Whitecap Resources Inc

TSX:WCP

Earnings Call Transcript 2023-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, Q2 2023 Results Conference Call. [Operator Instructions] And I would like to turn the conference over to Whitecap's President and CEO, Mr. Grant Fagerheim. Please go ahead, sir.

[Grant Fagerheim, President & Chief Executive Officer]

Thank you, Sylvie. Good morning, everyone, and thank you for joining us here today. Here with me are three members of our senior management team, our Senior Vice President and CFO, Thanh Kang and our Senior Vice President, Business Development and Information Technology, Dave Mombourquette.

Before we get started today, I would like to remind everybody that all the statements made by the Company during this call are subject to the same forward-looking disclaimer and advisory that we set forth in our news release that was issued yesterday afternoon. Our second quarter results emphasize the advantage that we have with our diversified asset base as we were able to partially mitigate the impact of the wildfires in North Central Alberta through outperformance of our lateral weighted Saskatchewan and Central Alberta block development programs.

In the second quarter, we generated $197 million of free funds, bringing our total free funds flow to $392 million in the first half of the year, of which 53% or $208 million as we will return to shareholders through our base dividend and share repurchases.

During the second quarter, we spent $218 million, including $177 million of drilling and completion capital and $37 million of facility expenditures. We spud 43 gross, 41.6 net wells during the quarter, 34, 32.6 net of which were in our East Division, where breakup conditions subsided earlier than anticipated and our teams were able to get back in the field in June.

Strong results across our East Division have continued, and the team has done a tremendous job on both of our legacy assets as well as those acquired over the past two-year period of time. In our West Division, we commenced drilling nine wells a three-well Montney pad at Kakwa and 6-wells on our 7-well Duvernay program at Kaybob spud in the second quarter.

Since acquiring the XTO assets 10 months ago, we've been able to reduce net debt by $800 million from $2.2 billion at the end of the third quarter of 2022 to now $1.36 billion currently. The balance sheet is in pristine shape with debt-to-EBITDA at 0.6 times and $1.7 billion of unused debt capacity.

The balance sheet has always been a priority for us and has allowed us to not only effectively manage through the commodity price cycles but to also capture value-enhancing opportunities on behalf of our shareholders. We are close to reaching our $1.3 billion debt milestone, which due to the wildfires has deferred this to the second half of the year. This is an important milestone for us as it represents debt-to-EBITDA ratio of less than one times using $50 WTI and a $3 per GJ AECO price assumption, which will then allow us to return 75% of our free funds flow back to shareholders, inclusive of the targeted $73 per share, $0.73 per share annual dividend.

Given the significant growth we have undertaken over the last couple of years, we have realigned our business units into two divisions, East and West, to better streamline reporting, processes and to drive operational excellence. The East Division consists primarily of conventional assets, which have lower decline rates, annual production growth rates of 1% to 2% and generally outsized free funds flow of the capital expenditures.

Our West Division is primarily our unconventional resource plays, which include the Montney and the Duvernay, and we'll have a higher annual growth rate of 10% to 15% given the depth and quality of inventory in this division. Our extensive portfolio of 6,584 gross, 5,675 net drilling locations allows us to continue to generate significant free funds flow, while growing the 3% to 8% production per share to organic billing towards 200,000 BOE per day over the next 5-year period of time.

As reported yesterday, results in our Montney and Kakwa continued to be strong with 82% of our wells drilled to date, achieving payout in less than one year or one year or less, some even paying out in less than five months. The free funds flow full potential and results to date from this asset that validates our initial technical evaluation of the XTO assets. Furthermore, our teams continue to make significant strides in further enhancing their understanding of the Montney assets, and we believe the continued refinement of our development plans specific to individual areas and pad selections, such as targeted intervals within the Montney benches, well spacing, completion design, production and operational efficiency will further increase the return characteristics and profitability of this expansive set of assets moving forward. In our West division, we have now drilled and completed our first 3-well pad and have commence drilling our second pad, a 4-well pad in the Duvernay.

We look forward to having the first three wells tied into permanent facilities nonproduction in late August, while the 4-well path is expected to be on production in the fourth quarter. We are very encouraged by the execution of our drilling and completion operations to date as well as our initial production test rates. Second quarter facilities capital included $15 million towards the expansion of our 3027 facility in the Valhalla region as well as initial capital for Missouri lake battery. This battery is expected to be completed in the second quarter of 2024, allowing us to efficiently develop one of the most attractive areas in the Montney that was acquired as part of the external transaction last year.

Drilling operations at Missouri Lake are expected to begin later this year, with production adds coinciding with the completion of the battery. Our longer-term development plan for the larger undeveloped Montney acreage includes the expansion and increased utilization of current infrastructure as well as new infrastructure to support and maintain control of our unconventional growth plans. I will now pass the mic over to Thanh to discuss our financial results.

