Baytex Energy Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2024

There are 7 speakers on the call.

Operator

Thank you

Speaker 1

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.

Speaker 1

After the presentation, there will be an opportunity for analysts to ask questions. Frame. I would now like to turn the conference over to Brian Ector, Senior Vice President, Capital Markets, Investor Relations. Please go ahead.

Speaker 2

Thank you, Ashia. Good morning, ladies and gentlemen, and thank you for joining us to discuss our Q1 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.

Speaker 2

All dollar amounts referenced in our remarks are in Canadian dollars unless otherwise specified. And 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.

Speaker 3

Thanks, Brian. Good morning, everyone, and welcome to our Q1 2024 conference call. In the Q1, 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.

Speaker 3

We drilled 83 net wells with 13 rigs running at the peak of the quarter and E and D expenditures totaling $413,000,000 1 third of our guided full year expenditures. Our 2024 guidance remains unchanged with E and D expenditures of $1,200,000,000 to $1,300,000,000 and production of 100 and 50,000 to 156,000 BOE per day. Based on the forward strip, we expect to generate approximately $700,000,000 of free cash in 2024. Our strong free cash flow profile reflects the efficiency of our E and D program, higher forecast production volumes for the remainder of the year and improved crude oil realizations in Canada and the Eagle Ford. In Canada, we are benefiting from the completion of the Trans Mountain pipeline expansion and increased oil export which is contributing to narrowing basis differentials out of Western Canada.

Speaker 3

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.

Speaker 4

Thanks, Eric. In Q1, adjusted funds flow per share was $424,000,000 or 52% per basic share which is a 21% increase compared to Q1 last year. The Q1 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 68,400,000 common shares during the 12 month period ending June 28, 2024. As of May 7, we had repurchased 46,700,000 common shares for $253,000,000 at an average price of $5.42 per share representing 5.4 percent of our total shares outstanding.

Speaker 4

Our total debt at March 31, 2024 was $2,500,000,000 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 flow will go to debt reduction.

Speaker 4

In addition, we're actively managing our debt maturities to ensure ample liquidity flexibility to execute our business plan while our overall debt position is reduced. With this in mind, subsequent quarter end we entered 2 significant transactions. Firstly, on April 1, we closed a private placement of US575 million dollars aggregate principal amount of senior unsecured notes with an 8 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, 2,032.

Speaker 4

Net proceeds from the offering were used to redeem the remaining $410,000,000 8.75 percent notes due April 1, 2027 and to repay a portion of our credit facilities. Secondly, we extended the maturity of our credit facilities by 2 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 U. S. $1,100,000,000 credit facility.

Speaker 4

The refinancing of our notes to 2,032 and the extension of our credit facilities out of 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 in revenue due to changes in commodity prices. For the balance of 2024, we have hedged approximately 40% of our net crude oil exposure utilizing 2 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 twenty twenty five 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.

Speaker 4

Now I'll turn the call over to Chad Lumbergh to discuss the results of our Q1 capital program.

Speaker 5

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 Q1, we brought 19 wells on stream, including 15 Lower Eagle Ford wells, 3 Upper Eagle Ford wells and 1 retrack. When we compare our operated Eagle Ford performance to a data set of over 5 60 wells sourced from public data, Our performance over the last 9 months ranks in the top quartile.

Speaker 5

On a production per lateral foot basis, we are at the top of the 2nd quartile. I'm very pleased with our results and I'm confident there's more of this to come. We remain focused on optimizing acreage and our systems. Our 2024 program includes 4 of the Eagle Ford wells, 3 of which were brought on stream during the Q1 and are still ramping. We also completed a refrac in our Medina unit that is expected to generate an internal of return of over 100%.

Speaker 5

Additional refrac opportunities have been identified and supplement our capital program. For 2024, we are targeting 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 2 pad 7 well drilling program in our Duvernay, which saw a 21% improvement in drilling days measured from spuds to rig release and a 10% improvement in drilling costs compared to 2023. Fracture simulation of the 3 well pad commenced in April and the 4 well pad is expected to commence in June.

