Veren Inc. (VRN) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. My name is Aris, and I'll be your operator for Crescent Point Energy's conference call today. This conference call is being recorded today and will be webcast along with a slide deck, which can be found on Crescent Point's website homepage. The webcast may not be recorded or rebroadcast without the expressed consent of Crescent Point Energy. All amounts discussed today are in Canadian dollars, unless otherwise stated. [Operator Instructions] During the call, management may make projections or other forward-looking statements regarding future events or future financial performance. Actual performance, events or results may differ materially. Additional information or factors that could affect Crescent Point's operations or financial results are included Crescent Point's most recent annual information form, which may be accessed through the Crescent Point's SEDAR or EDGAR websites or by contacting Crescent Point Energy. Management also calls your attention to the forward-looking information and non-GAAP measures sections of the press release issued earlier today. I will now turn the call over to Craig Bryksa, President and Chief Executive Officer of Crescent Point. Please go ahead, Mr. Bryksa.

Thank you, operator. I'd like to thank everyone for joining us today to learn about our strategic acquisition in the Kaybob Duvernay area of Alberta. This call will speak solely to the acquisition. Our year-end results will be released next week on February 24, as originally planned. Joining me today on the call are Ryan Gritzfeldt, Chief Operating Officer; and Ken Lamont, Chief Financial Officer. Before we discuss the acquisition, I'd like to rewind a bit and emphasize the key pillars that have been our focus for the past few years. Since 2018, this management team has been relentless in pursuing initiatives to strengthen our balance sheet and enhance our sustainability. We have achieved great success through these initiatives and have significantly reduced our net debt, lowered our cost structure, flattened our decline rate and implemented a returns-based capital allocation framework. While we continue to pursue additional internal efficiencies, we also realized there is potential to build upon our success through inorganic opportunities. By acquiring Shell's Kaybob Duvernay assets, we add a new core area to our portfolio that fits strongly with our asset criteria centered on low-risk plays with attractive returns, scalability, free cash flow generation and strong market access. This accretive acquisition improves our free cash flow generation and reduces our leverage ratios. It also provides us with over 10 years of drilling inventory and enhances our ESG profile as the assets carry minimal liabilities and operate with relative low emissions intensity. We view these assets as low risk. And given the delineation work that has been completed over the past decade, we believe the future development will be highly repeatable. Furthermore, we will retain and have access to both owned and third-party infrastructure, reducing our expected future capital requirements. Altogether, I believe the potential of this asset, combined with Crescent Point's proven track record in operational excellence and technical innovation, will further enhance shareholder value over the long term. I'll now provide a bit more color on the assets included in the transaction and why they are such a good fit within our portfolio. In assessing these assets, we were particularly attracted to the high-quality reservoir characteristics, including favorable downhole pressures and pay thickness. These assets are currently producing approximately 30,000 BOE per day and are strategically located in the heart of the condensate rich fairway. Production is primarily comprised of high-margin light oil condensate with a low royalty rate of approximately 5% and operating expenses of $7.25 per BOE, both of which are below our corporate average. This is a large oil-in-place reservoir that we plan to develop at conservative well spacing of 600 meters. We have internally identified approximately 200 net drilling locations which are primarily 2-mile horizontal wells, of which 36 are currently booked on a 2P basis. These locations are situated across approximately 500 net sections of contiguous land in the Kaybob area, which is 98% Crown and primarily undeveloped. The economics of the expected type wells are highly competitive with our current portfolio and are expected to generate full cycle returns of over 25% and well payouts of approximately 2 to 3 years at USD 50 WTI pricing. The expected breakeven of these wells is in the mid USD 30 WTI range. This addition to our portfolio provides us with added optionality and diversification within our returns-based capital allocation framework and budgeting process. Over time, we plan to further enhance the returns and, ultimately, free cash flow generation of these assets through incremental efficiencies and optimization. Over the years, we have gained significant experience in multi-well pad development through various plays with similar geology to the Kaybob assets. We have a proven history of realizing efficiencies and will seek to enhance long-term returns in this asset in a similar manner. We are also very excited to integrate our in-house technical expertise with a number of staff from Shell that will provide additional knowledge and experience specific to these assets. As part of the transaction, we will acquire ownership in key infrastructure for future development and market access, in addition to gaining firm takeaway capacity for the play's high-value, liquids-rich production. Our operations team is very excited about the opportunity to develop a premier and established play with exceptional untapped development potential. To realize this opportunity, we have structured an agreement that will continue to protect and strengthen our balance sheet while also enhancing shareholder value. Total consideration for this acquisition is $900 million, which includes $700 million of cash and 50 million Crescent Point shares. The purchase price equates to less than 3x net operating income at USD 50 WTI pricing and a recycle ratio over 2x, including future development capital. To provide some sensitivity, given that WTI prices are currently above USD 50, every USD 1 change in WTI adds approximately $8 million per year of net operating income directly from this asset. Closing of the transaction is expected in April of 2021. The transaction is highly accretive on all per share metrics. In particular, excess cash flow per share nearly doubled during a 12-month period following the closing of the acquisition. This transaction also enhances our netback and reduces our leverage ratios. Our revised 2021 guidance targets annual average production of 132,000 to 136,000 BOE per day and development capital expenditures of $575 million to $625 million. As a result of this acquisition, we expect to generate excess cash flow of $375 million to $600 million in 2021, assuming USD 50 to USD 60 WTI for the remainder of the year. At a similar commodity price assumption, our estimated leverage ratio also improves to approximately 2.3 to 1.6x adjusted funds flow by year-end. Upon closing, we will maintain significant liquidity of approximately $2 billion of unutilized credit capacity and will look to further enhance our financial flexibility by continuing to prioritize our balance sheet with our excess cash flow generation. As you can tell, we are very excited about this opportunity and the new chapter we are writing in the company's future. We believe this acquisition provides us with an incredible opportunity to enter a premier basin through a transaction that is immediately accretive to the company. The Kaybob Duvernay assets fit nicely within our long-term optimal portfolio, which is comprised of a mix of high-return assets that include free cash flow generation through primary production, other free cash flowing assets with secondary or enhanced oil recovery, low decline production and organic growth opportunities. We plan to remain active in assessing acquisitions and disposition opportunities to further complement our core operating areas and our focused asset strategy. In closing, I'd like to reiterate our core principles of balance sheet strength and sustainability and the benefits of this transaction to both those pillars. I'll now open the call for questions regarding this transaction for members of the investment community. Operator?

