Whitecap Resources Inc

TSX:WCP

Earnings Call Analysis

Whitecap Resources Reports Strong Q2 and Positive Outlook

Whitecap Resources had a successful Q2 2024, with production averaging over 177,000 BOE/day, compared to the forecast of 170,500 BOE/day. This resulted in $426 million of funds flow and $223 million of free funds flow. The company attributes these results to the exceptional performance of its technical teams and strong asset development, particularly in the Montney and Duvernay formations. Whitecap expects to close the year at the high end of its production guidance of 167,000 to 172,000 BOE/day and plans to use $200 million for share repurchases in the second half of the year, maintaining a low net debt position below $1 billion.

A Strong Second Quarter Performance

Whitecap Resources delivered an impressive second quarter, achieving record production levels of 177,000 BOE per day, surpassing the forecast of 170,500 BOE per day. This performance was primarily fueled by strong operational execution across their key areas, including Southeast Saskatchewan, Central Alberta, and their unconventional Montney and Duvernay assets. The company generated funds flow of $426 million, translating to $0.71 per share, with $223 million, or $0.37 per share, in free funds flow.

Strategic Development Initiatives

Since acquiring XTO assets in August 2022, Whitecap has made significant advancements in developing their Montney and Duvernay assets. They successfully executed their development plan for these assets, including the timely construction of the Musreau battery, which was completed under budget. The company is also moving forward with a fully funded Phase 1 Lator facility, enhancing their growth prospects moving forward.

Financial Flexibility and Shareholder Return Strategy

Whitecap's financial position remains strong, with net debt anticipated to be below $1 billion by year-end, which is quite favorable compared to their projected $1.7 billion in funds flow. This gives the company capital allocation flexibility as it looks to return value to shareholders. Year-to-date, the company has returned approximately $250 million to shareholders and plans to utilize $200 million from recent infrastructure dispositions for share repurchases in the latter half of the year. This indicates a prioritized approach towards share buybacks over dividend increases.

Robust Well Performance and Future Production Plans

The performance of new wells in the Montney and Duvernay regions has exceeded expectations, with the first eight wells at Musreau averaging 1,600 BOE per day each. Furthermore, these wells are projected to pay out within just five months, showcasing the economic viability of these developments. In total, Whitecap is set to bring on 15 new Montney and Duvernay wells in the second half of the year. Despite challenges in the natural gas environment, the focus on liquids-rich natural gas wells supports a positive outlook.

Maintaining Guidance Amid Market Dynamics

Whitecap has maintained its annual production guidance of 167,000 to 172,000 BOE per day and is well-positioned to potentially meet the upper end of this range. The company is also observing favorable pricing conditions due to its weighted exposure to light oil and a strong US dollar, albeit general commodity volatility remains a concern. Their proactive approach and strong operational results contribute to a generally positive outlook for the remainder of the year and into 2025.

Earnings Call Transcript 2024-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 2024 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, sir.

[Grant Fagerheim, executive]

Thanks very much, Sylvie. Good morning, everyone, and thank you for joining us. There are 4 members of our management team here with me today. Our Senior Vice President and CFO, Thanh Kang; our Senior Vice President of Business Development, Information Technology, Dave Mombourquette; our Vice President of our West division, Joey Wong; and our Vice President of our East division, Chris Bullin.

Before we get started today, I would like to remind everybody that the statements made by the company today during this call are subject to the same forward-looking disclaimer and advisory that we set forth in our news release issued yesterday afternoon.

I am pleased to report that we had a very successful second quarter with record quarterly production averaging over 177,000 BOE per day, especially when compared to our forecast of 170,500 BOE per day. This generated $426 million of funds flow and $23 million (sic) [$223 million ] of free funds flow. These results are directly attributed to the exceptional work of our exceptional technical teams.

Our year-to-date operationally and asset performance wise has been exceptional, resulting in production outperformance across our entire portfolio. In particular, our Southeast Saskatchewan Frobisher assets, our Central Alberta Cardium and Glauconite assets as well as our unconventional Montney and Duvernay assets all outperformed our earnings internal expectations.

