 million principal amount of 5.625% long-term notes due 2024 at par on June 1, 2022. And with that, I'll turn the call back over to Ed.
Edward LaFehr: Thanks, Rod. We are incredibly excited to be in this position today. To summarize, we remain focused on capital discipline, generating free cash flow and reducing debt. We materially advanced our Clearwater development during the first quarter, and these exceptional wells have enabled us to more than double our Clearwater production to 8,000 barrels per day. As a result, we are pleased to increase our 2022 production guidance and add 6 new Clearwater wells late this year. Our focus on delivering substantial free cash flow is unchanged. Our updated 5-year plan is expected to generate approximately $3 billion of cumulative free cash flow. And once again, I'm very excited that our Board of Directors has approved a share buyback program that is expected to commence in May. Our business is strong, and we look forward to executing our plans for the ongoing benefit of all stakeholders. And with that, I will ask the operator to please open the call for questions.
Operator: [Operator Instructions]. The first question comes from Patrick O'Rourke with ATB Capital Markets.
Operator: The next question comes from Eric Nuttall with Ninepoint Partners.
Operator: The next question comes from Josh Young with Bison.
Operator: The next question comes from Jeremy McCrea with Raymond James.
Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Brian Ector for any closing remarks. .
Brian Ector: Thank you, Shareese, and thanks, everyone, for participating in our first 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.
