Whitecap Resources Inc

TSX:WCP

Earnings Call Transcript 2022-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 Q4 2022 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

And I would like to turn to conference over to Whitecap's President and CEO, Mr. Grant Fagerheim. You may begin your conference.

[Grant Fagerheim, President & Chief Executive Officer]

Thanks, Sylvie, and 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 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 issued yesterday afternoon.

Whitecap had a very successful 2022 across all aspects of our business. Resulting in record funds flow, free funds flow and an extremely strong year-end independent reserves evaluation strong operational and financial execution resulted in continuous outperformance on our base assets despite the various headwinds the industry has faced such as supply chain issues and inflationary pressures.

This past year was also the combination of our consolidation strategy that started with a collapse in the crude oil prices in 2020. Our contra cyclical acquisition strategy added significant per share value for our shareholders and resulted in a much stronger and more resilient business with scale.

Our all-in $1.7 billion acquisition of XTO that closed at the end of August last year, was made possible through prudent management of our balance sheet and an extremely thorough technical evaluation of assets. A multi-decade unconventional inventory that we added in the Montney and the Duvernay complements our no decline, high netback oil-weighted assets and sets us up for long-term sustainable profitable growth.

This transformation of our company over the past couple of years has been remarkable, increasing our production based from 64,000 BOE per day in the fourth quarter of 2020, up to 166,000 BOE per day in the fourth quarter of 2022. Producing reserves over that time period have increased by 23% on a per share basis, while the total proved reserves per share have increased by 49%, with a before tax proved net present value at 10% discount rate of $19 per share based on our independent reserve evaluation.

In addition to growing our asset base and future drilling inventory, we continue to focus on cash returns to shareholders. After resetting our dividend early in 2020, we had an internal target to get our dividend back to 2014 levels through strategic acquisitions and free cash flow growth. We anticipate reaching our net debt target of $1.3 billion over the next several months and increasing our dividend to $0.73 per share on a per annum basis.

Cash returns to shareholders have been and continue to be a core priority for us. We continue to be an oral weighted upstream producer with 64% of our production being oil and natural gas liquids and 36% natural gas.

Although, 36% of our production is natural gas, it only represents 14% of our revenues, and therefore, the recent decrease in natural gas prices is not as impactful as to cash flows as one might have expected.

We remain bullish on long-term North American natural gas prices with the continued build-out of LNG export capacity. The use of natural gas as a transition fuel for industries such as power generation and for Western Canadian prices, specifically, it is encouraging to hear the commentary from Shell last week that the second phase of LNG Canada is progressing.

We also have a very positive outlook for crude oil prices, well into the future as a result of the massive underinvestment that has created a near to medium-term supply-demand imbalance.

With these comments, I'll now pass on to Joel Armstrong to comment on our operations. Thanks, Joel.

[Joel Armstrong, Senior Vice President, Production & Operations]

Thanks, Grant. Our company has experienced rapid growth over the past two years. We're proud to say that, we've maintained our strong safety record with the fourth quarter in line with our trailing 12-month and two year averages. We're always seeking out ways to improve our operations and safety is an integral part of this.

We're also pleased to report that in 2022, we decommissioned over 200 wellbores, had active surface reclamation activities on over 1,200 sites and received 52 reclamation certificates. In aggregate, we spent $20 million net on decommissioning activities this past year. And as discussed in September, we have $37 million included in our 2023 budget for decommissioning activities.

Strong execution in the fourth quarter resulted in production of 166,392 BOE per day, which is above our guidance of 165,000 BOE per day despite having 10,000 BOE shut in due to extreme cold weather in late December. Fourth quarter spending of $179 million resulted in drilling 50 and 35.2 net wells.

Switching over to current operations. We've had an active first quarter and recently hit our peak of 12 drilling rigs. We plan to run an average of 10 drilling rigs in the first quarter prior to breakup drilling 75 wells. We had forecasted inflation peaking in the first quarter of 2023 and remaining relatively stable as part of our 2023 budget, which is based on US$ 80 per barrel WTI, and we will continue to monitor our key cost inputs for both capital and operations in real time.

I'll now pass it on to Darin to discuss our reserves valuation.

