Calgary 鈥� Crescent Point Energy Corp. had a net loss of $2.62 billion in 2018 and took a $2.7 billion charge. It is continuing on its path to downsize while it reins in its debt. That focus on the bottom line means it won鈥檛 be increasing its capital expenditures as funds become available, and that it is coming close to deadlines on its sale of 21,000 boepd in southeast Saskatchewan.
Those are some of the key points of the company鈥檚 2018 year end report, as presented in a conference call from Calgary on Mar. 5.
The company has over $400 million of excess cash flow expected to be available in 2019 for net debt repayment and additional share repurchases. Craig Bryksa, president and CEO, said 70 to 80 per cent of that will be used for debt reduction as a 鈥減illar strategy.鈥� This number based on current strip prices, and excludes proceeds from any additional dispositions.
The company said strong capital discipline with 2018 capital expenditures $38 million under budget and annual production ahead of guidance.
Crescent Point executed over $355 million of dispositions in 2018, with an associated volume of 7,000 boepd of production.
They reported replacement of 142 per cent of 2018 production through organic reserves growth.
Crescent Point commenced a normal course issuer bid (NCIB) on January 25, 2019, with approximately 1.3 million shares repurchased to date at an average cost of $3.89 per share.
"In 2018, we spent below budget, exceeded our production guidance and increased our net asset value per share," said Bryksa. "In mid-2018, new management began transitioning the company to be more focused and efficient, realizing cost structure improvements and prioritizing capital allocation based on returns while continuing to advance our core areas. In addition to these changes and those set out in our transition plan, we also welcome and look forward to the additional insight and expertise provided through our ongoing board renewal process."
Financials
For the year ended December 31, 2018, Crescent Point's capital expenditures on drilling and development, facilities and seismic totaled $1.737 billion, which was below its annual guidance of $1.775 billion. Capital expenditures totaled $302.3 million in fourth quarter, including $278.4 million spent on drilling and development to drill 172 (139.6 net) wells.
For the year ended 2018, the company incurred a net loss of $2.62 billion, including a non-cash impairment of $3.71 billion ($2.73 billion after-tax). Post-impairment, Crescent Point said its balance sheet reflects a better approximation of the fair value of its asset base in the current environment and incorporates a higher cost of capital. The charge was not related to underlying asset performance and does not impact the company's adjusted funds flow or the amount of credit available under its bank credit facilities.
Differentials
Crescent Point's fourth quarter oil differential widened to $23.34/bbl from $10.74/bbl in third quarter. This compared positively to the fourth quarter Edmonton Par differential of $34.88/bbl. Based on realized prices to date and the forward curve, the company's first quarter 2019 oil differential is expected to narrow to approximately $8.75/bbl. This is expected to improve its realized oil price by approximately 15 percent relative to fourth quarter 2018. Crescent Point remains unaffected by the Alberta Government's production curtailments given the smaller size of its operations in the province.
During periods of increased market access constraint in Canada, the company expects that its oil production will continue receiving a premium due to a significant portion of its assets located either downstream of recent apportionment points or in the United States. Crescent Point is also exploring solutions to further enhance realized pricing for its Canadian oil production.
Subsequent to fourth quarter 2018, the company resolved a National Energy Board complaint with TEML and legal action through the negotiation and execution of a settlement agreement. The agreement includes a cash settlement payable to Crescent Point in addition to a revised pipeline tariff that is expected to increase the company's netback for oil production transported on the Saskatchewan pipeline system.
Operational
Crescent Point鈥檚 annual average production in 2018 was 178,166 boepd, exceeding Crescent Point's guidance of 177,000 boepd. As previously announced, the company sold approximately 7,000 boepd during 2018 for proceeds of approximately $355 million.
