TORC Oil & Gas Ltd. (WCP) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. My name is Sylvie, and I would like to welcome everyone to the Whitecap's 2020 Strategic Combination with TORC Conference Call. [Operator Instructions] And I would like to turn the call over to Whitecap's President and CEO, Grant Fagerheim. You may now begin, sir.

Thank you, Sylvia. Good morning, everyone, and thank you for joining us this morning. I am joined by 4 members of our senior management team, our CFO, Thanh Kang; as well as Darin Dunlop, our Vice President of Engineering; Joel Armstrong, our Vice President of Production and Operations; and Dave Mombourquette, Vice President, Business Development. 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 last evening. We are pleased to advise our at-market strategic combination with TORC Oil & Gas. This strong-on-strong combination will create one of the largest pure-play Canadian conventional light oil producers and the ninth largest publicly traded oil and gas company in Canada. The enhanced size and scale, the importance of which we have discussed several times in the past, will allow us to more effectively navigate commodity price volatility through the significantly enhanced free funds profile. We are expecting an improving commodity price environment over the next 12 months. And this transaction provides more optionality to increase shareholder returns through accelerated debt repayment, increasing cash returns to shareholders and improving our per share metrics. TORC's current production is approximately 25,000 BOE per day, with a baseline decline rate of 24%. We plan to operate these assets with a slightly different production growth profile to improve free funds flow and the long-term sustainability of our combined entity. Currently, we anticipate managing TORC's asset to generate approximately 22,000 BOE per day in 2021, which will result in moderated production decline rate of 19% for 2022. This will enhance our ability to generate stronger free funds flow to provide optionality for increased shareholder returns in the future. The combined new Whitecap entity is expected to have a 2021 base decline rate of 17%. The transaction is expected to close on or before February 25, 2021. So add approximately 18,000 BOE per day to the pro forma energy average production for 2021. There will be corporate synergies through G&A costs, interest expense, operating and capital cost reduction totaling $15 million, we anticipate, which is expected to be realized in the combined entity after closing. In addition, we anticipate opportunities for improving results with the application of appropriate technologies and the methods that Darin will discuss shortly. The enhanced free funds flow profile from corporate and operational synergies provides the combined entity with the ability to increase shareholder returns. We are anticipating pro forma free funds flow of over $312 million in 2021 at $45 WTI oil, resulting in approximately 3x coverage on our dividend obligation. This amount includes the expected 6% increase to our monthly dividend outlined in our press release. With respect to the NAL transaction, integration is progressing very well, with production performing better than forecast. Our team is increasingly more positive on the synergies between the 2 entities, in particular, inventory strengthening and cost reduction. Employees from both Whitecap and NAL continue to work diligently towards a seamless close on January 4, 2021. I would now like to pass on the mic to Dave to provide an overview of the TORC asset.

Thanks, Grant. As Grant mentioned, current TORC production is approximately 25,000 BOE per day, 88% of oil and natural gas liquids, and we are targeting production of 22,000 BOE per day in 2021. One of the attractions to the TORC asset base is that it is highly focused in Southeast Saskatchewan and the Cardium play. As Whitecap continues to grow, it's important for us to maintain a focused asset base within areas that we operate. In total, there's a 92% overlap between TORC and Whitecap's producing region. For some further details, 82% of the current production is in our Southeast Saskatchewan area, which has an excellent fit with our Weyburn asset and the NAL properties. Of the 6 Southeast Saskatchewan units that NAL operates, TORC is the other owner in 5 of those, which takes us to 100% working interest. NAL and TORC are partners on significant non-unit lands in Elswick, Midale and Flat Lake as well. TORC's other major region is the Cardium, which is 16% of their production. Their lands are directly on trend between our West Pembina and Wapiti properties. We look forward to working with them, sharing our extensive experience with the Cardium play, a focus area for us since 2010. On asset retirement obligations, we completed a detailed review as part of our due diligence process. TORC's ARO profile is very similar to Whitecap's, with our corporate LLR ratio at 3.8x and TORC at 3.1x, so combined, a very healthy 3.7x. The TORC assets have a discounted ARO value of $72.1 million relative to our existing $176.4 million. So $248.5 million combined, very manageable relative to our reserve value and funds flow being generated. I will now pass it on to Darin to provide more color on the upside potential of the TORC assets.

