Baytex Energy Corp. (NYSE:BTE) Q1 2024 Earnings Call Transcript

Baytex Energy Corp. (NYSE:BTE) Q1 2024 Earnings Call Transcript May 10, 2024

Baytex Energy Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. This is the conference operator. Welcome to the Baytex Energy Corp. First Quarter 2024 Financial and Operating Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity for analysts to ask questions. [Operator Instructions] I would now like to turn the conference over to Brian Ector, Senior Vice President, Capital Markets and Investor Relations. Please go ahead.

Brian Ector: Thank you, Ishia. Good morning, ladies and gentlemen, and thank you for joining us to discuss our first quarter 2024 financial and operating results. Today I am joined by Eric Greager, our President and Chief Executive Officer, Chad Kalmakoff, our Chief Financial Officer, and Chad Lundberg, our Chief Operating 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.

Following our prepared remarks, we will be taking questions from the analysts. In addition, if you are listening in today via the webcast, you will have the opportunity to submit an online question, and we will do our best to answer all questions submitted. With that, I would now like to turn the call over to Eric.

Eric Greager: Thanks, Brian. Good morning, everyone, and welcome to our first quarter 2024 conference call. In the first quarter, we safely and efficiently executed the largest exploration and development program in company history, and delivered operating and financial results consistent, with our full year guidance. We are off to a strong start in 2024 and expect to deliver substantial free cash flow, and meaningful shareholder returns over the next three quarters. We increased production per share by 15% in Q1, 2024, compared to Q1, 2023, with production averaging more than 150,600 BOE per day, 84% oil and NGLs. We drilled 83 net wells with 13 rigs running at the peak of the quarter and E&D expenditures totaling $413 million, one-third of our guided full year expenditures.

Our 2024 guidance remains unchanged with E&D expenditures of $1.2 billion to $1.3 billion and production of 150,000 to 156,000 BOE per day. Based on the forward strip, we expect to generate approximately $700 million of free cash flow in 2024. Our strong free cash flow profile reflects the efficiency of our E&D program, higher forecast production volumes for the remainder of the year, and improved crude oil realizations in Canada, and Eagle Ford. In Canada, we are benefiting from the completion of the Trans Mountain Pipeline expansion and increased oil export capacity, which is contributing to narrowing basis differentials out of Western Canada. In Eagle Ford, we benefit from our exposure to premium U.S. Gulf Coast pricing for our light oil and condensate production.

We intend to allocate 50% of free cash flow to the balance sheet, and 50% to direct shareholder returns, which includes a combination of share buybacks and a quarterly dividend. I’d like to now turn the call over to Chad Kalmakoff to discuss our financial results.

Chad Kalmakoff: Thanks, Eric. In Q1, adjusted funds flow per share was $424 million, or 52% per basic share, which is a 21% increase compared to Q1 last year. The first quarter is our highest capital spend quarter of the year, which sets the stage for a strong free cash flow and increased shareholder returns for the balance of the year. Our current normal course issuer bid allows us to purchase up to 68.4 million common shares, during the 12-month period ending June 28, 2024. As of May 7, we had repurchased 46.7 million common shares for $253 million at an average price of $5.42 per share, representing 5.4% of our total shares outstanding. Our total debt at March 31, 2024 was $2.5 billion, largely unchanged from year-end, due to our large Q1 capital program, and the impact of the weakening Canadian dollar on our U.S. dollar-denominated debt.

As I stated, our Q1 capital program has set the stage for a strong free cash flow profile, through the balance of the year. A significant portion of that free cash flow will go to debt reduction. In addition, we’re actively managing our debt maturities to ensure ample liquidity and flexibility, to execute our business plan while our overall debt position is reduced. With this in mind, subsequent to quarter-end, we undertook two significant transactions. Firstly, on April 1, we closed a private placement of US$575 million aggregate principal amount of senior unsecured notes with an eight-year term. We are very pleased with the market support for this offering. The notes bear interest at 7.38% per year and mature on March 15, 2032. Net proceeds from the offering were used to redeem the remaining $410 million 8.75% notes, due April 1, 2027 and to repay a portion of our credit facilities.

Secondly, we extended the maturity of our credit facilities, by two years to May 9, 2028. Again, we had great support from our syndicate, and I was pleased that we could complete the extension of our US$1.1 billion credit facility. The refinancing of our notes to 2032 and the extension of our credit facilities out to 2028 puts us in a great position with respect to our maturity schedule. We have ample liquidity and flexibility, to execute our business plans while reducing debt and providing shareholder returns. Turning to risk management, we employ a disciplined commodity hedging program, to mitigate the volatility and revenue due to changes in commodity prices. For the balance of 2024, we have hedged approximately 40% of our net crude oil exposure, utilizing two-way collars with an average floor price of $60 per barrel and an average ceiling price of $96 per barrel.

