Whitecap Resources Inc

TSX:WCP

Earnings Call Transcript 2021-Q2

[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 Second Quarter 2021 Results Conference Call. [Operator Instructions] And I would like to turn it over to Whitecap's President and CEO, Mr. Grant Fagerheim. You may begin, sir.

[Grant Bradley Fagerheim, President, CEO & Director]

Well, thanks very much, Sylvie. Good morning, everyone, and thank you for joining us here this morning. Here with me, we have 3 members of our senior management team: our Senior Vice President and CFO, Thanh Kang; as well as Darin Dunlop, Senior Vice President of Engineering; and Dave Mombourquette, Senior Vice President of Business Development. 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 we set forth in our news release that was issued earlier this morning. Our second quarter results continued the strong momentum from our first quarter drilling program, achieving record production of just under 117,000 BOE per day on capital investments of only $39 million. The NAL and Kicking Horse transaction has more than doubled our natural gas production to 153 million cubic feet a day within the second quarter, allowing us to capture currently strong natural gas pricing. Our second quarter funds flow was $267 million, resulting in fleet funds flow of $227 million. In the first half of 2021, we have generated $243 million of discretionary funds flow after $53 million of dividend payments, a significant accomplishment for our company and a testament to the profitability of our asset base. We also released our 2021 ESG report this morning, highlighted by increased emission intensity reduction targets after incorporating our recent acquisitions, further scope 1 and scope 2 emission reductions driving our net greenhouse gas emission balance further negative and the addition of a climate-related performance criteria to our short-term incentive pay program. New to the report is a third-party limited assurance of select emission metrics that will provide our stakeholders with increased confidence in our reported data. Whitecap is proud of the -- our team's environmental, social and governance accomplishments in 2020, and we look forward to further progression through 2021 and into the future. While our new energy team is making good progress towards revenue-generating opportunities across the energy transition spectrum, our operating teams are finding ways to reduce the environmental footprint of our current asset base on an ongoing basis, and I commend them for their efforts in this regard. I would now like to pass on to Darin to comment on some of our recent operational highlights and provide an update on our second half capital program. Darin?

[Darin Roy Dunlop, Senior Vice President of Engineering]

Thanks, Grant. From a production standpoint, our second quarter results outperformed expectations. This was mainly a result of higher initial production rates from our first quarter programs, accelerated timing of bringing these volumes online and lower declines from some of our waterflood assets. Some specific highlights from the first half include: over the first 120 days on production, our conventional multi-leg Frobisher horizontal program in Southeast Saskatchewan achieved initial rates that were on average 55% better than our type curve expectations for the area. Many of these wells have paid out in less than 3 months. This performance is one of the reasons why we executed on the private company acquisition that closed after the second quarter. This acquisition adds 87, 85.9 net, locations, many of which are analogous to the drills in our outstanding Q1 drilling program. Our Q1 drilling program also outperformed type curve expectations in our Viking, Lower Shaunavon and Charlie Lake programs. As well, we realized production increases as a result of the optimization of our acquired assets, primarily in the Southwest Alberta and Sturgeon Lake area. We have a robust second half capital program where we anticipate spending approximately $207 million, drilling 57, 42.2 net, wells, including 7 wells in Central Alberta, 26 wells in Western Saskatchewan, 17 in Eastern Saskatchewan and 7 wells in Northern Alberta, B.C. Of note, our second half program includes the fracture stimulation of a 4-well Montney pad in Kakwa that was drilled by the prior operator. Execution on this operation was exceptional, and we expect to realize completion cost savings that could result in a 10% reduction to our current type curve estimates of $11 million per well. We are now in the process of tying in these wells and expect them to be on production early in the fourth quarter. We have also commenced drilling on the first of our 2 3-well Kakwa Montney pads. We expect that all 6, 4.4 net, wells will be completed and on production by the first quarter of 2022. We have increased our 2021 production guidance by approximately 3% to 110,000 to 111,000 BOE per day with no changes to our capital spending guidance. The recent private company acquisition is expected to contribute 1/3 of this increase while the remaining 2/3 is a result of continued asset outperformance. Partially offsetting the increase is an unplanned downtime event at Weyburn during the third quarter, which will reduce our third quarter production by approximately 1,600 BOE per day down to 114,000 BOE per day. I will now pass it on to Thanh to comment on our financial results.

