Whitecap Resources Inc

TSX:WCP

Earnings Call Transcript 2019-Q1

[Operator]

Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to Whitecap Resources First Quarter 2019 Results Conference Call. [Operator Instructions] And I would like to turn the meeting over to Whitecap's President and CEO, Mr. Grant Fagerheim. You may begin, sir.

[Grant Bradley Fagerheim, President, CEO & Director]

Good morning, everyone, and thank you for joining us. I am joined by our CFO, Thanh Kang; as well as our VP Engineering, Darin Dunlop; and our Vice President of Operations and Production, Joel Armstrong. Before we get started today, I would like to remind everyone that all statements made by the company during this call are subject to the same forward-looking disclaimer and advisory that we set forth in our Q1 news release issued earlier this morning. In the first quarter, we achieved average production of 70,666 BOE per day, 84% oil and natural gas liquids, which is above our mid-range expectation of 69,000 BOE per day on significantly lower capital spending compared to the first quarter of the prior year. In the first quarter, we spent $124.9 million, or 28% of our 2019 capital budget compared to 41% in the first quarter of 2018.This defensive approach allowed us to generate funds flow in excess of our capital spending and dividend payments. A first for Whitecap, where historically we significantly outspend our funds flow in the first quarter of each year. The mandated Alberta crude oil curtailments have been very effective at bringing in Canadian crude oil price differentials to more normalized levels. And this, in turn, has resulted in a significantly better principal for Whitecap in the quarter and royalty payments to the province of Alberta. We paid approximately 50% higher Alberta royalty payments due to the Alberta crude oil curtailments, and we're happy to do so. In the first quarter, we realized an operating netback prior to hedges of $29.80 per BOE compared to $19.26 per BOE in the fourth quarter of 2018, an increase of 55%.Funds flow for the quarter increased 16% to $161.2 million or 39% per fully diluted share compared to $138.8 million or $0.33 per fully diluted share in the fourth quarter of 2018.The second quarter has always been the least capital intensive, where we are expecting to spend only 10% of our full year capital budget. This will allow us to generate approximately $104 million of free funds flow in the first half of 2019 and $129 million of free funds flow after capital and dividend payments for the full year based on current strip pricing. With the continued strong operating performance, a sustainable free funds flow profile and a solid balance sheet, our Board of Directors has approved a 5.6% increase to our monthly dividend to -- in essence, $0.0285 per share or 34 point -- $0.342 per share annualized. This will be the third consecutive year of sustainable dividend increases, including our increases in 2017 and 2018. With that, I will turn it over to Thanh to provide some color on our financial results and then Joel to provide an HSE update.

[Thanh C. Kang, Chief Financial Officer]

Thanks, Grant. WTI averaged USD 54.90 per barrel compared to USD 58.81 per barrel in Q4 of '18, a 7% decrease. As Grant mentioned, Canadian crude oil price differentials has significantly narrowed, with the Edmonton Par differential averaging USD 4.95 per barrel compared to USD 26.46 per barrel in Q4 of '18, an 81% improvement. Realized crude oil prices prior to hedges and tariffs were CAD 63.60 per barrel compared to CAD 47.22 per barrel in Q4 of '18, an increase of 35%.This resulted in a very strong fund flow netback of $25.35 per BOE in the first quarter compared to $21.18 in the fourth quarter of 2018, an increase of 20%. The most significant financial reporting item in the quarter was Whitecap's adoption of IFRS 16, whereby we present value our lease arrangements and record a lease liability and a corresponding right of use asset. Depreciation is recognized on the right of use asset over the lease term, interest expense is recognized on the lease liability, and payments are applied against the lease liability. On adoption, assets were increased by $92 million with a corresponding increase to liability. The net impact to funds flow was approximately $0.40 per BOE and an increase to D&A expense of $0.55 per BOE.Our balance sheet remains strong at $1.3 billion of net debt on credit capacity of $1.7 billion. Debt to EBITDA was 1.7x compared to our debt covenant of not greater than 4x. EBITDA-to-interest ratio was 14.1x compared to our debt covenant of not less than 3.5x. So a very strong balance sheet.I will now pass it on to Joel for an HSE update.

