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Crescent Point Energy Trust Units (CPG) Q2 2019 Earnings Call Transcript

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Crescent Point Energy Trust Units (NYSE: CPG)
Q2 2019 Earnings Call
Jul 25, 2019, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, ladies and gentlemen. My name is Britney, and I'll be your conference operator for Crescent Point Energy's Q2 2019 conference call. This conference call is being recorded today and will be webcast along with a slide deck, which can be found on Crescent Point's website home page. The webcast may not be recorded or rebroadcasted 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 June 30, 2019, were announced this morning and are available on Crescent Point's, SEDAR's and EDGAR's 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 Crescent Point's SEDAR's or EDGAR's website or by contacting Crescent Point Energy. Management also calls your attention to the forward-looking information and non-GAAP measure sections of the press release issued earlier today. I will now like to turn the call over to Brad Borggard, senior vice president, corporate planning and capital markets. Please go ahead, Mr.

Borggard.

Brad Borggard -- Senior Vice President, Corporate Planning, and Capital Markets

Thank you, operator, and I'd like to welcome everyone to our second-quarter 2019 conference call. With me are Craig Bryksa, president and chief executive officer; Ken Lamont, chief financial officer; and Ryan Gritzfeldt, chief operating officer.  Other members of the senior leadership team are also present to provide additional insight during the question-and-answer period at the end of the call. As the operator highlighted, this conference call is being webcast, along with the slide deck, which can be downloaded from the Crescent Point website. I'll now pass the call to Craig for an overview of Crescent Point's Q2 2019 results.

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Craig Bryksa -- President and Chief Executive Officer

Thanks, Brad, and thank you everyone for joining us today. Crescent Point's second-quarter results continue to demonstrate the changes we are implementing throughout the organization, to focus our asset base to become a more efficient company with a stronger balance sheet. Our plan continues to be based on our key value drivers, which includes balance sheet strength, disciplined capital allocation and cost efficiencies. We are committed to implementing our plan and have progressed each initiative during the quarter.

For example, we reduced our net debt by over 350 million during the second quarter bringing total net debt reduction to over $450 million year to date. This year, our operations and field teams have made tremendous improvements to realize efficiencies and recorded yet another strong quarter with improved operating expenses. Our first-half 2019 operating expenses were 5% lower than expected, or 20 million below our budget. Of note, these efficiencies are in addition to some of the cost initiatives, including 5% lower capital costs since late 2018 and a 10% reduction in our G&A expenses.  Our returns focused capital allocation is evident in our disciplined capital expenditures.

Despite lower year-over-year production, primarily due to dispositions, our second-quarter adjusted funds flow was essentially unchanged notwithstanding significant reduced capital spending and a 12% decrease in WTI prices. During the quarter, we sold 2,400 BOE per day of non-core assets with higher operating costs for cash proceeds of approximately $60 million. We also progressed the dispositions of our southeast conventional package despite the recent significant volatility in commodity prices. We are pleased with the progress to date of our infrastructure disposition process.

This asset package includes our southern Saskatchewan gas infrastructure and would provide annual cash flow of approximately $50 million to the purchaser. We've structured this package with the goal of having the transaction provide meaningful proceeds to Crescent Point, while also having minimal, if any, impact on our operating netback while we remain disciplined and flexible to our disposition process, to ensure we create value for our shareholders. Each of our initiatives that we have targeted take time however, I'm proud that our team has executed numerous changes and improvements in a very short period. We expect to follow on this success during the second half of 2019.

I would also like to highlight that we recently released our first sustainability report, which can be found on our website. This report details our environmental, social and governance practices and our commitment to safe operations, diversity and the communities in which we operate. I will now hand the call over to Ken to discuss our second-quarter financial results.

Ken Lamont -- Chief Financial Officer

Thank you, Craig. During the second quarter of 2019, Crescent Point generated adjusted funds flow of approximately $504 million or $0.92 per share fully diluted. This was based on strong operating net back of over $36 per BOE, which reflects our recent cost improvements and narrow oil differentials during the quarter.  Second-quarter capital infrastructures totaled 170 million, down from over 380 million in the first quarter of 2019. Due to an extended breakup and wet weather during the quarter, we delayed approximately 60 million of expenditures to the third quarter allowing us to operate in a more cost-effective manner.

During the quarter, we also returned capital to shareholders through dividends and share repurchases, while significantly reducing our debt by over 350 million. Our net debt as of June 30 equated to approximately one point nine times trailing funds flow, which is down from the two and a half times prior to the transition plan. Our cash and unutilized credit capacity as of June 30, 2019 remains strong at approximately 2 billion with no material near-term senior note maturities. We continue to protect our financial flexibility through our hedging program.

