Whitecap Resources Q2 2024 Earnings Call Transcript

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July 25, 2024

There are 8 speakers on the call.

Operator

I would now like to turn it over to Whitecap's President and CEO, Mr.

Operator

Grant Fagerheim. You may begin, sir.

Speaker 1

Thanks very much, Shelby. Good morning, everyone, and thank you for joining us. There are four members of our management team here with me today: our Senior Vice President and CFO, Sean Kang our Senior Vice President of Business Development and Information Technology, St. Malbouquet our Vice President of our West Division, Joy Wong and our Vice President of our East Division, Chris Bullen. Before we get started today, I would like to remind everybody that the statements made by the company today during this call are subject to the same forward looking disclaimer and advisory that we set forth in our news release issued yesterday afternoon.

Speaker 2

I am pleased to report

Speaker 1

that we had a very successful second quarter with record quarterly production averaging of 170 over 177,000 BOE per day, especially when compared to our forecast of 170,500 BOE per day. This generated $426,000,000 of funds flow and $23,000,000 of free funds flow. These results are closely attributed to the exceptional work of our exceptional technical teams. Our year to date operationally and asset performance wise has been exceptional resulting in production outperformance across our entire portfolio. In particular, our Southeast Saskatchewan Publishers assets, our Central Alberta Cardium and Gluconite assets as well as our unconventional Montney and Duvernay assets all outperformed our internal expectations.

Speaker 1

Since acquiring XPO Assets in August 2022, we have taken meaningful steps to develop our Montney and Kubernete assets, which have underpinned our strong operational performance in our unconventional assets. To date, we have designed and executed on this relevant plan across both our Montney and Duvernay assets, providing confidence to the market in the deliverability of our asset base and our operational execution design, constructed and brought on our modular battery on time and under budget developed a long range plan showcasing meaningful growth and depth of inventory within our Montney and Duvernay assets and in particular our next stage of Montney growth and development in our Littoral area of Alberta. Subsequent to the end of the Q2, we also announced a positive FID on our Phase 1 rebuild Latour facility that is fully funded by TGI. This in addition to the partial working interest disposition of our Musrow and Kibab facilities to strong partners, Copas and TGI, the total proceeds of $520,000,000 Through our extensive scale and depth of our high quality inventory, we've been able to secure additional pipeline and facility access, enhanced contract terms and highly competitive fees on our processing, transportation, fractionation and marketing for all areas of our Montney and Duvernay development.

Speaker 1

These synergies will enhance our future netback and reduce the overall financial impact of infrastructure working into disposition. We are very excited to move ahead with this partners and look forward to continued progression of our unconventional long end Duvernay development. I will now pass the phone on to Tom to discuss our Q2 financial results. Tom?

Speaker 2

Thanks, Grant. Our 2nd quarter financial results were equally as strong as our operational results, generating fund flow of 426,000,000 dollars or $0.71 per share and fund flow of $223,000,000 or $0.37 per share. Our predominantly light oil and condensate production base benefited from crude oil prices averaging over $110 per barrel on a Canadian dollar basis with total liquids representing 95% of our revenue for the quarter. Our operating costs decreased to $13.49 per BOE in the 2nd quarter, a strong result for our team and reflects higher production and continued focus on cost savings. Cash tax expense of $100,000,000 in the quarter included $33,000,000 or $0.05 per share impact on capital gains from the partial infrastructure disposition.

Speaker 2

Excluding this one time impact, the tax rate as a percentage of pre tax funds flow from 6 months ended to 12%, which is consistent with our forecast of between 12% to 14% for 2024. Year to date, we have returned almost $250,000,000 to shareholders, including $25,000,000 of share repurchases in July. We plan to use $200,000,000 of the proceeds from the partial infrastructure dispositions towards share repurchases in the second half of the year. Pro form a the dispositions, our net debt sits at below $900,000,000 and after share repurchases, we forecast net debt of below $1,000,000,000 at year end. This low level of debt relative to our projected $1,700,000,000 in fund flow provides us with capital allocation optionality going forward.

