Whitecap Resources Inc

TSX:WCP

Earnings Call Transcript 2018-Q2

[Operator]

Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to Whitecap Resources Second Quarter 2018 Results Conference Call. [Operator Instructions] I would now like to turn it over to Whitecap's President and CEO, Mr. Grant Fagerheim. You may begin your conference call.

[Grant Bradley Fagerheim, President, CEO & Director]

Good morning, and thank you for joining us, everyone, on this 1st day of August. I am joined by our CFO, Thanh Kang as well as 2 other members of our management team, Joel Armstrong and Darin Dunlop.Before we get started today, I would like to remind everybody 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 Q2 news release issued earlier this morning.As I expect you've seen, 2Q has been an excellent quarter for us in many respects as we continue on our long-term strategy. We achieved record average production of 75,813 BOE per day in the quarter, 85% crude oil and liquids. But more importantly, it was a record quarter on production-per-share basis at 100 BOE per day per 1 million shares. Compared to Q2 2017, production per share increased 19%, 4% from the previous quarter of Q1 2018. For the full year, we expect to grow production this year on a per-share basis compared to last year 14%, which is well in excess of our 6% to 8% per share long-term target.Funds flow for the quarter of CAD 196.5 million or $0.47 per fully diluted share was almost twice as much as our development capital spending of CAD 66.3 million and dividend payments of CAD 32.7 million combined, thereby providing us with nearly CAD 100 million of free cash flow in the quarter.In the second quarter, we spent 15% of our full year budget of CAD 450 million, drilling a total of 42 net wells. This brings our total first half 2018 development spending to CAD 248.7 million or 55% of our full year budget.With respect to our core areas, our Viking program in West Central Saskatchewan continues to perform very well with exceptional rates of return and capital payout in less than 1 year on a per-well basis. Compared to Q2 2017, average spud to rig release times have decreased 22% on our standard length 600-meter horizontal wells to 1.9 days and 27% on our extended reach 1,000-meter average length horizontal wells to 2.4 days. These reduced spud to rig release times are contributing to our drill, complete and equipment time costs being reduced or down by 5% to 10% below our original estimate.The Southwest Saskatchewan asset acquisition we completed in June 2016 continues to be an exceptional acquisition for us. Our technical team continues to uncover new areas for optimization and enhancement. The majority of our drills to date have been targeting the Atlas formation, where average spud to rig release times on our horizontal wells have decreased 16% to 3.7 days since we first spent capital on this play in July of 2016.We are also active on the Shaunavon, Rosary, [ Success ] formation, giving us options in our local Southwest Saskatchewan development program.In December of 2017, we acquired the Weyburn CO2 asset in Southeast Saskatchewan. The goal of the business unit was to keep production flat for 2018 at 14,800 BOE per day with minimal capital, and to resume development spending in the second half of 2018. So far so good, as the base production our performance has been exceptional, averaging slightly above 14,850 BOE per day to date and spending only 1/4 of our budgeted capital for the area.Our Weyburn team is excited to start deploying capital into this area with a 6 well drill-out reactivation program, 4 well CO2 expansion program, and the 12 well infill drilling program which started in late June.The Q1 drills at [ Wapiti ] targeting Cardium oil in Northwest Alberta business unit continued to significantly exceed expectations, 21% higher than our type curve expectations. And we have an additional seven 4.5 net [ full-up ] locations to drill in the second half of 2018.We are currently drilling the last well of a 3 well pad targeting Dunvegan oil in the [ Carr ] area. So far, from our drilling results, the reservoir looks exceptional, the drilling times have been 30% faster than planned, and the costs are 15% to 20% under budget.Our team's exceptional execution in the first half of 2018 is setting Whitecap up to outperform in 2018. As a result, we have elected to increase our 2018 production guidance modestly to capture the impact of our success to date.With that said, I'll turn the mic over to Thanh Kang, our CFO, to provide some color on our financial results, including our netbacks and other key financial metrics.