Speaker 5

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 Peabine, we brought 12 wells on stream during Q1 twenty twenty four and initial well performance exceeded In the Greater Cold Lake area, we recently brought 5 Wasita, Corlomo multilateral wells on stream. I'm very pleased with our Q1 development program, which delivered strong results across the portfolio. And with that, I will turn the call back to Eric for his closing remarks.

Speaker 3

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.

Speaker 3

I want to highlight the expansion of our land base in the Pembina Duvernay. During the Q1, 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 a very high quality. These lands will immediately compete for capital in our portfolio.

Speaker 3

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 $0.025 per share to be paid on July 2, 2024. And now we are ready to open the call for questions.

Speaker 1

Thank you. We will now begin the analyst question and answer session. First question comes from Mano Hauschoff with TD Cohen. Please go ahead.

Speaker 6

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.

Speaker 3

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.

Speaker 3

The pressure remains strong. All the indications that one would look 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 continue this program moving forward.

Speaker 3

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 Modena well continue to look very strong. So we're encouraged by this and encouraged by the validation of the candidate selection criteria as well.

Speaker 3

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 Meno, you can follow-up please.

Speaker 6

Sure. 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?

Speaker 3

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 caller that we had previously put out and maintained gives us a lot of confidence. We will continue to reiterate this kind of 15,000 BO a day target for Peavine. And then I think to the just because the reason we've outperformed in Peavine relative to the 15,000 is on surprising outperformance in the reservoir. And so the extent that continues to happen, there will be pleasant surprises and upside performance.

Speaker 3

But we will stick with the 15,000 BO 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.

Speaker 3

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.

Speaker 3

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 2 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.

Speaker 1

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

Operator

Thanks, Eric. I had a few quick questions for you. Just on that Modena refrac, can you just quantify the actual well 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?

Speaker 3

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?

Operator

The incremental rate, yes, to the 700.

Speaker 3

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

Operator

a day.

Speaker 3

And so, the incremental 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. Again, the reservoir pressure indications, ISIPs, treating pressure and other diagnostic tools that we have 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 $4,000,000 or where was that Canadian? US.

Speaker 3

US, okay. Amir, I think that rounds out the question.

Operator

Yes, perfect. And just on the Peavine, just a follow-up question 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

Speaker 3

day? Yes. So the 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 our relationship with the Peavine Metis and in particular over the years, this has been a 4, 5, 6 year relationship in the making.

Speaker 3

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.

Speaker 3

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.

Operator

Okay. That makes sense. And then just shifting over to the 2, Vernet. I know you have got some new wells that you are completing. Just the 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 or are you comfortable enough adding to that position ahead of the well results that you're completing?

Speaker 3

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 5 year plan, capital allocation and pace of development.

Speaker 3

So next year we had this year it's a 7 well program, a 4 well pad and a 3 well pad in our Duvernay. And next year it's entirely reasonable to expect it to be somewhere north of 7, perhaps 9 or 10. 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.

Speaker 3

We like the thermal maturation we are 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.

Operator

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% hedged, 60 floors, 90, 100 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 like beyond

Speaker 3

'twenty four? Yes, beyond 'twenty four, yes, because as you point out, 'twenty four 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.

Speaker 3

And as that comes down under 1, 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 0.9x might be closer to 30%, 0.8x 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.

Speaker 1

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

Speaker 2

All right. Thank you, Ashia. We do have a number of inbound questions coming in on the webcast. So I'm going to 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.

Speaker 2

So 3 components debt, share buybacks and 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 Q1. Can you speak Chad to our quarter end debt levels and expectations for the balance of the year please? Sure. Thanks Brian

Speaker 4

and thanks for the question. Good question. I think as we referenced 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 loan maturity profile, which is I think is the strongest it's ever been in the last 10 years. So looking at our 2 series of outstanding notes, we have 1 turned out to 2,030, we have 1 turned out to 2,032.

Speaker 4

I think this is a strong endorsement from our fixed income investors regarding depth and quality

Speaker 3

of our

Speaker 4

inventory. In our most recent issue of the 738 notes, the $575,000,000 the demand for the issue was very strong which was 5 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 referenced when we think we're a strong

Speaker 5

financial position.

Speaker 4

We also I guess I wouldn't be remiss to say that we do recognize our leverage ratio was higher than we want 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.

