Whitecap Resources Inc

TSX:WCP

Earnings Call Transcript 2019-Q4

[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 2019 Fourth Quarter and Year-end Results and Reserves Evaluation Conference Call. [Operator Instructions] And I would like to turn it over to Whitecap's President and CEO, Mr. Grant Fagerheim. Please go ahead, sir.

[Grant Bradley Fagerheim, President, CEO & Director]

Thank you. Good morning, everyone, and thank you for joining us. I'm joined by 3 members of our senior management team: our CFO, Thanh Kang; as well as Darin Dunlop, VP of Engineering; and Joel Armstrong, VP Operations and Production.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 the fourth quarter and year-end news release issued earlier this morning.We had an excellent year in terms of operational performance as well as being able to navigate through a volatile year for crude oil prices and Canadian differential pricing. Our original capital budget was set on December 18, 2018, at $425 million to $475 million, delivering average production of 70,000 to 72,000 BOE per day. As a result of our strong organic operating results, we were able to reduce our capital down to $400 million with no change to our average production for the year.The final tally for the year included achieving annual average production of 71,050 BOE per day on development capital spending of $404 million, significantly below what was initially contemplated. Total capital, including net acquisitions, was $407 million compared to $518 million in the prior year.Our program allowed us to improve our balance sheet strength by $103 million to $1.19 billion. We were also able to enhance return to shareholders by increasing the dividend by 5.6% effective with the May dividend and purchased 4.6 million shares through the normal course issuer bid during the year.With respect to our Montney program, the first nonoperated well was drilled and completed in 2019 and on production on December 5. The inflow from the first well, which was drilled as a step-out by our joint venture partner, is as expected. Water cuts on the well are still stabilizing and are consistent with the wells in the area, and the well was farthest removed from existing tests to increase variability and results are expected.Our first operated well is drilled and completed, and we anticipate this well will be on stream by mid-March. Our second operated well was drilled with completion expected after breakup. We also participated in a nonoperated well, which is currently drilling. Limited results to date are within the range of expectations, and we look forward to providing updates as the program progresses.We will continue to prioritize both return on invested capital as well as return of capital to shareholders through dividend and opportunistic share buybacks. A key component of our strategy is to maintain a strong balance sheet and liquidity position and to manage commodity price risk.As I mentioned earlier, net debt at the end of the year was $1.19 billion, resulting in $580 million of unutilized capacity of our existing $1.77 billion bank line, providing us with significant amount of financial flexibility. We continue to execute on our hedging strategy to mitigate risk and now have 47% of our crude oil production hedged in the first half of 2020 and 40% hedged in the second half of the year. Thanh will provide more details to our hedge portfolio later in the call.Environmental, social and governance issues remain topical not only in the investment community but as well with our Board of Directors. In 2019, we created a Board-level Sustainability Committee focused on evaluating risk and strengthening disclosure of our emissions and related factors. We believe that our ESG performance is competitive -- is a competitive advantage for Whitecap, having ownership and operating one of the largest carbon capture utilization and storage projects in the world.In this project in Weyburn, Saskatchewan, we store 1.8 million tonnes per year of CO2 annually, which is more CO2 than we emit corporately on an annual basis. We anticipate publishing our biannual sustainability report by midyear 2020, which will include additional opportunities to improve carbon efficiency in the future.I would like to now pass on to Joel for a comment on our ESG accomplishments in 2019. Joel?

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

Thanks, Grant. On health, safety and environment, 2019 was another strong year for the company. We remain firmly committed to ensuring our assets are developed in a manner that minimizes adverse impacts to the environment and at the same time, ensuring our employees and consultants are in a safe workplace.In 2019, we posted a combined employee and contractor total recordable injury frequency rate of 0.61. This rate is within our average range for the past 3 years and well below oil and gas industry averages.The total number of pipeline failures decreased for a third consecutive year, while at the same time, growing our inventory of active pipe. This trend speaks to the success of our asset integrity team and their initiatives performed throughout the year.2019 was the fifth consecutive year where we were able to reduce emission intensity and achieved significant reductions in both flared and vented gas intensity. Like the prior year, we safely stored more CO2 underground at Weyburn as part of our enhanced oil recovery process than we emitted from all operations, making Whitecap the only intermediate oil and gas company with net negative direct and indirect emissions.Lastly, we executed on an aggressive asset retirement program, spending $9.4 million on liability reduction in Alberta, British Columbia and Saskatchewan. We increased the number of wells that vented by 20% in 2019 over 2018, and we'll continue to advance our asset retirement program going forward.With that, I will pass it on to Darin to discuss our year-end reserves valuation.

