Calgary – After years of being on a continual growth path Crescent point, the largest oil producer in Saskatchewan, is making a dramatic change in direction. It’s reducing its areas of focus, cutting its staff by 17 per cent, and selling off up to 50,000 barrels of oil per day (boepd) in production, 28 per cent of its current production. There will be an emphasis on a $1 billion debt reduction by the end of 2019 as well as returning capital to shareholders, possibly through buybacks.
The company appointed Craig Bryksa as the permanent president and CEO after he served those positions in an acting capacity. Under his direction, the company is placing greater emphasis on returns versus growth during its 12 to 24 month transition. Following that period, Crescent Point expects its organic growth rate to increase in priority, including strong debt-adjusted metrics, as a product of a more focused and efficient production base.
The areas of focus will include the Viewfield, Flat Lake and Shaunavon areas, as well as the emerging plays in the East Duvernay in central Alberta and the Uinta in Utah. Up to 50,000 boepd of assets going up for sale include Swan Hills in Alberta, Viking play in west Central Saskatchewan, southeast Saskatchewan conventional (around 20,000 boepd), Battrum/Cantuar (5,000 boepd), and North Dakota. Since the North Dakota production is growing significantly, it is expected to be around 20,000 boepd.
In a press release and conference call on Sept. 5, the company it was an adoption of a new clearly defined transition plan with measurable deliverables.
In addition to Bryksa as CEO, the company appointed Robert (Bob) Heinemann as the new chairman of the board.
Regarding his appointment as permanent CEO, after a tenure as acting CEO, Bryksa said, “This is a great honour. I care deeply about this company, and I am looking forward to the opportunity to work with our current and prospective shareholders to re-establish Crescent Point within the investment community.”
He was promoted from within, having most recently served as vice president, engineering west.
Now the company will be focusing its asset base by pursuing significant upstream asset divestitures. They are targeting a net debt reduction of over $1.0 billion by year end 2019, at current strip commodity prices, through a disciplined return-focused budget and asset dispositions. This includes having Identified certain midstream assets for potential monetization. Lastly the reduced workforce is expected to result in an annual total expense savings of over $50 million.
“Our transition plan is designed to ensure we become a more focused and efficient company with a stronger balance sheet,” said Bryksa. “After taking a refreshed approach in reviewing our business, we will look to refocus our asset base into fewer operating areas, follow a more disciplined capital allocation process and reduce our costs. We believe this new approach will enhance our company’s sustainability and returns for shareholders.”
Crescent Point undertook a comprehensive review of its asset base, business strategy and organizational structure. The company’s objective in conducting the review was to identify measures to prioritize Crescent Point’s strategy based on key value drivers, which include balance sheet improvement, disciplined capital allocation and cost reductions.
Bryksa noted this included a suite of assets with high returns, scalability and the ability to increase free cash flow generation, multiple high-quality assets of smaller scale that could be divested to enhance shareholder returns, and a strong technical and operations team with a proven track record and waterflood expertise.
Crescent Point also identified several opportunities for improvement, which will be focal points over the next 12 to 24 months.
Ryan Gritzfeldt, chief operating officer, noted the company will be increasing its deployment of field automation, which increases staff efficiency and reduces downtime and workovers. He pointed out the company will focus on risk-adjusted returns instead of simple volume growth. He expects a 10 per cent improvement in capital efficiency.
The company previously focused on volume growth which resulted in acquisitions, a high total payout model, and increased leverage. The transition plan is designed to create a “new Crescent Point,” with a focused asset bas, stronger balance sheet, improved free cash flow and lower debt.
Once the company reaches its debt goals, that will free up money for returning capital to shareholders, including possible share repurchases, longer term capital projects, and net debt reduction.
Focused asset base
Crescent Point expects to optimize its capital allocation process and overall efficiencies by focusing its asset base. This approach is also expected to provide the company with opportunities to execute strategic dispositions to further strengthen its financial position. Crescent Point considered a number of value enhancing options as part of its streamlining process, ranging from asset divestitures to more complex scenarios. The company currently believes a straightforward plan is the best approach to executing its transition.
“We wanted to ensure the assets were high return, but also had scalability to allow for significant organic growing room,” Bryksa said. Other considerations included free cash flow potential and the ability to improve commodity market access. Based on these factors, Crescent Point has identified the Viewfield Bakken, Shaunavon and Flat Lake resource plays as key focus areas.
