Whitecap Resources Inc

TSX:WCP

Earnings Call Transcript 2021-Q3

[Operator]

Good morning. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to Whitecap Resources Third Quarter 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 call.

[Grant Bradley Fagerheim, President, CEO & Director]

Thanks, Jessica, and good morning, everyone, and thank you for joining us here today. Here with me are 4 members of our senior management team, our Senior Vice President and Chief Operating Officer, Thanh Kang; as well as Darin Dunlop, Senior VP of Engineering; Joel Armstrong, Senior VP of Production and Operations; and Dave Mombourquette, Senior VP of Business Development and Information Technology.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 news release that was issued earlier this morning.We are pleased with our third quarter operating and financial results. The execution by each of our teams has been exceptional over the past year with strong corporate results proving that we have successfully integrated multiple acquisitions in all areas while also keeping focus on performance of our own base assets.Production of approximately 116,000 BOE per day on capital investments of $135 million in the quarter speaks to the asset of outperformance and the capital efficiency improvements being made across the business. As outlined in our budget release 2 weeks ago, these capital efficiency improvements have translated into lower capital requirements moving forward and, therefore, higher returns for our shareholders.What we have highlighted in our press release this morning is an indication of how broad the accomplishments are across each business unit. Not only have the wells drilled in our 2021 program outperformed, but we have also enhanced and added to our inventory of high-quality drilling location over the past 9 months.Net debt at the end of the quarter was $1.3 billion and with receiving the proceeds of $188 million from the Weyburn royalty sale and discretionary funds flow of over $100 million in the fourth quarter, we expect to achieve our internal net debt target of $1 billion by year-end this year. I would now like to pass on to Joel Armstrong to comment on some of our health, safety and environment results today.

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

Thanks, Grant. The third quarter is very busy operationally with a strong capital program and our highest activity level to date at 2.2 million person hours. That said, this was one of our best quarters in the past 5 years and overall outstanding safety performance across our operations.Our total recoverable injury frequency rate continues to trend down seeing all quarters in 2021 below our previous 2-year average is another testament to the work put in by our operations team to ensure the safe and efficient integration of the new assets and personnel.From an ARO perspective, we cut and cap 55 wells during Q3 for a total of 196 so far in 2021. We have executed on $20 million of ARO capital year-to-date, which includes Whitecap and government funding. We are on track to meet our internal ARO budget of $10 million and have increased our '22 budget to $18 million.And I'll pass it on to Thanh to comment on our financial results and outlook.

[Thanh C. Kang, Senior VP & CFO]

Thanks, Joel. Strong quarterly funds flow of $294 million or $0.46 per share was driven by increased production and higher crude prices with WTI averaging over USD 70 per barrel and Edmonton per averaging almost CAD 90 per barrel during the quarter.The third quarter average AECO natural gas price of $3.60 per GJ was as strong of a quarterly price as we've seen since 2014. And with our natural gas production increasing to over 170 million cubic feet per day, our natural gas production has become an increasingly material portion of our cash flows.Our third quarter realized oil and natural gas price before the impact of tariffs and hedging were $81.2 per barrel and $3.79 per Mcf, which were 70% and 55% higher than the third quarter of 2020 and 10% and 16% higher than Q2 of 2021.Higher commodity prices resulted in hedging losses of $6.83 per BOE, while our average royalty rate of approximately 16% was consistent with the second quarter. Operating expenses of $13.71 per BOE and transportation expense of $2.29 were both consistent with prior quarters in our expectations.G&A expense of $1 per BOE is consistent with our historical average. We also recognized an impairment reversal of $1.9 billion or $1.4 billion after tax. The reversal was recognized across each business unit and as a result of higher forward benchmark commodity prices. We also announced a $200 million increase to our credit facility and a 1-year extension to the maturity date, which is now May 31, 2026.Our Q3 net debt of $1.3 billion has been further reduced by $188 million with the closing of the Weyburn royalty sales. And as mentioned, we expect to reach our debt target of $1 billion by year-end. Our current plan is to use the increased credit facility to repay the senior notes due in January 2022 and maintain our total credit capacity at $2 billion.Our guidance for '21 and 2022 reported last week is unchanged. We expect operational momentum to continue with production averaging 118,000 BOEs per day in the fourth quarter and averaging 111,700 BOEs per day for the full year. For 2022, we are forecasting mid-case average production of 122,000 BOEs per day on capital spending of $480 million.With that, I'll pass it now back to Grant for his closing remarks.