[Joel M. Armstrong, Vice President of Production & Operations]

Thanks, Thanh. In addition to strong financial and operating results through 2018, we focused on best-in-class health and safety for our employees and are committed to a long-term sustainability of our business. We increased our ESG disclosure last year with a comprehensive corporate sustainability report and update our full narrative reporting every 2 years with annually updated data tables. The report and the 2019 data table are available on our website at www.whitecap -- sorry, wcap.ca. GHG emissions, freshwater use and safety performance, all show positive trends. Whitecap's total direct GHG emissions declined by 15% year-over-year and reduced our emissions per BOE by 17% compared to 2017.In fact, Whitecap-sequestered CO2 volumes far exceed total direct and indirect emissions for all of Whitecap's operations by 12%. We were also able to reduce the spill frequency by 30% year-over-year and reduce our freshwater usage by 9%. Freshwater usage as a percentage of total water use was 7.4% compared to 8.4% in 2017. On safety. Whitecap employees and contractors achieved a TRIF of 0.26 with over 7 million personnel hours, which is a 62% improvement over 2017. Our focus and priority are to continue the positive trends achieved to date on GHG emissions, freshwater use and safety for our employees and contractors. I'll now pass it on to Grant for his closing remarks.

[Grant Bradley Fagerheim, President, CEO & Director]

Thanks, Joel. So we are off to a great start after the beginning of the year and on track to meet our annual production guidance of 70,000 to 72,000 BOE per day on capital spending of $425 million to $475 million. We plan to have a much more active capital program at the back half of the year, leading to significant growth in the fourth quarter of this year to 77,000 to 79,000 BOE per day, which will set us up for a very strong 2020. The first $100 million of free funds flow, for the balance of the year, will be directed towards further improving our financial flexibility for the future. This will be the third year of dividend increases and demonstrates our commitments to returning cash to our shareholders as well as the sustainability of our dividend and growth strategy. Thanks to each of you on this call for your support and interest in Whitecap. Until next time, enjoy your spring. With that, I'll turn the call over to the operator for any questions.

[Operator]

[Operator Instructions] And your first question will be from Thomas Matthews at AltaCorp Capital.

[Thomas Matthews]

I just was curious on the production beat versus guidance. I know that you had some weather issues in the quarter. So just wondering what area was the biggest source of outperformance versus your exceptions? And will that translate into potentially ramping up the drilling program for the back half of the year in that area?

[Darin Roy Dunlop, Former Vice President of Engineering]

Yes. Tom, it's Darin here. We had several areas that outperformed expectations. Like -- most of them are outlined in our press release, but our Viking and West Central Sask as well as our Cardium and Ferrier and Willy Green and as well as our Lower Shaunavon to a smaller extent but a lot more long-term impacts in Southwest Sask. As for whether that's going to change our plans for the second half, probably not. We have a strategic intent for at least 3 years of our budget, and we have it well planned out. There might be tweaks here and there, but nothing significant.

[Thomas Matthews]

Okay. Just being ahead on your program thus far in Q1, will that translate into potentially being able to spend less as the day -- as the year progresses? Or is the capital program pretty much set, and it'll be what it'll be?

[Darin Roy Dunlop, Former Vice President of Engineering]

I think our capital program is pretty much set other than some optimizations here and there. Obviously, we'll watch commodities and the market situation carefully. But we're pretty solid going through the second half of the year.

[Thomas Matthews]

Okay. And then just last question from me is the messaging in the press release on the first $100 million will be used to pay down debt. So hypothetically speaking, if prices stay where they are and you have, call it, an extra $30 million or $40 million, after you pay down that first $100 million, what's the intention with that extra cash flow? Is it continued debt repayment? Could you see a potential for another dividend bump as the year progresses? Or is it looking at your shares and doing buybacks at that time?

[Thanh C. Kang, Chief Financial Officer]

Yes. Thomas, it's Thanh here. I think in the commodity price environment, at a minimum, we'll look to pay back $100 million of net debt there. But I think, regardless, if we continue to see improvements here, it will be directed towards strengthening the balance sheet for the balance of the year to get -- As Darin mentioned, our capital program is set there. So in that $425 million to $475 million is what we'd expect it to be.

[Operator]

Your next question will be from Travis Wood of National Bank of Canada.

[Travis Wood, Analyst]

Yes. Within the operational update, you've provided some color on the Cardium result both at Willy Green and Ferrier. So could you expand on that a little bit with specifically looking at helping us understand, I guess, notably, what drove that massive outperformance versus the expectations? And kind of how you're thinking about completions? And how we could start to consider oil rates and GORs over time?