[Thanh C. Kang, Chief Financial Officer]

Thanks, Grant. In the quarter, WTI average $67.88 per barrel compared to $62.87 per barrel in Q1 '18 and $48.28 per barrel in Q2 of 2017.Despite wider differentials, given the increase in crude oil prices and the weaker Canadian dollar, we realized significantly higher prices for our crude oil. Realized crude oil prices were on a Canadian dollar basis CAD 75.36 per barrel compared to CAD 65.29 per barrel in the first quarter of 2018, an increase of 15%, and CAD 57.52 per barrel in the second quarter of 2017, an increase of 31%.In April, we started generating revenue from the blending facility at Weyburn. Blending revenue was CAD 3.5 million and blending expenses were CAD 2.4 million, resulting in a profit of CAD 1.1 million for the quarter. The blending revenue is additional upside that we did not include in our initial acquisition analysis. But full credit to our marketing team for capturing the upside as a result of changing market conditions.Crude oil blending can occur when there's large price variance between the different crude oil streams when there is both sufficient facility and pipeline capacity, though we don't forecast net blending revenue due to the uncertainty of monthly volumes with the variability of the various stream pricing. That being said, with the volatility of the crude differentials, we are evaluating flexible blending opportunities at many of our facilities.Net operating expenses in the quarter were CAD 11.29 per BOE, lower than our forecast of between CAD 11.60 to CAD 11.70 per BOE. And that's mainly from higher production volumes in the quarter. We'd expect net operating expenses per BOE to be relatively flat as we move through the second half of the year at between CAD 11.60 to CAD 11.70.Transportation expenses plus tariffs of CAD 2.98 per BOE for the quarter is relatively flat compared to the first quarter of 2018 as well as the second quarter of 2017. We are forecasting approximately CAD 3 per BOE for the remainder of the year.G&A expense of a CAD 1.27 per BOE is in line with our forecast of CAD 1.25. And we would expect that to remain fairly flat at CAD 1.25 per BOE for the balance of 2018.Interest and finance expenses excluding unrealized gain on interest rate contracts of CAD 1.99 per BOE is higher than the second quarter of 2017 at CAD 1.73 due to the additional debt we incurred from the late acquisition in 2017 of the Weyburn assets.We intentionally took on more debt given the low decline production profile of the Weyburn assets and the assets significant free funds flow, with the view that we would reduce the debt with free funds flow in 2018.In the second quarter we reduced our net debt by CAD 91.5 million. Net debt to Q2 annualized funds flow was 1.7x, and we anticipate to take that under 1.5x by the end of the year.In short, very strong financial results in the second quarter which reflect exceptional operational execution and strong business fundamentals.With that, I'll turn it over to Grant for some closing comments.

[Grant Bradley Fagerheim, President, CEO & Director]

Thanks, Thanh. The last 2 years with depressed crude oil prices has allowed Whitecap to position in an enviable position with a shallow decline production profile to be able to deliver strong return on capital [ employed ] numbers, generate sustainable organic per-share production growth and significant free funds flow.Our balance sheet remains strong and provides us with the financial flexibility to ensure that we withstand current volatile commodity prices. We are on track for delivering and achieving 14% production per-share growth in 2018, within excess of 29% per-share growth in cash flow. And that provides significant optionality with these proceeds.With that, we look forward to reporting back to our shareholders as we progress through the back half of 2018 and into the 2019 year.With that, I'll turn the call over to Joanna, our operator, for any questions.

[Operator]

[Operator Instructions] And your first question is from Shailender Randhawa from RBC Capital Markets.

[Shailender Randhawa, Analyst]

Couple questions for me. So one, just give us a sense of how you're thinking about free cash flow deployment in the second half of the year just in terms of buybacks and what you would do with the surplus of cash. And then secondly, just curious on what you see in terms of running room in the Deep Basin and whether there's opportunities to expand that footprint.

[Grant Bradley Fagerheim, President, CEO & Director]

Sure. Thanks, Shailender. Just regarding the free cash flow, and I want to make sure it's very clear that what we've tried to position Whitecap in is to have full optionality with the funds flow. And we do have a significant amount of free cash flow being projected for the back half of this year, as Shailender had said. Our first priority is always to be debt reduction and continue to drive down our debt if we don't have that better use of proceeds. Second would be consolidation in our core areas of operation, and then share buybacks. So we will continue to look to share buybacks. But we want to ensure that we've got a sound level of debt. And long term we're looking to have our debt to cash flow between 1x to 2x. When commodity prices are higher, we prefer that to be lower on a debt to cash flow basis. So our number one objective is debt management first of all, and to make sure that we've got flexibility that in the event that something does come up, we can use our balance sheet in order to proceed with an acquisition or increase our capital program. On your second question on running room in the Deep Basin, we think we've got a lot of room to move forward on in the Deep Basin. We've got a significant inventory both of Cardium and Dunvegan wells. And what we are looking at is continue -- right at this particular time in the Deep Basin, we have our current production is somewhere in that neighborhood of around 8,000 to 9,000 barrels a day of production. And we're looking at that area as a continued growth area to take us potentially up to between 12,000 to 15,000 barrels a day of production. So we got a significant amount of running room at this particular time. And of course, we're always looking to add to that as we move forward.