For the first half of 2025, we have hedged approximately 20% of our net crude oil exposure, utilizing two-way collars with an average floor price of $60 and an average ceiling price of $91 a barrel. Now I’ll turn the call over to Chad Lundberg, to discuss the results of our first quarter capital program.

Chad Lundberg: Well, thanks, Chad. I’m now pleased to speak to our Q1 operations, and highlight the significant efforts of our team. In the Eagle Ford, we continue to deliver strong results across the black oil, volatile oil, and condensate thermal maturity windows. In the first quarter, we brought 19 wells on stream, including 15 lower Eagle Ford wells, three upper Eagle Ford wells, and one refrac. When we compare our operated Eagle Ford performance to a data set of over 560 wells sourced from public data, our performance over the last nine months ranks in the top quartile. On a production per lateral foot basis, we are at the top of the second quartile. I’m very pleased with our results, and I’m confident there’s more of this to come.

We remain focused on optimizing our acreage and our systems. Our 2024 program includes four upper Eagle Ford wells, three of which were brought on stream, during the first quarter and are still ramping. We also completed a refrac in our Medina unit that, is expected to generate an internal rate of return of over 100%. Additional refrac opportunities have been identified to supplement our capital program. For 2024, we are targeting an 8% improvement in our operated drilling and completions costs for completed lateral foot over 2023. In our Canadian light oil business unit, we completed our 2024 drilling program in the Pembina Duvernay, and executed another successful winter drilling program in the Viking. We were pleased with the efficiency of our two-path, seven-well drilling program in our Duvernay, which saw a 21% improvement in drilling days, measured from spot to rig release and a 10% improvement in drilling costs, compared to 2023.

Fracture simulation of three-well pad commenced in April and the four-well pad is expected to commence in June. In our conventional heavy well business unit, Peavine continued to outperform expectations, and we followed up early exploration success with development in Morinville and the greater Cold Lake area. At Peavine, we brought 12 wells on stream during Q1, 2024 and initial well performance exceeded type curve expectations. At Morinville, we brought four multilateral horizontal wells on stream, and targeted the Rex formation, a Clearwater equivalent. In the greater Cold Lake area, we recently brought five Waseca horizontal multilateral wells on stream. I’m very pleased with our first quarter development program, which delivered strong results across the portfolio.

And with that, I will turn the call back to Eric, for his closing remarks.

Eric Greager: Thanks, Chad. I want to take a moment to thank our operating teams. As many recall, we started the year with some really challenging conditions, extreme cold across North America followed by heavy rainfall in Texas. The teams did a great job. They maintained safe and efficient operations, delivered on the quarter, and delivered the largest Q1 capital program in company history, setting us up well for the rest of the year. I want to highlight the expansion of our land base in the Pembina Duvernay. During the first quarter, we successfully acquired approximately 31 net sections of high quality Duvernay lands on the Southern flank of our existing acreage. This brings our core Pembina Duvernay acreage to 142 net sections, providing us with significant inventory and growth potential, in what is becoming a very interesting part of the Duvernay.

We believe the resource associated with the newly acquired lands, is of very high quality. These lands will immediately compete for capital in our portfolio. As I mentioned at the outset, we are building momentum, and expect to generate substantial free cash flow and direct shareholder returns this year. We are committed to a disciplined returns-based capital allocation philosophy aimed at driving increased per share growth and returns. Our Board has declared a Q2 cash dividend of $0.0225 per share to be paid on July 2, 2024. And now we are ready to open the call for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] The first question comes from Menno Hulshof with TD Cowen. Please go ahead.

Menno Hulshof: Thanks and good morning, everyone. I’ll just start with a question on the refrac program, where your rates still look to be pretty strong. Can you just speak to the overall economics of that program, including all-in costs? And is it possible that we see your current refrac inventory of 300 increase over time? Thank you.

Eric Greager: Hi, Menno. It’s Eric. Thanks for the question. Good to talk to you this morning. The economics are strong. So the rates remain strong. The pressure remains strong. All the indications that one would look to, you know, to give early indications of reservoir performance, stimulate reservoir volume, and what might endure over time, all feel very strong to us. And with a refrac, you can apply all the same things, the same diagnostic techniques to forecast as you would with an ordinary well. So that all feels pretty good. We do anticipate that we’re going to be able to continue this program moving forward. Candidate selection is very important, as you know, because what you don’t want to do is, you don’t want to build a refrac campaign that begins to interfere, with the balance of the program.

