Whitecap Resources Inc

TSX:WCP

Earnings Call Transcript 2022-Q3

[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 Q3 2022 Results Conference Call. [Operator Instructions] And I would like to turn the conference over to Whitecap's President and CEO, Mr. Grant Fagerheim. You may begin your conference.

[Grant Fagerheim, executive]

Good morning, and thanks, Sylvie. Good morning, everyone, and thank you for joining us here today. Here with me are four members of our senior management team. Our Senior Vice President and CFO, Thanh Kang; our Senior Vice President, Production and Operations, Joel Armstrong, our Senior Vice President, Engineering, Darin Dunlop; as well as Dave Mombourquette, Senior Vice President, Business Development and Information Technology.

Before we get started today, I would like to remind everyone 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.

I'm once again pleased to report another strong quarter for Whitecap, where we achieved our second highest quarterly cash flow per share result in the company's history. This is -- the volatility in commodity prices and the backdrop of recessionary fears impacting the global economy at this time.

Operationally, we had a very active quarter as we ramped up to 10 rigs by the start of August and drilled 84 gross wells in the quarter. The outstanding execution of our capital program by each of our business unit teams along with the asset level outperformance resulted in corporate results ahead of our internal expectations.

We also closed the acquisition of XTO Canada during the third quarter on August 31, another milestone for our company. As a result of significant effort and coordination among our various teams, the integration of the new assets and staff has been seamless. Optimization efforts of existing production is well underway and has been successful to date.

As mentioned in the press release earlier today, our recent Montney results continue to outperform our expectations. Since acquiring the Kakwa asset from a private company in mid-2021, we have brought on 16 Montney wells on stream by the end of this year and expect to drill an additional 23 wells next year. The latest two pads referenced are evidence that the improvement in drilling and completion designs over the past 3 to 4 years is significant, and we will continue to use our technical expertise to continually optimize our drilling program.

We believe that our asset base is unique and provides a very differentiated advantage. Our base conventional assets across Alberta and Saskatchewan are lower decline oil-weighted properties that generate significant free funds flow. This is balanced with our unconventional condensate-rich assets in the Montney and Duvernay, which are high impact and will be a primary source of growth for our company into the future. Considering our sizable land position with over 2,000 locations in the Montney and Duvernay in addition to our facility ownership, this provides us with the opportunities for improving capital efficiencies, decades of sustainable per share growth and stronger shareholder returns.

Our near-term focus is to reload our balance sheet by reducing net debt to $1.8 billion by the end of this year and $1.3 billion in mid-2023. This will ensure that we have the financial flexibility to withstand commodity price volatility and market cycles and to take advantage of further consolidation opportunities should they arise in the future. We are excited to continue to advance our business on behalf of our shareholders as we progress towards our near-term financial and operational goals.

I will now pass this on to Joel to comment on our ongoing operations.

[Joel Armstrong, executive]

Thanks, Grant. I want to briefly touch on the inflationary impacts on our current and forecasted operations. We're currently running nine rigs across our asset base, and we'll run between 10 and 11 rigs over the majority of 2023 outside of spring breakup. We've either fully contracted or have the right to extend oil drilling rigs through the end of 2023 at a minimum. Our 2023 budget of $900 million to $950 million that was announced at the end of September includes all known and forecasted cost increases due to inflation across all of our service providers based on WTI between $80 and $85 a barrel.

Next, I want to discuss our third quarter operating costs, which came in higher than our original expectations. Most of the increase in the third quarter is expected to be onetime in nature and is related to higher-than-expected power prices. August and September averaged over $260 per megawatt hour in -- which compares to just over $100 per megawatt hour in the preceding 12 months. These prices have somewhat stabilized to average approximately $100 per megawatt hour over the past 2 weeks.

Going forward, we've increased our power price assumptions but are still forecasting operating costs to decrease approximately to $13 per -- $13.50 per BOE going forward from our Q3 operating cost of $14.85 per BOE.

I'll now pass it on to Thanh to discuss our financial results.