[Operator]

And your next question is from Jeremy McCrea from Raymond James.

[Jeremy McCrea, Energy Analyst]

Just a quick question just on your rate of return on your well economics. I'm curious as you head into 2019, 2020, can you tell me maybe an area where you're seeing the best rate of change in terms of your well economics and an area that maybe you're seeing maybe like if there's potentially your well economics getting potentially worse and how you plan to shift capital into 2019 and 2020 versus what you're spending here now?

[Grant Bradley Fagerheim, President, CEO & Director]

With Darin Dunlop here -- Darin, do you want to go ahead?

[Darin Roy Dunlop, Vice President of Engineering]

Yes. With regards to where we see some -- and I'm talking relative to the economics you see in our corporate presentation where we see the biggest opportunity for additional increases in our Wapiti and the Cardium and the Deep Basin. We're still early in the stages of that development. So we might not have captured as -- currently right now our type curve, our performance of our last few wells has been over 20% above our current type curve. So if that continues on, we will pick the right time to identify when to start increasing that estimate. But we do believe that. And as for things heading down a little bit, I would point to areas where we're starting to focus on a little bit more waterflood development; that being West Pembina, we're starting to get into West Pembina and redeveloping the waterfloods. And with that, when you're drilling in waterfloods, you're seeing a little bit of an increase in water [ cuts ]. Your IPs aren't just high, and the same in the Viking as we start to consume more of our inventory. But one of the things we are going to see increase over time and that even though our rate of returns might start going down a bit, we're going to see our PIs and our long-term NPV increase as we start to realize the increased EURs per well due to waterflood improvement and redevelopment. And as well we do see in Southwest Sask, we continually make improvements. Through our technical analysis and that, we're able to high-grade more and more locations not only from geographical position but as well as a vertical and a formation position. So as we see our technical knowledge increase, we're also starting to see our well results increase with that. So we would anticipate that we would start to see some increases in our type curve performance in those areas.

[Jeremy McCrea, Energy Analyst]

Okay. And then just on your Wapiti Cardium and the Dunvegan up there, is takeaway an issue? Or do you see a good couple years here of growth still in front of you here before you may run into those kind of challenges?

[Grant Bradley Fagerheim, President, CEO & Director]

At this particular time, we do not have takeaway issues. And we continue to always get our marketing efforts out in front of, so we don't have restricted, in essence what we'll call frozen capital. We're a kind of drill-to-fill company on a go-forward basis. So what we're looking at into the future out there is, we have taken capacity on some of the facilities that are being built into the future out there. And again, we don't need it for the oil capacity, but we do need it for the associated natural gas. So at this particular time, we're in good position to continue to grow. And as the new facilities come on in 2019 and 2020, we've taken capacity, incremental capacity in those facilities as well.

[Operator]

Your next question is from Thomas Matthews from AltaCorp Capital.

[Thomas Matthews]

Just a couple of CapEx questions. I'm just looking at the remaining budget for this year. Is it fair to assume that production will remain relatively flat for the balance of the year and just the free cash flow will be used to pay down debt? I guess I didn't, in your three points there of what to use the free funds flow, I didn't hear anything on capital increases. So just curious on that. And then I have a follow-up after that.

[Thanh C. Kang, Chief Financial Officer]

Sure. It's Thanh here. So on the production side of things, we'd expect it to be relatively flat in the back half of the year between 74,000 to 75,000 BOEs per day. Capital spending pretty similar profile to what we had in the previous years, where we'd expect to have higher levels of spending in the third quarter versus the fourth quarter there. In terms of free cash flow allocation, that's correct, our capital plans is at the CAD 450 million. Don't expect that to change. We're already growing by 14% per share this year. So our focus really will be on enhancing our 2019 production numbers.

[Thomas Matthews]

Right. And then I guess just a follow-up. Looking into 2019 and beyond, we've seen other producers trying to flatten that spending profile quarter-over-quarter. Is that something you would consider? Or is there still going to be a big spend in Q1 and then a bigger spending in Q3 relative to Q2 and Q4?