[Grant Bradley Fagerheim, President, CEO & Director]

Thanks very much, Thanh. With the strategic acquisitions closed earlier in the year, we are now fully integrated and the rate of change for the better on the acquired assets, both technical and financial, has been remarkable.As a reminder, our purchase price for the NAL transaction was $155 million. And through the first 9 months of 2021, the assets have generated $150 million of operating income and are expected to generate $260 million annually based on our current strip pricing.The torque assets have also generated over $200 million of operating income in the first 7 months and are expected to generate $360 million of operating income annually relative to the purchase price of approximately $1 billion. We must also mention that we are very excited about the Kicking Horse asset, as we have increased production by 50% to this point from 8,000 BOE per day to 12,000 BOE per day currently.Our plan in 2022 is to ramp up production over the course of the year and expect to maintain average production in the 18,000 to 19,000 BOE per day range and beyond that. On strip prices, we currently project that this asset will generate $200 million of operating income in 2022, while spending $85 million of capital expenditures.With regards to the new energy initiative we put in place in late 2020, we recently announced the memorandum of understanding with Federated Co-op to use our carbon capture utilization and storage expertise and enhanced our recovery project at Weyburn to assist Federated Co-op in achieving their initial production targets.The Weyburn asset continues to not only be very strategic as we look to advance solution for reducing greenhouse gas emissions, but also has been a very significant contributor of free cash flow for Whitecap. We purchased the property in December of 2017, and since then, have generated operating income of $600 million on capital expenditures, including CO2 purchases of $170 million.Including the royalty sale, proceeds of $188 million, we have recovered over 80% of the purchase price and still have significant upside remaining in the asset has a very low decline of less than 3% and a long producing reserve life index of 17 years.The memorandum of understanding with Federated Co-op is part of a larger strategy to develop a carbon hub in the Greater Regina, Saskatchewan, area with a longer-term potential as a hydrogen hub. We look forward to updating our shareholders on this and other new energy initiatives as they progress.Whitecap strategy of moderate growth, 3% to 5% per year per share, enhanced by strategic acquisitions has been very successful to date, and we will continue to look for opportunities to enhance shareholder returns. The setup for Canadian Energy and, in particular, Whitecap has not looked as strong in many years with WTI just slightly over $80 and AECO at over $4 per GJ. And when combined with weaker Canadian dollar, low interest rate environment, strong capital efficiencies, this results in record prefunds flow.On strip prices, Whitecap in 2022 is generating almost $900 million of discretionary free funds flow. This is after our capital program of $480 million and our base dividend of $171 million. As previously communicated, we are committed to returning 50% of our 2022 discretionary funds flow to our shareholders, but the remaining 50% being allocated towards our balance sheet to build dry powder for disciplined and targeted acquisitions as well as new energy initiatives.We remain both optimistic and excited about Whitecap's future, the returns to be generated for our shareholders and look forward to updating shareholders on our progress. On behalf of our management team, our Board of Directors, we would like to thank our shareholders for your interest and support of Whitecap Resources.With that, I will turn the call over to Jessica for any questions you might have.

[Operator]

[Operator Instructions] Your first question is coming from Patrick O'Rourke with ATB Capital Markets.

[Patrick Joseph O'Rourke]

Just wanted to ask, in terms of the deal that -- or memorandum of understanding that you guys have with Federated Co-op, sort of what the opportunity set on the cost offset side is there that you're thinking about like what the quantum could be for investors? And then as I understand it right now, your carbon injection, you don't receive an offset credit for that. Is there a pathway to receiving credits there or something you can do with the new energy initiative to offset some of the risks in terms of potential rising carbon tax that we have here in Canada?