So it has to be complementary, supplementary. But the economics are very strong. IRRs in excess of 100, and all the diagnostics on the Medina well continue to look very strong. So, we’re encouraged by this, and encouraged by the validation of the candidate selection criteria as well. So, we do believe we’re going to be able to, over time, and at a measured pace, add this kind of supplemental capital and production program at incrementally better capital efficiencies over time. Let me just pause there and, Menno, you can follow-up, please.

Menno Hulshof: Sure. No, that was great, Eric. Maybe I’ll just follow-up with a question on future upside. You look to be working a number of different areas here in Canada, especially on the heavy side of things. Which of these emerging plays are you currently most excited about?

Eric Greager: Well, Peavine certainly continues to exceed our expectations. And the fact that we’re in Q1, having meaningfully exceeded the high end of our guidance range, or the high end of our collar that we had previously put out and maintained, gives us a lot of confidence. We will continue to reiterate, this kind of 15,000 BOE day target for Peavine. And then I think to the extent we exceed performance, that’ll be a pleasant surprise. And the reason for that is just, because the reason we’ve outperformed in Peavine relative to the 15,000 is on surprising outperformance in the reservoir. And so, to the extent that continues to happen, there’ll be pleasant surprises and upside performance. But we will stick with the 15,000 BOE a day as our kind of go forward plan.

Although, I would expect 2024 to continue to run a little bit above that. So Peavine, is one we’re really excited about. Of course, the Clearwater equivalent, the Rex at Morinville just North of Edmonton, is an area we’ve put several full length development multilateral horizontals in. It continues to perform very well, and we’re very excited about that. And the Waseca up in the greater Cold Lake area, also continues to outperform our expectations. And so, we continue to delineate those plays and continue to be excited about what we learn as we delineate, find the extents and understand the quality and performance criteria of the reservoir itself. And of course, in the North and West quadrant of our Peace River area, we did acquire some opportunities.

These would be in the blue sky. It’s very early, but we call this play Grizzly and it shows up in our heavy oil portion on slide 21. And we’re pretty excited about that as well. But again, it’s very early. So it’s not as far along as the Rex at Morinville, or the Waseca in the greater Cold Lake area. But all three of these are developing nicely, and the team is continuing to put to work. Two geoscience teams across our heavy oil fairway and continuing to find opportunities. On lands, we already own and create opportunities where we can extend our land position commercially.

Menno Hulshof: Thanks, Eric. I’ll turn it back.

Eric Greager: Thanks, Menno.

Operator: The next question comes from Amir Arif with ATB Capital Markets. Please go ahead.

Amir Arif: Thanks, Eric. And a few quick questions for you. Just on that Medina refrac, can you just quantify the actual wealth or the cost of the completion? And I think you did provide a rate of 700 barrels a day, but just curious where it was prior to the frac?

Eric Greager: Yes. So Amir, you broke up just a little bit. I think you asked the capital on the refrac and the rate. Is that right?

Amir Arif: The incremental rate, yes. To the 700?

Eric Greager: Yes, the incremental rate. Okay. So that well had declined to the point where it was, I don’t know, I’m going to say less than 50 barrels a day, BOE a day. And so the incremental as it, as we put it on production after the refrac was in excess of 700 BOE a day. So, incrementally it’s 650 plus BOE a day. And again, the reservoir pressure indications, ISIPs, treating pressure and other diagnostic tools that we’ve used, pressure dependent rates and the like have all indicated that we have touched substantial or created substantial new reservoir fracture surface area. So we think at a discounted price, we’ve basically completed a new almost 5,000 foot lateral. And we did so, I think it was about, Chad Lundberg, US$4 million? Or was that Canadian?

Chad Lundberg: U.S.

Eric Greager: U.S. Okay. Amir, I think that rounds out the question.

Amir Arif: Yes, perfect. And just on the Peavine, just to follow-up questions, to your comments that you made there, the better production is due to the better wells. What’s the limitation in terms of being able to grow that further? Is it just, is there surface constraints? Or is it just how much capital you’re allocating in terms of your target number of 15,000 barrels a day?

Eric Greager: Yes, so the 50 sorry, one five, 15,000 barrels a day, is an output, not an input. So that is the consequence of the other decisions we’ve made. What is actually the constraint is, you know, our relationship with the Peavine, Métis, and in particular, over the years, you know, it’s been a, this has been a four, five, six year relationship in the making. And, we believe engagement, and respectful engagement and doing what you said you were going to do, in terms of managing the relationships with the communities in which we operate, is a key principle. And one of the key principles during the negotiation was our pursuit to understand how much development and at what pace the community would tolerate. And we’ve understood that, we’ve continued to engage, to reiterate that.

