Whitecap Resources Inc

TSX:WCP

Earnings Call Transcript 2018-Q4

[Operator]

Good morning. My name is Sylvie, and I will be your conference coordinator for today. At this time, I would like to welcome everyone to the Whitecap Resources 2018 Fourth Quarter and Year-end Results Conference Call. [Operator Instructions]And I would like to turn the conference over to Grant Fagerheim. Please go ahead. Sir, you may begin.

[Grant Bradley Fagerheim, President, CEO & Director]

Good morning, everyone, and thank you for joining us here today. I am joined by our CFO, Thanh Kang; as well as our VP Engineering, Darin Dunlop; and our VP of Operations and Production, Joel Armstrong. 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 fourth quarter news release issued earlier this morning.From an operational perspective, 2018 was an exceptional year of organic growth for Whitecap, as fourth quarter production averaged 73,185 BOE per day and 74,415 BOE per day for the year. Fourth quarter average production was in line with our expectation of 73,500 BOE per day, which was impacted by 1.8 million a day of nonoperated dry gas production that was shut in, and our decision to hop our Viking drilling program early in response to the wide crude oil differentials experienced in the fourth quarter. This resulted in capital expenditures being $10 million lower than our forecast of $86 million for the quarter, and $450 million for the year. In the fourth quarter, we saw the importance of price diversification, as not all benchmarks are created equal.Approximately 50% of our crude oil production is in Saskatchewan, which receives stronger pricing than Alberta. The Edmonton Park discount averaged USD 26 per barrel in the fourth quarter compared to the Midale par discount of $17, which is what we received in Southeast Saskatchewan. In Southwest Saskatchewan, the Fosterton premium to WCS was USD 13 per barrel. In addition, we realized $49 million in hedging gains on our differential hedges, which allowed us to generate strong principle net back of $20.62 per BOE in the fourth quarter.Funds flow for the quarter was $138.8 million or $0.33 per fully diluted share, and $704 million -- $704.4 million or $1.67 for the full year.Funds flow for the year exceeded capital spending $440.5 million and dividend payments of $132.3 million by $131.6 million, which resulted in a total payout ratio of 81%.With those comments, I will turn it over to Thanh to provide some color on our financial results, including our netbacks and our other key financial metrics; and then to Darin to comment on our year-end reserve report.

[Thanh C. Kang, Chief Financial Officer]

Thanks, Grant. 2018 was a very volatile year for crude oil prices with WTI trading as high as USD 76.41 per barrel, as low as $42.53 and averaging $64.77 in the year. The Canadian light oil differential traded as wide as USD 37.10 per barrel, as narrow as $1.80, and averaged $11.12 for the year. And finally, the Canadian heavy oil differential traded as wide as USD 52.60 per barrel as narrow as $10.20 and averaged $26.31 for the year.Our average realized crude oil price prior to hedges and tariffs was $66.46 per BOE compared to $58.61 in 2017, a 13% increase.Operating expenses were $12.28 per BOE and processing income was $0.44 in the fourth quarter. On a combined basis, they were in line with our $12 per BOE expectation for the quarter. We're forecasting Q1 '19 operating expenses combined with processing income to be $12.75 per BOE.However, as we ramp-up production in the back half of 2019, we project these expenses to decrease to $11.50 in Q4 of '19.Transportation expenses for the fourth quarter were $2.20 per BOE, and tariffs were $0.60 per BOE. On a combined basis, they were consistent with our forecast of approximately $3.For 2019, we anticipate transportation and tariffs to be relatively stable at $3 per BOE.G&A expenses of $0.78 per BOE were 29% lower than our expectation of $1.10, as there was an adjustment in the quarter to true-up to full year expected G&A expenses.We are forecasting 2019 G&A of $1.20 per BOE.Interest and financing expenses of $2 is consistent with our expectation of $2 per BOE, and we anticipate this to be similar in 2019.The DVAA rate prior to an accounting impairment was $18.57 per BOE, which was comparable to the prior year at $18.45.There was an accounting impairment charge of $219.3 million in the fourth quarter relating to technical revisions on our Viking assets in West Central Saskatchewan, which Darin will discuss in further detail with our reserve report.Our balance sheet remains strong at $1.3 billion of net debt on credit capacity of $1.7 billion. Debt to EBITDA was 1.7x compared to our debt covenant of not greater than 4x. EBITDA to interest ratio was 4x -- 14x compared to a debt covenant of not less than 3.5x.With that, I'll turn it over to Darin for comments on our year-end reserve report.

