Whitecap Resources Q2 2023 Earnings Report

Whitecap Resources EPS Results

• Actual EPS: C$0.29
• Consensus EPS: C$0.25
• Beat/Miss: Beat by +C$0.04
• One Year Ago EPS: N/A

Whitecap Resources Revenue Results

• Actual Revenue: $873.40 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Whitecap Resources Announcement Details

• Quarter: Q2 2023
• Date: 7/26/2023
• Time: N/A
• Conference Call Date: Thursday, July 27, 2023
• Conference Call Time: 11:00AM ET

Whitecap Resources (TSE:WCP) Inc is engaged in the business of acquiring, developing, and holding interests in petroleum and natural gas properties and assets. The company acquires assets with discovered petroleum initially in place and low current recovery factors. Light oil is the primary byproduct of Whitecap's Canadian assets. To extract petroleum products from its resources, the company uses horizontal drilling, in addition to multistage fracturing technology. Crude oil is the leading revenue generator out of the basket of energy products sold by Whitecap.

Whitecap Resources Q2 2023 Earnings Call Transcript

Key Takeaways

• Whitecap generated $197 million in free funds flow in Q2, bringing H1 free funds flow to $392 million and returning 53% ($208 million) to shareholders via dividends and share repurchases.
• The company reduced net debt by $800 million since the XTO acquisition, with current net debt at $1.36 billion, a 0.6× debt/EBITDA ratio, and $1.7 billion of unused borrowing capacity.
• Operational resilience in Q2 was driven by the East division’s outperformance offsetting wildfire impacts, while the West division advanced Montney and Duvernay drilling programs, with many wells achieving payouts in under one year.
• Whitecap realigned into two divisions—East (conventional assets with 1–2% annual production growth and low decline) and West (unconventional plays targeting 10–15% growth and 6,584 gross drilling locations)—to streamline reporting and boost operational efficiency.
• 2023 capital spending guidance remains at $900–950 million, full-year production guidance was adjusted to 157,000 BOE/day due to wildfire impacts, and liquids weighting is now expected to reach 65%.

[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 Q2 2023 Results Conference Call. After the speakers' remarks, there will be a question and answer session. And I would like to turn the conference over to Whitecap's President and CEO, Mr.

[Operator]

Grant Fagerheim. Please go ahead, sir.

[Speaker 1]

Thank you, Sylvie. Good morning, everyone, and thank you for joining us here today. Here with me are 3 members of our senior management team: Our Senior Vice President and CFO, Thanh Kang our Senior Vice President, Engineering, Darren Dunlop and our Senior Vice President, Business Development and Innovation Technology, Dave Monbocat. Before we get started today, I would like to remind everybody that all the 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 yesterday afternoon. Our Q2 results emphasize the advantage that we have with our diversified asset base as we were able to partially mitigate the impact of the wildfires in North Central Alberta through outperformance of our lighter oil weighted Saskatchewan and Central Alberta block development programs.

[Speaker 1]

In the Q2, we generated $197,000,000 of free funds flow, bringing our total free funds flow to 3 $92,000,000 in the first half of the year, of which 53 percent or $208,000,000 has been returned to shareholders through our base dividend and share repurchases. During the Q2, we spent $218,000,000 including $177,000,000 of drilling and completions capital and $37,000,000 of facility expenditures. We spent 43 gross 41.6 net wells during the quarter, 34, 32.6 net of which were in our East division, where breakup conditions subsided earlier than anticipated and our teams were able to get back in the field in June. Strong results across our East division have continued and the team has done a tremendous job on both of our legacy assets as well as those acquired over the past 2 year period of time. In our West division, we commenced drilling 9 wells, a 3 well Montney pad at Kakwa and a 6 wells of our 7 well Duvernay program at KaBOB, were studied in the Q2.