[Operator Instructions] Our first question comes from the line of Patrick O'Rourke with ATB Capital Markets.

Great deal. We know these assets well over here, and we really like them. Just a few questions. In terms of running these assets on a go-forward basis, it looks like you're going to bring them down to 25,000 BOE per day to run flat going forward. Is that kind of the right way to interpret that? And then in terms of the condensate, which is extremely impressive on these assets, of 57%, is there any -- if you run it at 25,000 flat, we've seen condensate volumes lean out a little bit over time on condensate rich assets. How do you think about that product mix going forward in years 2, 3, 4 and beyond that?

Thanks for the question. So production right now is averaging around -- running right around 32,000 BOE per day. We're going to bring that down to around 30,000 BOE per day. So that 24,000 that you quoted, keep in mind that this doesn't close until April, so we only have 9 months of production for the year. So that's what you're seeing there when we have that 24,000. So right -- going forward, we'll be running that at 30,000 BOE per day. It fits nicely, too, within our corporate decline rate. So again, if you remember, Crescent Point, entering this acquisition, was around 25%. These assets are running right around 28% decline rate. So pro forma, the entity is going to be in that 25% range. So we're feeling really good about the operations and how that's going to move forward. As far as the condensate ratio, you're right on there with the volumes of that. We don't see that fluctuating here over the next couple of years. Things on that look very strong. So I'd pass it off to Ryan, if he has any other comments around any of the production condensate ratios.

Yes. Yes, I think your observation, I think, is valid. From our perspective, the condensate gas ratio, we feel kind of in the fairway that we're acquiring here. The CGRs do drop over time a little bit. So on an IP30 basis, we'll be 75%-ish liquids. And on a total reserves basis, when we're looking at our McDaniel's independent report, we're closer to 65% liquids on a reserve basis so -- which aligned very well with our internal assumptions as well.

So the only thing -- I was just going to add, backing up to the last comment as well. So keep in mind, we're going to run this asset flat at 30,000 BOE per day. And in a $50 price environment, it generates about $330 million a year in net operating income, and it will take us about $180 million per year to sustain that level. So it's a significant free cash flow engine for us. And when you look at it on a per share metric, it basically doubles our free cash flow per share in the next 12 months at $50 WTI pricing. So it's significant on that front.

Yes. And then I know it still doesn't seem to be a big part of the business quite yet. But in terms of gas, you're kind of in new territory here. Have you thought about -- or how is the gas currently being marketed? AECO is obviously the place to be on a transport-adjusted basis generally or at least it has been this year. But have you looked at any diversification strategies? Or should we expect those to play out maybe a little bit later on?

So I mean that's one thing that we're going to continue to work through. But the other thing I would highlight for you still, Crescent Point pro forma is still 74% oil and 12% NGL, so still very heavily liquid weighted. Our gas does move up, on a percentage basis, from 10% within the company to 14% so, again, still very heavy to both the light oil and condensate side. So we'll continue to work through the gas end and the marketing around that. We do have -- and this asset does come with good agreements on that as well. So keep that in mind, that will be things for us in the future as we add in more to this. Ryan, I don't know if you had any comments around -- on marketing or anything like that.

No. I think on the marketing side, I mean, I think we're really impressed with the infrastructure in place here. Shell has obviously invested a lot in and built a very strong infrastructure system from our point of view. So with that, combined with the agreements in place on C5, C3+ and the gas, we feel really confident that everything is in place for us to execute our plan here for these assets.

