Calgary – The price of oil tumbled from US$75 per barrel of WTI in early October to US$42 on Dec. 24, before coming back to US$51 on Jan. 15. In that context, Crescent Point Energy Corp. released its capital budget for 2019, with a 30 per cent decrease compared to what it spent in 2018.
“This year's budget highlights the new team's emphasis on returns and capital allocation,” said Craig Bryksa, president and CEO of Crescent Point, said in a Jan. 15 press release.
“Given the significant decline and volatility in commodity prices, we have reduced our 2019 capital budget by approximately $500 million, or 30 per cent, compared to the prior year. Due to our revised approach to capital allocation and taking into account improved overall efficiencies, our annual average production is unchanged from the prior year, net of dispositions. Additionally, we are on track to meet our 2018 guidance with capital expenditures approximately $35 million below budget.”
Crescent Point's reduced 2019 capital expenditures budget of $1.20 to $1.30 billion is expected to generate annual average production of 170,000 to 174,000 boepd. After adjusting for dispositions that added approximately 4,500 boepd to the 2018 annual average production, the company's 2019 production guidance is unchanged from the prior year.
As of Jan. 15, Crescent Point lead the entire country with the most active drilling rigs deployed, according to Rig Locator (riglocator.ca). Their 17 rigs working included 10 in southeast Saskatchewan, four in southwest Saskatchewan, two in west central Saskatchewan and one near Swan Hills, Alta.
In total, Crescent Point disposed of assets producing approximately 7,000 boepd in 2018 for proceeds of approximately $355 million. This includes approximately 2,000 boepd of gas weighted production in the second half of 2018 for proceeds of approximately $65 million. Consistent with its previously stated transition plan, the company is currently exploring further disposition opportunities, including certain upstream and infrastructure assets. Crescent Point said it will be disciplined during its divestiture process to ensure appropriate asset values are realized for shareholders.
Share repurchase and dividend
Given Crescent Point's current share price compared to the fundamental underlying value of its common shares, the board of directors has authorized a share repurchase program. Based on current market conditions and the company's commitment to living within cash flow, Crescent Point will pursue approval from the Toronto Stock Exchange for a normal course issuer bid (NCIB) to acquire up to seven per cent of its public float. The commencement of the NCIB will be announced following receipt of approval from the TSX.
The board has also approved a move to a quarterly cash dividend of CDN$0.01 per share, with the first quarterly dividend payable on April 1, 2019 to shareholders of record on March 15, 2019. The company's cash dividend of CDN$0.03 per share for the month of December 2018 is payable January 15, 2019, as previously announced. Crecent Point’s stock price at opening on Jan. 15 was $4.24 per share. Its 52-week low is $3.70 and its 52-week high is $11.81.
“Dividends remain a valuable component of our total return offering to shareholders,” said Bryksa. “Based on our current share price, we believe share repurchases are a more accretive form of returning capital and provide a permanent benefit for all shareholders. We will revisit potential dividend increases over time in a sustainable manner.”
The reduced dividend and lower 2019 capital budget provides Crescent Point with increased flexibility in the current oil price environment. The company's capital allocation process, which is driven by risk-adjusted returns, now incorporates share repurchases as a new tool for value creation. The NCIB is expected to be funded within adjusted funds flow, including a portion of funds that were previously directed to the company's monthly dividend payment.
The company anticipates a total payout ratio in 2019 of approximately 85 to 95 per cent, including capital expenditures, dividends and potential share repurchases. Under Crescent Point's budgeted oil price of WTI US$50.00/bbl, and assuming the midpoint of the company's capital budget range, over $150 million of funds is forecast to be available for debt reduction, share repurchases or a combination thereof.
“Our 2019 budget is disciplined, focused and flexible,” said Bryksa. “Should oil prices fall below our budgeted WTI assumption of US$50.00/bbl, we have the ability to further revise our capital program with a continued focus on returns and operating within cash flow. If oil prices strengthen, we are well positioned to generate excess cash flow and increased value for shareholders.”
Incremental funds realized from higher commodity prices and potential proceeds from future dispositions will be allocated based on the most value added opportunities available, with a priority on debt reduction, accretive share repurchases and returns based growth. The company's adjusted funds flow sensitivity to a US$1.00/bbl change in WTI is approximately $50 million in 2019.
The company said it will remain flexible in its 2019 capital spending plans as it continuously monitors commodity prices, costs and returns. Crescent Point's capital spending guidance excludes any potential expenditures on land, which are expected to be modest at approximately one to two per cent of incremental capital.
The company's 2019 capital budget incorporates realized capital cost reductions to date of approximately five per cent on average across its asset base. Consistent with the key value drivers within its transition plan, management has focused Crescent Point's efforts on efficiencies, including reduced drilling days, completion optimization and improved logistics. The company has also lowered its expected 2019 general and administrative expenses by approximately 10 per cent compared to 2018, excluding one-time severance costs. Crescent Point said it remains committed to achieving additional cost improvements in 2019 as part of its plan.
2019 Capital spending by area
Crescent Point has allocated approximately 55 per cent of its total capital expenditures budget in 2019 to its key focus areas in the Viewfield Bakken, Shaunavon and Flat Lake resource plays, all within Saskatchewan. This is an increase from approximately 45 per cent in the prior year, reflecting the company's commitment to risk-adjusted returns. The company plans to develop these resource plays through a combination of low-risk, high-return drilling, waterflood programs and new infrastructure investments to support future growth.
As part of its waterflood initiatives, Crescent Point plans to convert approximately 145 producing wells to water injection wells in 2019, compared to approximately 70 conversions in 2018. This increase demonstrates the company's ongoing focus on the consistent advancement of decline mitigation techniques, as previously outlined in its transition plan. Crescent Point's 2019 production guidance includes the anticipated impact on production of approximately 2,000 boepd from converting existing producing wells to water injection wells.
The company has further enhanced the horizontal well economics within its emerging Uinta Basin resource play in Utah by focusing on stacked, multi-well pad development. Unit costs for Crescent Point's two-mile horizontal wells have improved by over 10 per cent compared to the prior year, reflecting drilling efficiencies and completion optimization. Based on existing market access in the Uinta Basin and risk-adjusted returns at current oil prices in the earlier stage East Shale Duvernay play, the company has reduced capital allocated to these resource plays. Approximately 15 per cent of Crescent Point's total capital expenditures budget is allocated to these plays in 2019, in comparison to approximately 25 per cent in the prior year. The company may increase spending in these areas as they continue to advance, or as oil prices improve.
“Approximately 70 per cent of our 2019 budget is allocated to our focus areas, including emerging and earlier stage plays,” said Bryksa. “We allocate capital based on risk-adjusted returns taking into account the long-term development plans for each area.”
As previously highlighted during third quarter 2018 results, Crescent Point's assets currently receive a premium to Canadian index prices as approximately 90 per cent of its oil production is located either downstream of recent apportionment points or in the United States. The company is forecasting an oil differential for 2019 in line with current strip prices for its various crude streams.
As at January 9, 2019, Crescent Point had, on average, approximately 40 per cent of its 2019 oil and liquids production, net of royalty interest, hedged at a weighted average market value price of approximately CDN$76.00/bbl.