Since acquiring XTO assets in August 2022, we have taken meaningful steps to develop our Montney and Duvernay asset, which has underpinned our strong operational performance in our unconventional assets. To date, we have designed and executed on the development plan across both our Montney and Duvernay assets, providing confidence to the market and the deliverability of our asset base and our operational execution, designed, constructed and brought on our Musreau battery on time and under budget, developed a long-range plan, showcasing meaningful growth and depth of inventory within our Montney and Duvernay assets and in particular, our next stage of Montney growth and development in our Lator area of Alberta.

Subsequent to the end of the second quarter, we also announced a positive FID on our Phase 1 new build Lator facility that is fully funded by PGI. This, in addition to the partial working interest disposition of our Musreau and Kaybob facilities to strong partners, Topaz and PGI for total proceeds of $520 million.

Through our extensive scale and depth of our high-quality inventory, we've been able to secure additional pipeline and facility access, enhanced contract terms and highly competitive fees on our processing, transportation, fractionation and marketing for all areas of our Montney and Duvernay development. These synergies will enhance our future netbacks and reduce the overall financial impact of infrastructure working interest disposition.

We are very excited to move ahead with both partners and look forward to continued progression of our unconventional Montney and Duvernay development.

I will now pass the phone on to Thanh to discuss our second quarter financial results.

[Thanh Kang, executive]

Thanks, Grant. Our second quarter financial results were equally as strong as our operational results generating funds flow of $426 million or $0.71 per share and free funds flow of $223 million or $0.37 per share. Our predominantly light oil and condensate production base benefited from crude oil prices averaging over $110 per barrel on a Canadian dollar basis with total liquids representing 95% of our revenue for the quarter.

Our operating cost decreased to $13.49 per BOE in the second quarter, a strong result for our team and reflect higher production and continued focus on cost savings. Cash tax expense of $100 million in the quarter included $33 million or $0.05 per share impact on capital gains from the partial infrastructure disposition. Excluding this onetime impact, the tax rate as a percentage of pretax funds flow for the 6 months ended was 12%, which is consistent with our forecast of between 12% to 14% for 2024.

Year-to-date, we have returned almost $250 million to shareholders, including [ $25 million ] of share repurchases in July. We plan to use $200 million of the proceeds from the partial infrastructure dispositions towards share repurchases in the second half of the year. Pro forma the dispositions, our net debt sits at below $900 million, and after share repurchases, we forecast net debt of below $1 billion at year-end. This low level of debt relative to our projected $1.7 billion in funds flow provides us with capital allocation optionality going forward.

I will now pass it off to Joey for remarks on our West division results.

[Joey Wong, executive]

Thanks, Thanh. Our Montney and Duvernay assets continue to perform well with updated data showing that our recent wells are outperforming on both an initial and longer-term basis. As we progress development of this asset base, incremental data is analyzed by our team and informs production strategies and forecasting models for existing wells while also helping to shape development and expectations for our plans going forward.

As we highlighted in our Investor Day in early June, our approach to customized pad design, completion parameters and development plans has yielded positive results across our Montney and Duvernay assets at Kakwa, Lator and Kaybob. Our recent results on our first 8 wells at Musreau are another data point that validates this approach.

Over the first 90 days, the 8 wells have averaged 1,600 BOEs a day per well with almost 1,100 barrels per day of condensate per well. At times, we were producing at over 80% of our condensate stabilization capacity of our new facility. And after bringing on our third 4-well pad in late Q3, we expect to be producing consistently at sales condensate capacity of almost 11,000 barrels per day.

The economics of these first 8 wells are very robust and are projected to pay out in only 5 months. In total, we plan to bring on 15 Montney and Duvernay wells in the second half of the year after bringing on our latest Duvernay 3-well pad at 1134-B in the second quarter. Although we would define each area as drilling liquids-rich natural gas wells, the liquids and more specifically, the condensate volumes drive the economics of each area. When running sensitivities on our Kaybob Duvernay plus Kakwa, Lator, and Musreau Montney type curves, we can run $0 natural gas prices for the first 4 months of production and still achieve average payout in less than 1 year across the 4 areas.

This is why it makes sense for us to adhere to our schedule and continue to bring wells on production despite challenging natural gas environment at this time.

I'll now pass it on to Chris for his comments on the East division.