Crescent Point continues to advance its key focus areas. In Viewfield, the company's waterflood program has allowed for a base decline rate of approximately 25 percent in 2019. This decline rate is below the corporate average and helps drive free cash flow generation in the play. In Flat Lake, south of Torquay, the company has been testing longer laterals and drilled several two-mile horizontal wells as part of its fourth quarter program. This group of wells generated encouraging results with average 30-day initial production (IP30) rates of over 270 boepd and are expected to pay out in approximately 18 months at current strip prices. Crescent Point has budgeted for an increased number of two-mile horizontal wells in 2019 based on these results and recent well cost reductions of approximately 10 percent.
As part of its waterflood program, Crescent Point converted 79 producing wells to water injection wells in 2018 for approximately $50 million. The company plans to convert approximately 145 wells in 2019 for approximately $40 million, highlighting its focus on cost reductions while advancing decline mitigation techniques. Conversion costs to date in 2019 have been on, or below, budget.
In the Uinta Basin, Crescent Point continues to generate strong production results through its two-mile horizontal well program. During 2018, the company completed 11 two-mile horizontal wells targeting the Wasatch and Uteland Butte zones with IP30 rates averaging approximately 900 boepd. Notwithstanding these strong results and its ability to reduce well costs by over 10 percent, the company reduced capital allocated to this play in 2019 based on returns due to existing market access.
The company鈥檚 oil production is currently 25 per cent U.S.-base, with roughly half of that considered, 鈥測ellow wax in Salt Lake City,鈥� and the other half UHC, or sweet at Clearbrook. Their Canadian production includes 45 per cent light sour blend, 10 percent mixed sweet blend and 20 per cent medium oil (selling at a 20 per cent premium to Western Canadian Select), originating at Fosterton, in southwest Saskatchewan.
Outlook
Since the second half of 2018, Crescent Point's new management team has prioritized its key value drivers, which include disciplined capital allocation, cost reductions and balance sheet improvement.
The company said it now allocates capital based on returns versus simple volume growth. This shift in focus has allowed Crescent Point to adopt a capital program with more consistent activity levels throughout the year and has resulted in increased competition for capital across the company's portfolio of assets.
Crescent Point has increased its emphasis on cost reductions compared to its historical focus on operational outperformance. Since September 2018, management has reduced the company鈥檚 workforce, streamlined its executive team and implemented new initiatives that have resulted in significant savings in general and administrative costs, operating expenses and well costs. Crescent Point is also implementing new practices to further improve its controllable operating expenses. Further savings across the organization are expected as the company continues to focus its asset base.
Crescent Point's financial flexibility remains strong with cash and unutilized credit capacity of $1.62 billion, no material near-term debt maturities and a strong portfolio of oil and gas commodity hedges. As part of its transition plan, Crescent Point is targeting to further improve its balance sheet through net debt reduction by way of free cash flow generation and proceeds from any dispositions.
On January 15, 2019, the company revised its dividend strategy. This new strategy provides increased flexibility in the event of lower commodity prices and enhanced free cash flow generation as commodity prices improve. Crescent Point also initiated a disposition process during first quarter 2019 to market its southeast Saskatchewan conventional assets while at the same time progressing the strategic divestment of certain infrastructure assets. The company said it plans to remain disciplined and flexible throughout its divestiture processes.
As the company generates additional cash flow at higher commodity prices or realizes proceeds from potential asset dispositions, it plans to continue prioritizing the allocation of such funds to further net debt reduction and accretive share repurchases. Based on an updated adjusted funds flow sensitivity of approximately $40 million for every US$1.00/bbl change in WTI, the company expects to realize over $400 million of excess cash flow in 2019 based on its guidance and current strip prices, including approximately $50 million of hedging gains.
As at March 1, 2019, Crescent Point had, on average, over 40 percent of its oil and liquids production, net of royalty interest, hedged through 2019. The company has also recently added oil hedges at attractive prices extending through to third quarter 2020.
Crescent Point is on track with its 2019 budget, which remains unchanged, with annual average production of 170,000 to 174,000 boepd and capital expenditures of $1.20 to $1.30 billion. The company expects to update shareholders as it continues to execute its transition plan and elect new independent directors as part of its Board