[Thanh C. Kang, Senior VP & CFO]

Thanks, Darin. Crude oil prices once again improved through the quarter with WTI ending the quarter around $73, with the average for second quarter at USD 66 per barrel. The Canadian light oil differential also improved through the quarter to average USD 3.31 per barrel discount to WTI while the Canadian heavy oil differential widened throughout the quarter but was $1 tighter than the first quarter at approximately USD 11.50 per barrel on average for the quarter. For natural gas, AECO averaged just over CAD 3 per GJ in the quarter, with price strength continuing into the third quarter and through the winter on the forward curve. Our average realized crude oil price, this will be prior to the impact of hedges and tariffs, was $73.50 per barrel in the second quarter compared to $26.55 in the Q2 of 2020 and $65.11 per barrel in Q1 2021. Our second quarter oil realizations compared to Canadian dollar WTI was relatively consistent with the first quarter at between 89% to 91%. Our average realized natural gas price prior to the impact of hedges and tariffs was $3.26 per Mcf in the second quarter compared to $2.14 per Mcf in Q2 of 2020 and $3.34 per Mcf in Q1 of 2021. Our royalty rate of 15.8% was higher than the first quarter primarily as a result of higher pricing. Operating and transportation expenses were $13.73 per BOE and $2.32 per BOE in the second quarter, up from $13.36 and $2.05 in Q1 of 2021 due to a full quarter of production from acquired assets. We anticipate higher operating cost per BOE in the third quarter due to the downtime at Weyburn that Darin had mentioned and then normalizing in the fourth quarter. G&A expenses came in as expected at $1 in the second quarter, and we expect it to remain consistent for the remainder of the year. Onetime transaction costs relating to the acquisition that closed in the quarter were $1.5 million. Fund flow for the second quarter of $267 million equates to $0.43 per share, which generated a total payout ratio of only 26% after capital invested and dividends paid to our shareholders. Whitecap's net debt at June 30 was $1.4 billion on total capacity of $2 billion. Our debt-to-EBITDA ratio is 1.4x and EBITDA-to-interest ratio was 20.6x, both well within our debt covenants. Subsequent to the quarter end, we closed the acquisition of a private company with operations primarily in the [ Weir Hill ] area of Southeast Saskatchewan for $67 million, which was comprised of 3.6 million Whitecap shares and $44.4 million in cash. We have subsequently repurchased the entire amount of the shares issued for the transaction to make it an all-cash deal. And I expect that by the end of the year here, our debt is going to be $1.2 billion. As a result of the acquisition, we've increased our preliminary 2022 production outlook to 122,000 BOEs per day, but our preliminary capital spending outlook remains at the $560 million to $580 million. At WTI prices in the $55 to $65 range, we would generate $400 million to $650 million of free funds flow before our annual dividends of $123 million. This shows how robust our profitability is today even at prices below current strip. At these levels, we would still be able to reduce our net debt to 0 in 3 years. From a breakeven standpoint, WTI prices have to average less than $44 per barrel on an annual basis for us not to be able to cover our sustaining CapEx of around $500 million and the dividend with our funds flow. With our hedges in place for 2022, this breakeven price drops to $42.50, which is 35% lower than current strip prices. So even at these depressed prices, our debt-to-EBITDA ratio would remain at only 1.8x, well below our covenant of 4x, further highlighting the sustainability of our business model. I'll now pass it on to Grant for his closing remarks.

[Grant Bradley Fagerheim, President, CEO & Director]

Thanks, Thanh. It is truly remarkable how far we've come over the past year. While sometimes it feels like forever ago, we are reminded that only a year ago, we were doing everything to maintain the optionality and flexibility for better days that we believe were ahead of us. We were able to maneuver through 2020 oil price collapse by having an already strong balance sheet, a low decline rate asset base and the flexibility to make the tough and right capital allocation decisions. A year later, we have shown that we were able to take advantage of the low price environment to strengthen our asset base and sustainability. Our second quarter results have provided further evidence that we are now a more profitable and sustainable company than ever before. We will continue to seek out ways to further improve the profitability of our business while maintaining our focus on strong balance sheet and financial flexibility for increased returns to our shareholders into the future. On behalf of our management team and our entire Board of Directors, we would like to thank our shareholders for your support and the support of Whitecap. And with that, I will turn the call back over to Sylvie for any questions you may have.

[Operator]

[Operator Instructions] And your first question will be from Travis Wood with National Bank.

[Travis Wood, Analyst]

Question is related to sustainability. Obviously, you've increased guidance this year around the acquisition but also some decline mitigation. Could you remind us where that decline sits today, kind of how you see that trending into 2022, what you're using for 2022 in the updated preliminary number? And then as well, the last part of that question is what was the unplanned downtime at Weyburn?