[Darin Dunlop, Senior Vice President of Engineering]

Thanks Joel. We are very pleased with the results of our year-end reserve evaluation as performed by our independent reserves engineer McDaniel. Through our successful 2022 organic capital program PDP F&D costs continue to decrease. Our 2022, PDP F&D cost of $13.20 per BOE was down 19% from last year and 40% from 2020 and resulted in a very strong PDP F&D recycle ratio of 3.6 times.

Our capital efficiency in converting undeveloped reserves to producing reserves was better than forecast a testament to the strength of our assets as well as our execution. Folding the XTO assets into our reserves, resulted in a per share growth of 19%, 49% and 61% for PDP, total proved and total proof plus probable reserves respectively.

Pro forma, our recent dispositions, we had now have over 6,500 identified locations on our asset base, of which only 36% have been booked in our reserve report. This inventory provides us with over 25 years of profitable and sustainable growth.

Outperformance of our existing Southeast Saskatchewan Frobisher horizontals and Weber unit wells combined with our Central Alberta block and [indiscernible] wells contributed to almost 11 million BOE and positive technical revisions to our PDP reserves or approximately 3% of our closing balance.

In the 1P and 2P cases these positive technical revisions were offset by proactive negative adjustments in some of our legacy assets, including some of those which have been disposed already. These adjustments resulted in minor technical revisions of less than 0.5% and 1.5% of the closing BOE balances in both 1P and 2P cases, which is well within expectations.

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

[Thanh Kang, Senior Vice President & Chief Financial Officer]

Thanks Darin. We had a record financial result in 2022 with funds flow of over $2.3 billion or $3.74 per share generating free funds flow of over $1.6 billion. $480 million of total returns to shareholders were split approximately 50-50 between dividends and share repurchases.

Net income for 2022 was $1.7 billion or $2.70 per share compared to net income of $1.8 billion or $2.95 per share in 2021. Net income decreased primarily due to a larger noncash impairment reversal of $1.9 billion in 2021 compared to $661 million in 2022 offset by higher funds flow.

For the fourth quarter, we generated funds flow of $594 million or $0.97 per share and free funds flow of $415 million. We paid $67 million of dividends and reduced net debt by approximately $300 million in the fourth quarter, resulting in year-end net debt of $1.9 billion. Our year-end debt-to-EBITDA ratio was 0.7 times and EBITDA to interest ratio of 45 times were well within our covenant of less than four times and greater than 3.5 times, respectively.

Subsequent to year-end, we closed three non-strategic dispositions, which resulted in $426.4 million of assets and $110.9 million of the associate decommissioning liabilities being reclassified as held-for-sale on the balance sheet. The dispositions bring our current net debt to approximately $1.5 billion giving us $1.6 billion of available debt capacity and a forecasted debt-to-EBITDA ratio of 0.7 times at current strip prices.

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

[Grant Fagerheim, President & Chief Executive Officer]

Thanks very much Thanh. For 2023, our production guidance is unchanged at 160,000 to 162,000 BOE per day and capital between $900 million to $950 million. At $80 per barrel WTI and a $3 per GJ AECO forecast funds flow of approximately $1.8 billion and free funds pool of $900 million.

We look forward to utilizing the significant free funds flow generated in 2023 to meet our near-term financial milestones. These milestones include; number one, achieving net debt of $1.3 billion; number two, further increasing our dividend to $0.73 per share, a 26% increase from our current dividend of $0.58 per share per annum; and number three, returning a total of 75% of our free funds flow back to shareholders, which includes the base dividend of $0.73 per share supplemented with share repurchases.

The remaining 25% of our free funds flow will be directed towards further strengthening our balance sheet with net debt estimated to be between $1 billion to $1.2 billion prior to the year-end 2023.

Looking out for the next five-year period of time at a 3% to 8% per annum organic production growth, we can grow to over 200,000 BOE per day, generating over $4.5 billion and free cash flow or $7.35 per share at a $75 WTI and $3.50 AECO price per GJ. This would use up only one-sixth of our identified drilling inventory that we've spoken to earlier.

Beyond 2023, we look to enhance our 200,000 BOE per day organic growth target with business development initiatives focused on increasing per share profitability and sustainability should the opportunities present themselves. Although this 2023 year has begun with a significant amount of oil and gas price volatility, we are excited about the upcoming year and look forward to continued progress towards our financial and operational goals, while generating strong returns for our shareholders.