“Average production from these areas in Q2, 2018, was approximately 102,000 boepd, or approximately 60 per cent of the total production, with each asset currently generating free cash flow,” he said.
The company also plans to continue advancing its emerging and earlier stage resource plays in the Uinta Basin and East Shale Duvernay in a paced and disciplined manner, which could provide significant opportunity over the long-term and garner increased capital over time. Average production from these assets over Q2, 2018 was approximately 23,000 boepd, or 13 per cent of the company’s total production.
“Our remaining areas, which currently represent approximately 50,000 boepd, are high quality assets that, in general, don’t provide significant scalability,” he said.
To improve its balance sheet, the company is looking at several areas, including upstream asset dispositions and cost reductions.
Crescent Point is also reviewing the sale of certain infrastructure assets, mostly gas infrastructure in Saskatchewan. In recent years the company built or expanded gas plants at Oungre and Viewfield. The company believes such a transaction could unlock value, provide a near-term source of proceeds for net debt reduction and create a strategic partnership. Such a purchaser could also potentially fund key future infrastructure projects, further increasing Crescent Point’s financial flexibility, market access and overall returns.
With asset sales being partially dependent on prevailing market conditions, the company plans to be flexible in its divestitures program.
Crescent Point is targeting a net debt reduction of more than $1 billion by year end 2019 at current strip commodity prices. The company’s debt reduction strategies include maximizing free cash flow through an efficient capital allocation process, cost reductions and disciplined asset sales. As at June 30, 2018, Crescent Point had a net debt to funds flow from operations of over 2.0 times and cash and unutilized credit capacity of approximately $1.5 billion, with no material near-term debt maturities.
The company is targeting a net debt to funds flow from operations below 1.3 times in a commodity price environment of US$65/bbl WTI. Although this leverage target will vary based on commodity prices, Crescent Point’s long-term goal is to maintain a strong financial position, protect against price volatility and generate strong debt-adjusted per share metrics for shareholders.
Consistent with its focus on free cash flow generation, versus simple volume growth, the company expects to internally fund its development programs and further strengthen its balance sheet.
Crescent Point expects to increase free cash flow generation through a combination of initiatives, including an improved cost structure, a more disciplined capital allocation process and advancing decline rate mitigation techniques, such as waterflood. The company will manage its capital allocation process in the context of each investment, including its waterflood programs, competing for capital based on risk-adjusted returns and long-term development goals.
Restructuring
As part of the company’s cost reduction initiatives, Crescent Point is finalizing an organizational restructuring that includes an immediate workforce reduction of approximately 17 percent of employees. The company expects this realignment to provide annual savings of over $50 million through reductions in both operating and general and administrative expenses. These savings partly reflect the recent restructuring of the executive team, which is also expected to result in approximately 20 percent lower annual compensation for current named executive officers in 2018 compared to 2017.
“I want to thank all of our staff for their hard work and contributions over the years,” said Bryksa. “This restructuring is difficult, however we needed to adjust the organization to match our current business needs. We are all focused on executing our transition plan and are excited about Crescent Point’s future.”
The company’s transition plan also includes an ongoing review of its operating and capital costs, including the implementation of field automation to further increase efficiencies.
2018 and preliminary 2019 guidance
Crescent Point’s 2018 guidance remains unchanged, with an annual average production of 177,000 boepd and $1.775 billion of capital expenditures. This guidance implies second half 2018 capital spending of approximately $750 million and production averaging approximately 174,000 boepd, reflecting previously announced dispositions that closed toward the end of second quarter 2018.
The company expects its 2019 capital expenditures to be approximately $1.55 billion to $1.60 billion, at current strip commodity prices, with annual average production of approximately 176,000 to 180,000 boepd. This initial production range reflects various capital allocation scenarios and does not account for potential dispositions during the second half of 2018. Crescent Point intends to finalize its 2019 guidance upon the completion of its 2018 capital program. The company’s capital expenditures budget excludes capital expenditures on land, which are less predictable and partly dependent on land sale outcomes. Land expenditures in 2019 are expected to be modest at approximately one to two percent of incremental capital. Crescent Point’s cash flow sensitivity in 2019, inclusive of current hedging, is approximately $45 million for every US$1/bbl change in WTI.
“We would like to thank our shareholders for their patience during this time. We recognize that change will not happen overnight, however, we expect to deliver ongoing improvement in the company’s financial position, profitability and sustainability,” Bryksa concluded.