[Thanh Kang, executive]

Thanks, Joel. As Grant mentioned, third quarter funds flow of $547 million or $0.88 per share was the second highest in our company's history and resulted in $339 million of free funds flow after capital expenditures of $208 million. Of that $339 million of free funds flow, $138 million was returned to shareholders through our base dividend and $71 million in share repurchases through our NCIB. The remaining $200 million helped fund our cash purchase of XTO deal that closed on August 31 for a net consideration of $1.7 billion after working capital adjustments.

Our balance sheet is in excellent shape with net debt at the end of the third quarter of $2.2 billion, resulting in a debt-to-EBITDA ratio of only 0.8x, and we have over $900 million of liquidity on our credit facility. As Grant mentioned, this will be further reduced to $1.8 billion by year-end.

We forecast production to average approximately 165,000 BOEs per day in the fourth quarter, an increase of 13% over Q3 production. Our full year 2022 capital program of between $670 million to $690 million is unchanged. As Joel mentioned, removal of certain onetime items, along with a full quarter of XTO volumes is expected to reduce our operating costs by 9% to approximately $13.50 per BOE in the fourth quarter.

We also expect our royalty rate to decrease despite several wells coming off royalty holidays earlier than expected, which slightly increased our third quarter royalty rate to 21%. At U.S. $85 WTI, we forecast a royalty rate of approximately 19% for the fourth quarter.

In the third quarter, we incurred onetime transaction costs of $11 million relating to the XTO acquisition for legal, accounting and advisory fees. For 2023, our budget of $900 million to $950 million and average production of 170,000 to 172,000 BOEs per day is unchanged. Our 2023 budget generates annual production per share growth of 21% and at $80 WTI and $5 AECO, we forecast over $1.2 billion of free funds flow.

Our sensitivities are every USD 5 per barrel change in WTI. Our funds flows impacted by $110 million. For every $0.50 change in AECO, our funds flow is impacted by $45 million and every $0.01 change in the FX rate for our funds flow is impacted by $30 million. As a reminder, approximately 90% of our liquids production is linked to light oil or condensate pricing and is not impacted by the recent widening of heavy oil differentials.

I will now pass it back to Grant for his closing remarks.

[Grant Fagerheim, executive]

Thanks, Thanh. One additional item that I wanted to touch on this morning was the continued success of our new energy team that has been achieved. We have two new carbon hubs that we recently selected by the Alberta government for further evaluation, one in Central Alberta and the other in Southern Alberta. This brings us to a total of three Alberta hubs and one Saskatchewan hub where our subsurface experienced and advanced technical knowledge of operating CO2 sequestration facilities has made us a top choice for industrial emitters to partner with and support. We are confident that our partnerships across the CCUS value chain will provide not only -- add new revenue source to Whitecap but also provide support for decarbonization plans across multiple industries.

We are excited to advance our business forward with an active winter drilling season ahead of us and a line of sight to reaching our net debt milestones and increasing the return of capital to our shareholders. I want to also note that we have five smaller-sized disposition packages in the market that have executed on, would accelerate the achievement of our debt targets. However, as we are in a position of strength, execution of any transaction would only be done so that a value -- that improves the returns relative to just cash flow flowing the assets over the longer term.

With those comments completed, I will turn the call over to our operator, Sylvie, for any questions. Thank you.

[Operator]

[Operator Instructions] And your first question will be from Patrick O'Rourke at ATB Capital Markets.

[Patrick O'Rourke, analyst]

I know you commented on the wells that were brought on, on the former Kicking Horse land here. Certainly, what we're seeing in the public data corroborates really strong well performance in 62, 5 west to 6. We're seeing that from a gas rate perspective. I'm wondering if you could perhaps comment on what you're seeing on the liquids yield, particularly condensate performance?

[Darin Dunlop, executive]

Yes, it's Darin here. Yes. No, for sure. It's commensurate. Like obviously, there's different condensate gas ratios across that pool, but it's commensurate with what the gas rates we're seeing. So if you were using condensate gas ratios that you're seeing from companies that reported that they are in line.

[Patrick O'Rourke, analyst]

Okay. Great. I know certainly, just to the east of condensate gas ratios are pretty strong. So we'll try to extrapolate that.