[Thanh C. Kang, Chief Financial Officer]

Yes. But something that we would look at as part of our '19 budgeting process. But it'll be at the rim, very insignificant if there's anything associated with that. Very comfortable that the CAD 450 million is what we're looking at, at this time.

[Thomas Matthews]

Right. Yes. I was talking more 2019.

[Grant Bradley Fagerheim, President, CEO & Director]

Yes. Going forward, so we try and blend down -- you're always going to have -- we always think that we're going to have a higher component in the first quarter that ultimately sets you up for the full calendar year from a production standpoint. But we are trying to re-weight. And we have the opportunity to do that, re-weight a little bit to balance it out because of the waterflood projects and the EOR projects that we have as well. So I think from an operational intensity perspective, we have Joel Armstrong here, he would love to see us flatten it out more, but we are going to have always a larger component in the first quarter. Maybe not 50% of our capital program, but maybe somewhere between 30%, 30% to 40% -- well, it's 35% to 40% will always be the percentage of capital spent in the first quarter, I would expect.

[Operator]

Your next question is from Travis Wood from National Bank.

[Travis Wood, Analyst]

Just wanted to continue on the conversation largely around the Dunvegan. Is there opportunity there? If not this year, I know you're in the process of drilling the pad -- can you first kind of give us a timeline around when we could expect some results from the Dunvegan pad? And then, is there the opportunity to evolve the drilling and completions into ERHs there? And then, in the context of EOR opportunities, how does the Dunvegan fit into that conversation?

[Grant Bradley Fagerheim, President, CEO & Director]

Darin, do you want to go ahead and just talk to this?

[Darin Roy Dunlop, Vice President of Engineering]

Yes, for sure. I missed that last bit there, Travis. Can you go through that again?

[Travis Wood, Analyst]

Yes. The last part was just trying to understand more -- this is probably more a longer-term conversation. But how could the Dunvegan fit into EOR opportunities as the primary drilling starts to get chewed through?

[Darin Roy Dunlop, Vice President of Engineering]

Right now, our bigger focus on evaluating EOR is, as you're aware, is in the Cardium and in Wapiti. And that's primarily maybe not from a reservoir quality basis, but more from a contiguous land basis. So one of the things that inhibits us at this point in time from looking at EORs in the Dunvegan is that you don't have large land blocks of contiguous working interest. It's a bit scattered. We have significant landholdings, but they're different working interests and spread. So that sort of inhibits us from putting a formalized plan for waterflood in the Dunvegan forward. But that being said, the reservoir quality in areas of the Dunvegan certainly would be conducive to flooding if we could put together a more contiguous land block.

[Travis Wood, Analyst]

Okay. And then the other questions were geared towards potentially moving the Dunvegan into an ERH program that ties into the pad development. Is there opportunity to replicate what you're doing in the Cardium and into the Dunvegan from that perspective?

[Darin Roy Dunlop, Vice President of Engineering]

For sure. And in our Dunvegan, we have several ERH. We have drilled some 2-mile wells in the Dunvegan in the Carr area. Realistically, the way we approach using ERHs is we evaluate. It depends on depth. Obviously, the deeper you are true vertical depth, the farther you can go out effectively on a lateral length. So we look at it individually from opportunity to opportunity to optimize our economics. So it's not an ERH strategy; it's a continual strategy on optimizing our economics. So where our land block and the depth of the reservoir allows it, we will drill as many ERH or the most economic wells, which in a lot of case is ERHs, as possible.

[Operator]

Your next question is from Adam Gill from Eight Capital.

[Adam Gill, Research Analyst]

Quick question for me. Just wondering, given the strong outperformance on production for Q2, why not be a little more aggressive with the guidance increase? And I'm just wondering if you can give us any color where current volumes are standing?

[Grant Bradley Fagerheim, President, CEO & Director]

Sure. As far as there are turnarounds -- what we're always trying to put up there, obviously, is achievable numbers. There's no sense getting in front of the market and try and set numbers that aren't able to be achieved. In the third quarter, we do have third-party plant turnarounds as well that are factored in. Our current volumes are just shy of between around 75,500 barrels a day at this particular time right now, as we speak. So and we'll continue to focus on having those production volumes as it moves through. July was a good month for us; it was a strong month. And obviously, starting on the first day of August, we've got strong production profile. But we definitely want to make sure that we're achievable and don't disappoint the shareholders on a go-forward basis.