And it’s the pace of development today that we have kind of level loaded our program at, that dictates the current production rate. So it’s really constrained not by, the quality of the reservoir or by capital, but rather by our license to operate within the community, and our respect for the community relationship.

Amir Arif: Okay. That makes sense. And then just shifting over to the Duvernay, I know you’ve got some new wells that you’re completing. Just a large addition of acreage relative to before you get some additional well results, just curious if you can add some color in terms of is that a different part of the Duvernay, or is it the same trend? Are you comfortable enough adding to that position ahead of the well results that you’re completing?

Eric Greager: Yes, we’re actually very excited about the quality of the resource associated with these almost 31 net sections we’ve added. You probably know this, but for the benefit of the entire audience. There was substantially more acreage posted in the Crown auction than what we bought. So, we were very surgical and intentional about going after the acreage that we wanted. We got the acreage we wanted, all of the acreage we wanted, and we’re really excited about the quality of the resource associated with it. So, we’ll continue to step up in our five-year plan capital allocation and the pace of development. So next year we had, this year it’s a seven-well program, a four-well pad and a three-well pad in our Duvernay. And next year, it’s entirely reasonable to expect it to be somewhere north of seven, perhaps nine or ten.

And I think that’s very reasonable, because this is really high quality acreage, and it’s on trend in the same thermal maturation windows and very close to, geographically, very close to our existing position. So we think we’ve got acreage in the best part of the Pembina Duvernay. We like the reservoir quality we’re in. We like the thermal maturation we’re in. We like the liquids mix. And continue to make progress on unlocking the secrets of the reservoir, which will include our new 31 net sections.

Amir Arif: Okay. Perfect. And then just one final question, just on the hedge book. You’ve already got a great hedge book for this year, 40% hedge, 60 floors, 9,800 ceilings. Just as your net debt comes down, can you give us a sense of what you’re thinking about your hedging philosophy going forward?

Eric Greager: Yes, yes beyond ’24. Yes, because as you point out, ’24 is pretty well done. We like the shape and character. And 2025 and beyond, it will continue to follow our net and total debt down. And so 40% was kind of predicated on 1.1 times, 1.2 times total debt to EBITDA leverage ratio. And as that comes down under one, we’ll continue to reduce the 40% down linearly, really, not in big staggered steps. But essentially linearly by quarter in conjunction with the leverage ratio as it comes down. So 0.9 times might be closer to 30%. 0.8 times might be closer to 20% of net crude exposure, and so on as it comes down. And we’ll just follow that leverage ratio out in time, as the debt comes down. So will the need for our hedge book engaged at the same level.

Amir Arif: Appreciate the color. Thanks.

Eric Greager: Thank you, Amir.

Operator: This concludes the question-and-answer session from the phone lines. I would like to turn the conference back over to Brian Ector for any questions received online. Please go ahead.

Brian Ector: All right. Thank you, Ishia. We do have a number of inbound questions coming in on the webcast. So, I’m going try and summarize a few of them and ask members of the team to address each of the inbound questions. There are a number of themes evolving from the questions that are coming in, and most relate to a discussion around capital allocation in our portfolio. So three components, debt, share buybacks in our NCIB program, and dividends. And so, I want to turn the questions over first to Chad Kalmakoff, and I’m going to summarize this. But we talked about having a strong financial position, but our debt really didn’t come down in the first quarter. Can you speak, Chad, to our quarter-end debt levels and expectations for the balance of the year, please?

Chad Kalmakoff: Sure. Thanks, Brian. Thanks for the question. Good question. I think as we reference our strong financial position, it’s good to know that we’re speaking to more than just our leverage ratio. Truly, the things we look at are like our financial liquidity, our long-term note maturity profile, which I think is the strongest it’s ever been in the last 10 years. So looking at our two series of outstanding notes. We have one turned out to 2030, we have one turned out to 2032. I think this is a strong endorsement from our fixed income investors regarding the depth and quality of our inventory. In our most recent issue, the 7.38 notes, the $575 million, the demand for the issue was very strong, which was five times oversubscribed.

And again, as we mentioned before, we’ve turned out our credit facilities as well out to 2028. So that maturity profile is one of the things we reference, when we think about our strong financial position. We also, I guess I wouldn’t be – I’d be remiss to say that we do recognize our leverage ratio, is higher than we want it to be. So our debt-to-EBITDA ratio, 1.1 times above some of our peers who are typically in that 0.5 to 1 times ratio. I think we just acknowledge that we realize this and debt repayment is a priority for us. 50% of our free cash flow for the balance of the year will be directed to our balance sheet. And with that, we do expect to reduce our overall debt by just over 10% this year. I think lastly, when you look at the quarter, I think a couple things we talked about.