[Darin Roy Dunlop, Former Vice President of Engineering]

Yes. Tom, (sic) [ Travis ], it's Darin here. I'll speak primarily to Ferrier, but I'll start off with Willy Green. Willy Green is a smaller area for ourselves. It varies between some of our inventory there is offsetting existing waterflood. So that's where you see the variation of sometimes you'll have a lower GOR, higher oil rate and some of other inventories further away from waterflood. So there's quite a variation in our results there. And when I -- and we carry several type curves there. The same very much in Ferrier. We -- those -- some of the more outstanding results we had were within the waterflood. So as you know, within a waterflood, you can have areas of bank, banked oil, higher pressure and lower GORs. So some of those results -- and they -- we have several type curves throughout Ferrier. But as far as inventory remaining, we're looking at about -- in Ferrier somewhere, after this quarter, drilling 37 gross wells, somewhere around 30 net of inventory left in Ferrier. And that's sort of a mix between redevelopment in the waterfloods as well as outside of the more of a primary production. And as to your question on fracking. We did experiment -- did a couple trials with some more high-intensity fracking. Our standard in the area has been in and around 65 meters spacing between our fracs. We did a couple of trials down to 45 and a little bit tighter down to 32. Jury's still out on what is the benefit of that incremental capital, but we're analyzing as we go, and we are considering that technology, or I would not call it a technology, that more of a completion improvement along the way in specific applications as dictated by the reservoir.

[Operator]

Next question will be from Jeremy McCrea at Raymond James.

[Jeremy McCrea, Energy Analyst]

Just a bit of a follow-up question to Travis there. Do you expect, just given some of those rates in the Ferrier, Cardium, do you expect to put any more capital into that area here as the year goes forward or maybe even to 2020? Just it hasn't really been too much of an active area for you guys, and I'm just curious as to how you see that going forward now.

[Darin Roy Dunlop, Former Vice President of Engineering]

Yes. Tom, (sic) [ Jeremy ], it's Darin here again. We have a fairly solid plan of redevelopment of our waterflood, such that we can take results like we saw in the first quarter, analyze them, reevaluate or redevelop them to the waterfloods in that area. So we're pretty set on our plan there and plus the fact that we don't -- at this point in time, we don't see ramping up our capital spending in either of those areas other than what we already have planned. In Ferrier, we have 4 more wells planned for the second half. So 8 well -- an 8-well program and an inventory of around 40 wells is probably appropriate.

[Jeremy McCrea, Energy Analyst]

Okay. And then just for your Wapiti Cardium. You talked about some improvements in costs. Are those more structural in nature? Or is it -- what do you get for the benefit of just 10% cost savings? Is that -- is it just as -- like less-intensity frac? Or like what -- how is the IP kind of related to that as well?

[Joel M. Armstrong, Vice President of Production & Operations]

Jeremy, it's Joel here. So that kind of 2 components driving our cost savings are really around water management and flowback strategy. We haven't really done too much to frac intensities or tonnage or anything like that. It's more about water management and flowbacks.

[Operator]

And your next question will be from Christopher Jones at Haywood Securities.

[Christopher Jones, Associate Analyst of Energy Research]

Congratulations on another strong quarter. My question is sort of a high-level one regarding tuck-in acquisitions. Now given the company has been a pretty effective acquirer over the last several years, just curious what your short-term to medium-term outlook is for potential tuck-ins. And what type of environment would you like to see before M&A creeps back into the conversation surrounding free cash flow deployment? And how does market sentiment sort of play into that decision going forward?

[Grant Bradley Fagerheim, President, CEO & Director]

Chris, it's Grant. Just on the acquisition strategy. We don't think that this is a time to be active on acquisitions. Specifically, we've got a very strong inventory of opportunities at this particular time. We've got a pretty -- very strong plan laid out for the next 3-year period of time. And quite frankly, we're challenged with understanding how consolidation could take place this year. I think that with the volatility that we've seen in commodity prices and the differential, so realized pricing, the lack of interest from equity investors, I think people have taken the strategy to be focused on their balance sheet, which we have, and running a sustainable business within cash flow where they can. Those that can should be able to do that like Whitecap Resources. So from our perspective, we have not -- this isn't a year for us to be active on the acquisition front. We thought this was a year that we should really focus on balance sheet strengthening and perhaps look to the future on any consolidation opportunities that may exist in '20 or '21.

[Operator]

[Operator Instructions] And we currently have no other questions, Mr. Fagerheim. So I would like to turn the call back to you for any additional comments.

[Grant Bradley Fagerheim, President, CEO & Director]

I just want to, once again, thank everyone for your time today and your interest in Whitecap Resources, and look forward to reporting next time in August. So thanks very much, everyone, and happy spring, and enjoy your summer. And enjoy the new government we have in the province.

[Operator]

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.