[Operator]

Your next question is from Juan Jarrah from TD.

[Juan Jarrah, Research Analyst]

One of the questions I had was, so you mentioned in the Viking you're seeing 5% to 10% cost improvements, obviously, better-than-expected productivity as well. Couple questions there. How sustainable is this? And two, are you seeing anything similar in your other areas?

[Grant Bradley Fagerheim, President, CEO & Director]

I'm going to let Joel Armstrong turn his mic on here. Joel, go ahead.

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

Ever since we purchased the Viking asset from Compass back in '14, I believe, it's been a quest of forever improving the efficiencies. We're getting to the point where we're likely not going to realize big step changes going forward. These wells are being drilled extremely fast. Making sure that we can stay in the zone and keep [indiscernible] is an important part of the process. But we're getting to a point where we probably won't see too much more. Having said that, throughout our other areas that aren't as mature in terms of development, for sure, we're seeing better drilling performance, utilizing ERH 1.5s or 2.0s as Darin mentioned, to improve our overall economics. So there's always lots of room. We never throw our hands in the air and quit trying to improve on the economics. But realistically, those mature areas like the Viking won't see a whole bunch more improvement.

[Juan Jarrah, Research Analyst]

And I guess as a follow-on, does that set you up for potentially lower CapEx for the year and the same production? Or maybe better production, same CapEx-type thing? I mean, the reason I ask that is because your Viking is 30% of your budget. And if you're seeing similar improvements across your asset base, potentially I'm just trying to think how to think about that.

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

Yes. I think you're currently in an environment where commodities have shown improvement, especially on the WTI side. So along with that comes some price escalations that we're competing against. So overall, we think we can hold our cost structure very similar to where we're at today, while mitigating some of the escalation that we're dealing with.

[Juan Jarrah, Research Analyst]

Great. Last question for me is on Weyburn. You've kept production flat. You've only spent 1/4 of your CAD 60 million budget. I'm trying to get a sense of where you think that production could go by year-end.

[Thanh C. Kang, Chief Financial Officer]

We are forecasting, we had forecast to keep it flat. We had originally forecasted to see a slight decline obviously with no capital development and just maintenance capital being spent. We had expected to see a slight decline in the first half. Due to some efficiencies realized in keeping our stuff running and reducing our downtime, we have actually managed to keep it flat in the first half. But that being said, the development, which includes 6 drill-outs, 12 in-fills and 4 EOR rollouts, one of the things to remember is, I think it's actually 5 of those wells we're drilling are going to be injectors. And also the initial rate profile on these Weyburn wells are not like a Viking or conventional. They do come on at fairly 50 barrels a day [ type ] initial rates. But we do expect to see CO2 and waterflood influences over the next 1 to 3 years. So that being said, we're not going to be expecting to be much above a 15,000 barrel a day exit in Weyburn.

[Operator]

Your next question is from David Popowich from CIBC.

[David Popowich, Director of Institutional Equity Research]

Good quarter today. I don't to belabor the CapEx questions too much. But I guess I'm just kind of wondering at the rate of spending that you guys are currently going, at what point do you guys see yourselves exhausting the CAD 450 million budget this year? And then just kind of on a related note. Can you see any circumstances under which you might bump some 2019 spending into Q4 2018, as you guys did last year?

[Grant Bradley Fagerheim, President, CEO & Director]

Yes. Go ahead, Thanh.

[Thanh C. Kang, Chief Financial Officer]

Yes. In terms of spending for the full year there for the balance of the capital, expect to see in the third quarter, Dave, somewhere between CAD 130 million to CAD 150 million of capital. And then Q4 will be very similar to what we were spending in Q2, in the neighborhood of CAD 40 million to CAD 60 million. So we'll spend that throughout the year here to get to the CAD 450 million. As I previously mentioned, we're comfortable with our growth rate at this time. So the capital plans for this year will be the CAD 450 million.

[Operator]

At this time there are no further questions. You may proceed.

[Grant Bradley Fagerheim, President, CEO & Director]

So with that, I guess that concludes our call for today. I appreciate everyone calling in. And for those of you that are shareholders, thanks very much for your support, and look forward to continuing to come back to you with announcing our numbers as we go forward. So thanks very much. Appreciate it. And happy August. Bye for now.

[Operator]

Ladies and gentlemen, this concludes today's conference call. We thank you for participating, and we ask that you please disconnect your lines.