Speaker 4

I think lastly when you look at the quarter, I think a couple of things we talked about. One large capital program Q1 would have impacted that. Secondly, maybe not as obvious, we talked about our notes. Those are all U. S.

Speaker 4

Dollar denominated notes. So at year end, FX rates would have been about 132. They moved to 1.35. So that $0.03 move increased our debt at quarter end by approximately $50,000,000 That would be why you express

Speaker 3

it in Canadian dollars. Yes,

Speaker 4

as we're in Canadian reporting issuer. Now that being said obviously that impacts our debt levels. A weaker Canadian dollar is actually net beneficial to our business. Obviously the value of our U. S.

Speaker 4

Business in total would have a large increase with the relative weakening of the Canadian dollar. Lastly, Derek just mentioned we do have that we did have a $35,000,000 land purchase in the New Verney, high perspective something we're pretty excited about. So those would be the large contributing factors to the non debt reduction. I'll just conclude by saying we realize investors are looking for some debt reduction as are we. We are committed to debt reduction and we are confident we'll reach our debt targets.

Speaker 2

Thank you. Thank you, Chad. And keeping on the line, I'll repeat this question that came in as well. We touched on the debt repayment plan. And I'll turn this over to Eric for a bit broader conversation on capital allocation.

Speaker 2

What are our priorities, debt repayment, shareholder returns, the buyback program versus the dividend?

Speaker 3

Yes. So let me unpack that. Our priorities remain 50% of our free cash flow allocated to debt repayment as Chad Kalmakoff just took us through and the other 50% to direct shareholder returns. And the direct shareholder returns are biased in terms of the size of that 50% allocated to our normal course issuer bid. In the last three quarters, we've taken out 5.5% of our total shares outstanding and that will continue.

Speaker 3

And of course the other part of that direct shareholder return portion of the allocation is our fixed base dividend. And that fixed base dividend of course is currently set at $0.09 per share per year or $0.025 per quarter per share. And that remains part of the 50%. So I guess what I would say simply is it's fifty-fifty and you could ask 100 shareholders their priorities and you could get something like 50 different answers. Some people like more dividends, some people like more share repurchases and others like 100 percent to debt.

Speaker 3

And because we look at it over time and on a balanced and reinforced framework that doesn't kind of whipsaw quarter to quarter, we like this fifty-fifty allocation. We think this threads the needle between pleasing the broadest possible cross section of shareholders. So let me just stop there, Brian.

Speaker 2

And then continuing on the question around the dividends, Eric, are there any conditions where shareholders could expect to see a dividend increase and would we ever consider a special dividend that some other companies have put in place?

Speaker 3

Yes. So special dividends are real challenging for issuers, particularly if they are kind of special one time dividends, surprises essentially. They're great for shareholders but it's very difficult for the issuer to get value embedded in the stock because nobody knows how to discount the probability when that will happen and how big it will happen. Now variable dividends are a different construct around special variable dividends. And if you have a very rigorous formulaic approach to how you go about quantifying the forward variable dividends, That's something I've seen done and I think that can get priced into the stock.

Speaker 3

I would say the third thing is on raising the dividends. One of the reasons we started with a modest fixed base dividend currently yielding, let's call it, 1.8%, was to give us the opportunity over time to increase the dividend on a per share basis and hopefully on a yield basis consistently over time. Now we haven't so far because we've only been at this now for 3 quarters, But it is certainly our desire to over the long arc of time create a track record of raising our fixed base dividend and our dividend yield over time as part of our total shareholder returns framework. Now the last part I'll say on this, it's not specifically around dividends or the dividend question. But when we take 50% of our free cash flow and we allocate it to reducing our debt, even though that's not part of our direct shareholder return framework, it's still meaningfully impactful to share price appreciation because if you assume for the moment that all things equal, the enterprise value of the business stays the same over time and every dollar of debt you reduce becomes a dollar of equity increased in the business.

