Crescent Point is more interested in returns for investors and Alberta’s Duvernay these days, as opposed to aggressive drilling in Saskatchewan

CALGARY – Despite oil prices at their highest levels in a decade, and calls from politicians and the public for Canadian and American oil producers to ramp up production to displace Russian oil from the market, Crescent Point Energy Corp. is focusing on returns to shareholders. That was evident from their year-end earnings report on March 3, which showed a more sedate pace of drilling compared to its previous history, and an increasing shift in focus from Saskatchewan to Alberta.

For several years Crescent Point had been one of Canada’s most aggressive oil companies. For years much of the oil downturn, prior to the COVID-19 pandemic, it led the entire country in drilling rigs employed, frequently with more than 20 rigs at work in Canada. Most of the time, all but one of those rigs were working in Saskatchewan.

But this past winter drilling season, the company has been typically running just five rig in this province – two in southwest Saskatchewan, and three in the southeast. The southwest rigs were working near Shaunavon, while in the southeast one rig was working in the Flat Lake play near Torquay and two in the Viewfield play near Stoughton.

 

And that previous frenetic pace of drilling came through substantial debt. It was also financed by numerous accretive bought-deal financing rounds which expanded the shareholder base each time. In the last few years, under its current president and CEO Craig Bryksa, Crescent Point has gone the opposite direction on both of those paths. Instead of ever-increasing production through acquisitions and the drill bit, the company has focused greatly on reducing debt and now its increasing share buybacks.

In a conference call on March 3, Bryksa explained the company had generated “over $785 million of excess cash flow in 2021 with capital expenditures and production in-line with annual guidance.”

He spoked of a “disciplined 2022 budget, which is expected to generate approximately $1.1 billion of excess cash flow at US$80/bbl WTI.”

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The company has had multiple dividend increases as well as share buybacks. “I’m happy to report that we’ve increased our planned share repurchases from $100 million to $150 million, which is expected to be executed by mid year,” Bryksa said. “This increase reflects the continued improvement in our financial outlook and our commitment to returning capital to our shareholders. Our progress in 2021 was a direct result of our continued discipline and execution over the last several years.”

Attention turns to Alberta

Crescent Point has increasing turned its attention to its new Kaybob Duvernay play in northwest Alberta, where it had purchased Shell’s former assets in the region. To that end, the company reported it had Improved full-cycle returns in the Kaybob Duvernay through additional well cost reductions now totaling 20 per cent.”

Additionally, the company said it “achieved strong initial production rate of over 825 boepd per well, based on approximately 30 days, on first fully operated Kaybob Duvernay pad.”

It has also fully repaid $670 million of debt to acquire the Kaybob Duvernay assets, in addition to reducing net debt by $144 million in 2021.

“We made great ESG progress in reducing both our emissions and our asset retirement obligations,” Bryksa said.

Crescent Point’s net debt as of Dec. 31, 2021 was approximately $2.0 billion. In total, approximately $815 million of funds were directed to the balance sheet in 2021, including proceeds from dispositions.

As previously announced, Crescent Point successfully renewed and extended its unsecured, covenant-based credit facilities of $2.3 billion with a maturity date of November 2025. The company retains significant liquidity with an unutilized credit capacity of approximately $2.0 billion as of Dec. 31, 2021.

For the year ended Dec. 31, 2021, Crescent Point reported net income of approximately $2.4 billion, primarily driven by a $2.5 billion ($1.9 billion after-tax) reversal of non-cash impairment in second quarter due to an increase in forward commodity prices and the independent engineers’ price forecast. In fourth quarter, net income totaled $121.6 million.

Operations

Nearly all the discussion in the company’s press release and the accompanying conference call focused on the Kaybob Duvernay play in Alberta.

“The company continues to gain operational momentum in its Kaybob Duvernay play, realizing ongoing operational efficiencies and cost reductions. Recent well costs are trending at approximately $8.25 million, including drilling, completion, equip and tie-in, down from $8.75 million previously announced,” the release said.

Bryksa said in the conference call, “Since entering the play, we have already reduced full cycle well cost by approximately $2 million or 20 per cent. We expect to achieve initial efficiencies over time as we gained further operational momentum in the play. I note that we achieved these cost savings while also deploying a larger practice than the prior operator.”

These savings have improved expected full-cycle rates of return and provide additional insulation to the company’s capital budget in the current inflationary environment.

Crescent Point’s Kaybob Duvernay wells are expected to generate full-cycle rates of return of over 120 percent and a payout of less than a year, at current commodity prices and budgeted cost inflation assumptions. “Given the strong returns, we have made the Kaybob Duvernay our largest focus area in our 2022 capital budget,” said chief operations officer Ryan Gritzfeldt.

