Earnings Call Transcript - BTE Q4 2022

Operator, 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. I would now like to turn the conference over to Brian Ector. Please go ahead.

Brian Ector, Speaker

Thank you, Ashier. 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, CEO

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 improved 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 were 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's 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, Operator

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

Menno Hulshof, Analyst

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, CEO

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, which are 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, Analyst

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, CEO

It's slightly lower than before, but it has improved. The main reason for this improvement is the significant decrease in Henry Hub gas prices, which is allowing industry resources to shift from gas-heavy areas with less attractive returns to oil-rich regions where both operators and service companies are seeing better profitability. This shift has relieved some of the inflationary pressure, positively impacting our results. When we initially set the $55 target, we had factored in inflationary pressures from the latter half of 2022. However, due to the factors I mentioned, those pressures have eased a bit. Therefore, while we set $55 as a target, as it drops to that level, inflationary pressures have also decreased. We're already noticing this change, making resources a bit more accessible for us, which has lowered our WTI breakeven point.

Menno Hulshof, Analyst

Thanks, Eric. I'll pass it back.

Eric Greager, CEO

Thank you.

Operator, Operator

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

Amir Arif, Analyst

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, CEO

I’ll provide some insights, and then I’ll see if anyone else in the room wants to add to this. The negative technical revisions we experienced were mainly in the Eagle Ford, which is known for being a fracture stimulated play. When prices increase, the ability to stack and space in a play depends on the price levels. As prices rise, we typically see some down spacing occurring across all unconventional resources and virtually all plays. Essentially, what has happened is that due to the fluctuations in commodity prices and some adjustments in cash costs, most of the negative technical revisions came from the longer-term projections. The present value impact is minor, but there is a noticeable volume impact. This is an important point to consider. If we analyze our asset portfolio, we can see that our operations in Canada have shown improvement in the year-end reserves for 2022, particularly in the Eagle Ford and in the longer-term projections. Overall, the year-over-year reduction can be attributed to straightforward factors. We took a cautious approach in our booking for the Clearwater at Peavine, which is exceeding our expectations and proving to be an outstanding asset. There is still considerable capacity available there as we move forward with developing Peavine and Duvernay as well. I’m very enthusiastic about the quality of the resource, and we’ve accelerated our development pace, although that hasn’t been represented in our 2022 year-end reserves. Our conservative bookings for both Duvernay, as a fracture stimulated resource, and Peavine play a role here. Additionally, we have sold some reserves, and I believe it was beneficial to refresh that commentary, as it reflects in our total reserves. I’ll leave it at that. Thank you.

Amir Arif, Analyst

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, CEO

The higher operating costs are leading to some curves falling below the economic limit over time. However, there are more curves available, and they offer higher economic returns per curve. While some volumes may not meet the economic threshold, especially as they are discounted towards the end of the curve, this doesn't affect their value but does impact volume. The situation is subject to fluctuations based on commodity prices, cash costs, and spacing and stacking assumptions. Therefore, the dynamics are more variable for fracture stimulated plays compared to traditional development.

Amir Arif, Analyst

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, CEO

Our plan is to continue accelerating our share repurchase plan, based on our current reasonable view of commodity prices for Q3.

Amir Arif, Analyst

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, CEO

I'm very pleased with the performance of the first two wells in terms of drilling, casing, and cementing. The execution has been very solid. We've released two wells out of six, so it's a bit early to draw conclusions about the information we will have. The design of our experiments is careful and should generate sufficient data through our ongoing collection efforts, including the modeling and regression work done by our technical teams. Although we've released only two wells and are currently focused on those, we are positioned to gather the necessary information. However, it's still premature to confirm we will have all the data we need at this stage. Much of the critical information regarding production and reservoir pressure performance will likely come in the fourth quarter due to the sequence of drilling, casing, cementing, breaking up, stimulation, and flow back. This process will take time for the data to accumulate, but we expect to have the structured information required to transition from the current demonstration phase of derisking to development.

Amir Arif, Analyst

Okay. Sounds good. Thanks.

Eric Greager, CEO

Thank you.

Operator, Operator

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

Jeremy McCrea, Analyst

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 happened 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, CEO

Yeah. Hey, Jeremy, that's a great question. I have this 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. The exploration team that discovered the Clearwater at Peavine ring-fenced that asset and gave us a first-mover advantage on what is absolutely the crown jewel of the play. 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. A company our size with land this size should have and we do have an ongoing organic exploration program. Not a lot to talk about in terms of the results of that program because we are early in the year, but it's ongoing development and 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. 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 I'm pretty excited about the potential, and it's a demonstrated capability of the company.

Jeremy McCrea, Analyst

Okay. And maybe just a more personal question for you here. So you've been there for four months now. 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, CEO

I'm really excited about Peavine, which, as we discussed earlier, is likely to stabilize at around 12,000 to 15,000 barrels a day. This should generate a significant amount of free cash flow and lead to impressive outcomes. The Duvernay is also a valuable asset for us. I'm optimistic about the quality of the resources and the technical abilities of our team to tap into that potential. Essentially, we have two key points: one is achieving outstanding results while freeing up our subsurface technical team to explore further, and the Duvernay enhances our quality and development capabilities in a region we already have a presence in. I'm confident about our efforts in Lloyd and the wider Peace River area, including Peavine. I feel positive about our performance in Viking; it's a very solid operation. What I appreciate about our portfolio is its risk diversification. Operating in a single regulatory environment or being tied to one price point can create challenges, but by being exposed to both heavy and light resources, we have the chance to benefit from favorable market conditions and leverage our position effectively. Our netbacks in Viking are impressive, making it a consistently efficient production engine. Looking at our operations in the Eagle Ford, this represents about a third of our production and half of our cash flow, benefiting from premium pricing linked to ship channel gas. While current conditions are not ideal, we also have exposure to Freeport LNG and other opportunities. This diversification minimizes correlated risks within our business and allows us to strategically allocate resources for a more balanced and profitable operation. On the subject of acquisitions, it’s important to focus on creating shareholder value rather than pursuing M&A for its own sake. When considering the best use of our resources, we can pay down debt, buy back shares, or reinvest in the business. Currently, reinvesting yields the best returns, but we acknowledge investors' interest in direct returns. That's why we have a solid capital return framework that we aim to enhance over time. All of this combines to highlight how we can effectively utilize our excess cash flow while also creating value through strategic growth. However, we won’t engage in M&A merely for expansion; our goal is to build more resilient and sustainable businesses that access lower costs of capital and deliver consistent returns for shareholders. I’ll pause there as I believe that covers the main points.

Jeremy McCrea, Analyst

Okay. Okay. Well, thanks for your comments there.

Eric Greager, CEO

Thank you.

Operator, Operator

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

Brian Ector, Speaker

Yes. Thanks, Ashier. Thanks everyone for participating in our year-end conference call. Have a great day.

Operator, Operator

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