Thanks, Dave. TORC has done an exceptional job of consolidating assets in their core operating regions and compiling a highly economic drilling inventory of over 1,600 -- 1,300 net locations. The inventory is very concentrated in 4 primary play types, allowing for significant improvements to be realized by conducting focused technology and optimization pilots. Some potential opportunities include: improving the application of ERH drilling; targeted multi-leg horizontal placement; and advanced fracture stimulation design, all of which will optimize reservoir development and maximize productivity and reserve recovery. The larger combined entity will allow for the acceleration of these pilots and the resulting inventory enhancements. With only 35% of the inventory included in the reserves assignment, the unbooked inventory provides ample opportunities for growth in reserves, net asset value and production. The TORC assets increased our operated working interest in the Weyburn CO2 flood by over 3% to 65%. Over 68% of TORC's production is supported by enhanced recovery, also known as EOR, which is a primary driver of its low decline rate and associated sustainability. Whitecap has had an exceptional track record of optimizing and expanding EOR schemes as well as identifying, derisking and developing new EOR opportunities to enhance its business model. We feel significant EOR upside opportunities also exist on the TORC assets. Combine this with Whitecap's 15% decline rate, which is driven by 70% of our production being impacted by enhanced recovery, and you have an extremely predictable and sustainable production and cash flow stream. As a combined entity, we will operate over 90% of our production, and we'll continue to have the lowest net GHG emissions intensity in Canada with strategies in place to continue to reduce it. With that, I will pass it on to Thanh to provide some color on the financial aspects of the combination.

Thanks, Darin. We see this as a very positive transaction for Whitecap, and when we combine with the previously announced NAL transaction, creates a pro forma entity that's more resilient in a low-price environment and better positioned for strong shareholder returns as commodity prices improve. Our balance sheet remains very strong as we are combining 2 entities that have a very disciplined and conservative approach to debt management. On closing of the transaction, net debt is expected to be approximately $1.4 billion and decreasing to $1.2 billion by year-end 2021. That's using a $45 WTI price. Whitecap's bank debt is a 4-year secured covenant-based facility with no annual redeterminations. The current capacity, including our private placement notes, is $1.77 billion with an ability for additional Pari-Passu debt of up to $500 million to be used for acquisitions. We anticipate absorbing TORC's bank debt into our existing credit facility and post-closing to increase our credit capacity to $2 billion, providing us with $600 million of liquidity in the near term and $800 million of liquidity by year-end 2021, so more than sufficient. The combined credit metrics remain very strong with debt-to-EBITDA of 1.8x at $45 WTI and 1.3x at $50 WTI, both well below our debt covenant of not greater than 4x. There's no change to our 2020 guidance as both the transactions, NAL and TORC, are expected to close in 2021. So our 2020 guidance remains at 65,000 to 67,000 BOEs per day on capital expenditures of $190 million. Our Q4 '20 average production remains unchanged again between 59,000 to 61,000 BOEs per day. Our preliminary guidance for 2021, including NAL and TORC, with closing dates of January 4 and February 25, 2021, respectively, is average production of between 99,000 and 101,000 BOEs per day on capital investment of $280 million to $300 million. At $45 WTI, fund flow is expected to be over $600 million with free funds flow of over $300 million. After paying for dividend obligations of $106 million, we will have $200 million of discretionary funds flow remaining. As I've mentioned, this is a preliminary guidance, and we'll look to put out our full budget for 2021 when we close the TORC transaction on February 25, 2021. I will now pass it on to Grant for his closing remarks.

I'm sorry, Mr. Fagerheim. We cannot hear you at this time.

Thanks, Thanh. I want to commend TORC's CEO, Brett Herman; and CFO, Jason Zabinsky, and the entire team at TORC for the company they've been able to build over the past 10 years. We feel very fortunate to carry forward what they've created into our combined company. The announcement of all this, a series of strategic combinations, including NAL and now, TORC, positions our combined shareholders for significant returns when the world economy recovers from the pandemic. Our combined entity will provide our collective shareholders the size and scale to better withstand commodity price volatility through a more resilient and sustainable platform for investment. We are pleased to have Manulife and now CPP as strategic partners as we continue to execute on both our organic capital plans and selective and targeted consolidation strategies. We are optimistic on the future and believe that Canadian Energy will continue to play an important role in the energy transition and diversification with our existing CO2 carbon capture projects as well as other potential initiatives. Whitecap is well positioned to provide strong shareholder returns well into the future. On behalf of our management team, our employees and our Board of Directors, we would like to thank all of our shareholders for your interest and support of Whitecap. Thank you very much. With that, I will turn the call back over to the operator, Sylvia, for any questions.