Speaker 3

And so, this is something we recognize. So, essentially, the full $700,000,000 of free cash flow generated this year goes to direct shareholder returns to the 50% NCIB and dividends. But indirectly as we pay down debt goes to share price appreciation because it moves from the debt side of your EV to the equity side of your EV. And this is where we really think there's some substantial acceleration or compounding of the benefits. If we buy back 7% or 8% of our total shares outstanding each year and we add to that 7% or 8%, a 2% fixed base dividend and then we add to that 2% top line production growth, That's a 12% total shareholder return on the sum of those three parts.

Speaker 3

And then when you add to debt that kind of puts goose and acceleration in that. It's meaningfully north of the 12% TSR. So that's a fairly fulsome discussion I think around shareholder return framework.

Speaker 2

Thanks, Eric. Back to Chad Kalmykoff, just really quickly, Chad, can you during the quarter we had a press release around seeking exempted relief for our normal course issuer bid. If you could just explain the plan like what does that relate to?

Speaker 4

Sure, thanks Brian. That exempt relief is really to allow us to buy additional shares directly through the NYSE versus the TSX. So really just kind of directing some of our NCIB to U. S. Shareholders versus the Canadian shareholders, we need to release to do that.

Speaker 4

Generally speaking, we buy off both exchanges but we have been a little bit more directed to the U. S. Exchange probably to ensure that we maintain our

Speaker 2

foreign private issuer status. Okay, thanks Chad. So we touched on the debt repayment plan, normal course issuer bid, the dividends. Eric, one more question and this relates to another use of the free cash flow and capital that relates to production growth. So how do you think about balancing current production and cash flow goals versus incremental spending to generate production growth And what are the trade offs as you think about the company's future?

Speaker 3

Yes, thanks Brian. It's a great question. Those of you who've indulged in our IR deck online know that we've got a 1% to 4% range over the 5 year plan, our LRP. And we talk often about 2% per year. It's just handy shorthand for the midpoint of that growth range in terms of top line production growth per year.

Speaker 3

The 2% essentially is meant to be just north of flat such that you can with some certainty ensure that you don't create back to back sequential quarters of negative growth, right. So because that has negative optics around sequential negative production growth, what you'd like to do is if you have a quarter that goes down relative to the subsequent quarter, you'd like it to be only 1 quarter and not a pair of quarters. 2% generally does that if you use a short hand math and given the seasonality of our business and where we operate. And so we think that's just right. Otherwise, you could just say just barely north of flat and what does just barely north of flat production mean in terms of maintenance capital.

Speaker 3

It means you're maximizing your free cash flow generation. And that is our commitment. Our commitment is to allocate our capital to the returning projects and maintain the maximum operational efficiency in each part of our portfolio while not growing any faster than necessary so that we can maximize free cash flow generation and allocate that free cash flow to debt reduction, share repurchases and our dividend.

Speaker 2

A couple of questions have come in around the production volumes we reported during Q1. Eric, could you explain maybe the difference between what we realized in Q1 from a production standpoint relative to Q4 and how that sets us up for the year?

Speaker 3

Yes, thanks Brian. So Q4 was strong. So above the high end of our guidance range at the exit and on less capital in Q4 than we anticipated. So that was a very strong kind of operational outcome for Q4. The thing that's important to keep in mind is the 151 I'll call it for Q1 was also well within our outlined full year guidance plan.

Speaker 3

So 150 to 1 and 56 was our plan, our guidance plan. And the 151 or 150.6 is what we expected in line with our expectations. Now the difference between the 160 and the 151, it's important to understand there was 4,000 BOE a day in the Viking, 100% oil sold and the proceeds from that were put to debt in Q4. And so that accounts for 4,000 of the 9,000. The other part of that drop between 1 $151,000,000 is really related to seasonality and in particular related to our Marathon non op activity in our non op Eagle Ford, the Karnes Trough, Eagle Ford.

Speaker 3

Marathon had been working very diligently throughout the year and in particular throughout the summers Q2 and Q3. But by the end of Q3 essentially spent the capital they had allocated to the project. And so in all of Q4, there was no stimulation, no wells turned to sales. And so naturally between Q3 and Q1, all the production, particularly the newest production with the highest pressures released in late Q3 declined off into Q1. And so that is the other part of the gap.

Speaker 3

But none of this comes as a surprise Brian and you know this. This was all within our guidance range and we continue to reiterate not only our $150,000,000 to $156,000,000 guidance range but also the continued growth throughout the quarters of our production. So let me stop there.