As a result, we now have on average approximately 48% of our oil and liquids production hedged for the remainder of 2019 at a weighted average market value price of approximately CAD 78 per barrel. Approximately 42% of our first-half  2020 and 25% of our second half 2020 oil and liquids production is also hedged at similar prices., providing additional production to our cash flows and our overall returns. I will now pass the call over to Ryan to discuss our operating results. Ryan?

Ryan Gritzfeldt -- Chief Operating Officer

Thanks, Ken. Crescent Point's average production of 172,476 BOE per day was comprised of approximately 90% oil and liquids and with net of 2,400 BOE per day of non-core asset dispositions completed during the quarter. Drilling and development activities were limited during the second quarter due to normal seasonality within our Canadian operations. We remain on track with our annual guidance and target approximately 55% of our capital budget to be spent during the second half of the year.

This planned spending includes infill drilling and water flood development in each of our key focus areas, along with continued two-mile horizontal development and Flat Lake.  In addition, we plan to continue centering our U.S. operations on cost-efficient multi-well pad development for which production is expected to come on stream during the fourth quarter. As part of our ongoing goal to improve the company's free cash flow generation, we have increased our focus on realizing cost efficiencies throughout our organization, while also increasing our decline mitigation program over prior years. With these efforts, our team has significantly improved our operating expenses through implementing new processes and continued well optimization and run-time improvements from our evolving field automation program.

Year to date, our operating expenses are 20 million or 5% below budget, which is net of any noncontrollable fixed cost increases incurred during the year. These operating savings are in addition to the improvement we have achieved in capital costs since late 2018 through reducing our average drilling days, completion optimization improvements and cost savings supply chain initiatives. This is a significant achievement and I want to acknowledge our operations team and field staff for their hard work, dedication and continued focus on safe operations. Our water flood program is yielding solid results and continues to advance in each of our key focus areas.

Viewfield Bakken, our largest operating area with the longest water flood history has a base decline rate of 25% in 2019 with its four original water flood units declining on average at 20%.  During the first half of the year, we converted approximately 100 producing wells into water injection wells across the company and remain on track to convert a total of about 145 wells in 2019.  I will now hand the call to Brad for an update on our guidance.

Brad Borggard -- Senior Vice President, Corporate Planning, and Capital Markets

Thanks, Ryan. As part of our Q2 release, we updated our annual guidance to reflect the disposition of 2,400 BOE per day of higher cost non-core assets executed during the quarter. With our guidance, we now expect to generate annual average production of 168 to 172,000 BOE per day compared to our prior guidance range of 170 to 174,000 BOE per day.  Capital expenditures remain unchanged at 1.2 to 1.3 billion based on planned spending for those non-core assets during the remainder of the year. Notwithstanding the delay in our second-quarter capital expenditures and the timing impact of the associated production, which is now expected to come online largely during the fourth quarter, we remain on track with our annual guidance.

Our fourth-quarter production is also expected to benefit from the completion of our U.S. pad drilling program as previously budgeted.  I'll now pass the call back to Craig for closing remarks. Craig?

Craig Bryksa -- President and Chief Executive Officer

Thanks, Brad. We continue to center our strategic direction on focusing our asset base and balance sheet's strength. By taking this approach, we believe we will continue to improve our overall efficiencies, returns, financial flexibility and per share metrics.  At 55 to $60 U.S. WTI, we expect to generate approximately 400 to 600 million of excess cash flow in 2019, allowing for significant net debt reduction and accretive share repurchases.

Since our last conference call, we limited activity within our share repurchase program due to the extreme volatility we have witnessed in commodity prices. Although our priority remains balance sheet strength, we are committed to allocating 20 to 30% of our excess cash flow in 2019 to share repurchases during the year. We will continually assess the allocation of our excess cash flow as we strengthen our balance sheet, including potential asset dispositions. I'd like to thank our shareholders and employees for their continued support and engagement.  I will now open the call up for questions from the investment community.

Operator, please open the line for questions. 

Questions & Answers:


Operator

[Operator instructions] Your first question comes from the line of Travis Wood from National Bank. Your line is now open.

Travis Wood -- National Bank -- Analyst

OK. Thanks. Good morning everybody. In the press release, Craig, I think you've highlighted about 50 million of cash flow out of the infrastructure assets that you're marketing.

Can you help us understand kind of what needs to be realized in kind of the nuances for those assets to drive that 50 million in free cash? And then in the context of value and we're starting to get questions on what the value of those assets could be, is it fair for us to use kind of and eight to 11 times range given where some of the infrastructure assets have transacted to date?