I will now turn the call back to our operator, Sylvie for any questions you might have. Thank you everyone.

[Operator]

Thank you sir. [Operator Instructions] And your first question will be from Jack Austin [ph] at Jack A. Capital [ph].

[Unidentified Analyst]

Hey guys, can you hear me?

[Grant Fagerheim, President & Chief Executive Officer]

You bet.

[Unidentified Analyst]

So congratulations on the great year. I love it. So I just have one question. And I know you guys have been very clear on the $50 and then $350 million sustainability. But I'm just wondering if -- and we have OPEC came over us to is like it's very unlikely that this does happen. But if it does happen would you guys cut like capital expenditures you have about $925 million? And could you just give some more color on -- I know it's a very small chance, but if it came down to $50 and $3.50 or below that? Thank you.

[Grant Fagerheim, President & Chief Executive Officer]

Thanh, do you want to go ahead?

[Thanh Kang, Senior Vice President & Chief Financial Officer]

Yeah, for sure Grant. Thanks for that question there. I think the way that we look at the business down at that $50 level though; we're certainly bullish on both oil and natural gas in the longer term here. At that level, I would say that we wouldn't be looking to grow our business. We're looking at maintaining our level of production. And so the $930 million would be much lower than that. It would be about $700 million to maintain our production at about 161,000 BOEs per day. So there's a lot of ability for us to withstand that volatility even at that low price and still fund our maintenance capital as well as our dividend program.

And so when we look at lower pricing scenarios, the most important thing for us which we focused over the last few years here is maintaining low leverage. And so getting to that $1.3 billion is critically important for us, but we'll be somewhere between $1 billion to $1.2 billion by the end of this year here which gives us even more financial flexibility and a lower pricing environment here.

So to answer your question for sure, we would be cutting capital. Our objective here on the dividend even at the $0.73 level is to continue to maintain that, but more importantly continue to grow it commensurate with our production growth rate in that 3% to 8%.

[Unidentified Analyst]

Thanks. Thank you very much, guys. Love it. Thank you.

[Operator]

Thank you. [Operator Instructions] And your next question will be from Christopher Jones at Haywood Securities. Please go ahead.

[Christopher Jones, Haywood Securities]

Hi, gentlemen. I just wanted to ask a question on slide 11 about looking or employing new well design to improve well performance. So maybe just talk a little bit about some of the specific changes you've made on the completion side. And then maybe on the back end, what have you seen from a, sort of, a per well EUR or decline profile? And any associated costs creep associated there? Thanks.

[Grant Fagerheim, President & Chief Executive Officer]

Yes. Perhaps. Joel and/or Darin wants to take this question?

[Joel Armstrong, Senior Vice President, Production & Operations]

Yeah, Christopher, it's Joel here. I guess, just speaking to completion design. More specifically in the Montney -- every well, every pad go through several iterations through the geomechanical, geological engineering, spacing. So every single well is looked at differently. It's not really a carbon copy from one completion to the next. Overall design mechanics are always very similar plug and perf, of course. Outside of that, I think, we've proven up our -- there are other plays Cardium Glauconite, sort of, completion design and yes, no real major changes on that.

In terms of on -- the cost side I don't think -- I think as we talked about earlier, we're starting to -- we're seeing our kind of our peak inflation in Q1. We've tweaked where we could to try and maintain our cost structure best possible. Don't foresee any upward pressure right now at the current commodity pricing. If there is a correction in quality pricing we'll see -- expect to see the capital side relate to that. I don't know if there's anything else I can offer on that. Darin, do you have anything?

[Darin Dunlop, Senior Vice President of Engineering]

No. Just to reiterate what Joel is saying, we look at a lot of factors when designing our development program and that changes obviously our frac design and wellbore design where we place wells in that. And in that is included our outlook on pricing. So different spacings for different pricing regimes.

[Christopher Jones, Haywood Securities]

Okay. Very helpful. Thank you.

[Operator]

Thank you. Next question will be from Peter Lender [ph], Investor. Please go ahead.