[Grant Bradley Fagerheim, President, CEO & Director]

I'll be as concise as I can on this, Patrick, but it's complicated. It ends up being quite a complicated answer. Number one, just regarding the memorandum of understanding, what we're waiting for, to better understand commercial and economic terms, is what the greenfield standard is going to look like in Canada, where the investment tax credit has to be established by the federal government.So as you know, as our shareholders would know, we pay for our CO2 at this particular time. We do not receive carbon credits on the other side. So what you're referencing is offset credits. What we're looking for is what the investment tax credit market will look like as well as what we're trying to do is minimize our cost of buying CO2 into the future.We have 2 contracts right now that expire in late 2024 and 1 in 2026. So the 2 components are offsetting the cost with lower or no cost for taking CO2 and then what does the carbon credit market look like and what the federal governments are going to do with offset credits. As they look to escalate carbon tax from $40 a tonne today to $170 a tonne, what is that going to look like on the offset credit side.So at this time, we're just -- we think there is a large amount of upside, and we also believe that the most efficient pathway to a lower carbon economy is through carbon capture that we have the technology on. So we're waiting anxiously, as I think most Canadians are as to what the carbon offset market will look like going forward.

[Patrick Joseph O'Rourke]

Yes, I think we all are. And then just maybe shifting gears a little bit here, really impressive results at Kakwa on the Kicking Horse wells there. Thinking about that 43% liquids cut that you're kicking off of that, are you guys able to break down sort of how much of that is really high-value condensate? Obviously, condensate prices are extremely strong right now. We have them at a premium to even Brent. And then what percentage or sort of marketing you're doing on the NGL side of that 43% as we think of that asset developing?

[Darin Roy Dunlop, Senior Vice President of Engineering]

Yes, it's Darin here. Yes, the majority of that liquids volume is field condensate, I would say, over 90%. And as for the marketing of it, I'll pass it on to Grant.

[Grant Bradley Fagerheim, President, CEO & Director]

Sure. So yes, what we're working is marketing at this particular time into the market centers in Alberta, and then we're looking -- as we grow our production, we're looking for longer-term arrangements that we're in the market actively on at this particular time. So because it is such a new venture for us there, both the Karr and the Kakwa side, we're now getting substantial enough to be able to do longer-term contracting for our liquids.

[Operator]

[Operator Instructions] Your next question comes from Josef Schachter of Schachter Energy Research.

[Josef I. Schachter, Author & President]

Congratulations and a very nice quarter on the integration of the acquisitions. Great timing on that. In this quarter, you did corporate acquisitions. So are you -- what's your feeling now on M&A? Is it a seller's market and you really have to be choosy and things that really fit into yours that you see economics that are upside? And why not look at buying more land? Is there land available in all your core areas? I would assume land prices are very cheap and the governments will be pretty happy to put them up and have more revenue coming in from that side of the coin.

[Grant Bradley Fagerheim, President, CEO & Director]

Yes. Thanks, Josef, and I appreciate the acknowledgment of the transactions we had done before. Just on M&A, our belief is that when we're looking at M&A opportunities, we always look at a -- not the current price environment, but we look at what a 3- to 4-year price environment and our expectation of that, what that would look like. So at this particular time, it's always the, I call it, the magic of crossing over between buyer and seller expectations. Many sellers, I expect, not at that the current pricing environment and -- but the current pricing environment to us is actually over a 3- to 4-year period of time that we expect it to be.So you had referenced about land prices, and that goes back into the strategy around acquisitions. We have a very strong inventory of opportunities. We can't even capitalize on all the opportunities we have now. So it would have to compete on the acquisition side. They compete with our existing inventory of opportunities. So what we can do with those to advance forward and has to be substantial enough for it. We get greater returns for our shareholders and demonstrates that will be more sustainable longer term. As far as land prices, land prices have come back quite markedly. And we look at more specifically in the Deep Basin and up into Northern Alberta are very strong prices. So that -- why I answered that in that context is we don't have to chase land sales. We'll participate if they're in and around our existing assets, but we do not have to chase prices up around because we have strong enough inventories in each one of our areas.