[Chris Bullin, executive]

Thanks, Joey. As you've heard, consistently strong results are the theme so far and the East Division results are no exception. Momentum carried through from our first quarter drilling program, and we are very pleased with what our assets and teams were able to accomplish in the second quarter. We brought on a total of 26, 20.4 net wells during the second quarter, 14 of which carried over from the first quarter and 12 were [ brought ] in the second quarter Outperformance relative to our expectations has come from both the new 2024 wells and higher-than-forecasted base production levels.

In Southeast Saskatchewan, our 2024 Frobisher results have been exceptionally strong, with expectations for these wells to pay out in less than 6 months. Highlighting the attractiveness of these assets is that not only in the initial payout very quick, we actually forecast these wells to pay out our capital investment 3 times in the first 3 years. This is truly a top-tier asset, and we are very pleased with the land position we have built in only 3 years since entering the play through the torque acquisition in early 2021.

Moving west to our Viking assets in West Central Saskatchewan, where the initial results on recently acquired land in the Elrose area are meeting our expectations and are above historical results for the area. We continue to advance enhancement opportunities as we have just brought our first 1.5 mile ERH in the Elrose area. The ability to drill ERH wells into the newly consolidated land position will improve capital efficiencies and enhance our future inventory.

In Alberta, we have achieved strong production results from our recent Glauconite drilling program, as our first 6 wells online continue to significantly outperform expectations. A combination of flowing unrestricted through alternative infrastructure along with attractive subsurface qualities, despite being a challenging area to drill as initial liquids production outperforming our expected rates by 40% over the first 90 days on production.

I also wanted to take a moment to highlight a recent operational enhancement initiative in our Central Alberta Cardium program. We recently drilled a 4-well pad in West Pembina and successfully implemented an updated frac design, which increased our daily sand placement by 25% to 50% compared to previous, resulting in 6% total cost savings on completions, relative to budget expectations. We are actively investigating the applicability of this new frac design across our conventional asset base.

Our recent West Pembina results have been very strong, and these well cost savings are improving the already robust economics of our light oil Cardium assets. Although some of our East division plays don't receive the same notoriety as our unconventional assets, our teams continue to do an excellent job of improving the long-term sustainability and profitability of these assets. thereby further strengthening our corporate free cash flow.

With that, I'll turn it back over to Grant for his closing remarks.

[Grant Fagerheim, executive]

Thanks, Chris. Joey and Thanh for your remarks. As you've heard, the first 6 months of the year have been very strong for Whitecap, and we look forward to building off this momentum in the second half of the year. We have not changed our production guidance of 167,000 to 172,000 BOE per day. But given the success to date, we do expect to come in close to the higher end of the range, if not higher.

As we advance through the remainder of the year, we expect our price realizations to remain very robust, given our exposure to light oil as well as a strong U.S. dollar, although commodity price volatility is expected to continue. We are in an advantageous position financially with low net debt, low decline rate, further supports long-term sustainability and profitability across our commodity cycles.

The outlook for Whitecap continues to be positive, and we are looking forward to the second half of this year as we develop and grow our assets into 2025 and beyond.

With that, I'll now turn the call over to the operator, Sylvie, for any questions.

[Operator]

[Operator Instructions] And your first question will be from Dennis Fong at CIBC.

[Dennis Fong, analyst]

Congrats on the second quarter results as well as the strong well performance. I've got a couple of questions here. The first one kind of goes back to the well performance in the multi-bench development. I was actually hoping to get a little bit more clarity or understanding around what you view would be or what results you're frankly looking for to help you confirm both your development strategy? And then secondarily, you feel more comfortable rolling out a kind of an improved type curve through both guidance and kind of your 5-year plan that you outlined at your Investor Day.

[Joey Wong, executive]

Dennis, it's Joey Wong here. So the first question in terms of what we're looking for on results. Of course, the results themselves on a production basis, we put in our release there that at 1,600 barrels per day or so, that's slightly above our reference type curve. So the short answer on what we're seeing on results is that they're a slight beat to our expectations, which is good.