[Thanh Kang, Senior Vice President & Chief Financial Officer]

Thanks, Grant. Second quarter funds flow of $415 million or $0.68 per diluted share equates to a funds flow netback of approximately $31 per BOE. Strong liquids production, improved differentials on our sour and medium crudes sold the Saskatchewan and onetime GCA adjustments all contributed positively to our netback in the quarter. Production shut-ins due to the Alberta wildfires resulted in increased per unit operating cost to over $15 per BOE in the second quarter. Going forward, we forecast operating costs will decrease to approximately $13 per BOE as we increased production in the back half of the year.

As Grant mentioned, the balance sheet is in excellent shape with a debt-to-EBITDA ratio of only 0.6 times and $1.7 billion of unutilized capacity. Our balance sheet will continue to strengthen as we forecast net debt passing the $1.3 billion target and reaching approximately $1.2 billion by year-end based on current strip prices. At this point, we will have decreased net debt by $1 billion since the closing of the XTO transaction and returned over $500 million to shareholders through base dividends plus share repurchases. Our 2023 capital spending guidance remains unchanged at $900 million to $950 million, and we've adjusted our annual production guidance to 157,000 to 159,000 BOEs to reflect the impact of the Alberta wildfires.

Oil and liquids production has been stronger than forecasted through the first six months of the year and in combination with some of the program changes we've made earlier this year; we're now expecting our annual liquids weighting to increase to 65% from 64% previously. I will now pass it back to Grant for his closing remarks.

[Operator]

Mr. Fagerheim, we cannot hear you.

[Grant Fagerheim, President & Chief Executive Officer]

Thanks, Thanh. We are excited for the opportunity set that is ahead of us and look forward to capitalizing these assets to extract as much value from the assets as we can. Our teams continue to refine their understanding of each play that we are in, and we have an expansive inventory depth that we can efficiently develop and hit our growth targets, while continually improving profitability and returns to shareholders.

With our healthy inventory depth, strong balance sheet, low decline, high netback asset base, Whitecap is in a position of strength and as we advance our business through the remainder of 2023 into 2024 and beyond Canadian oil and gas deposits as long weighted export projects begin to come online and high-quality responsibly produced Canadian energy can be utilized in markets around the world. Whitecap has and will continue to be significant supply source of conventional oil and as of recently, a larger supplier of natural gas to end users across North America. We are also advancing our carbon capture utilization in storage hubs across Alberta and Saskatchewan and as our subservice expertise and experience with carbon sequestration is highly sought after to assist these large [indiscernible] in their decarbonization efforts. We have multiple projects that are scheduled to begin sequestration in late 2024, and while there is still a significant amount of work to be done with all the stakeholders involved, we are confident that the solutions will be found to making significant advancements on moving Canadian energy into a lower carbon economy. With that, I will now turn the call over to the operator, Silvie, for any questions. Thank you.

[Operator]

[Operator Instructions] And the first question will be from Jeremy McCrea at Raymond James. Please go ahead.

[Jeremy McCrea, Raymond James]

I want to talk about some of your operations. Just based on some of the test results that you've been getting in the Montney some of the early looks at the Duvernay, are you guys looking at shifting any of your capex within your budget here maybe later this year or what you're kind of somewhat picking here in 2024? And just is there any new technology that you're seeing from any maybe even some of your peers that can improve any of these plays here?

[Darin Dunlop]

Hi Jeremy, it's Darin here. The results we're seeing are within our expectations of what we thought are our budget allocation, capital allocation is going to remain pretty similar. And as for groundbreaking technology changes, not really the Montney and Duvernay for that matter are both fairly well up the learning curve. So, there is the only modifications and optimizations being made are very specific on a pad-by-pad, well-by-well, reservoir-by-reservoir basis. So, nothing earth shattering from that perspective.

[Grant Fagerheim, President & Chief Executive Officer]

And just to follow on to that, Jeremy, I think that's in Montney, I mean as Darin referenced, quite far up the learning curve, we've drove total of 30 Montney wells to date, including our Karr and Kakwa areas for our acquisitions, our joint venture with Hammerhead and our acquisition of TimberRock as well as the XTO transaction. So, we're quite far up on learning curve as far as new using the newest technologies that are available to us. And as Darin said, that getting the results that we're having are as expected and maybe a little bit better than expected. What was new to us? I think is a Duvernay and we're seeing some very good test results at this particular time and look forward to advancing those projects and bringing those on stream for a full-time and be able to talk to it perhaps at the end of the third quarter.

[Jeremy McCrea, Raymond James]

Okay. Maybe kind of just shifting gears here a bit. Now that you're kind of close to your targeted debt levels. Any more thoughts on the A&D market, what it's looking like if you're looking to potentially sell some additional noncore assets? Or is there anything that you want to maybe add to the portfolio now that your balance sheet is in a much stronger shape to do a cash acquisition?