[Speaker 1]

Since acquiring the XTO assets 10 months ago, we've been able to reduce Net debt by $800,000,000 from $2,200,000,000 at the end of the Q3 of 2022 to now $1,360,000,000 currently. The balance sheet is in pristine shape with debt to EBITDA at 0.6 times and $1,700,000,000 of unused debt capacity. The balance sheet has always been a priority for us and has allowed us To not only effectively manage through the commodity price cycles, but to also capture value enhancing opportunities on behalf of our shareholders. We are close to reaching our $1,300,000,000 debt milestone, which due to the wild powers has deferred this to the second half of the year. This is an important milestone for us as it represents debt to EBITDA ratio of less than 1 times using $50 WTI and a $3 per GGA AECO price assumption, which will then allow us to return 75% of our free funds flow back to shareholders, inclusive of the targeted $73 per share $0.73 per share annual dividend.

[Speaker 1]

Given the significant growth we have undertaken over the last couple of years, we have realigned our business units into 2 divisions, East and West, to better streamline reporting processes and to drive operational excellence. The East division consists primarily of conventional assets, which Have lower decline rates, annual production growth rates of 1% to 2% and generally outsized free funds flow of the capital expenditures. Our West division is primarily our unconventional resource plays, which include the Montney and the Duvernay, and will have higher annual growth rate of 10% to 15% Given the depth and quality of inventory in this division, our extensive portfolio of 6,584 gross, 5,005 net drilling locations allows us to continue to generate Significant prefunds flow while growing 3% to 8% production per share through organic drilling towards 200,000 BOE per day over the next 5 year period of time. As reported yesterday, results in our Montney of Kakwa continued to be strong With 82% of our wells drilled to date achieving payout in less than 1 year or less, some even paying out in less than 5 months, The free funds flow potential and results to date from this asset validates our initial technical evaluation of the XTO assets.

[Speaker 1]

Furthermore, our teams continue to make significant strides in further enhancing their understanding of the Montney assets and we believe the continual refinement of our development plans specific to individual areas and pad selections such as Targeted intervals within the Mondi benches, well spacing, completion design and production operation efficiency will further Increase the return characteristics and profitability of this expansive set of assets moving forward. In our West division, we have now drilled and completed Our first three well pad and have commenced drilling our second pad, a 4 well pad in Duvernay. We look forward to having the first two wells tied into permanent facilities on production in late August, while the 4 well pad is expected to be on production in the Q4. We are very encouraged by the execution of our drilling and completion operations to date as well as our initial production test rates. 2nd quarter facilities capital included $15,000,000 towards the expansion of our three zero seven three zero seven facility in the Valhalla region as well as Initial capital for our Musgrove Lake battery.

[Speaker 1]

This battery is expected to be completed in the Q2 of 2024, allowing us to efficiently develop one of the most attractive areas in the Montney that was acquired as part of the XPO transaction last year. Drilling operations at Musro Lake are expected to begin later this year with production adds coinciding with the completion of the battery. Our longer term development planning for the larger undeveloped Montney acreage includes the expansion and increased utilization of current infrastructure as well as new infrastructure to support and maintain control over our unconventional growth plans. I will now pass the mic on to Tom to discuss our financial results.

[Speaker 2]

Thanks, Grant. 2nd quarter fund flow of $415,000,000 or $0.68 per diluted share equates to a fund flow netback of Approximately $31 per BOE. Strong liquids production, improved differentials on our sour and medium crudes sold in Saskatchewan and onetime GCA adjustments All contributed positively to our netback in the quarter. Production shut ins due to the Alberta wildfires resulted in increased per unit operating cost to over $15 per BOE in the Q2. Going forward, we forecast operating costs will decrease to approximately $13 per BOE as we increase production in the back half of the year.

[Speaker 2]

As Grant mentioned, the balance sheet is in excellent shape with a debt to EBITDA ratio of only 0.6 times and $1,700,000,000 of unutilized capacity. Our balance sheet will continue to strengthen as we forecast net debt passing the $1,300,000,000 target and reaching approximately $1,200,000,000 by year end based on current strip prices. At this point, we will have decreased net debt by $1,000,000,000 since the closing of the XCO transaction and returned over $500,000,000 to shareholders through base dividends plus share repurchases. Our 2023 capital spending guidance remains unchanged at $900,000,000 to $950,000,000 and we've adjusted our Annual production guidance to 157,000 BOEs to reflect the impact of the Alberta wildfires. Oil and liquids production has been stronger than forecasted through the 1st 6 months of the year.