Asked by an analyst how much of their capital budget is going into the Duvernay, Bryksa said, “If you look at our budget this year of the $825 to $900 million, about 26 per cent of that budget is being allocated to the Duvernay. And then when you look at us, in our in our five year plan, it’s roughly the same as that. I would say our five-year plan really mirrors 2022. So when you look at it, that way, it’s in that 26 to 28 per cent standing.”

Capital expenditures at Shaunavon are budgeted at 19 per cent, followed by 18 per cent at Viewfield, 17 per cent at North Dakota, 10 per cent at Flat Lake and 10 per cent at “other.”

He said they had around 200 wells, about a 10 year drilling inventory, in the Duvernay, based on “a very conservative well spacing” of 600 metres. They might do a more dense well spacing in the future.

Gritzfeldt said the company’s average production for 2021 was 130,683 barrels of oil equivalent per day, comprised of over 80 per cent oil and liquids, and in line with their annual guidance.

“Our development program remains focused on low risk, high return projects, including infill wells and decline mitigation programs in Saskatchewan, alongside larger multi-well pads in Saskatchewan, alongside larger multi-well pads in Kaybob and North Dakota.”

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Gritzfeldt said, “Although we expect some cost pressures in the current commodity price environment, I would point out that we have reduced our days on site in recent Kaybob drills, highlighting our ongoing wins. And in a similar fashion, we also reduced our drilling days in our Viewfield, Shaunavon and North resource plays by 10 to 15 per cent during 2021.”

Lamont said it was the safest year on record for Crescent Point, and he thanked the company’s employees for that.

Chief financial officer Ken Lamont said, “Our annual development capital expenditures total $624 million. This is in line with our annual guidance in 2021.”

Bryksa said, “We will continue to be disciplined and we reiterated our 2022 capital expenditures guidance of $825 million to $900 million. We will continue to focus our free cash flow, creating value for our shareholders. Our capital expenditures guidance remains unchanged, despite current cost inflation pressures, thanks for ongoing efforts to realize internal efficiencies and manage our supply chain.”

He said that at US$80 per barrel WTI, they expect to generate free cash flow of approximately $1.1 billion in 2022.

Notably, the charts in their March presentation show “cumulative 5 year excess cash flow” for oil at US$40, $70 and $80 per barrel. The day of the presentation, it was closer to US$100, and by the morning of March 6, WTI was going for as much as US$125 per barrel. However, it also notes that approximately 50 per cent of its production for 2022 is hedged with swaps of C$75.59 in Q1 and C$83.03 for Q2, Q3 and Q4. Their hedging program drops to ~20 per cent of their volumes for Q1 of 2023.”

“To further enhance our financial position. We are currently exploring disposition opportunities for certain non-core assets that are not material to our company. This is normal course of our business,” he said.

Dividends and buybacks

Lamont said, “Throughout the past year we allocated most of our excess cash flow to our balance sheet. As a result we’ve been moving quickly towards meeting our near term leverage target of $1.3 to $1.4 billion in absolute net debt.”

As previously announced, the company’s board of directors approved and declared a first quarter 2022 dividend of $0.045 per share, payable on April 1, 2022 to shareholders of record on March 15, 2022. This equates to an annualized dividend of $0.18 per share, an increase of 50 percent from the prior level.

Lamont said, “Our current quarterly dividend of four and a half cents per quarter or 18 cents annualized equates to a conservative payout ratio of 7 per cent of adjusted funds flow at $50 WTI. We believe this payout ratio is more sustainable and allows for dividend growth over time.”

The board has approved the return of additional capital to shareholders given the continued strength in commodity prices and Crescent Point’s improving financial position. The company is increasing its total planned share repurchases to up to $150 million, which it expects to execute by mid-2022, from $100 million announced previously. These planned repurchases were initiated in December 2021 with approximately 8.1 million shares repurchased and cancelled to-date for total consideration of approximately $60 million.

On March 4 Crescent Point received approval from the Toronto Stock Exchange to renew its normal course issuer bid (NCIB). The price the company will pay for any common shares will be the market price at the time of purchase or such other price as may be permitted by the CSA. Any private purchase made under an exemption order issued by a securities regulatory authority will generally be at a discount to the prevailing market price.

As of February 28, 2022, the company had a public float of 573,099,751 common shares and 574,601,885 common shares issued and outstanding. Crescent Point will not acquire, through the facilities of the TSX, more than 1,351,208 common shares during a trading day, being 25 percent of the average daily trading volume of the Company’s common shares on the TSX for the six calendar months prior to the date of approval of the NCIB by the TSX (being 5,404,833 common shares), and, in addition, will not acquire per day on the NYSE more than 25 percent of the average daily trading volume for the four calendar weeks preceding the date of purchase, subject to, in both cases, certain exceptions for block purchases.

The call concluded with some questions from investment analysts. However, no calls from the media were accepted or answered. This has been a common pattern for quarterly earnings calls from Crescent Point.

 

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