Speaker 2

Thanks, Eric. Okay, I want to shift. We've had a number of inbound questions on the webcast related to our operations. I'll start with Chad Lundberg. As an opening question.

Speaker 2

Chad, how many wells are planned to be drilled in 2024?

Speaker 5

So yes, total quantum of wells drilled this year will be 215. If you reference the investor pack online at Page 7 of the slide deck, roughly 60 of those are being allocated into the United States in the E deferred properties both on a non op and operated basis. 100 of those are in the Canadian side, our lighter oil business and then approximately 90 would be the balance of the 250 through our heavy properties. The other thing I would note is just the efficiencies we're seeing as we levelize or you go forward and think about the big machine that we call our assets today. Just the efficiency, you see it in the press release, we saw 21% improvement on drill days to the Duvernay.

Speaker 5

That translated and flowed through a 10% cost increase. We're seeing that in the United States with 8% reduction in EUFORD costs, largely synergistic with each other and we're just excited to be able to share across both sides of

Speaker 2

the border as we think about improving. And Chad, just an investor asking us to confirm our 2024 plans at Peabody in the well count I believe we're looking at for a total of 35 wells this year.

Speaker 5

Yes, I mean Peavine has been a tremendous story obviously for those who have followed us since we started back in 2021 with our first exploration and discovery well. This year we've ramped to 2 rigs steady pace program that would be approximately 35 wells. 12 of those are down in Q1. We're looking at an option to maybe drop that back to 1 rig and attempt to drill through breakup here. It would still achieve close to the same well counts, the 35.

Speaker 5

But we're excited again about the efficiencies that we can drive out of the program by really continuing to think about operating this equipment on a very steady basis and the crews, the equipment, efficiencies we can drive out of that.

Speaker 2

And Chad, with recent flooding around the Texas area last week, any of our production affected?

Speaker 5

No. The short answer is nothing is affected last week. Definitely heavy rains in the Houston area. I think when I think about that production team, they're very good at managing and operating obviously in their local and acute conditions, no different than in Canada in our cold conditions that permeate themselves through the Q1 time period. But no flooding effects last week.

Speaker 2

Maybe a question back to you, Eric, operationally production levels that could we talked about our heavy oil plays. You mentioned earlier, you referred to the REX, the Waseca, Grizzly, even the Duvernay. What production levels could be expected in these heavy oil plays as we move forward?

Speaker 3

Yes. So these are in terms of moving the needle on a base of 150 3,000 BOE a day at the midpoint of our range. They're not going to be that meaningful. But having said that, the well performance really, really is quite strong and the economics are really incredible because these generally speaking these multilaterals in high quality competent reservoir don't require liners, they don't require cementing, they don't require any stimulation. These are just long open hole multilaterals tied into a single well.

Speaker 3

And so the capital is very modest compared to unconventional Duvernay and Eagle Ford for example. So a couple of 100 barrels a day out of each well and we've got 4 wells on in Morinville and I think we've got 5 wells on in the new Waseca play at Greater Cold Lake and both of those are in excess of 1,000 barrels a day today. And they are very flat declines, flatter in Waseca than in Morinville because the Morinville reservoir is a little higher pressure. And when you have higher pressure, you generally have higher early decline rates. But nevertheless, both of those will grow to a few 1,000 barrels a day each and on the basis of 153,000 BOE a day and growing, it's modest.

Speaker 3

But again, these things are so accretive in terms of economics and NAV creation that they are very, very attractive to us. And we will continue to deploy our geoscience teams and our intellectual property across our large heavy to find these where they are.

Speaker 2

A 2 part question on the Duvernay for you. Any ability to acquire additional land beyond the Crown Land purchase in Q1? And part 2, what level of production and wells per year could we see from the Duvernay and what type of growth profile?

Speaker 3

Yes. So there's always more you can buy. We're very intentional about where we spend the money. It's got to be as good as what we've got already or better. And of course, the 31 net section acquisition we made in Q1 in the Duvernay met that criteria and is immediately executable.