Just sort of moving over to the return of capital framework here. There's been a little bit of commodity volatility. But when you announced the XTO transaction, I think you did a very good job codifying the milestones for incremental dividend growth here, and you've obviously reiterated that today. I'm wondering at the time you have pointed to the potential for somewhere in the neighborhood of $200 million to $300 million in share buybacks for the balance of the year. And I'm wondering with everything that's gone on in commodity adjustments, all of the kind of factors that you've talked about on the call here today, is that still a good number for investors to have in their heads?

[Thanh Kang, executive]

Yes. Patrick, it's Thanh here. I think in the near term here, as you've mentioned, we're really focused on reloading our balance sheet and getting to that $1.8 billion and then ultimately, that $1.3 billion of net debt and ultimately targeting that $0.73 per share dividend. I think what you're referencing in that is the share buyback of that $200 million to $300 million is really our ability to return more cash back to our shareholders after we've achieved that $1.3 billion of net debt.

I mean even in the quarter, you saw that we spent a little bit of money here, $71 million on the share buybacks. And we'll continue to pick at it. But I think from a meaningful perspective here, we'll look at doing that once we achieve the $1.3 billion of net debt.

[Operator]

And next question will be from Jeremy McCrea at Raymond James.

[Jeremy McCrea, analyst]

Just to follow-up with Patrick's question there a little bit. Just with these assets that you have up for sale. If you are successful in getting a good price for that and really expedites reaching your debt target sooner, can we expect the dividend -- the bump in the dividend to be paid sooner potentially even as early as Q1, if you're successful?

[Grant Fagerheim, executive]

Yes. Jeremy, it's Grant. For sure, that's one of the things that we have talked about and as a management team and Board that should we be successful in selling some of the assets and reducing our debt levels quicker to the $1.8 billion, we'll be increasing our dividend to -- as we've talked about, to a higher level at that particular time, with the ultimate objective to get to the $1.3 billion or under to take our dividend from what is currently $0.44 all the way up to that $0.73 and that's what we're looking to do.

And we expect in the context of the market today with commodity prices the way they are, that we should be able to achieve both our first milestone late this year 2022 and within the first half of 2023. Of course, it's all subject to commodity prices, but that's what we're looking for. And I'm very excited about being able to take it to those levels and still have plenty of free cash flow left over or whether it's any other return of capital we would like to do, whether it's share buybacks or incremental dividends at that particular time.

[Jeremy McCrea, analyst]

Okay. And then just kind of just one last question. Just looking out beyond 2023 here, kind of, let's say, over the next 5 years, do you see yourself allocating more and more capital to the Montney versus where it is now? Or how do you -- do you think like it's always going to be kind of in that 40%, 50% of CapEx here that you're going to be spending?

[Grant Fagerheim, executive]

Yes. It really is -- I think that we have to -- there's a very large inventory of opportunities that we acquired from XTO. So we will have a base level of capital put into that. But part of this is commodity price dependent. Obviously, we've got a very -- plethora of oil opportunity as well in Saskatchewan and Alberta. So a combination of -- and we're always looking, as we talk about organic growth between 3% to 8% per share per year, supplemented with the acquisitions or share buybacks. So we'll look to continue to advance that.

But you have to look at it in the context of what the commodity prices are as well. So that -- right now, we'll set a base level. And next year, we're talking about 23 wells in the Montney that we're drilling, and that would probably be a base level of wells into the future as well.

[Operator]

Your next question will be from Chris Jones at Haywood Securities.

[Christopher Jones, analyst]

Just to follow up on the first two questions related to returns to shareholders. And maybe I'm asking the same question framed differently. To date, buybacks have largely been tactical in nature. Just wondering, going forward, do you expect share repurchases representing a growing share of free cash flow in 2023? Or do you kind of see the moderating in some of those, at least knowing larger blocks have already been repurchased?

And then just a quick follow-up to that related to any special dividends in 2023. Do you expect to preannounce those? Or will they -- will sort of use them to pat cash returns at the end of the year to satisfy the targets to return about 75% of free cash flow to shareholders?