[Darin Roy Dunlop, Vice President of Engineering]

Thanks, Joel. 2019 was another strong year for Whitecap as we continue to focus on organic reserves growth. We were able to successfully replace production and increase reserves across all categories while only spending 60% of our funds flow. Our PDP, 1P and 2P reserve additions replaced 100%, 133% and 169% of production, respectively. PDP, 1P and 2P reserves per debt-adjusted share increased by 7%, 9% and 11%, respectively. We achieved these increases in a very cost-effective manner with a PDP FD&A cost of $14.45 per BOE, resulting in a very profitable PDP recycle ratio of 2.1x.Whitecap is focused on maximizing our cost efficiency and inorganically converting undeveloped reserves to cash flow. The level of this efficiency is measured by PDP F&D, and ours has been very consistent over the last 5 years. It has ranged between $11.25 and $14.46 per BOE to average $13.13 per BOE, which has resulted in an average PDP recycle ratio of 2.3x over this period.We like the measure of PDP F&D as it removes the subjectivity of undeveloped reserve booking practices and the associated changes in future development costs. We believe PDP F&D and the associated recycle ratio is a true measure of our ability to economically support our business model and the dividend in the long term. Our total proven FD&A costs were $17.95 per BOE, and our 2P were $21.06 per BOE, generating recycle ratios of 1.7 and 1.4x, respectively.In addition to PDP F&D, we also maintain an emphasis on 1P and 2P growth. This growth supplies the feedstock for our PDP reserves and associated funds flow growth. Over the last 5 years, we have grown our 1P and 2P reserves by 134% and 131% on a BOE basis. On an oil basis, this jumps to 167% for 1P and 158% for 2P. This has more than kept pace with our PDP growth, ensuring ample feedstock for us to sustainably grow funds flows.The 2019 reserves evaluation includes expanded ARO liabilities as recommended by COGE. The expanded definition of ARO now includes suspended and serviced wells, gathering systems, facilities and surface land development. The 2019 McDaniel report included ARO costs of $924.1 million undiscounted or $114.9 million when discounted at 10%. This is a $167 million increase over 2018 or just $26 million when discounted at 10%. Our resulting total proved plus probable reserve value discounted at 10% is now $6.3 billion.With that, I'll pass it on to Thanh to provide some color on our financial results.

[Thanh C. Kang, Chief Financial Officer]

Thanks, Darin. Today, I will compare results from the fourth quarter of 2019 to the third quarter of 2019.Funds flow in the fourth quarter of '19 increased 20% to $184.5 million compared to $154.3 million in the previous quarter. $14.5 million of the increase was attributed to higher production volumes and $15.7 million was due to higher cash netback. Funds flow per share increased 22% to $0.45 per share compared to the previous quarter.Net loss for the quarter was $203.9 million or $0.50 per share. The net loss during the quarter was due to a noncash accounting impairment expense of $296.9 million in our West Central Alberta and West Central Saskatchewan business unit. The noncash accounting impairment expense was primarily due to the engineers price deck decreasing at December 31, 2019, compared to December 31, 2018.On average, USD WTI decreased by approximately 7% and Canadian MSW crude oil prices decreased by approximately 6% across all years on the reserve engineers price deck. We would expect, going forward, any significant changes to the engineers price deck would result in additional impairment expense or a reversal of previous year's expenses.Excluding the noncash accounting impairment expense, net income was $93 million or $0.23 per share.Whitecap's balance sheet remains strong with year-end net debt at $1.19 billion on total capacity of $1.77 billion. Our debt-to-EBITDA ratio was 1.6x in 2019, a decrease of 4% compared to 2018.On our risk management contracts for calendar year 2020, we have WTI cost of collars with a notional amount of 20,000 barrels per day at an average price of CAD 64.39 by CAD 83.06 and a swap with a notional amount of 2,000 barrels per day for the first half of the year at a fixed price of CAD 80.93. For further details on our outstanding hedges, refer to Note 5 on our financial statements.With respect to 2020, we are expecting to spend development capital of $350 million to $370 million, of which $150 million to $170 million will be spent in the first quarter. Q1 production is expected to average between 71,000 to 73,000 BOEs per day.We are closely monitoring the recent drop in oil prices to ensure that our spending profile for the remainder of the year is well within our funds flow. As a result of our current risk management program, our shallow decline assets and our strong capital efficiencies, we were able to withstand near-term price volatility without altering our capital budget for the year. Should oil prices remain low for an extended period of time, we will look to adjust our capital spending profile for the balance of the year.We feel that we're well positioned in this environment with our cost of debt fixed and termed out, a strong balance sheet and a dedicated and motivated team to continue to further enhance the return profile for Whitecap shareholders. We look forward to making advances through 2020 and reporting back to you with our progress.This concludes our remarks, and we'll be happy to answer any of your questions. I will now turn it over to the operator.

[Operator]

[Operator Instructions] And your first question will be from Luke Davis at RBC.

[Luke Davis, Analyst]

Just relating to the acquisition in Q1, just wondering how much incremental ARO you would have taken on with that.

[Grant Bradley Fagerheim, President, CEO & Director]

I don't know what the number is off the top of my head. We're going to have to -- we'll get back to you with that, Luke. The exact number, we're not sure about.

[Luke Davis, Analyst]

Sure. Okay. And then just as a follow-up, wondering if you can comment broadly on what you're seeing in the M&A market and where you guys might see opportunity going forward.

[Thanh C. Kang, Chief Financial Officer]

Yes. It's Thanh here, Luke. I think our focus really is to look at transactions that complement our existing core areas here. And similar to what we did with the -- that small acquisition for $16.2 million in the first quarter as well as the joint venture transaction that we did in the Montney there, those are the types and styles of transactions that we would look to focus on in 2020 here.

[Operator]

[Operator Instructions] And at this time, gentlemen, we have no other questions registered. Please proceed.

[Grant Bradley Fagerheim, President, CEO & Director]

We want to thank each of you for your interest in Whitecap and the progress we've made to date. We understand that investing in the energy industry at this time has been challenging. You should know that we will continue to do everything we can to improve the returns for our shareholders in an environmentally and socially responsible manner. Wishing you all the best for the day and the year, thank you.

[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.