Speaker 2

I will now pass it off to Joey for remarks on our West Division results.

Speaker 3

Thanks, Fawn. Our Montney and Givernay assets continue to perform well with updated data showing that our recent wells are outperforming on both an initial and longer term basis. As we progress development of this asset base, incremental data is analyzed by our team and informs production strategies and forecasting models for existing wells while also helping to shape development and expectations for our fleet going forward. As we highlighted in our Investor Day in early June, our approach to customize pad design, completion parameters and development plans has yielded positive results across our Montney and Duvernay assets at Kakwa, Otore and J Wells. Our recent results on our first 8 wells at Muzro are another data point to validate this approach.

Speaker 3

Over the 1st 90 days, the 8 wells have averaged 1600 BOEs a day per well with almost 1100 barrels per day of condensate per well. At times, we were producing at over 80% of our condensate utilization capacity of our new facility. And after bringing on our 3rd co well pad in late Q3, we expect to be producing consistently at sales condensate capacity almost 11,000 barrels per day. The economics of these first 8 wells are very robust and are projected to pay out in only 5 months. In total, we plan to bring on 15 Montney and Duvernay wells in the second half of the year after bringing on our latest Duvernay three well pad at 1134B in the second quarter.

Speaker 3

Although we would define each area as drilling liquids rich natural gas wells, the liquids and more specifically the condensate volumes drive the economics of each area. By running sensitivities on our KBOB Duvernay plus Kakwa Latour and Azuromotany type curves, we can run $0 natural gas prices for the 1st 4 months of production and still achieve average payout in less than 1 year across 4 areas. This is why it makes sense for us to adhere to our schedule and continue to bring wells on production despite the challenging natural gas environment at this time. I'll now pass it on to Chris for his comments on the East division.

Speaker 4

Thanks, Joey. As you've heard, consistently strong results are the theme so far and the East Division results are no exception. Momentum carried through from our Q1 drilling program and we are very pleased with what our assets and teams were able to accomplish in the 2nd quarter.

Operator

We brought

Speaker 4

on the total of 26, 20.4 net wells during the 2nd quarter, 14 of which carry over from the Q1 and 12 were spud in the 2nd quarter. Outperformance relative to our expectations has come from both the new 2024 wells and higher than forecasted case production levels. In Southeast Saskatchewan, our 2024 Probuschor results have been exceptionally strong with expectations for these wells to pay out in less than 6 months. Highlighting the attractiveness of these assets is that not only in the initial payout very quick, we actually forecast these wells to pay out our capital investment three times in the 1st 3 years. This is truly a top tier asset and we are very pleased with the land position we have built in only 3 years since entering the play to the Torque acquisition in early 2021.

Speaker 4

Moving west to our Viking assets in West Central Saskatchewan, where the initial results on recently acquired land in the Elros area are meeting our expectations and are above historical results for the area. We continue to advance enhancement opportunities as we have just bought our first 1.5 mile GRH in the El Rose area. The ability to drill ERH wells into the newly consolidated land position will improve capital efficiencies and enhance our future inventory. In Alberta, we have achieved strong production results from our recent guacamite drilling program as our first six wells online continue significantly outperformed expectations. A combination of flowing unrestricted through alternative infrastructure along with attractive subsurface qualities, despite being a challenging area to drill, as initial liquids production is performing our expected rates by 40% over the 1st 90 days on production.

Speaker 4

I also want to take a moment to highlight a recent operational enhancement initiative in our Central Alberta Cardium program. We recently drilled a 4 well pad in West Pembina and successfully implemented an updated frac design, which increased our daily sand placement by 25% to 50% compared to previous, resulting in 6% total cost savings on completions relative to budget expectations. We are actively investigating the applicability of this new frac design across our conventional asset base. Our recent West Ham metal results have been very strong and these well cost savings are improving the already robust economics of our light oil Cardium assets. Although some of our existing employees don't receive the same notoriety as our unconventional assets, our teams continue to do an excellent job of improving the long term sustainability and profitability of these assets, thereby further strengthening our corporate free cash flow.

