Earnings Transcript for BTE - Q4 Fiscal Year 2022

Operator: Thank you for standing by. This is the conference operator. Welcome to the Baytex Energy Year End 2022 Financial 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 to ask questions. [Operator Instructions] I would now like to turn the conference over to Brian Ector. Please go ahead.

Brian Ector: Thank you, Ashier [ph]. Good morning ladies and gentlemen and thank you for joining us to discuss our fourth quarter and full year 2022 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 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. On the call today, we will also be discussing the evaluation of our reserves at year-end 2022. These evaluations have been prepared in accordance with Canadian disclosure standards, which are not comparable in all respects to United States or other foreign disclosure standards. Our remarks regarding reserves are also forward-looking statements. 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 Eric.

Eric Greager: Thanks Brian. Good morning, everyone, and welcome to our year end 2022 conference call. I have now been with Baytex for four months. And during these early days, I have had the opportunity to meet many of you in the investment community. This is something I look forward to continuing as we build even stronger relationships with our investor base. Yesterday, we returned to trading on the New York Stock Exchange, and we look forward to improve trading liquidity and a better trading experience for our shareholders. As part of our conversations with shareholders, I've been asked on many occasions, what attracted you to Baytex? The first thing I always point to is the high-quality and diversified oil portfolio we hold in Canada and the Eagle Ford in Texas. With over a decade of development opportunities across the portfolio, the Baytex business is strong. Our objective is to deliver modest, reliable annual production growth, while generating meaningful free cash flow and maintaining reasonable financial leverage. We have a strong shareholder return framework in place and we are committed to building an even stronger and more resilient business over time to increase shareholder value and enhance direct shareholder returns on a per share basis. What has impressed me even more than the quality of the asset portfolio are the people. Both in Calgary and across our field operations, this is a passionate team of high-quality professionals who are committed to creating value for shareholders. This really excites me. Operationally, we have delivered volumes to market in a safe and efficient manner and executed our programs to the benefit of all stakeholders. And that's not always easy, especially when the teams are facing days and weeks like we did in December with minus 40-degree temperatures and heavy snowfalls. We are grateful to our employees and contractors for their commitment and perseverance to operating safely and reliably. Let's now discuss our results in a little more detail. 2022 was an exciting year for Baytex. We delivered strong operating results, generated record free cash flow, further strengthened our balance sheet and initiated direct shareholder returns. We generated a 4% year-over-year increase in production, repurchased 4.3% of our shares outstanding and reduced net debt by 30%. In other words, Baytex delivered on all the commitments we laid out at the beginning of 2022. Production during the fourth quarter averaged approximately 87,000 BOE per day, which brought full year production to 83,500 BOE per day. We generated free cash flow in the fourth quarter of $143 million and for the full year 2022, a record $622 million. We maintained capital discipline despite inflationary pressures across our portfolio that was consistent with the industry and the broader economy. Exploration and development expenditures totaled $104 million during the fourth quarter and $522 million for the full year. We delivered adjusted funds flow of $256 million in Q4 2022 and $1.2 billion in 2022. During Q4 2022, we reversed $268 million of previously recorded impairments on our assets, primarily as a result of higher forecasted commodity prices. This contributed to net income of $353 million in the fourth quarter and $856 million in 2022. During 2022, we initiated direct shareholder returns, allocating 25% of annual free cash flow to a share buyback program, with 75% of free cash flow allocated to debt reduction. We repurchased 24.3 million common shares for $159 million at an average price of $6.54 per share. In addition, we significantly strengthened our balance sheet, reducing net debt by 30% to $987 million, representing a net debt-to-EBITDA ratio on a trailing 12-month basis of 0.8 times. Today, our balance sheet is stronger than at any point in the last 10 years. With respect to year-end reserves, we generated a strong PDP recycle ratio of 2.8 times, and a 1P recycle ratio of 1.4 times based on 2022 operating netback of $54.64 per BOE. At year-end, our PDP reserves totaled $124 million BOE, proved reserves totaled $264 million BOE and proved plus probable reserves totaled 438 million BOE. And we maintain a strong reserve life index of 13.8 years based on proved plus probable reserves. The present value of our reserves, discounted at 10% before tax is estimated to be $5.9 billion, up from $5.1 billion at year-end 2021. The increase is largely attributable to a higher commodity price forecast being utilized by our reserves evaluator, using the consultant average of approximately $81 per barrel WTI in US dollars. Our net asset value at year-end 2022 discounted at 10% before tax is $9.28 per share. This is based on the estimated reserves value plus a value for undeveloped acreage net of long-term debt and working capital. As a responsible energy producer, we are committed to monitoring greenhouse gas emissions from our operations, setting targets to reduce our emissions intensity and pursuing cost-effective strategies to produce energy for society with a lower carbon intensity. In 2022, we reduced our greenhouse gas emissions intensity by 15% from 2021 levels. This is a 59% reduction from our 2018 baseline and represents an annual reduction of 1.7 million tons of CO2 equivalent, which is the equivalent of taking 340,000 cars off the road annually. Operationally, the highlight continues to be our Clearwater development at Peavine. This is an asset that, at current commodity prices, generates the strongest economics within our portfolio and has the ability to grow organically while enhancing our free cash flow profile. During the fourth quarter, our Clearwater production averaged 11,000 barrels per day and for the full year 2022, averaged 7,400 barrels per day. During 2022, we drilled 22 net wells at Peavine, with initial well performance continuing to outperform type curve assumptions, and we now hold the top 15 initial rate wells drilled across the play. We expect to bring approximately 31 net wells on-stream at Peavine in 2023. Looking forward, we expect another strong year in 2023, as we advance development across our high-quality oil-weighted portfolio, further delineate our Peavine, Clearwater acreage and progress our Duvernay light oil resource play. We are committed to allocating capital efficiently to generate meaningful free cash flow and increasing direct shareholder returns. Our 2023 guidance remains unchanged, as we target production of 86,000 to 89,000 BOE per day, with exploration and development expenditures of $575 million to $650 million. Based on the forward strip, we expect to generate approximately $450 million of free cash flow in 2023 and expect to reach a net debt level of $800 million during Q3, 2023, at which time, we anticipate increasing direct shareholder returns to a 50% allocation of our free cash flow and accelerating our share buyback program. I'm excited to continue helping move this business forward. And now operator, we are ready to open the call for questions.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Menno Hulshof from TD Securities. Please, go ahead.