[Grant Fagerheim, President & Chief Executive Officer]

Yes. Just on the M&A market, and I've got Dave Mombourquette sitting here, he's anxious to get going again for sure with his team. But no, what we're looking at is we think that as I had referenced earlier, I think in the last call that when we did the cleansing of the assets that we weren't going to capitalize that we did in the first quarter of the year, bringing in $400 million of cash to our balance sheet that was helpful to us. And I think we are very comfortable with the asset suite that we have now. One of the areas we may bring on assets that that we're not looking to drill over the next 7- to 10-year period of time, we may look to bring in third-party capital into some of the areas because we have such an expansive opportunity set in front of us. So that's an area that we'll look at. But we have to be cautious to ensure that if we're truly not going to capitalize them, that they don't get others to that will be something we'll look at as we move into the balance of this year and into '24. As far as specific acquisitions, we said that this is a year, we're going to be focused on operations and we're committed to that.

[Jeremy McCrea, Raymond James]

Okay, thank you very much.

[Grant Fagerheim, President & Chief Executive Officer]

Thanks, Jeremy.

[Operator]

Next question will be from Josh Turanich at Haywood Securities. Please go ahead.

[Joshua Turanich]

Hey, guys, strong quarter and thanks for taking my questions. My first question is on the Montney and Kakwa. I was hoping if you could add some color on what specific opportunities you're seeing to enhance capital efficiencies in the region?

[Darin Dunlop]

Yes. Darin here. Can you repeat that? I missed the middle part.

[Joshua Turanich]

Yes, I was wondering if you could add some color on what specific opportunities you're seeing to enhance capital efficiencies in the region?

[Darin Dunlop]

Yes. It's primarily just continue to exceed what our expectations are with regards to proper placement fit-for-purpose frac designs depending on what the reservoir characterization is, flowing through controlled facilities to optimize our cash flow in the short term, like nothing -- like I said in the last question, nothing groundbreaking, just continual improvement piece by piece.

[Joshua Turanich]

Okay. My second question is on Duvernay. How do you think about optimizing the asset going forward either on the drilling or completion side, now that you've taken over the asset? And what would you -- or what would increase the confidence to accelerate the development of the play in 2024?

[Grant Fagerheim, President & Chief Executive Officer]

Yes. First of all, just -- we've walked into this cautiously the Duvernay play just when we acquired it. We had not been drilling up in this place. We wanted to do more geoscience and engineering work on it before we went in. And we're very pleased with what we've seen on our first 3-well pad, not just from the drilling, but from the completion and test results that we're having at this particular time.

And that allowed us to shift our capital around and drill the 4-well pad that we're on right now. We're on the third well in the three -- 4-well pad, drilling that out that we talk about and are earlier, but bringing on by the end of the year, the second pad. So we're tiptoeing into the play. I would expect that this year we'll have grow seven wells. But moving forward with set our budget up, depending on results as to what we get here

Darin and the engineering team together with our geoscientists and operations guys will put together our budget for '24 and '25 that will include probably advancing these projects a little bit more. We're not capacity -- facility capacity constrained there. We own the 1507 plants, and it is only utilized to the [indiscernible] of about 65% today. So we have capacity to move our products through that.

[Joshua Turanich]

Okay. Thanks, that’s all for me.

[Grant Fagerheim, President & Chief Executive Officer]

Okay. Thank you.

[Operator]

Thank you. A reminder to please press star 1 if you do have any question. Next will be Travis Wood at National Bank. Please go ahead.

[Travis Wood, National Bank]

Yeah, thanks. [indiscernible] in terms of the facility that came with XTO. So it's about 65% full room to that to help on the cost side, I expect. But maybe on caps with caps up and running, are you guys seen any wiggle room to improve costs, both on transport on the liquid side now, or and on the processing side with some incremental space like that 1507?

[Grant Fagerheim, President & Chief Executive Officer]

Yes. Just -- and I think your 2-part question is, first of all, the 1507 facility. Obviously, we'll continue with more throughput will drive down cost on a per unit basis. So that will be an area that we'll good to advance. And as far as the gas pipeline and getting tied into that, that will take place in the first quarter as well. So first quarter leading into the second quarter. So which we do have capacity. We have capacity on that -- on the CAC system. So I think we're in a very good shape here. Increasing production, driving down costs. I think it's -- in these bigger [indiscernible] unconventional resource plays, both in the Duvernay and Montney.

[Travis Wood, National Bank]

Okay. That's perfect. So kind of leveraging off the pipeline in Q1 of next year?

[Grant Fagerheim, President & Chief Executive Officer]

That's correct. Yeah, that’s right, Travis.

[Travis Wood, National Bank]

Okay. Okay, thanks Grant.

[Grant Fagerheim, President & Chief Executive Officer]

Okay.

[Operator]

Thank you. And at this time, Mr. Fagerheim, it appears that we have no other questions. Sir, please proceed.

[Grant Fagerheim, President & Chief Executive Officer]

Well, that was quick. We keep going here for quite a while. Anyway, thanks, Silvie. And once again, I want to thank each of you for taking the time and interest and listening to our call today. We are excited to announce our company for with strong full returns to shareholders, and we look forward to updating you on the progress from an operational perspective over the next several months. All the best. Have a good day, enjoy [indiscernible] to your summer.

[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.