Speaker 4

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

Speaker 1

Thanks, Chris, Joey and Sean for your remarks. As you've heard, the 1st 6 months of the year have been very strong for White Shaft, and we look forward to building off this momentum in the second half of the year. We have not changed our production guidance of 167,000 to 172,000 boe per day and given the success to date, we expect to come in close to the higher end of the range, if not higher. As we advance through the remainder of the year, we expect our price realizations to remain very robust given our exposure to light oil as well as our strong U. S.

Speaker 1

Dollar, although commodity price volatility is expected to continue. We are in advantageous position financially with low net debt. Our low decline rate further supports long term sustainability and profitability across our commodity cycles.

Speaker 2

The outlook for Whitecap continues

Speaker 1

to be positive and we are looking forward to the second half of this year as we develop and grow our assets into 2025 and beyond. With that, I will now turn the call over to the operator, Salveen, for any questions.

Operator

Thank you, And your first question will be from Thomas Phung of CIBC. Please go ahead.

Speaker 5

Hi, good morning. Congrats on the 2nd quarter results as well as the strong well performance. I've got a couple of questions here. The first one kind of goes back to the well performance in the multi bench development. I was actually hoping to get a little bit more clarity or understanding around what you view would be or what results you're frankly looking for to help you confirm both your development strategy?

Speaker 5

And then secondarily, we feel more comfortable rolling out a kind of an improved type curve throughout both guidance and kind

Speaker 4

of your 5 year plan that you outlined yesterday?

Speaker 3

Dan, it's Joey Wong here. First question in terms of what we're looking for on results, of course, results themselves on a production basis. We put in our release there that at 1500 barrels a day or so, that's slightly above our reference acre. So the short answer on what we're seeing on results is that they're a slight beat to our expectations, which is good. What we're also looking for, which won't be quite as visible on the production is the interaction between wells, be it on a short term or long term basis.

Speaker 3

And I think we had talked about that a little bit in the last call there is that what we're looking at is do we see that the wells interacting with each other, whether that be on initial completion, whether that be kind of in the short term production period, whether that be in the long term production period. In the short term production period and the interaction on crack, what we're seeing is actually some really, really encouraging results that the wells are just barely seeing interaction from each other, which is kind of what we want to see. As we move to the balance of our asset base, what we're going to do is look at how the rock changes, look at how the currency ratio has changed and tailor our development plan from there. But that's a long winded way of saying we're liking what we're seeing and it's reaffirming the plans we've got right now.

Speaker 5

Great. I appreciate that context. The second question I have, and it might be

Speaker 6

a little bit early

Speaker 5

for this, obviously, just given it's still kind of mid to late summer, and you guys are probably just starting your capital budget planning. How should we be thinking about the CapEx cadence going into 2025, especially with the now, we'll call it, accelerated development of Litch Core with that recently signed infrastructure deal?

Speaker 2

Thanks for that question, Dennis. It's Tom here. I think as we look at production and capital spending for the balance of the year here, Q3 will be higher than Q4, but expect to be within the range there somewhere in that $1,000,000,000 to $1,100,000,000 for 2024. Thinking about 2025 and certainly this wouldn't be budget quality at this particular time here, but I would use 5% growth which gets us to about 180,000 BOEs per day. Capital plans despite kind of the acceleration of La Torre with the CGI funding there on the facility, I would still expect to see between $1,100,000,000 $1,200,000,000 for 2025.

Operator

Thank you. Next question comes from Aaron Malkoff with C. Cowen. Please go ahead.