[Speaker 2]

And in combination with some of the program changes we've made earlier this year, We're now expecting our annual liquids weighting to increase to 65% from 64% previously. I will now pass it back to Grant for his closing remarks.

[Operator]

Mr. Fagerheim, we cannot hear you.

[Speaker 1]

We are thanks, Tom. We are excited about for the opportunity set that is ahead of us and look forward to capitalizing these assets to extract as much value from the assets as we can. Our teams continue to refine their understanding of each play that we are in, and we have an expansive inventory depth that we Can efficiently develop and hit our growth targets while continually improving profitability and returns to shareholders. With our healthy inventory depth, strong balance sheet, Low decline, high netback asset base, Whitecap is in a position of strength and as we advance our business through the remainder of 2023 Into 2024 and beyond. The outlook for Canadian oil and gas is positive as long awaited export projects begin to come online and high quality, responsibly produced Canadian energy can be utilized in markets around the world.

[Speaker 1]

Whitecap has and will continue to be significant supply source of conventional oil and as of recently a larger supplier of natural gas to end users across North America. We are also advancing our carbon capture utilization And as our sub service expertise and experience with carbon, sequestration is highly sought after to assist these large emitters in our de carbonization efforts. We have multiple projects that are scheduled to begin sequestration in late 2024. And while we there is still a significant amount of work to be done with all the stakeholders involved, we are confident that the solutions will be found to making significant advancements on moving Canadian Energy into a lower carbon economy. With that, I will now turn the call over to the operator Sylvie for any questions.

[Speaker 1]

Thank you.

[Operator]

Thank you, sir. And the first question will be from Jeremy MacRae at Raymond James. Please go ahead.

[Speaker 3]

Hi, guys. I want to talk about some of your operations. Just based on some of the test results that you've been getting in the Montney, Some of the early looks at the Duvernay. Are you guys looking at shifting any of your CapEx within your budgets here, maybe later this year or what you're Kind of somewhat thinking here for 2024. And just is there any new technology that you're seeing from any maybe even some of your

[Speaker 4]

Yes. Hi, Jeremy. It's Darren here. No, the results we're seeing are within our expectations of what we thought. So our budget allocation, capital allocation is going to remain pretty similar.

[Speaker 4]

And as for groundbreaking technology changes, not really. The Montney and Duvernay for that matter are both fairly well up the learning curve. Well by well, reservoir by reservoir basis. So Nothing earth shattering from that perspective.

[Speaker 1]

And just to follow on to that, Jeremy, I think that in the Montney, I mean, We're as Darren referenced, quite far up the learning curve. We've drilled a total of 30 Montney wells to date, including our KAR and Cataquap areas through our acquisitions, our joint venture with Hammerhead and our Acquisition of Timber Rock as well as the XTO transaction. So we're quite far up the learning curve as far as new using the newest technologies that are available to us. And as Darren said, getting the results that we're having are as expected and maybe a little bit better than expected. What was new to us, I think, is Duvernay, and we're seeing some very good test results at this particular time and look forward To advancing those projects and bringing those on stream for a full time and be able to talk to it perhaps at the

[Speaker 3]

end of the Q3. Okay. Maybe kind of just shifting gears here a bit. Now that you're kind of close to your targeted debt levels, Any more thoughts on the A and D market? What it's looking like if you're looking to potentially sell some additional non core assets?

[Speaker 3]

Or is there anything that You want to maybe add to the portfolio now that your balance sheet is in a much stronger shape to do a cash acquisition?

[Speaker 1]

Yes. Just on the M and A market, and I've got Dave Marbruquette sitting here. He's anxious to get going again for sure with his team. But no, what What we're looking at is, we think that as I had referenced earlier, I think in the last call, when we did the cleansing of the assets that we weren't going Capitalize that we did in the Q1 of the year, bringing in $400,000,000 of cash to our balance sheet. That was helpful to us.

[Speaker 1]

And I think we're Very comfortable with the well, we are very comfortable with the asset suite that we have now. One of the areas We may bring on assets that we're not looking to drill over the next 7 to 10 year period of time. We may look to bring in 3rd party capital in some of the areas because we have such an expansive opportunity set in front of us. So that's an area that we'll look at, but we have to be cautious To ensure that if we're truly not going to capitalize on that maybe we can get others to, but that will be something we'll look at as we move into the balance This year and into 2024. As far as specific acquisitions, we're not we said that this is a year we're going to be focused on operations and we're committed to that.