[Darin Roy Dunlop, Senior Vice President of Engineering]

Yes. Travis, Darin here. Yes, our base decline -- I'm hopefully going to get all your questions answered, but remind me if I miss one. Our base decline is anticipated to be 20%, in that ballpark. As for 2022 and beyond, that's going to depend on what allocation we put into our capital program, but I can't see it being much different than the 20% we've been seeing as of now. And in Weyburn, what that was, we had a failure on one of our CO2 recycle compression -- compressors. And as a result, we had to shut in some production to conserve our CO2 injection, and we expect that compressor to be repaired and back online in mid-September.

[Travis Wood, Analyst]

Okay. That's perfect. So 20% kind of just flat line into the end of this year and potentially some upside to that percentage as Weyburn comes back on at the -- or fully operational from CO2 side through the end of the year?

[Darin Roy Dunlop, Senior Vice President of Engineering]

Yes. I'd say -- the volumes at Weyburn are so small that it's not going to really impact our base decline. They're changing 1,600 barrels a day the figure that way so...

[Operator]

Next question will be from Christopher Jones at Haywood Securities.

[Christopher Jones, Associate Analyst of Energy Research]

Congrats on what appears to be another solid quarter. My question is on uses of free cash flow. Previously, you guys laid out pretty good detail around how you wanted to allocate free cash flow. So with that, just curious if you could provide that same level of detail, particularly in light of rising commodity prices, which has helped accelerate free cash flow and sort of sped up debt repayment. May we see larger allocations to returning capital to shareholders? Or sort of how do you see that breakdown between debt reduction and returning capital going forward?

[Grant Bradley Fagerheim, President, CEO & Director]

So -- yes. Thanks, Christopher. Just on that, our first priority will continue to be balance sheet management. And our objective here, as we had talked about, was taking our debt to $1.2 billion or under this year. So once we get to that particular level -- and that could happen as early as late September, early October in this current commodity price environment. But the funds above that, then we'd be looking for the potential of a return of capital back to shareholders rather than a return on capital. We won't be -- we're not expecting to be increasing our capital development -- our development program for the remainder of this year. But the optionality does exist for whether it's future acquisitions or increased dividend payments or the potential for increasing our capital program going into 2022 to set that up. So priorities: number one, balance sheet; number two, return of capital to our shareholders; and then the optionality on acquisitions or increasing our capital going into the 2022 year.

[Operator]

[Operator Instructions] And your next question will be from [ Joel Copel ], investor.

[Unknown Attendee]

Great job again. You guys are superlative and you lead the industry. Warren Pies, former energy strategist at Ned Davis Research; and Michael Kao, former Goldman Sachs commodity trader, both agreed that in backwardation, you're looking at increasing oil prices. So why are you hedging into steeply backwardated oil markets? You're giving up so much of the upside.

[Thanh C. Kang, Senior VP & CFO]

Yes. It's Thanh here, Joel. I think the way that we think about it from a hedging perspective is looking at making sure that we're fully funding not only our capital program but our dividends to a low commodity price environment. With the objective that -- our view too, as is yours, is that crude oil prices will continue to improve as we move through time here, so leaving as much upside as we can but also protecting the downside. So when you look at our hedge book today, we're about 18% hedged for 2022. But what that allows us to do is really lower that breakeven price. So what I mean by that is even WTI down to $44, it allows us to cover our capital program as well as our dividend. So it gives that base level that we're comfortable with in terms of the growth profile as well as the dividend but exposing our shareholders significantly to the upside there. So we're comfortable with the book that we have right now from a hedging perspective, and it's really thinking further down the road and how we can improve our sustainability in 2023 and beyond.

[Unknown Attendee]

One follow-up question, please. Hess was buying puts and leaving the upside completely open. Is that not a possibility for Whitecap too?

[Thanh C. Kang, Senior VP & CFO]

Yes, for sure, it is. We run a fully funded model. Cash flow is critically important to us. Our preference is to use simple vanilla structures like costless collars as well as swaps. So we'll use a combination of those. Puts, depending on the price level that you're trying to protect, can be quite expensive. And if we're trying to lower our breakeven down to $44 -- $45 WTI, those could be pretty expensive puts that we're putting in place here. We can increase that WTI price, but I think that lowers the protection that we have for our shareholders relative to the dividend protection.

[Operator]

[Operator Instructions] And at this time, gentlemen, it appears that we have no other questions. Please proceed.

[Grant Bradley Fagerheim, President, CEO & Director]

Thank you, Sylvie. As we conclude this quarterly earnings call, I would like to thank each of you for your continued interest in Whitecap; and to our full staff here, both in the office and in the field, at Whitecap, for your diligence, continued energies and direction on making the company the best that we possibly can. To all of our shareholders and your families, wish you all the best through the remainder of the summer holidays. Thank you.

[Operator]

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.