Speaker 1

Thanks. So I guess I'll start with asking the

Speaker 7

prequel question to one of Dennis' questions. I'm curious about the

Speaker 1

cadence of Demi and Motte and your new tie ins to the back half of this year. And I guess the

Speaker 7

second part of that is how you're thinking about the shape of the production profile through your end?

Speaker 2

Thanks for that, Aaron. Yes, I think when we look at our Montney and Duvernay productions, it is chunky in terms of production adds throughout the balance of the year here. Again, when we look at it on an average for the full year basis, as Grant mentioned there, we're very comfortable that we'll be at closer to the high end of the production guidance closer to the 171,000 BOEs per day. When we look at the 3rd quarter with respect to the unconventional, there really isn't any wells that we're expecting to come online until August 25 at the earliest there. So a lot of our production adds will certainly come in the Q4.

Speaker 2

So again, expect that we'll be at the top end of our guidance range there between the 167,000 to 172,000 BOEs per day.

Speaker 7

And a follow-up question to that. Given the lumpiness of production additions,

Speaker 2

is there any way

Speaker 7

to maybe feather wells in overtime to avoid relatively lumpy quarters or is that just operational particularly feasible?

Speaker 2

You know what, that's a good question. It's something that we'll certainly look at as we develop our budget for 2025 to smooth it out through the quarters. What we've been focusing on really is maximizing cash flow for the year. And so it's been designed certainly with that in mind for 2024, but smoothing it out is definitely consideration for 2025.

Speaker 1

And just to add to that, Aaron, is that what we're looking at as we focus moving forward into the 2025, 'twenty six, 'twenty seven budget timeframes is when do we add incremental drilling rigs in both the unconventional and into the conventional part of our assets? Again, we want to ensure that part of this facility infrastructure transaction that we did, we want to make sure that there's facility infrastructure in order to produce our wells. And as Tom is saying, focus our netback and our ability to increase our cash flow on an ongoing basis. So we'll look to as part of the budget process for, let's say, for the next 3 years going forward is how do we blend and smooth the production, the lumpiness of the production profile out as we advance through those years.

Speaker 3

Thanks for that. If I could

Speaker 7

follow-up, I have one more financial question. And that's given your commitment to the MTIB to the back half of the year, I'm curious why share repurchases were fairly minimal in Q2, without having excess free cash flow

Speaker 1

to be more.

Speaker 2

Yes. So the way that we're thinking about the NCIB purchases, Aaron, is really looking at it on a 6 month basis there just with the way that the cadence for capital is. We'll typically have our highest capital programs in the Q1 and Q3 and then they'll taper down in Q2 and Q4 there. So it's better for us to look at it in 6 month increments. Effectively, in the first half of the year here, free cash flow was directed both to the balance sheet as well as the dividend.

Speaker 2

And as you mentioned there, as we get into the back half of the year, we'll generate more free cash flow to be able to execute on our NCIB. So the way that we're looking at it today in the back half of the year, this is using our deck at $80 of ETI here. We have about $30,000,000 to $50,000,000 That's over and above our dividend obligation that we'll use on the NCIB. And then as per our press release there, we're carving out an additional 200,000,000 dollars that we'll use on the proceeds from the disposition towards the NCIB. So the capital allocation or I should say the free cash flow allocation hasn't changed.

Speaker 2

We're still looking at 75% return back to shareholders in the form of the dividends and share buybacks. But they think that $200,000,000 is incremental to that.

Speaker 1

Just a last comment to add into that is that part of we have to be mindful of our trading blackout periods of time as well. So as we go into some time periods, we're very respectful of trading blackouts, which are we're very stringent on at Lakecap Resources. So that plays into our overall time period as releasing information to the market. We were in a long discussion with not only the infrastructure sell down, but we were in a time period here with just dropping into this our quarterly reporting as well.

Operator

Next question will be from Patrick O'Rourke of Citi Capital Markets. Please go ahead.