[Josef I. Schachter, Author & President]

Okay. And now for somebody who's not so informed on this, once we know what the carbon credits are going to be, do you see this something that gives you opportunities in new areas in Western Canada for storage? Is this something that you could take into Eastern Canada into the States, given your technical expertise? How far of a range of business should we be looking at just in Saskatchewan, Alberta or something even larger than that as you take the technologies and skill sets elsewhere?

[Grant Bradley Fagerheim, President, CEO & Director]

Yes. No. Just regarding carbon capture, I think it is principally focused at this time in Western Canada. And what's interesting to note and -- Eastern Canada, I'm sure, may have some opportunities. It's not as understood geologically as Western Canada is. So we have a very good understanding of where the partially depleted reservoirs are. We have an understanding where saline storage could be effective.And what's interesting to note, and I think that -- I think it gets missed by many in Canada versus the U.S. because of the land tenure system in Canada with us having the majority of land owned by the Crown and with the Crown being, whether it's prudential or federal government -- majority provincial governments, they're much easier to put together carbon storage opportunities versus what it is in the U.S. where only about 10% to 13% of their lands are actually owned by Crown.The majority are owned by freeholders or the undivided interest. There's large undivided interest up to 100 to 200 people on -- even on the core section of land that participate. And that's why you're seeing many of the carbon storage projects in the U.S. that will go offshore versus we have the added advantage in Canada of having a Crown tenure system that has to be more clearly understood, including by our federal government.So we think that we're in very well positioned Canadian energy producers, and those that are in the carbon capture world have an opportunity to really advance this and continue to demonstrate the new technologies that are available to us and being able to be utilized in Western Canada.

[Josef I. Schachter, Author & President]

And last one for me. You drilled 53 wells in the quarter and 109 for the first 9 months. What do you see as the total well count for this year? And what's your forecast given your budget for well count drilling in 2022?

[Darin Roy Dunlop, Senior Vice President of Engineering]

Yes, Darin here. Let me pull these up. But I believe in our budgets -- in our budget release of last week, I guess, it was 163 for the next year -- 168 for next year. And for the remainder of this year, I don't have that off the top of my head here, but it's going to be with the acceleration -- there it is. Acceleration is going to be 160 for this year and [ 124.8 ] net and 49 -- that's 49 and 38.4 net in the first quarter.

[Josef I. Schachter, Author & President]

Okay. One last one for me. Sorry to push one more. How do you see the cost side going for both drilling and fracking and other inputs? And what do you see as the kind of the limitations like frac crews -- in the Trican call, they talked about 27 frac crews available now and is there going to be a chance to get to 200 rigs? If there is in Canada, there just isn't enough for fracs. So maybe you can give us some inputs there.

[Grant Bradley Fagerheim, President, CEO & Director]

Josef, your 1 question over. Anyway, let me hand it off to Joel Armstrong, our VP Operations, to talk about that. Thanks.

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

Yes, Josef. So obviously, there's been a lot of margin expansion of the service providers, and we recognize that early in the process. So we've secured all of our critical services for the upcoming Q4 and early 2022 program. So all our rigs are contracted. We're aligned with our frac pumpers.Cost of returns are pre-pandemic, and now we're starting to see margin expansion beyond that. So we don't carry current prices in our budget either. So we're not carrying expanded capital costs either. So we expect those 2 would balance each other out. There is definitely a correlation between commodity prices and service costs.

[Josef I. Schachter, Author & President]

Okay. Super. Well, again, congratulations on the great quarter and a great year, and I think that complement deserves the extra question.

[Operator]

At this time, gentlemen, we have no other questions registered. Please proceed.

[Grant Bradley Fagerheim, President, CEO & Director]

Okay. Well, thank you, everyone. First of all, I do want to say -- give a special shoutout to our valued employees for their continued efforts, also to our Board of Directors for your support and guidance over this past year and to everyone on the call for your continued interest in Whitecap Resources. And sincere thanks to all. Have a good day. Thanks very much.

[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, too, ask that you please disconnect your lines.