No fire sale here: Crescent Point

Crude-by-rail facilities are idle, but they’re being considered

Calgary – Crescent Point doesn’t plan on selling off assets at fire sale rates, it’s looking into using rail facilities that are currently idle, and service companies probably shouldn’t expect much in the way of increases.

Those were some of the nuggets that came out of Crescent Point Energy Corp.’s third quarter results conference call on Oct. 25.

Craig Bryksa, president and CEO, said they’re getting a lot of questions on their divestment strategy.

“We described ourselves in the past as being a fairly focused company, but when you look at us, we’ve really been working in 11 areas. We want to pare that down to about five-ish, to really become more focused and efficient,” he said.

The other theme of the strategy is balance sheet strength, and in particular, strengthening it. One of the methods is disposition of 50,000 bpd over time.

“It’s going to take time. And with the macro market that we’re living in, both with commodity prices, and then recently, with differentials, this is something we’re going to be very disciplined to. We’re going to ensure we get fair value for the assets we do sell. It doesn’t do us any favours to just blow assets out the door for discounted rates, so we are not going to do that by any means.

“So what you’re going to see from us is a very flexible but disciplined process, very methodical over the next 12 to 24 months as we reshape the company. As deals are done, we will let the market know at that time,” Bryksa said, adding he doesn’t want to see them backed into any corners.

Asked about the use of crude-by-rail, and if they’re not going to use their own facilities, could they handle third party volumes, Bryksa said, “At the moment, we’re not using our rail facility in southeast Saskatchewan. Obviously, we’ve been working the numbers, looking at deals. From that perspective, as you know obviously any deal, rail companies are looking for some term. At this ten seconds, we don’t have any deal in place.”

He also noted the option of trucking into North Dakota. The Stoughton facility was handling upwards of 30,000 barrels per day, but has the capacity of up to 40,000 barrels per day. They also have 10,000 to 15,000 bpd of rail capacity in southwest Saskatchewan, but it is unused. In Utah, they are using rail capacity.

Sky-high oil price differentials have been making headlines. Asked about this, he noted their pricing on southwest Saskatchewan oil, at Fosterton, is currently about $10 to $11 better, per barrel, than Western Canadian Select oil. That’s the oil that’s been seeing differentials of up to US$50 per barrel against West Texas Intermediate.

For service companies hoping to see an increase on their vendor rates, don’t expect too much. Asked about possible inflation from service companies in 2019, Bryksa said, “Right now, overall, we’re seeing fairly flat numbers, so that’s what we’ve got forecasting into next year as well.”

In more general comments, Bryksa said, “In early September, we announced the transition plan and key deliverables that were designed to ensure Crescent Point becomes a more focused, returns-driven company with a stronger balance sheet. In particular, we expect to generate increased free cashflow through a more-disciplined capital program and cost savings.

“Although we are in the very early stages of implementing our plan, we have completed the reorganizational restructuring we announced last month. We expect the reorganization to result in approximately $50 million in annual cost savings, starting in the fourth quarter of 2018.”

Crescent Point’s third quarter production averaged 174,275 barrels of oil equivalent (boepd) boepd, comprised of approximately 90 percent oil and liquids. Average production during the quarter was slightly ahead of forecast and takes into account approximately 4,800 boepd of previously announced non-core asset dispositions that closed at the end of second quarter. The company's fourth quarter production estimate is currently tracking ahead of forecast, based on an annual guidance of 177,000 boepd.

Operating activity within Crescent Point’s Canadian assets resumed at the beginning of third quarter following normal seasonality related to spring break-up. In the Viewfield Bakken and Shaunavon resource plays, the company is focused on a combination of low-risk, high-return infill drilling and waterflood development. In the Flat Lake resource play, Crescent Point's return-focused development strategy is expected to generate improved efficiencies by utilizing new facilities, implementing pad drilling and reducing costs.

In the company's emerging and earlier stage resource plays, Crescent Point remains encouraged with well results, including recent two-mile horizontal wells targeting multiple zones in the Uinta Basin. The company is focused on improving well costs and overall efficiencies in this resource play through stacked, multi-well pad development. Crescent Point will continue to pursue new opportunities for increased market access in the Uinta Basin and monitor well results in the East Shale Duvernay before increasing capital allocated to these resource plays.

The company's average selling price per barrel of crude oil was CDN$80.11 during third quarter. Despite the recent widening of Canadian oil differentials, Crescent Point expects its realized oil pricing in fourth quarter to be significantly stronger than Canadian index prices as approximately 90 percent of the company's oil production is either located downstream of recent apportionment points or in the United States. As a result, Crescent Point currently expects its average crude oil selling price in fourth quarter to be only approximately 15 percent lower compared to third quarter, based on realized prices to date and current forward pricing.

Crescent Point said it remains committed to achieving its transition plan deliverables, which are centered around a focused asset base, balance sheet strength, improved margins and increased free cash flow generation.

During its recent strategy review, the company identified a number of assets as potential divestment candidates. Crescent Point is targeting a net debt to funds flow from operations of 1.3 times or less over the next 12 to 24 months and will be disciplined during the divestiture process to ensure appropriate asset values are realized for shareholders.

Craig Bryksa said, “We remain committed to achieving each of our deliverables and will keep our shareholders informed as we execute our strategy. Once we achieve our goals, we expect to be in a stronger position to allocate increased free cash flow to other value creating opportunities."

During the third quarter Crescent Point drilled 112 wells (107.2 net) in the Williston Basin (which is principally southeast Saskatchewan, but also includes North Dakota), 90 wells (54.7 net) in southwest Saskatchewan, eight wells (3.6 net) in the Uinta Basin, and five wells (3.7 net) elsewhere. That totalled approximately $366.4 million for drilling, $45 million on facilities and seismic, and $5 million spent on land.

Ryan Gritzfeldt, chief operating officer, said, “Approximately 45 of our third quarter production was priced off the light sour blend, or LSB, benchmark produced in southeast Saskatchewan. And, our U.S. assets, located in the Uinta Basin and North Dakota, and are not subject to Canadian differentials, represented approximately 25 per cent of our third quarter oil production. These assets combined, or 70 per cent of our total oil production, currently receive a premium, relative to MSW (mixed sweet blend) light at Edmonton.

“Finally, our southwest Saskatchewan assets, which account for 20 per cent of our corporate oil production, produces a medium-gravity crude that accesses Fosterton pricing, which currently receives a premium to WCS (Western Canadian Select).”

On October 23, 2018, the Canadian federal government announced a new carbon pricing policy, which is expected to apply to Crescent Point's Saskatchewan operations beginning in April 2019. The direct impact from this policy is expected to be minimal, with incremental costs representing less than one percent of annual funds flow from operations.

In Flat Lake, the company is utilizing new facilities, implementing pad drilling and reducing costs. In Utah, they will be using primarily two-mile horizontal wells and stacked multi-well pads.

Guidance

Crescent Point’s 2018 guidance remains unchanged, with an annual average production of 177,000 boepd and capital expenditures of $1.775 billion. As previously released on Sept. 5, 2018, the company's preliminary 2019 capital expenditures guidance is expected to be approximately $1.55 billion to $1.6 billion, with annual average production of approximately 176,000 to 180,000 boepd. As disclosed previously, the company's guidance excludes expenditures on land, which are expected to be modest at approximately one to two percent of incremental capital.

Crescent Point plans to announce its formal 2019 guidance upon completion of its 2018 capital program. The company will continue to monitor oil differentials and their impact on corporate returns as it finalizes its guidance and capital allocation for 2019.

 

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