Speaker 6

Hey, good morning, guys. Strong quarter there. Good to see

Speaker 3

the well results. I have a

Speaker 6

couple of mostly financial questions here for you. You alluded to with the sort of room you've made on the balance sheet post the infrastructure dispositions. You alluded to capital allocation flexibility. But Thanh just pointed to what we're pretty narrow goalpost with respect to 2025 capital spend and production at this point in time. So just wondering if you can maybe walk us through

Speaker 3

with respect

Speaker 6

to the flexibility and things you could do sort of rank order what your priorities would be in terms of dividend growth, acquisitions, incremental production growth that could be above and beyond, what you just talked about or spoke to on 2025?

Speaker 2

Yes, sure. Thanks for that question, Patrick. Yes, as we go through the list of returns back to shareholders here, the dividend at the $0.73 there, sustainable down to $50 WTI. The yield from our perspective is too high. So there's certainly no rush for us to input the dividend at this time.

Speaker 2

The priority would be around share buybacks. And that's why we've allocated the $200,000,000 towards buying back our shares. Could we potentially use more? Yes, absolutely, we can. I think the $1,000,000,000 that we're targeting in net debt at the end of the year feel comfortable for us.

Speaker 2

But I would say priority is the NCIB over any dividend increases at this particular time. And the reality is when we continue to buy back our shares here, we reduce that overall dividend obligation and we are increasing it on a per share basis there. Optionality around the balance sheet outside of returning capital to shareholders would be around smaller tuck in acquisitions, where we have a working interest, we're the operator there. And really it's just a consolidation of a play that we have expertise in versus larger scale M and A activity at this particular time.

Speaker 6

And then maybe just build a little bit or add a little bit of nuance to Aaron's earlier question with respect to execution on the buyback. You have a $200,000,000 number that's out there. You're looking at in 6 months increments. Obviously, the first half of the year is a higher capital obligation, just given the way the cadence of the drilling programs tend to play out or in particular the Q1. Just wondering how you look at that $200,000,000 in the back half of the year.

Speaker 6

Can we expect it to be sort of executed on a very ratable basis on a month by month basis? Or is there going to be a bit of finesse to that around sort of the share price performance and the blackout period that Grant touched on?

Speaker 2

Yes. I mean, I think the way that we look at it is, if you look at the Q3 here, we'll likely spend somewhere in that $125,000,000 on the share buybacks on a very methodical and consistent basis here. And then in the Q3, you've got the $75,000,000 plus whatever free cash flow is left after paying dividends. So as I mentioned in that $30,000,000 to $50,000,000 So expect to see an excess of $100,000,000 in the 4th quarter based on our forecast at this time here.

Speaker 6

Okay. Thank you very much.

Operator

Thank you. And at this time, gentlemen, there are no other questions registered. Please proceed.

Speaker 1

Well, thank you everyone for your time to listen to our call today. And we would like to wish everyone a very pleasant reminder of your summer weather and summer holidays. Bye for now. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, please ask that you please

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Key Takeaways

  • Whitecap delivered record Q2 production averaging 177,000 BOE/d, surpassing guidance and generating $426 million in funds flow and $23 million in free funds flow.
  • Operating costs fell to $13.49/BOE, cash tax expense included a one-time $33 million capital gains impact, and year-to-date returns to shareholders reached $250 million, with $25 million in July buybacks and $200 million planned for H2 share repurchases.
  • Pro forma net debt is below $900 million (forecast < $1 billion by year-end) against $1.7 billion in projected annual funds flow, providing significant capital allocation optionality.
  • Secured a fully funded FID on Phase 1 of the Latour facility with TGI and completed partial dispositions of Musreau and Kakwa assets for $520 million, gaining enhanced pipeline, processing and marketing terms to boost future netbacks.
  • Unconventional Montney and Duvernay wells outperformed expectations—eight initial wells averaged 1,600 BOE/d (1,100 bbl/day condensate) with a projected 5-month payout—and 15 more wells are slated for H2 development.
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Earnings Conference Call
Whitecap Resources Q2 2024
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