Craig Bryksa -- President and Chief Executive Officer

Travis, so the infrastructure packages are southern Saskatchewan gas infrastructures. So it's all of our gas processing facilities and our major transmission lines are included in that, this is all in southern Saskatchewan. So the $50 million of cash flow to the potential purchaser, that's a combination of the throughput and the tools that would make that up. And then your question around the cash flow, I think you said eight to 11 times, is that right?

Travis Wood -- National Bank -- Analyst

Yes. Yeah.

Craig Bryksa -- President and Chief Executive Officer

That's a fair assumption on that.

Travis Wood -- National Bank -- Analyst

And is there -- and on that 50 million, are you at all -- I know it's probably a bit of a sensitive subject given where we're at in the process, but is there a range on that potential cash flow? Is there a scenario where we could see more than 50 million of cash flow?

Craig Bryksa -- President and Chief Executive Officer

So to that, too, Travis, we're right in the middle of the process and that's all part of the negotiations, but 50 million is what we're basing it of based on the throughput and the tools.

Travis Wood -- National Bank -- Analyst

OK. And then maybe in the same context, if we assume 50 million in cash flow, take that as processing fee and throughput fee, how do we think about the cost structure kind of pro forma, if something like this transacts within the Crescent Point?

Craig Bryksa -- President and Chief Executive Officer

So our goal with this one, Travis, is to keep our netbacks basically neutral. And part of that is -- part of this package is an oil pipeline that will allow us to realize better pricing for our crude stream. So at the end of the day, you've got to uptick a little bit on our operating cross due to the processing fees, but you've got to win on the back-end with realized pricing on your oil. So call that, net-net, neutral.

And I would say that that doesn't include any incremental savings as the interest due on that as well so keep that in mind.

Travis Wood -- National Bank -- Analyst

All right. Thanks for that color.

Operator

Your next question comes from the line of Juan Jarrah from TD. Please go ahead. You're  line is now open.

Juan Jarrah -- TD Securities -- Analyst

Hey. Great. Thanks, guys I've got a bit of a big-picture question. Clearly, you've had a really good Q2, you've had a number of good quarters under your belt.

Things are moving in the right direction. I guess, the question to you guys, to you, Craig and team, is once you execute the strategy on dispositions and rightsizing the balance sheet, let's say, in the next year or so, once you get to that, lets call it the promise land, what does Crescent Point looks like assuming like a 55 to $60 oil group?

Craig Bryksa -- President and Chief Executive Officer

J.J., it's Craig here. That's a good question. So something aren't going to change. I mean, our focus on having a very focused asset base, maintaining debt and building balance sheet strength are going to remain.

So that's going to stay consistent with the company in any commodity price environment and as we move through this. And our mindset around returns and our capital allocation process, that's not going to change as well. So when you look at our key focus areas, those areas have the ability to grow in the high singles to low doubles on a debt- adjusted per-share metrics so a significant amount of growth there. But if you look out into, call it,  2020, 2021, the commodity price environment is where we are at today, look for us to be in that, call it flat to mid singles range with a focus on free cash flow generation and then continuing to return capital to shareholders in some way shape or form, whether it is through share buybacks or dividends and if things are what they are today with the share prices the way they are, that focus will be on share buyback.

Juan Jarrah -- TD Securities -- Analyst

And as a follow-up to that, just a dividend, could we see a scenario where the dividend gets revisited and perhaps increased over time?

Craig Bryksa -- President and Chief Executive Officer

And also, to that J.J., we will continue to watch that. Any dividend adjustment we do make would be, we would ensure that it is a sustainable adjustment toward that. But right now, our focus is on, I guess, debt reductions and share buybacks with the share price that we're trading now.

Juan Jarrah -- TD Securities -- Analyst

That makes sense. Thank you.

Operator

There are no further questions at this time. Please proceed, Craig.

Craig Bryksa -- President and Chief Executive Officer

Thank you for taking time to join our call. If you have any questions that were not answered, you can call our investor relations lines at your convenience. Thank you.

Operator

[Operator signoff]

Duration: 24 minutes

Call participants:

Brad Borggard -- Senior Vice President, Corporate Planning, and Capital Markets

Craig Bryksa -- President and Chief Executive Officer

Ken Lamont -- Chief Financial Officer

Ryan Gritzfeldt -- Chief Operating Officer

Travis Wood -- National Bank -- Analyst

Juan Jarrah -- TD Securities -- Analyst

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