[Speaker 3]

Okay. Perfect guys. Thank you very much.

[Speaker 1]

Thanks Jeremy.

[Operator]

Next question will be from Josh Sturteach at Haywood Securities. Please go ahead.

[Speaker 5]

Hey guys, strong quarter and thanks for taking my questions. My first question is on the money at Kakwa. I was hoping if you could add some color on what specific opportunities you're seeing to

[Speaker 4]

Can you repeat that? I missed the middle part.

[Speaker 5]

Yes. I was wondering if you could add some color on what specific opportunities you're seeing to enhance capital efficiencies in the region?

[Speaker 4]

Yes, primarily just continue to exceed what our expectations are with regards Proper placement, fit for purpose frac designs depending on what the reservoir characterization is, Going through controlled facilities to optimize our cash flow in the short term, like nothing Like I said in the last question, nothing groundbreaking, just continual improvement

[Speaker 3]

piece by piece.

[Speaker 5]

Okay. My second question is on the Duerne. How do you think about optimizing the asset going Forward either on the drilling or completion side now that you've taken over the asset. And what would you or what would

[Speaker 1]

Yes. First of all, just We've walked into this cautiously, the Duvernay play, just when we acquired it. We had not been drilling up in this place. We wanted to do More geoscience and engineering were up on it before we went in, and we're very pleased with What we've seen on our first three well pad, not just from the drilling, but from the completion and the test results that we're having at this particular time. And that has allowed us to shift our capital around and drill the 4 well pad that we're on right now.

[Speaker 6]

We're on the

[Speaker 1]

3rd well of a 3 of a Four well pad drilling that out that we talked about earlier about bringing on by the end of the year, the second pad. So We're tiptoeing into the play. I would expect that this year we'll have drilled 7 wells, but Moving forward, we'll set our budget up. Depending on results as to what we get here, Darren and the engineering team, Together with our geoscientists and operations guys, we'll put together a budget for 2024, 2025 that will include probably Advancing these projects a little bit more. We're not capacity facility capacity constrained there.

[Speaker 1]

We own the 15 to 7 plant and it is only utilized to the tune of about 65% today. So we have capacity to move our product through that.

[Speaker 5]

Okay. Thanks. That's all for me.

[Speaker 1]

Okay. Thank you.

[Operator]

Thank you. Next will be Travis Wood at National Bank. Please go ahead.

[Speaker 6]

Yes, thanks. In terms of the facility that came with XTO, so it's about 65% full room To help on the cost side, I expect, but maybe on caps, with Cap's up and running. Are you guys seeing any wiggle room to improve costs both on transport on the liquid size Now or and on the processing side with some incremental space left at 15% to 7%. Yes.

[Speaker 1]

Just to have and I think your 2 part question is, first of all, the 15 to 7 facility, obviously, we'll continue here with Our throughput will drive down costs on a per unit basis. So that will be an area that we'll look to advance. And as far as the caps pipeline and getting tied into that, That will take place in the Q1 as well. So Q1 leading into the Q2, so Which we do have capacity. We have capacity on that on the into the cap system.

[Speaker 1]

So I think we're in very good shape here, Increasing production, driving down costs, I think it's in these bigger what will come or say unconventional resource place, both in the Duvernay and the Montney.

[Speaker 6]

Okay. That's perfect. So kind of leveraging off the pipeline in Q1 of next year?

[Speaker 1]

That's correct. Yes, that's right, Trent.

[Speaker 6]

Okay. Thanks, Grant. Okay.

[Operator]

Thank you. And at the time, Mr. Fagerheim, it appears that we have no other questions. Sir, please proceed.

[Speaker 1]

Well, that was quick. We could keep going here for quite a while. Anyway, thanks, Sylvie. And once again, I want to thank each of you for taking the time and interest in listening to our call today. We are excited to advance Our company forward with a strong total returns to shareholders, and we look forward to updating you on the progress from an operational perspective over the next several months.

[Speaker 1]

All the best. Have a good day. Enjoy the balance of your summer.

[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.