What we're also looking for, which won't be quite as visible on the production is the interaction between wells, be it on a short-term or long-term basis. And I think we had talked about that a little bit in the last call there is that -- what we're looking at is do we see the wells interacting with each other, whether that be on initial completion, whether that be kind of in the short-term production period, whether that be in the long-term production period.

In the short-term production period and the interaction on frac, what we're seeing is actually some really, really encouraging results that the wells are just barely seeing interaction from each other, which is kind of what we want to see.

As we move to the balance of our asset base, what we're going to do is look at how the rock changes, look at how the condensate ratio has changed and tailor our development plan from there. But that's a long-winded way of saying, we're liking what we're seeing and it's reaffirming the plans we've got right now.

[Dennis Fong, analyst]

Great. I appreciate that context. The second question that I have, and it might be a little bit early for this, obviously, just given it's still kind of mid- to late summer, and you guys are probably just starting your capital budget planning. How should we be thinking about the CapEx cadence going into 2025, especially with the now, we'll call it, accelerated "development of Lator" with that recently signed infrastructure deal.

[Thanh Kang, executive]

Yes. Thanks for that question, Dennis. It's Thanh here. I think as we look at production and capital spending for the balance of the year here, Q3 will be higher than Q4, but expect to be within the range there, somewhere in that $1 billion to [ $1.1 billion ] For 2024. Thinking about 2025 and certainly, this wouldn't be budget quality at this particular time here. But I would use 5% growth, which gets us to about 180,000 BOEs per day.

Capital plans despite kind of the acceleration of Lator with the PGI funding there on the facility, I would still expect to see between $1.1 billion and $1.2 billion for 2025.

[Operator]

[Operator Instructions] Next question will be from Aaron Bilkoski at TD Cowen.

[Aaron Bilkoski, analyst]

Thanks. So I guess I'll start with asking the prequal question to one to Dennis' questions. I'm curious about the cadence of the new Montney and Duvernay tie into the back half of this year? And I guess the second part of that is how you're thinking about the shape of the production profile through year-end?

[Thanh Kang, executive]

Yes. Thanks for that, Aaron. Yes, I think when we look at our Montney and Duvernay production, it is chunky in terms of production adds throughout the balance of the year here. Again, when we look at it on an average for the full year basis, as Grant mentioned there, we're very comfortable that we'll be closer to the high end of the production guidance closer to the 171,000 to 172,000 BOEs per day.

When we look at the third quarter with respect to the unconventional, there really isn't any wells that we're expecting to come online until August 25 at the earliest there. So a lot of our production adds will certainly come in the fourth quarter. So again, expect that we'll be at the top end of our guidance range there between the 167,000 to 172,000 BOEs per day.

[Aaron Bilkoski, analyst]

Maybe a follow-up question to that. Given the lumpiness of the production additions, is there any way to maybe feather wells in over time to avoid relatively lumpy quarters or is not just operationally -- not particularly feasible?

[Thanh Kang, executive]

You know what, that's a good question. It's something that we'll certainly look at as we develop our budget for 2025 to smooth it out through the quarters. What we've been focusing on really is maximizing cash flow for the year. And so it's been designed certainly with that in mind for '24, but smoothing it out is definitely a consideration for 2025.

[Grant Fagerheim, executive]

And just to add to that, Aaron, is that -- what we're looking at as we focus moving forward into the 2025, '26, '27 budget time frames, is when do we add incremental drilling rigs in both the unconventional and into the conventional part of our assets. Again, we want to ensure that part of this facility infrastructure transaction that we did, I want to make sure that there's facility infrastructure in order to produce our wells. And as Thanh was saying, focus on our netback and our ability to increase our cash flow on an ongoing basis.

So we'll look to, as part of the budget process for, as I say, for the next 3 years going forward, is how do we land and smooth the production -- the lumpiness of the production profile out as we advance through those years.

[Aaron Bilkoski, analyst]

If I could follow up with one more financial question. And that's -- given your commitment to the NCIB through the back half of the year, I'm curious why share repurchases were fairly minimal in Q2 despite having, I think, excess free cash flow to do more.

[Thanh Kang, executive]

Yes. So the way that we're thinking about the NCIB purchases, Aaron is it's really looking at it on a 6-month basis there, just with the way that the cadence for capital is. We'll typically have our highest capital programs in the first quarter and the third quarter, and then it will taper down in Q2 and Q4 there. So it's better for us to look at it in 6-month increments.