Speaker 3

That's the other thing. You don't necessarily want to find yourself in a position where you bought high quality resource that you can't execute on quickly. And so next year, because we've already finished the drilling casing and cementing of our 2024 program, next year we'll actually be deploying capital against not only our existing Pembina Duvernay position but our new extension to better understand it, continue to inform our technical models and bring obviously value forward on that land acquisition. And now in terms of how fast we can grow it, we've steadily ramped activity in our Pembina Duvernay, 2 wells per year, 4 wells per year, 6 wells per year last year, 7 wells per year this year. We are expecting north of 7 next year.

Speaker 3

I am going to say 9 or 10 if we are just kind of broad brush strokes here. But it will certainly be 7 to 10. It will be more than what we've done this year. And we're going to continue growing that. Our LRP contemplates a max of 12 wells per year.

Speaker 3

But that was before our new acquisition. And so we think we'll be north of that as well. And we think this, as we continue to ramp this and on good results potentially accelerate, because the capital efficiency is very strong and accretive to our portfolio, we would grow this thing to we think north of 20,000 BOE a day over perhaps a 5 year period, perhaps a year or 2 longer. Some of this is still in the works in our current LRP. But it's a meaningful addition.

Speaker 3

In fact, with most of the rest of our portfolio running flat, this is where our growth engine is and we're very excited about that. It's high quality contiguous position with lots of control and we're excited about the opportunity to continue deploying capital there, growing the asset and doing so at incrementally accretive capital efficiencies which will improve our overall business over

Speaker 2

At a high level, Eric, acquisitions and dispositions, what are we thinking about as it relates to that? What areas would you consider core? And maybe part of that given the diversity of the asset base would we consider pursuing asset sales?

Speaker 3

Yes. So we sold a portion of the Viking last year. It's a good place to start in this answer because we call those assets 4 again in Play Doh and it was 4,000 BOE a day and we got $160,000,000 out of that. Now, the challenge was and the reason those assets were carved out of the portfolio is because they could not compete for capital within our portfolio. And so given that fact we were left with 2 choices.

Speaker 3

We were left with deploying capital against assets that didn't compete in the portfolio and that capital then of course punches below its weight because you've taken it away from an allocation to a higher performing asset So that's dilutive to your performance. Or you don't allocate capital and we know that fracture stimulated reservoirs over time like Oregon and Plato and Viking starved of capital would decline to no value over a couple of years. And so you don't want to starve an asset of capital and allow it to decline to no value. You also don't want to allocate capital to So we set a retention value on that basis. And the proceeds were clearly worth more than it was inside our quarter because market conditions change, differentials change, quality and performance, the quality pricing and so on changes.

Speaker 3

So, we revisit that frequently and continue to reallocate our capital to the highest returning portions of our business within our portfolio. If something doesn't compete, then it gets considered for disposition. Right now, everything in our portfolio is funded and competes for capital. But should that change, we will run a disciplined discounted cash flow analysis and we will set a retention value and we will test the market. And if it's worth more on the open market than it is within our portfolio, we will sell it.

Speaker 3

We think that's disciplined. We think that's the right economic basis upon which to sell assets. And the proceeds of any sale would be applied today to our debt.

Speaker 2

Thanks, Eric. Let's revisit really quickly our free cash flow profile for the year. Q1 free cash flow is 0. We talked about that. We say full year free cash flow is $700,000,000 Why the disconnect between Q1 and the balance of the year, Eric?

Speaker 2

And maybe a second part of that is there any reduction in E and D spending to improve the free cash flow profile?

Speaker 3

Well, it's a great question. We talked earlier about the 2% top line production growth year over year as being set essentially as close to flat as we feel comfortable because that the seasonality of our assets and our portfolio require us to be a little north of flat to avoid things that we think wouldn't be very constructive. So we like 2% per year top line production growth. And if we reduce E and D capital further of course that would have lagging knock on production impacts. And these are all very profitable investments.

Speaker 3

So everything we're investing in have IRRs that are substantially north of our threshold, crochets that are substantially north of our thresholds and are all very economic. And so, these are economic investments and we've set the Indy Capital to be as low as it can be which corollary to that essentially suggests that we are maximizing free cash flow generation. The reason there was 0 free cash flow in Q1 is because the size of the capital program in Q1 essentially took all the operating cash flow and committed it to CapEx leaving nothing for free cash flow. And the reason we did that in Q1 is because we need to get a strong start to the year because we don't always know how breakup is going to treat us like what is going to happen during breakup in Canada. So we always start very strong on our drilling and completions program to set ourselves up for optionality depending on whatever happens with breakup.

Speaker 3

And then if we have good options through breakup, we can then levelize our program and levelize our capital, our production profile as well as our free cash flow generation. And that's certainly our objective is to continue to levelize our capital, our production profile and our free cash flow. It would be ideal. We certainly recognize it as does the investment community. If we could stay in the market all four quarters of any given year and apply a uniform buyback structure.

Speaker 3

And that is certainly our objective and we're working very hard to make that a reality out into the future.

Speaker 2

We've got time I think for 2 questions we're coming up on the hour and it's been a very thoughtful and thorough list of questions coming in today. Is a little different Eric, one around executive compensation and your thoughts around executive compensation. A comment around stock options, we don't grant stock options. So maybe just your thoughts on executive compensation and our approach?

Speaker 3

Yes, so our approach to executive compensation is to ensure that all of our executives have a substantial portion of total compensation at risk. Our long term incentive plan is based on a 1 year 3 year TSR. Those TSRs are linked to total shareholder returns and so when the share price underperforms so does our compensation. So we take a direct at risk compensation hit when share price underperforms. We think that's the right thing to do.

Speaker 3

Something like 70% of my own compensation is at risk. And to go beyond that in the past 15 or 16 months I've bought well north of 1,100,000 shares of Baytex and used personal money, personal family money to do so. And I think that's the right thing to do as well. Insiders need to own the business. We need to feel the pain.

Speaker 3

So we think at risk compensation is an important principle. We think insider ownership is an important principle. And we also mark our compensation every year to our peer group. And we are below the mean, below the median on virtually every executive level of business in terms of our compensation. And so, this is all public information that you can find as you look through public circulars.

Speaker 3

But I do think it's really important to point out, 1, we benchmark it 2, we maintain a competitive level with our peer group and currently below the medium or central tendency of that dataset. And 3, substantial at risk compensation with substantial

Speaker 2

portions of insider ownership. And last question today Eric, what has to happen for the share price to reflect the value of the assets? A few investors have reached out today expressing frustration with where we're trading. What are your thoughts on the value creation for basex?

Speaker 3

Yes, I'm frustrated too. I feel your pain. And I think there are a number of things that are perhaps idiosyncratic or unique to Baytex that are weighing on our short term, near term share price performance. 1 is our substantial ownership by the majority owners of Ranger Juniper Capital. These are smart guys.

Speaker 3

They are long term energy investors and they are constructive on our business and on energy in general. However, because they are perceived as eventual sellers and they hold a 12% position in our stock that weighs on our stock as the so called overhang. And that's really not something we can do anything about except to endure. And I think the second one that's unique to our stock is the CRA matter. So, the Canadian or Canada Revenue Agency, we've talked about that.

Speaker 3

We've disclosed that. It's not something that this leadership team really had any responsibility over creating, but we have responsibility to manage and solve for it. So we've contained the risk. We're quite confident that we will prevail based on the feedback from our tax counsel. But even if we don't prevail, we have contained the risk with outside insurance.

Speaker 3

And so, we feel pretty good about that and that's all been very thoroughly disclosed. And then beyond that, I think it's just it feels like forever since we closed and we've done a great job integrating Ranger and driving well performance and general operating efficiency into and from the assets. And we are very pleased with the team's performance, the asset performance and the integration performance. But it's only 10 months since we closed. And that transformational transactions really do take time to stabilize.

Speaker 3

And I think it's been a bit of a bumpy ride. So I think first I would say, it is not wasted on us that our share price has underperformed. We're doing everything we can to manage that and we're happy to talk 1 on 1 with any of you who want to unpack this more.

Speaker 2

Excellent. I think it's a great way to wrap up today's call. So Ashia, we'll call it there. Thank you everyone and thanks to everyone for participating in our Q1 conference call. Have a great day.

Speaker 1

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

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Earnings Conference Call
Baytex Energy Q1 2024
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