Okay. That is sort of as, I think, we expect over here.

Thanks for the questions.

Thank you.

We have the following question from Travis Wood with National Bank.

Yes. A couple of questions here. First, just running through some iterations around the sustaining capital. How can we think back into kind of a decline and what you guys are thinking as kind of the drill, complete and tie-in well cost for these wells?

Okay. So thanks for the question, Travis. And the decline rate, like I was saying right now, is running at about 28% on the asset. Keep in mind, they're doing a number of completions right now, and that flushed up slightly. On a go-forward basis, the pro forma entity will be at about 25% decline. As far as capital costs, right now, the capital costs are about $9.5 million. And then on a full cycle basis, they're about $10 million a well. So look for us to really zero in on this. And as we've shown in the past, and whether it's our Uinta asset, our North Dakota assets, as we get into pads and really become efficient, that's where we'll really start to zero in and drive down those costs. But in the short term, that's how they're running right now, at about $9.5 million and then $10 million full cycle is what I'd say to that. And I don't know, Ryan, again, do you want to add any questions (sic) [ answers ] around the DCT?

Yes. I think, Travis, I would just add, I mean I think other operators in the past have disclosed well costs that are a little bit lower than this. And I mean I'm super excited for our teams to combine our expertise with the knowledge of certain Shell staff that we'll be integrating into our organization. And I'm sure we'll work hard to drive cost improvements and increase our returns. And like Craig said, I mean, this is kind of similar depths to our North Dakota and our previous Uinta assets, same kind of frac sizes as our Uinta assets. We've drilled a handful of our own East Shale Duvernay wells. And on the surface side, this is actually really close proximity to our Swan Hills play. So we're -- I think we're familiar with the area. We have a lot of expertise and experience with that, and we're really excited to get in here and work with some new service providers and infrastructure partners to carry out our plan.

Okay. Perfect. And then around spacing, I know you kind of talked about inventory with about 600-meter spacing. Do you have a sense on the developed sections what Shell was running, what some of their technical teams thought was an optimal kind of development scheme or a drilling schematic for the region?

Ryan, I'll pass that to you. Do you want to handle that?

Yes. Yes, really good question, Travis. I think, honestly, one of the reasons we became very interested in this reservoir and this basin was we were looking at it as an analog to our East Shale Duvernay play to look at more historical production here to get a better feel for EURs, proper spacing, frac designs and then quickly learn that this reservoir kind of, like Craig mentioned, had high-pressure, thick pay, large hydrocarbon in place. Higher liquid yields were more in the volatile oil window here, resulting in strong economics and returns. And there are actually various spacing developed throughout sections on the acreage. And so I think based on us analyzing all of that data, we do feel confident that starting at 600-meter spacing go forward is a conservative approach and, hopefully, technically, the right way to get our -- to get the highest returns out of this play. So yes, they did have various spacing. And from our analysis, we feel that 600-meter spacing is probably the way we're going to develop this.

Okay. Perfect. And last question. The -- I know that in the past, kind of over the last 10 years or so, the Eagle Ford was used as a bit of an analog with this part. Do you guys have a sense or any concerns around some of the parent-child issues that we've heard about in some of the U.S. plays? And do you see that potentially percolating up here within any kind of developed sections that Shell's already spent capital on?

Yes. So I think on all of the producing assets, I think we've taken that account into our decline analysis. And like I said, there is some really good data on various spacings within the core area that Shell has drilled up. We've ran some pretty detailed reservoir models to show that, yes, there can be some depletion when you're looking at 400-meter spacing or less. And that's why, like I say, current plans will be to develop this at 600-meter spacing. And that's how we're getting the EURs that we're coming up with.

Yes, the other thing I would add to that, Travis, is keep in mind, there's -- a large position of this land base is undeveloped. So we're going to be getting in there and developing it at our spacing which, in our view, is conservative on that 600 meters.

Okay. And to Patrick's comment, the way, I guess, we think about this is potentially kind of 20 wells a year or so, just kind of go forward.

It's about 18 wells a year go forward and to run at flat, around, like I say, that 30,000 BOE per day. So call it $180 million to sustain it and generating $330 million a year in net op income at $50 pricing. So again, you can see how that starts to torque up as oil starts to move in the right direction.

[Operator Instructions] There are no further questions at this time. Mr. Bryksa, you may proceed.

Thanks, everybody, for taking the time today. If we didn't get a chance to answer any of your questions, please reach out to myself or Shant, or Brad, or Ken, or Ryan, or any of the team at any point in time. Again, always happy to engage. So again, thank you for taking the time. As you can see, we're very excited to add this asset within -- to our portfolio and really starting to advance Crescent Point moving forward here. So thanks again.

Crescent Point Investor Relations department can be reached at 1 (855) 667-6923. Thank you, and have a good day.