[Darin Roy Dunlop, Vice President of Engineering]

Thanks, Thanh. In the year focused on organic growth, we grew our reserves by approximately 2%, and more than replaced our production in all categories, 114% in PDP and 129% and 126%, respectively, for 1P and 2P. As only 15% of our spending this year was on A&D activity, most of my comments will be related to our development capital results and the associated SMBs. Also, the numbers I'm quoting will be inclusive of changes in FDC unless otherwise stated.We had another strong year from a PDP perspective, where our F&Ds up $13.06 per BOE resulted in a recycle ratio of 2.2x. This is even more impressive when you compare it to the forecasted average cost to develop the proven undeveloped reserves in our 2017 reserves report, which was $16.39 per BOE. This demonstrates that we were about 20% more efficient at converting our undeveloped reserves to PDP than was forecast in last year's reserve report. This has been the case for the last 2 years.Our 1P and 2P F&Ds of $22.70 and $24.83 per BOE generated recycle ratios of 1.3x and 1.2x, respectively. These F&D costs, while still providing very economic returns are higher than past years for several reasons. One, we had a onetime addition of $194 million in long-term future development cost or FDC. This is primarily made up of incremental CO2 volumes in Weyburn, but also included the new COGE Handbook requirement for the inclusion of future maintenance capital. When discounted, this FDC addition only reduces our NPV10 by $65 million; two, we elected to reduce our Viking recovery for well estimates in some of our non-water flooded areas. This was a conservative, but proactive action to position Whitecap for many more years of economic Viking development and reserve additions and conversions. On average, our Viking drills still generate some of the shortest payouts and highest rate of returns in our portfolio and in Western Canada, for that matter. And thirdly, our reserve additions were much more oil and liquid focused in 2018 at 92% versus 77% in 2017. These higher netback additions typically coincide with higher F&D.Reserve additions and the associated F&Ds in any given year can often be skewed by the timing of results and subsequent interpretations relative to the development and maturity of an asset. A more relevant assessment, as it relates to the long-term financial performance and objectives of a company is to look at F&D trends. For example, over the last 4 years, our 3-year cumulative PDP F&Ds have declined 43% from $22.06 to $12.55 per BOE, and have also declined 38% on an FD&A basis. We anticipate that due to the nature and quality of our assets, we will be able to maintain these exceptional PDP F&Ds and provide the platform for generating reliable returns for our shareholders.I will now provide some commentary on some of our asset regions. For reference, the percent reserve increases I am quoting here forward are calculated by taking the total revisions divided by the opening reserve balance. Same for the production replacement percentages. Total revisions divided by the average 2018 production.Our Weyburn asset was acquired in December of 2017, and as a result, the 2017 reserves reflected the previous evaluated historical assumptions relating to forecast methodology, performance and future development plan.In 2018, we undertook a comprehensive and collaborative review of Weyburn's reserves to realign our assessment with Whitecap's development plans. As a result, our PDP and 1P reserve saw positive revisions of 11 million and 16.6 million BOE, respectively, increases of 16.7% and 18.5%. From a production replacement perspective, these assets replaced 208% and 314% of the production on a PDP and 1P basis.Associated with the revised reserve development was the $147 million increase in CO2 FDC. This CO2 increase is scheduled over the life of the pool, and the impact it has on a 10% discounted basis is much less at $49 million.These positive revisions are a significant increase in a reserve base that is among our most stable and predictable producing assets.In addition, we believe there are still solid technical grounds for the possibility of further increases in future years as we act on our development and expansion plan.In Southwest Saskatchewan, we also realized exceptional growth, with our reserves increasing 18.1% on PDP, and 17% on 1P, with a corresponding 142% and 166% replacement of the production.Our Viking assets in West Central Saskatchewan represent approximately 10% of our corporate reserves base. After conducting a very detailed technical review of the region, we identified that wells in some of our more mature primary developments might be at risk of not recovering their bulk reserves. Therefore, as previously mentioned, we proactively elected to reduce our Viking reserve recovery per well estimates in some of our nonwater flooded areas.When the positive impacts of water flood additions, pipe conversions and growing extensions are included, the regions PDP reserves increased by 3 million BOE, while 1P and 2P reserves were reduced by 4.2 million and 6.2 million BOE, respectively.Our Viking initial rates, ultimate recovery and costs are still among the best for active Viking operators, and therefore, economics associated with these revised estimates are still exceptional at 7.5-month payouts, and over 200% rate of returns on average.This year, we conducted an in-depth technical review of our complete corporate drilling inventory, and compiled an internal estimate of the associated reserves down to an individual well level. Approximately 50% of our inventory remains unbooked, and this unbooked inventory has the potential to increase our 2P reserves by upwards of 35%, at an average F&D of $11.30 per BOE. 70% of this unbooked inventory is associated with our waterflooded EOR properties, which have additional reserves upside as the development of these properties and the associated ultimate recovery estimates mature.In conclusion, we feel Whitecap's current and future reserves base is in excellent shape and provides us a platform from which to deliver many years of consistent growth and returns to our shareholders.I will now pass it back to Grant for some closing comments.