[Operator Instructions] And your first question will be from Jordan McNiven at Tudor Pickering Holt.

Just wondering if it's possible to get a bit more color on the operating cost side of things, looking at Whitecap before the deal being kind of $12 per BOE range and TORC around a $13, and not sure where NAL was, but with the gas weight, I assume it compared pretty well in there, too. And so we're looking at the guide of $13 to $14. I mean I assume that cost does keep up with the volume declines. But also just wondering I'm curious from my side anyway that there is quite a bit of conservatism built in here, and I kind of appreciate it takes a while to get your hands wrapped around these assets and everything. But If we think longer term, say, 2022-plus, I mean, what do you think would be achievable on these assets from an operating cost standpoint?

Yes. Thanks, Jordan. It's Thanh here. I mean, when we look at TORC's operating costs and their transportation in Q3, all-in was about $15. So we are expecting that to increase a little bit here with the lower production profile. So the anticipation is, on a pro forma basis, that would be ourselves, TORC as well as NAL to be in that $13.50 to $14, expect transportation to be in around that $2 per BOE. I think when we've modeled it in, certainly on the TORC side, I mean, they're good operators, but I think with the 92% overlap of the asset bases, certainly, we do see that trending down as we think about the future. But as always, we're pretty conservative when we come up with our numbers. Historically, we've been able to achieve not only operating cost reductions but also improved capital efficiencies.

Okay. I guess, I mean is it possible to put any numbers around that? Or you just want to stay away from that for now? I mean you think getting back into the $12-ish range is achievable with these assets? Or do they just come with an inherently higher cost structure that does bias things up?

Yes. I would say it's really early on right now, Jordan. Let the team -- let's close this transaction, first of all, get the teams on -- their hands on the assets. And we'll be able to find efficiencies at this time. Expect it to be slightly better than that. But again, we're looking to outperform the market.

Next question will be from Josef Schachter at Schachter Energy Research.

Congratulations on the deal. It was very accretive. And my first question is you had, as you said in the commentary, 92% overlap in terms of core areas with the NAL deal and some of your smaller areas. Do you see divesting any of the noncore areas and kind of consolidating, making tighter each of your major core areas going forward?

Yes. Josef, it's Grant speaking here. At this particular time, at a highest level, we're thinking that we may have up to 1,500 barrels a day of production but, again, a production that would be what we'll call nonstrategic to Whitecap. But what we'll do is we want to make sure that we, first of all, integrate the assets and see if there's upside that we can potentially capture effectively and have the resources, the financial resources to do so or potentially look to monetize them into the market. So -- but it is approximately -- they have 1 of the assets in Southern Alberta, TORC, that we may look to monetize on. And then there's some other assets -- smaller assets in Manitoba and Southeast Saskatchewan that we may look to monetize on.

Okay. Super. And in terms of drilling activity, are we to take a bit for the first half, given you're spending a lot of focus on integrating that there will be a lower level of drilling activity maybe just to offset some of the depletion on the core Whitecap assets and that any drilling, including -- you talked in the last conference call about some natural gas opportunities within NAL that, that stuff would be pushed towards post breakup.

Yes. Josef, just on -- we're anticipating, as we had talked about in our previous calls that once oil was in that $45 range and we could get appropriate levels of return on the capital we deploy, we'll be more active than we have been since late March. We're anticipating using start-up in late December or first part of January using 9 rigs, and we're anticipating approximately $120 million of capital being spent in the first quarter. So we will be active, more active than we've been in the last 2.5 quarters leading -- and leading into the end of the year. And once again, we come back to this return on capital, where is the best places to put our capital at this time. Once we get over the $45 hump, we want to start to deploy capital again. And I agree with your comments on reducing some of the depletion that will take place with our production moving forward.

Okay. And last one for me. Where is your production now for Whitecap itself?

Yes. So we're -- again, we're estimating the Q4 average to be somewhere between 59,000 and 61,000 BOEs. And we're slightly above that at this particular time.

Congratulations.

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

Okay. I do want to recognize the efforts and dedication of our staff as we advance from an evaluation process to the integration processes that we have -- are currently living through it and we'll have as we move through to the end of February. I just want to say that our team has done a marvelous job. And it's with their dedication that we're able to accomplish the transactions that we've done. And to all the listeners today, thank you for your support as we drive forward to provide advanced returns to our shareholders. Stay safe. Stay healthy. Merry Christmas, and best of the season to all of you.

Thank you, Mr. Fagerheim. 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.