[Unidentified Analyst]

Yes. Good morning, gentlemen. I got a question on your XTO acquisition, what trends do you have for this year? Have you started drilling on it yet since you acquired it? And basically how much you're going to spend on these lands in 2023? And by the way great results.

[Grant Fagerheim, President & Chief Executive Officer]

Peter, I'll start off and then I'll ask Thanh to continue on. We certainly have begun drilling on these lands. And just for clarity we had -- when we bought the Montney -- the Montney acreage that we bought from XTO we had a 65% working interest on the Kakwa lands already through previous acquisition that we've done on with Kicking Horse. So we've been on these for over a two-year period of time actually with activity. But specific to our activity this year maybe Thanh, we can talk about how we're looking to capitalize on the number of wells we're looking for 2023.

[Thanh Kang, Senior Vice President & Chief Financial Officer]

Yes, for sure Grant. So this year as we mentioned our capital budget is between $900 million to $950 million. 45% of that budget is going to be allocated to our Northern Alberta business unit there of which 24 wells will be in the Montney. And right now we're anticipating three wells in the Duvernay there. The 36% is going to be allocated to our Saskatchewan business unit and then the remaining 17% in Central Alberta both keeping production relatively flat. Our anticipation in the Montney in particular is to grow that to about 38,000 BOEs per day. And when you look at our target over the next five years to get to 200,000 BOEs per day that has the Montney growing to about 65,000 BOEs per day there. So as Grant mentioned, we have been drilling in the Montney already, being 65% working interest in Kakwa and XTO being 35% there and we would have drilled 12 wells in 2022. So look to continue to expand on that with the additional 24 wells in 2023.

[Unidentified Analyst]

Is it fair to say that you're pleased with the results so far?

[Thanh Kang, Senior Vice President & Chief Financial Officer]

Yeah, for sure. I think what we'll look to do with the results that we've seen last year as well as build on it through our first quarter capital program here. With more data points we'll look for a more fulsome operational update as part of our first quarter results.

[Unidentified Analyst]

Great. Thank you very much.

[Grant Fagerheim, President & Chief Executive Officer]

Thanks, Peter.

[Operator]

Thank you. Next question will be from Anthony Linton at Barclays. Please go ahead.

[Anthony Linton, Barclays]

Hey, good morning guys and congratulations on a strong year. Just one question -- a couple of questions for me. Just to start there's a line in the release. Obviously, the focus for 2023 remains on operational execution. But there's a line in the release talking about business development activities beyond 2023. Just wondering how that might look as you kind of think about it and you think about the opportunities today?

[Grant Fagerheim, President & Chief Executive Officer]

I'll take a stab at that firstly and ask any of our Vice Presidents to jump in. So this is the year we wanted to ensure to our shareholders that this is a year for operational excellence. What we wanted to do is make sure that we have such a very strong inventory of opportunities within the organization. This is 2023 as a year to ensure that we refine our operational capabilities and making sure that we execute to have strong execution on this in advance. You heard Joel talking earlier about some of the well placement, some of the well designed. This is a year for us to really focus on that activity as we move through 2023. So on the business development front will be a quiet year for us. It will be a much quieter year than it has since 2021 and 2022, as we look to really drive performance from organic and that's why we say beyond 2023. If there's opportunities that can compete or add to our inventory of high-quality inventory and long-term profitability and sustainability, we'll look to do that as we move forward. But really 2023, we wanted to ensure from our perspective that shareholders understand that this is a year of inter -- we'll call it organic growth or optimization from our existing assets.

[Anthony Linton, Barclays]

Okay. That's great to hear. Thanks. And then maybe just coming back to the five year growth plan looking at that 3% to 8% production growth. I know you've talked about that in the past. How does the capital allocation across your business units kind of evolved over that time frame?

[Grant Fagerheim, President & Chief Executive Officer]

Sure. Thanh, do you want to strike on that?

[Thanh Kang, Senior Vice President & Chief Financial Officer]

Yeah. It's Thanh here. I mean if you look at our business today, it's -- there's three business units. We're looking at Central Alberta, Saskatchewan and in Northern Alberta. So Saskatchewan and Central Alberta are really our free cash flow generating business units. So what we'll look to do within that portfolio is really keep it relatively flat 1% to 2% growth over the next five year period of time. The key growth area for us will definitely be coming from Northern Alberta which is primarily the Dunvegan the Montney and the Charlie Lake area there. So we're looking to grow that somewhere in that 15% per annum over the next five year period of time. So the capital allocation that we're looking at in 2023, as I mentioned 45% in Northern Alberta, 36% in Saskatchewan and 17% in Central Alberta. That should remain relatively stable over the next five years.

[Grant Fagerheim, President & Chief Executive Officer]

Just a small note on that Anthony. The -- Thanh referenced Dunvegan meaning he meant the Duvernay.

[Thanh Kang, Senior Vice President & Chief Financial Officer]

Duvernay. Yeah, sorry about that.

[Anthony Linton, Barclays]

Got you. Okay, awesome. That’s great color, I’ll turn it back. Thanks.

[Operator]

Thank you. Next question is from Patrick O'Rourke at ATB Capital Markets. Please go ahead.

[Patrick O'Rourke, ATB Capital Markets]

Hi, good morning, guys. I just wanted to clarify something I heard in the opening salvo there, and see how it sort of evolves here and a little bit of a scenario analysis. I believe that it was mentioned, that you guys are going to be running 10 rigs up until breakup. Just wondering, how that looks in the second half of the year from a rig count perspective. And then Thanh mentioned, sort of maintenance capital level at $700-ish million there to pull flat at 160-ish 161,000 BOE per day. What sort of rig count would be required to sustain that going forward?

[Grant Fagerheim, President & Chief Executive Officer]

Joel, I'll turn it over to you if that works?

[Joel Armstrong, Senior Vice President, Production & Operations]

Yes. I mean, Patrick, we're -- it's Joel, here. We're spending $320 million in Q3, versus say $264 million Q1. So we'll be at a similar rig count, than what we are right now. I don't think, we'll see 12, but on that 10 or 11 rigs in Q3.

[Patrick O'Rourke, ATB Capital Markets]

Okay. And in the downside scenario I think it's unlikely from a commodity price perspective as well. But what sort of rig count, would be required to hold the business flat?

[Joel Armstrong, Senior Vice President, Production & Operations]

You're talking a $50, WTI scenario?

[Patrick O'Rourke, ATB Capital Markets]

Yes.

[Joel Armstrong, Senior Vice President, Production & Operations]

I mean, Patrick, I don't -- we're kind of making up numbers here, but seven eight rigs to kind of maintain our base level somewhere in there.

[Darin Dunlop, Senior Vice President of Engineering]

Yes, you could -- it's Darin, here. Yes, you could probably just take a ratio would be a reasonable estimate.

[Thanh Kang, Senior Vice President & Chief Financial Officer]

Yes.

[Patrick O'Rourke, ATB Capital Markets]

Okay. And then kind of a second question, shifting gears here. I know that gas revenue as a percentage of overall revenue is fairly low here. But -- are you guys looking at anything on the more sophisticated gas marketing front here? Some of your peers, sell gas into the Mid-Continent California, LNG deals. Anything that you're looking at from a business development front on that perspective, that could potentially extract a little bit more value out of basin from you guys?

[Grant Fagerheim, President & Chief Executive Officer]

We are certainly looking at that at this particular time. And first of all, to understand where we came from, we talked about we -- in 2020 we were producing about 60 million, a day and now we're about 320 million to 330 million, a day of natural gas. So this is a big change for us. So what we're looking at is, not just only the pricing centers in North America, but also offshore into LNG markets.

So we are looking to, alter what we call are -- where we take our products to. The key is transportation to make sure that we can transport it to the market centers. And then, we're reviewing each one of the market centers. And that work is aggressively ongoing. So, we'll come back. And as we move through this year, we'll have more of an update, as we move through the 2023 year, will a greater update on that Patrick.

[Patrick O'Rourke, ATB Capital Markets]

Okay. Thanks very much.

[Operator]

And at this time gentlemen we have no further questions registered. Please proceed.

[Grant Fagerheim, President & Chief Executive Officer]

Thank you, Sylvie. Well, thanks to each of you for taking the time and interest to listen to our call today and we will look forward to updating you on our progress, on numerous different items as we move through the next several months. So, thanks very much. Enjoy your day. All the best.

[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.