Menno Hulshof: Thanks and good morning, everyone. I'll start with the Clearwater. It sounds like the end goal is still 15,000 barrels a day, at which point it largely becomes a free cash flow generator. But with November production having averaged at 12,000 barrels per day and with TMX just around the corner, let's say, sometime in the first half of 2024, how committed are you to 15,000 barrels per day as a peak rate? And why did you settle on that number?

Eric Greager: Hey, good morning, Menno. It's Eric here. Thanks for the question. We're always working closely with the communities in which we operate. And I think you and I have spoken about this kind of one-on-one over cups of coffee. Really, that is the governing constraint. We want to be respectful and just be sure that we don't set expectations that put us in a position of pressing too hard. So we've reached this band of 12,000 to 15,000 barrels per day. It feels very comfortable to us, operationally. It's not terribly challenging other than when there are heavy snowfalls and minus 40-degree days, they're challenging for pretty much any situation in life. If we could move it a little bit faster, certainly, the resource can do that. Operationally, we could handle that. We just don't want to set expectations that are out of line and want to be really responsible with regard to the impacts we have within the communities in which we operate. So I guess the short answer is we're committed to 12,000 to 15,000 barrels a day and we'll continue to do everything we can from a surface cultural perspective and using the relationships to engage at every level within the communities to ensure that we're doing that responsibly. I think those relationships are one of the key assets that responsible operators maintain. And so, to us, it's very important. So I guess, as we sit here today, Menno, we are committed to 12,000 to 15,000 and we'll continue doing what we can to ensure that is delivered reliably. And if there's an opportunity, we can push it higher, but let's stick with that band for now.

Menno Hulshof: Terrific. Yeah. That all makes a lot of sense. And then just moving over to WTI breakeven, you talked about the 2023 budget being funded down to $55 WTI back in December. But just looking at some of the assumptions, they've shifted around, in some cases, a lot. Some cases, a little. Some for the better, I noticed that you're using a heavy differential that's quite a bit wider than it is today and then some for the worst, like lower natural gas prices. So if you kind of roll all of that up, where do you think your WTI breakeven stands today?