Effectively in the first half of the year here, free cash flow was directed both to the balance sheet as well as the dividend. And as you mentioned there, as we get into the back half of the year, will generate more free cash flow to be able to execute on our NCIB. So the way that we're looking at it today in the back half of the year, this is using our deck at $80 WTI here. We have about $30 million to $50 million. That's over and above our dividend obligation that we'll use on the NCIB.

And then as per our press release there, we're covering out an additional $200 million that we'll use on the proceeds from the disposition towards the NCIB. So the capital allocation or I should say, the free cash flow allocation hasn't changed. We're still looking at 75% return back to shareholders in the form of the dividend and share buybacks, but the $200 million is incremental to that.

[Grant Fagerheim, executive]

And just the last comment to add into that is that part of -- we have to be mindful of our treating blackout periods of time as well. So as we go into different time periods, we're very respectful of trading blackouts, which are -- we're very stringent on Whitecap Resources. So that plays into our overall time period as releasing information to the market.

We were in a long discussion with not only the infrastructure sell-down, but we were in a time period here with just dropping into this -- our quarterly reporting as well.

[Operator]

Next question will be from Patrick O'Rourke at ATB Capital Markets.

[Patrick O'Rourke, analyst]

Strong quarter there. Great to see the well results. I have a couple of mostly financial questions here for you. You alluded to with the sort of the room you've made on the balance sheet, post the infrastructure dispositions. You alluded to capital allocation flexibility. But Thanh just pointed to what were pretty narrow goalposts with respect to 2025 capital spend and production at this point in time.

So I'm just wondering if you can maybe walk us through with respect to the flexibility and things you could do sort of rank order what your priorities would be in terms of dividend growth, acquisitions, incremental production growth that could be above and beyond what you just talked about or spoke to on 2025.

[Thanh Kang, executive]

Yes. Sure. Thanks for that question there, Patrick. Yes. As we go through the list of returns back to shareholders here, the dividend at that $0.73, they're sustainable down $50 WTI. The yield from our perspective is too high. So there's certainly no rush for us to increase the dividend at this time. The priority would be around share buybacks. And that's why we've allocated the $200 million towards buying back our shares. Could we potentially use more, yes, absolutely, we can.

I think the $1 billion that we're targeting in net debt at the end of the year feels comfortable for us. But I would say priority is the NCIB over any dividend increases at this particular time. And the reality is when we continue to buy back our shares here, we reduced that overall dividend obligation, and we are increasing it on a per share basis there.

Optionality around the balance sheet outside of returning capital to shareholders would be around smaller tuck-in acquisitions where we have a working interest, we're the operator there. And really, it's just a consolidation of a play that we have expertise in versus larger scale M&A activity at this particular time.

[Patrick O'Rourke, analyst]

Okay. And then maybe just build a little bit or add a little bit of nuance to Aaron's earlier question with respect to execution on the buyback. You have a $200 million number that's out there. You spoke to looking at it in 6-month increments and obviously, the first half of the year is a higher capital obligation just given the way the cadence of the drilling programs tend to play out or, in particular, the first quarter.

Just wondering how you look at that $200 million in the back half of the year. Can we expect it to be sort of executed on a very ratable basis on a month-by-month basis? Or is there going to be a bit of [ finest ] to that around sort of the share price performance and the blackout periods that Grant touched on.

[Thanh Kang, executive]

Yes. I mean I think the way that we look at it is if you look at the third quarter here, we'll likely spend somewhere in that $125 million on the share buyback. So on a very methodical and consistent basis here. And then in the third quarter, you've got the $75 million plus whatever free cash flow is left after paying the dividend. So as I mentioned, in that $30 million to $50 million. So expect to see an excess of $100 million in the fourth quarter based on our forecast at this time here.

[Operator]

Thank you. And at this time, gentlemen, there are no other questions registered. Please proceed.

[Grant Fagerheim, executive]

Well, thank you, everyone, for your time to listen to our call today. And we would like to wish everyone the very pleasant remainder of your summer weather and summer holidays. Bye for now. Thank you.

[Operator]

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines.