Whitecap Resources Q3 2023 Earnings Call Transcript

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October 26, 2023

Key Takeaways

  • Our Q3 drilling program invested CA$281 million to drill 76 successful wells, delivering production of 157,000 BOE/d and generating CA$466 million of funds flow and CA$184 million of free funds flow.
  • We reached our net debt milestone of CA$1.3 billion on a 0.6× debt-to-EBITDA ratio, with over CA$1.8 billion of liquidity on credit facilities to manage commodity price volatility.
  • The 2024 budget plans CA$1.0–1.2 billion of capital to drill 258 wells and target average production of 162,000–168,000 BOE/d, while allocating CA$165 million to infrastructure and CA$150 million to EOR projects.
  • Inflationary pressures of approximately 10% have pushed our full-year capital spending to the high end of guidance and could weigh on costs going forward.
  • Initial results from our Duvernay program have exceeded expectations with average IP90 rates of ~1,500 BOE/d per well, supporting plans to drill 11 Duvernay wells in 2024.
AI Generated. May Contain Errors.
Earnings Conference Call
Whitecap Resources Q3 2023
00:00 / 00:00

There are 7 speakers on the call.

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 2023 Results and 2024 Budget Conference Call. Note that 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

And I would like to turn the conference over to Whitecap's President and CEO, Mr. Grant Fagerheim. Please go ahead, sir.

Speaker 1

Thanks, Sylvia, and good morning, everyone, and thank you for joining us here this morning. Here with me today, I have 5 members of our management team, our Senior Vice President and CFO, Thanh Kang our Senior Vice President, Production and Operations, Joel Armstrong, our Senior Vice President, Business Development and IT Dave Bomburquette. We also have Joey Wong, our Vice President of the West Division and Chris Bullen, our Vice President of our East Division joining us for the first time here today. Before we get started, 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. I'm happy to report that our Q3 was very successful both operationally and financially.

Speaker 1

Our active 3rd quarter drilling program resulted in $281,000,000 of capital spending and the drilling of 76 gross Successful wells, which generated production of over 157,000 BOE per day. When we announced our first quarter results, We had reallocated portions of our capital program to higher oil weighted assets and since Then our liquids production has outperformed our expectations. Total liquids production, including oil, condensate and NGLs was over 103,000 BOE per day in the Q3 and with crude oil prices averaging CAD110 per barrel, we were able to generate $466,000,000 of funds flow and $184,000,000 of free funds flow. After our dividend payment of $88,000,000 we allocated approximately $100,000,000 of prefunds flow to our balance sheet, resulting in the achievement of our $1,300,000,000 debt milestone that we had set earlier. Over the past 3 years, Whitecap has undertaken a large transformation increasing from approximately 60,000 BOE per day up to approximately 160,000 BOE per day today through a series of transactions with the XTO transaction last summer being the largest at $1,880,000,000 As an all cash yield, we were able to significantly increase Current and future value for our shareholders while protecting our balance sheet through the commodity price cycles.

Speaker 1

We will now return 75% of our free funds flow to our shareholders through our $0.73 per share dividend on an annual basis and share repurchases under our NCIB. Since first implementing a base dividend in 2013, we have focused on strong cash returns to shareholders along with continually growing our business. Our focus will continue to provide moderate annual organic production growth of 3% to 8% per year, while growing our dividend commensurate with our targeted annual growth rate. I will now pass it on to Thanh to discuss our financial results. Thanh?

Speaker 2

Thanks, Grant. An excellent quarter for Whitecap with production, funds flow and free funds flow being the highest so far in 2023 and net debt at its lowest. As mentioned, our 3rd quarter funds flow was $466,000,000 or $0.76 per fully diluted share, which was 12% higher relative to the Q2. Impacting our Q3 funds flow was current income tax expense of $44,000,000 which equates to approximately 9% of pre tax funds for the quarter and 4.5% for the 9 months ended. We recalculate current taxes quarterly based on current strip prices.

Speaker 2

As strip prices are volatile, this will cause fluctuations in our quarterly current tax expense as year to date accruals need to be trued up. For 2023, we are forecasting a full year current tax rate of 4% to 6% of pre tax funds flow. This will increase to 10% to 15% in 20 24 as our 100 percent deductible pools will be fully exhausted. As Grant mentioned, our balance sheet is in great shape and hitting our $1,300,000,000 net debt milestone is key to managing through commodity price volatility. Our 3rd quarter debt to EBITDA ratio was 0.6 times and we now have over $1,800,000,000 of liquidity on our credit facilities.

Speaker 2

As a reminder, approximately 90% of our liquids production is linked to light oil or condensate pricing. And although differentials on these products have widened slightly into the Q4, the larger decreases that we have seen in heavy oil prices are less impactful to our funds flow. As discussed in the press release yesterday afternoon, we anticipate our full year 2023 production to come in at the low end of our guidance range and with inflationary pressures at approximately 10% above our original expectations, we anticipate our full year capital to be at the high end of our guidance range at approximately 950,000,000 Early time outperformance of our Montney type curves has improved the economics through quicker payouts. However, at this time, we have not made any adjustments to our expected reserves on a per well basis and along with temporary suspensions of existing wells to complete fracking operations of new wells and some unplanned downtime, we now expect annual production to be 157,000 BOEs per day. I will now pass it back to Grant for his remarks on the 2024 budget.

Speaker 1

Thanks, Don. The 2024 budget we put forward last evening represents meaningful progress towards our organic production goal of over 200,000 BOE per day by the end of 2027 along with meeting our near term goals of high Free cash flow generation and increasing our net asset value longer term. Our Board of Directors approved the 2024 budget of $1,000,000,000 to $1,200,000,000 which is expected to generate average production of 162,000 to 168,000 BOE per day. We plan to drill approximately 258 wells and invest $165,000,000 on infrastructure projects and $150,000,000 on EOR projects. Our West division will be allocated approximately $600,000,000 to drill 42 wells, 80% of this capital will include 28 wells, which will be in the Montney and the Duvernay, the focus assets within our division.

Speaker 1

The significant depth of Montney and Duvernay inventory supports higher growth and increased profitability with greater scale. In the West division, we anticipate investing 130 and $165,000,000 towards infrastructure projects. The 3 primary projects are a 20,000 BOE per day battery, which will serve service the Musgrove area to the north of our Kakwa development and is scheduled to be completed in Q2 of 2024. The other two projects will support the next stage of our development in the Duvernay and Kaibab and our long term growth plans for the Montney development in the Latour region. With regards to our infrastructure spending and build out, It is our intention to build facilities that we have plans to produce through, retain operational control and consider selling down our interest to strategic partners in the future if it is beneficial to our operations and our financial position at the time.

Speaker 1

For our East division, we are allocating approximately $500,000,000 to drill 215 wells across our Central Alberta and Saskatchewan. The focus on for our East division is to hold production at relatively flat and continue to generate outsized free cash flow for the company. We have also allocated approximately $150,000,000 to EOR initiatives to improve on our already low decline rate and our sustainability over the longer term. One of the many challenges that our business has faced over the past years has been the impact of inflation has had on our cost control. Since the beginning of 20 23, we have experienced approximately a 10% inflation on our capital and operating costs, higher than what we expected when we released our 2023 budget.

Speaker 1

The main drivers of inflation have consistently been Steel, labor, raw materials on the capital cost side, our labor and power costs have been higher than expected on the operating cost side. For 2024, we have modeled certain costs to stay relatively flat, while we do expect some inflationary pressures to persist in labor, power and frac sand. At current prices, we forecast $1,800,000,000 of funds flow in 2024, which generates $700,000,000 of free funds flow using the midpoint of our capital guidance. I will now pass the phone off to Joey for more remarks on our West Division results and 2024 budget. Joey?

Speaker 3

Thanks, Brent. Our 2024 budget for the West Division will take our Montney program to the north of our main capital development and into Musro. We are currently running 2 rigs in the area and have had a good start to drilling operations on our first two four well pads. Given the need for infrastructure, we took additional time to plan our development at Muzro and now plan to drill a total of 16 wells at Muzro by the end of 2024, 8 of which will be spud in Q4 of this year and 8 wells in 2024. The first eight wells is scheduled to come on production with the completion of our battery in Q2.

Speaker 3

The battery which will be pipeline connected to the CAP system will help to fully capitalize on our identified 55 drilling locations over 16 secondtions at Masero. Depending on factors such as geology, offsetting wells and localized reservoir characteristics, we will be drilling both single bench as well as multi bench pads. We are looking forward to the results from our Musgrove development in the second half of twenty twenty four. Another area that I wanted to touch on was Berwind and given the completion of 2 standing DUCs that were drilled in the drilled by the previous operator in 2019. Given its size, this area was not a significant focus as we were evaluating this acquisition.

Speaker 3

However, it is pipeline connected to an existing third party gas plant and if these two wells continue to outperform expectations, this area could attract more spending to develop the approximately 100 identified Now moving on to the Duvernay. We are very pleased with the results from our first three wells into the play with an average IP90 rate of approximately 1500 BOEs per day per well with both rates and liquid rates above our expectations. Our second pad, a 4 well pad at 1114 was brought on production on October 15 and we're very encouraged with early time data. Both drilling and completion operations on these first two paths have been executed very well and we feel confident that our team can continue to this trend with the 11 Duvernay wells planned for 2024. With our 100 percent working interest ownership of the 1507 gas facility in KaBOB each incremental pad that we bring on production in the Duvernay improve the utilization of that facility and improve the overall profitability of the area.

Speaker 3

The Gathering system upgrades that we're making in 2024 will help facilitate future development on the west portion of our acreage at KaBOB and help fill that plant up by the end of 2025. I'll now pass it on to Chris for his comments on the East division.

Speaker 4

Thanks Joey. The East division is looking to follow-up on what has so far been a Successful 2023 with a strong 2024. Our assets across each region from Central Alberta to both Western and Eastern Saskatchewan have all outperformed expectations. For 2024, we plan to drill 215 wells in the East division. Approximately 65% of these wells will be directed towards quick payout, short cycle, light oil weighted assets in the Viking in Western Saskatchewan and in the Probusure in Eastern Saskatchewan.

Speaker 4

At current prices, our type of business areas achieved capital payout in only 5 months. The second theme that is prevalent with our teams in these division Is the constant drive to improve on our already highly economic inventory. We are continually increasing lateral lengths and drilling more extended reach horizontal wells across each play type, providing for better efficiencies across our asset base. We are also drilling more dual and triple leg laterals in our Frobisher focused Eastern Saskatchewan assets, which accounts for about 80% of our 2024 program. In addition to the above, we have recently piloted our first open hole multilateral in the Viking in the Elros area.

Speaker 4

This well just came on production, so there are no results to report just yet. However, if we are successful here, we believe this could enhance a substantial portion of our Viking inventory. We are also allocating approximately $150,000,000 to EOR initiatives for 2024. Our EOR projects are a key differentiator for Whitecap as a low decline rate and subsequent low maintenance capital requirements are coupled with the high netback nature of our light oil weighted assets which helps to generate strong free cash flow for the company. The majority of our EOR capital will be directed towards the Weyburn CO2 project where we are very pleased to have recently signed an extension with SPC and the Boundary Dam facility for Q2 supply to the end of 2,034.

Speaker 4

With that, I'll turn it back over to Grant for his closing remarks.

Speaker 1

Thanks, Chris and Joey. We're very excited about 2024 Capital Program and how we position Whitecap for the long term including our current assets, our extensive drilling inventory and as importantly, the dedicated and very capable personnel we have within our company. We have over 3,000 locations in our West division that can sustain a consistent growth rate of 10% over the next 25 years with recent results supporting our outlook for this division. We also have 3,500 drilling locations within our East division that will provide significant free cash flow to the company with various technical initiatives underway to further enhance our lighter oil weighted inventory and future growth. Lastly, I'm very pleased that our Canadian Energy is on the cusp of adding significant pipeline takeaway capacity for both crude oil and natural gas over the next 2 years, thereby allowing Canadian production that complies with high standard environmental standards to reach foreign markets.

Speaker 1

Not only should our pricing realizations improve, but having greater certainty of our products as we're getting to markets that need the most should be something that we are all proud of as Canadians. With that, I will now turn the call over to the operator, Sylvie, for any questions.

Operator

Thank You will then hear a 3 tone prompt acknowledging your request. And your first question will be from Dennis Fong at CIBC. Please go ahead.

Speaker 5

Hi, good morning and thanks for taking my questions. My first one really is just around free cash allocation. You reached your $1,300,000,000 target here very recently. But can you talk towards the mechanics on returning free cash flow via buybacks? I know there's The component of allocation after you've, we'll call it, paid the dividend component.

Speaker 5

But can you talk a little bit around The management of cash through time as well as the buyback program please? Thanks.

Speaker 2

Sure. It's Thanh here. Thanks for that question here, Dennis. So with respect to the share buybacks on the free cash flow allocation, In the Q4 here, basically based on strip pricing, we have about $125,000,000 on the NCIB in order to get to that 75% of free cash flow that goes back to shareholders. So what we'll look to do is once we finalize what that funds flow looks like For the Q4, sometime in March February, March next year, we'll look to execute on the NCIB.

Speaker 2

Going forward in 2024, As you know, from a capital spending perspective, the highest CapEx is going to be in the Q1 and Q3 and then we'll have lighter capital spending in the Q2 and Q4. So we'll look at everything on a 6 month basis. Really the first half of the year, we'll look to finalize what our free funds flows looks like and then start looking at executing on the NCIB. So it's a 6 month look back effectively to make sure that we're very confident that we are generating That free funds flow before we spend it on the NCIB.

Speaker 5

Great. Appreciate that color. My follow-up on that question is in the press release you highlighted a $1,000,000,000 I don't want to call it next target, but the expectation of achieving a of achieving $1,000,000,000 of net debt in 2024. Is that a stopping point? Or is the view that, you want to further The balance sheet or build dry powder on an ongoing basis and does that potentially impact or influence the way you look at allocating free cash flow once you reach I guess that next

Speaker 2

level. Yes. I think that when we look at where our debt levels are right now, it's very low. I mean we're 0.6 times debt to EBITDA. At the $1,000,000,000 we're 0.5 times debt to EBITDA there.

Speaker 2

So as we continue to allocate 75% of free funds flow back to shareholders, 25% Against the balance sheet, you could potentially see us drive down even lower levels of debt. And I think given the volatility that we're seeing in the market here, Specifically on the price of oil and the higher cost of borrowing, I think you're going to see A higher cost of borrowing for a longer period of time here. So having lower levels of debt is a prudent thing from our perspective here. But the reality is, as we continue to grow our business 3% to 8%, I think we've put together a very strong 2024 budget here. But we're always going to look for ways to enhance that model as we move into 2024 and beyond here.

Speaker 2

And having that Flexibility in your balance sheet really provides that optionality for our shareholders.

Speaker 1

Just to follow on to that. I do think, as Tom was speaking to it, with our debt capacity at this particular time, our line at $3,100,000,000 and just under $1,300,000,000 drawn, We have a very significant amount of significant capacity of $1,800,000,000 And when we look at This relative to our share buybacks, I mean, we've always said maintained a priority to run within a responsible level of debt. But on the buyback side, we look at our intrinsic values as well from a PDP basis as well as a total proved. And this is a good time to be buying back our shares. So all that will go into the mix as to ensuring that we're just focused on creating as much value for shareholders as we possibly can and supplementing The budget that we do have out there through share buybacks, through any acquisition activity that may come forward, we'll continue to look at that as well.

Speaker 1

But That all starts with protecting our shareholders today and creating as much value into the future as we possibly can.

Speaker 5

Great. Thanks. Appreciate the color from both of you. I'll turn it back.

Operator

Thank you. And your next question will be from Patrick O'Rourke at ATB Capital Markets. Please go ahead.

Speaker 6

Hey, good morning guys and thanks for taking my question. Just Looking through the specifics of the budget for 2024, I know that you've got about $130,000,000 allocated to infrastructure for the West unit. Now that you've had some time and appreciating that things can shift around a little bit, I know you mentioned potentially drilling some wells at Berlin at some point in the future. Sort of what is your current infrastructure and processing capacity there? And then in terms of that 130,000,000 How will that evolve as we move out into the outer years of kind of the multiyear plan here?

Speaker 6

Because you hit a point where that drops off and that will enhance the capital efficiencies or do you think that that's more of like annual run rate?

Speaker 1

Yes. Thanks, Patrick. Just regarding the infrastructure build out in what we'll call the West division, It's our intention to continue to have, as I mentioned in my previous comments, operational control and build out our infrastructure in front of the drilling program that we're Drilling programs that we do have. Today, the growth potential that we have available to us would be about another somewhere in that neighborhood of another 30,000 barrels a day of capacity today, but we want to stay in front of that with infrastructure build out And retaining operational control as we move forward. How we look at that, we're talking about $130,000,000 this year.

Speaker 1

There will be a long build order infrastructure here, whether it's our capital or we'll call it competitors' capital or 3rd parties, there will be an inordinate amount of capital that's spent on infrastructure out here. And these can't be measured on a 1 year basis. They're measured for the longer term. They're in place for up to 40 year period of time. So we're very mindful of that.

Speaker 1

And what we want to do is make sure that we're in front of it with building out our infrastructure in the preferred areas we want to be. So when we drill our wells, we can actually Bring them on production. So that's how we think about. As far as 2025 and 26, we haven't done a detailed analysis on that, But you would expect similar type build out programs in excess of $100,000,000 a year going forward. That would be our expectation.

Speaker 2

And I would just add that it's really in the context of the $1,000,000,000 to $1,200,000,000 that we're forecasting for this year, but it will be very similar, I think as we look forward in 2025 and 2026 and that $1,000,000,000 to $1,200,000,000 inclusive of the facility spends that we're looking at.

Speaker 4

Okay. Thank you.

Operator

Thank you. And at this time, Mr. Feger Haim, it appears we have no other questions.

Speaker 1

Okay. Thank you, Sylvie. And once again, I'd like to thank each of you for taking the time and interest to listen on our call today. We are excited about to complete the balance of our 20 'twenty three program and to advance our company forward with a strong 2024 budget and we'll be increasing total returns to shareholders. We look forward to updating you on our progress through the remainder of 'twenty three and into 'twenty four.

Speaker 1

All the best. Have a good day. 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 line.

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