Eric Greager: Yeah. It's a little bit lower, I would say. So it has improved. And the reason I would say that is, because increasingly, what's happening with the fairly dramatic reduction in the strip Henry Hub gas pricing is there's a release of industry resources and those resources are moving from gassier plays where the returns aren't as interesting for the operators to more oily plays where differentially they're getting more profitable returns, both the operators and also the service companies. And so what that means is, there's a flow of resources, which has taken some of the upward pressure out of inflation, which is improving the results. The other thing, I would say is, when we set that $55 comment, it had essentially baked into it, the second half of 2022 or maybe the third -- yeah, third quarter, fourth quarter of 2022, inflationary pressures. And as a result of what I just mentioned, those have led up a little bit. And so generally speaking, we set $55 as an arithmetic number that funded the price at $55. But when the price drops to $55, obviously, the inflationary pressures moved down with it. And we've already begun to see that happen. So differentially, we're seeing resources come just a little bit more available for us, which has lowered our WTI breakeven.

Menno Hulshof: Thanks, Eric. I'll pass it back.

Eric Greager: Thank you.

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

Amir Arif: Thanks. Good morning guys. Just a couple of quick questions. Just first on the reserves. Can you just give us a little more color on the negative technical reserve revisions that you had in Eagle Ford?

Eric Greager: Yes. Yes. So, I'll make a comment, and then I'll look around the room to see if others want to sort of follow up and fill in the blanks. These -- the negative technical revisions were primarily in the Eagle Ford. The Eagle Ford is a fracture stimulated play as everyone knows. And when prices move up, it is spacing and stacking to the extent that you can stack in a play in the horizon is a function of price. There's a price dependency. So, as prices move up, there is some down spacing that generally takes place, and we see it across all unconventionals and basically all plays. And essentially, what has happened is there's -- because of the puts and takes around commodity price, but also some of the cash cost structure, most of the negative technical revisions are taken out of the longer tail of the curves. So, the PV impact is almost inconsequential, but the volume impact shows up. And so, this is one of the things that I would point to. And I would say that if you look differentially across our asset portfolio, you'll notice that Canada is incrementally improving or improved in the 2022 year-end reserves. It was primarily focused in the Eagle Ford and focused in the tail of the curves. I think that's probably what I would say here. But generally speaking, the year-over-year reduction is also primarily a result of pretty simple things to understand. We took a really conservative booking approach to the Clearwater at Peavine and it's obviously outperforming our expectations and an absolutely spectacular asset. And so, there's a lot of capacity left there as we continue to develop Peavine and Duvernay, likewise. I'm very excited about the quality of the resource, and we stepped up our pace of development, but that's not reflected in our 2022 year-end reserves. And so conservative booking on both Duvernay as a fracture stimulated resource play and Peavine. And then, of course, we sold some reserves, I think, just a simple refresh of that commentary was good for the business, but it does show up in the total reserve. So yes, let me park it right there. Thank you, Amir.

Amir Arif: I appreciate that, Eric. So, just to clarify that. So, it's basically additional locations that you've added that are causing the decline rate to be a little higher on the tail end. Is that fair?

Eric Greager: Well, it's essentially -- slightly higher cost on the operating side of the business, causes the curves to go under an economic limit out in life, but you've got more curves, you've got higher economic returns on a per curve basis. But out in time, effectively, some of the volumes are below the economic limit out in time. And again, because it's discounted and it's at the tail end of the curve, it has no value impact, but it has a volume impact. And of course, this moves up and down according to commodity price, implied cash costs and spacing and stacking assumptions. So, it always moves up and down, but it's a little noisier on fracture stimulated play than it is on more conventional development.

Amir Arif: Okay. No, I appreciate that color. And then just moving on to the free cash flow allocation to shareholders. As you move from the 25% to 50% during the third quarter or later in the year, for now, is the preference to remain that allocation going entirely to buybacks?

Eric Greager: Yeah. Yeah. Our plan is still -- as we see it today, given a reasonable view of commodity price as we see Q3 and the assumption is at this point and our plan is to continue accelerating our share repurchase plan.