[Thanh Kang, executive]

Yes. Thanks for that question there, Chris. I think if we think about the business and return of capital on a go-forward basis there, once we achieve that $1.3 billion, which, as Grant mentioned, sometime in the first half of 2023 there. Our free cash flow, if you look at it going forward, and this is using $75 WTI is about $1.1 billion. So we're returning 75% of that back to our shareholders, that's about $800 million. So of that $800 million, about $450 million is going to be used to service the $0.73 dividend that we're targeting here.

So we have another $350 million effectively to return back to shareholders either in the form of the NCIB or additional dividends, whether it's in the form of special or variable there. So lots of optionality in terms of what we can do. I think that relative to where Whitecap is certainly trading at today, our preference is to focus on share buybacks. And those are important from a dividend sustainability perspective because if we can reduce the amount of shares that we put out into the market, that means that we can increase and have more dividends available to our shareholders there.

So that's the way that we see, I think our priorities as we look forward. Number one is looking at reloading our balance sheet; number two, increasing that dividend level to the $0.73. And then I think the third priority would be around share buybacks at this particular time.

[Operator]

[Operator Instructions] And your next question will be from [ Jack Austin ] at [ Jack A. Capital ].

[Unknown Analyst]

I'm just wondering how you guys see the labor market right now, where you guys see it and how it is? And then as well, if you guys see the difference between Canadian energy prices and then U.S. prices improving or getting worse going forward and especially, I think, with the LNG terminal in Vancouver is it wherever coming on in 2024?

[Joel Armstrong, executive]

Jack, it's Joel Armstrong. In reference to your first question on the labor market. I think things have started to level out, I would say, in terms of pricing and/or the labor front. So we've been pretty consistent with our programs, and that was by design to make sure that we kind of maybe going back in time, we'd always front-end load our capital programs, try to level load throughout the year for that exact reason just to make sure that we can manage the labor side and execute our capital programs as best as possible. And we're very fortunate on how the capital programs have been executed so far. So my comment is things are in good shape.

[Grant Fagerheim, executive]

And just -- thanks, Joel. Just regarding your second question on what we would foresee on commodities going forward, I think you're going to continue to see -- we believe you're going to continue to see strength on oil prices, the WTI price, WTI and Brent. And that -- when we talk about the strength, I mean, we're in this today in that $8, $9 range. And -- but somewhere between 80 to 90, maybe I'm sure there's going to be times where it's out of those -- out of that band for a short period of time. But this is a very healthy band.

And when you look at that relative to the Canadian -- when you put the foreign exchange to the Canadian dollar trading in that $0.73, $0.735 range, that ends up with a $120 oil price. So very, very healthy prices.

When I talk about differentials, your question, I think, is -- really goes down the path of what happens to differential. We've got WCS trading very wide at this particular time. We're not as exposed to WCS pricing at Whitecap Resources because we're primarily a light oil producer but we do see the fourth quarter being challenged on WCS pricing and into the first quarter until we're -- and that goes back to the refinery challenges that we have in the U.S. right now in the U.S., Midwest and Toledo and other areas.

The component we have on more focus on light, which is trading on about a $2 differential between and we've been budgeting at $3.50 range. So we're well within our range there. So forecasting, once we see TMX coming on, we think that deletes the entire system, which will be sometime in the back half of 2023. It brings on that incremental -- between 500,000 to 600,000 barrels a day of incremental capacity we hope to pick -- system as far as natural gas is concerned and shift over to that.

We think that Canada is pretty well-balanced. Yes, we're producing about 17 to 17.5 Bcf a day today, which is up quite substantially from what we were. But I think that as you move forward into 2025, you may see that differential from 9x pricing back on the differential in natural gas prices to be stronger. But in the meantime, Canadian natural gas prices, once we get TransCanada through the end of this month and early into November, I think that differential definitely squeezes in from where it is at this particular time. So lots of, we'll call it, tailwinds on the differential side, both on oil and natural gas going forward.

[Operator]

And at this time, Mr. Fagerheim, we have no other questions registered, sir. Please proceed.

[Grant Fagerheim, executive]

Okay. Thank you, Sylvie. Thanks to each of you for taking the time and interest to listen to this call today. We are excited to execute on an active winter drilling season program and believe that our company is very well positioned to manage through this current price volatility. We look forward to updating you on our progress over the next few months. Wishing you all the best. Bye for now.

[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. Enjoy your afternoon.