[Grant Bradley Fagerheim, President, CEO & Director]

Thanks, Darin and Thanh. Looking forward, we feel that 2019 creates a comeback year for Canadian oil companies. We start the 2019 year on a conservative note, spending less than 25% of our annual budget in the first quarter, which normally is approximately 45% of our capital program. We then see growth to 78,000 BOE per day in the fourth quarter, which is a 7% production growth over Q4 2018 levels.We will look for opportunities to enhance shareholder returns as we move through the year. We have a strong balance sheet, which will remain our priority along with the strategy of sustainable growth and dividends, funded by funds flow that will provide strong returns to our shareholders over the longer term, and we look forward to executing on this strategy.Thanks to each of you on this call for your support and the interest in Whitecap, as we navigate through these volatile commodity pricing environment.With that, I will turn the call over to the operator for any questions. Thank you.

[Operator]

[Operator Instructions] And your first question will be from Thomas Matthews at AtlaCorp Capital.

[Thomas Matthews]

I just had a couple of questions. I just wanted to confirm that the increase in pricing here hasn't caused you to deviate from your first half strategy as CapEx spend is locked down and there'll be no changes there?

[Thanh C. Kang, Chief Financial Officer]

Yes, sure. It's Thanh here, Thomas. Yes -- no, the strategy of the priority is the same here. We'll look at a defensive first half of the year, still anticipate somewhere in that $70 million of free cash flow and the $450 million on a full year basis. So the free cash flow at this time is directed towards debt repayment.

[Thomas Matthews]

Okay. And then because I know you that you announced your budget on late December when it felt like the world was coming to an end. So I guess, when do you make the decision to either increase the budget or potentially use some of that free cash flow for other means, like potential dividend increase or additional share buybacks? Do you make that decision kind of after the summer?

[Grant Bradley Fagerheim, President, CEO & Director]

Thomas, just -- it's Grant speaking. And -- but we'll make that decision, ultimately, at the end of the first quarter. So we're just about completed through. Joel can comment on that further if you're interested. We're just about through our drilling phase in the first quarter here. So once we get through that experience, the results -- we'll view the results. We'll see where pricing is and everything in that at that particular time, make a final decision on what we do. I expect that we'll keep within our capital program of $425 million to $475 million. But the increased pricing and the reduced differentials that we're seeing, we anticipate there's probably going to be more free cash flow generated. So we'll make a decision on whether it's increased capital, dividend or just continue as -- our top priority is to continue to whittle away on our debt.

[Thomas Matthews]

Okay, sounds good. And then just final question. It's just on the reserve report, it's probably a question for Darin. But you mentioned the big positive revision in PDP from Weyburn. But then there was also the mention of an increase to the FDC on a 1P and 2P level, but there was a reduction in FDC on the PDP level. So I'm just kind of wondering where that reduction came from, given the increase, I guess, in the future reserves? Was there just a reevaluation of what you needed to keep the current barrels online at Weyburn? Or is that related to another pool?

[Darin Roy Dunlop, Vice President of Engineering]

No, no. That's exactly what you had mentioned, Thomas, is that when we revised our development plan to -- in the reserves to reflect more what's along the lines of Whitecap has planned, and our efficient use of CO2, more of it was allocated to the undeveloped rollouts versus our producing asset. So that's you saw a little bit less CO2 FDC in the PDP, but an increased FDC in the 1P and 2P.

[Thomas Matthews]

Okay. So less CO2 allocated to the current production, more CO2 needed on the rollouts on top of what was already booked?

[Darin Roy Dunlop, Vice President of Engineering]

Correct.

[Operator]

[Operator Instructions] And currently Mr. Fagerheim, we have no other questions. So I would like to turn it back to you for any more comments.

[Grant Bradley Fagerheim, President, CEO & Director]

Okay, well, thanks very much. And we look forward to coming back to everyone here, and also following on what is going on with our Prime Minister. So thanks very much, everyone, and have a good day. Bye for now.

[Operator]

Thank you, sir. Ladies and gentlemen, this does concludes your conference call for today. And once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.