Amir Arif: Okay. And then just the final question on the Duvernay. Once you've got these two, three-well pads drilled; do you feel you have enough information to start moving this to more of a development stage in 2024, or is it still too early to try to move this into more of a production development phase?

Eric Greager: Well, I'm really pleased with the way the first two wells have gone from a drilling, casing, cementing, just operationally. It has been really, really solid execution. We're -- we've got two wells released and out of six or two, three well pads. So I would say it's probably a little early to declare that we have -- that we will have the information. This rigorous design of experiment has been structured such that we should have enough information in terms of the data collection efforts that are underway in terms of the modeling and regression work that has been done by the technical teams. And the way we've structured the design of experiment on the two pads, we should have the information. But because we've only released two wells and only on case toll TD releases, it's a little too soon to say we will have the information, but we certainly structured the design of experiment that we will. And it will be -- I would say, if you think about all the various levers of data collection and sensitivities we're going to need to run, a lot of it is on the production and reservoir pressure performance side at the end, and that's going to come probably in Q4, just by virtue of drilling, casing, cementing and then break up and then stimulation and then flow back with sensitivities and variabilities built into the design of experiment. So it's just going to take time for that data to flow in, but we should have and are structured to have the information necessary to move from what I would call demonstration phase, which is the part of the derisking effort today to development.

Amir Arif: Okay. Sounds good. Thanks.

Eric Greager: Thank you.

Operator: The next question comes from Jeremy McCrea from Raymond James. Please go ahead.

Jeremy McCrea: Hi, Eric. Thanks. These questions are a little bit more high level here. But just on the back of the other questions, what assets do you think is the most underappreciated by the market here, you think? Just in terms of some of the new drilling completion technology that you're seeing today, I just look at what happen with the Clearwater and suddenly where that came out of almost somewhat nowhere. I'm just looking at your asset base and trying to understand where the next big potential play is here in your portfolio?

Eric Greager: Yeah. Hey, Jeremy, that's a great question. I have this foxy little saying that oil is where oil was, and it sounds a little hokey, but it's true when you think about it. We sit on a million and quarter net acres across our asset base. And the exploration team that discovered the Clearwater at Peavine, ring-fenced that asset and gave us a first- mover advantage on the -- absolutely the crown jewel of the play is the same geoscience team that is now endeavoring to poke around the balance of our position in and around the Clearwater fairway and around the broader Peace River. And a company our size with a land-based this size should have and we do have an ongoing organic exploration program. And so not a lot to talk about in terms of the results of that program because we are early in the year, but it's an ongoing development, and it's something the teams are quite good at. Technically, in the subsurface. Operationally and financially, this team is just really, really sharp across the board, and I couldn't be happier with the capabilities. And so oil is where oil was. We sit on a million and quarter net acres, and we've got a team and a budget and a lot of capabilities to unlock it. So I think we've talked in smaller groups about the organic exploration program and what we hope to learn there. Let me just leave it at that. But I would say there's -- I'm pretty excited about the potential, and it's a demonstrated capability of the company.

Jeremy McCrea: Okay. And maybe just kind of just a more personal question for you here. So you've been there for four months here. Guidance really wasn't changed, but where is your bias in terms of where you want to shift the company here now that you've kind of talked to different groups and seen everything. Like just in terms of M&A potential, basins you want to grow, just now that from your own personal bias here, where you want to take the company?

Eric Greager: Yes. So I'm really excited. The Peavine, obviously, according to our earlier conversation, it's going to kind of plateau here at, let's say, 12,000 to 15,000 barrels a day. Spin-off a big pile of free cash flow and just really create spectacular results. The Duvernay gives us a nice leg up. I'm very encouraged about the resource quality and what I've seen in terms of just the technical capabilities of the company and the team to unlock that potential. And so those are two things

Jeremy McCrea: Okay. Okay. Well, thanks for your comments there.

Eric Greager: Thank you.

Operator: Thank you. This concludes the questions session. I would like to turn the conference back over to Brian Ector for any closing remarks.

Brian Ector : Yes. Thanks, Ashier [ph]. Thanks everyone for participating in our year-end conference call. Have a great day.

Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating. Have a pleasant day.