Whitecap Resources Inc. (WCP) Earnings Call Transcript & Summary

Good morning, and welcome to Whitecap Resources Annual and Special Meeting being held this morning by audio webcast on the Lumi meeting platform. [Operator Instructions] I would now like to turn it over to Whitecap's Chairman of the Board, Mr. Ken Stickland. Please go ahead.

Thank you very much. Good morning, everyone. Welcome to the annual and special meeting of the shareholders of Whitecap Resources, Inc. I'm now going to bring the meeting to order, and I'd like to first thank you for all joining us today in our inaugural webcast meeting. Hopefully, next year, we're back in person. Again, I'm Ken Stickland, and I'm the Chairman of the Board of Directors of Whitecap Resources, and I'll act as the chair of the meeting. As the COVID-19 crisis prevents us from holding our meeting in person, it's hosted on the Lumi virtual shareholder meeting platform. This allows registered shareholders to vote and to submit questions and comments to the moderator to be read and addressed at the meeting. If you have a question or comment, please submit it through the system. Following the formal portion of our meeting today, Grant Fagerheim, our President and Chief Executive Officer, will make some brief remarks. After his remarks, he will address any questions. I'm going to ask Shannon Gangl to act as our secretary of the meeting, and Jacquie Fisher and Frank Kailik, representatives of the Odyssey Trust Company, to act as our scrutineers. I've received confirmation from Odyssey as to the due mailing of the meeting materials and the financial statements for the year ended December 31, 2019. I've also received confirmations that the updated location and form of the meeting have been publicly disclosed by press release dated April 9, 2020. I direct that this confirmation, together with copies of these documents, be kept by the secretary with the minutes of this meeting. Business may be transacted at this meeting if 2 or more persons are present holding or representing by proxy, not less than 25% of the shares entitled to vote at the meeting. The scrutineers' report has been received, and it shows that there is a quorum of shareholders present at the meeting, and I direct that the scrutineers' report be kept by the secretary with the minutes of this meeting. I now declare that the meeting is regularly called and properly constituted for the transaction of business. We will conduct each vote by way of vote cast on the Lumi platform and those submitted by proxy. I understand that the scrutineers have tabulated all the votes received prior to the voting cutoff. If you have previously voted, you will not need to vote again when prompted. By voting again, you will revoke any prior vote made prior to voting cutoff. We will now open voting for all the resolutions. Particulars of the votes cast on all matters may be obtained from the secretary after the meeting. I direct that the scrutineers' report on all matters be next to the minutes of the meeting as a schedule. I'd first like to present the financial statements for the year ended December 31, 2019, and these are located on the Lumi dashboard page. The next item of business is to fix the number of directors. We have some people to make some resolutions.

My name is Thanh Kang, and I move the number of directors to be elected at this meeting to be fixed at 9.

My name is Janice Wood, and I second the motion.

Is there any discussion or questions submitted from any registered shareholder or proxy holder on that motion? And we'll just pause to see if there's any questions.

Mr. Chairman, there are no questions on that motion.

Thank you. The next item of business is the election of directors of Whitecap Resources Inc. I will now entertain the nominations for 9 positions as directors of Whitecap.

I nominate Heather J. Culbert; Grant B. Fagerheim; Gregory S. Fletcher; Daryl H. Gilbert; Glenn A. McNamara; Stephen C. Nikiforuk; Kenneth S. Stickland; Bradley J. Wall; Grant A. Zawalsky, as directors of Whitecap Resources Inc., to hold office until the next annual election of directors or until their successors are elected or appointed, subject to the provisions of the Business Corporations Act Alberta and the bylaws of Whitecap.

I second the nomination.

As there are no further nominations, I now declare the nominations closed. The next item of business is the appointment of auditors. I move -- or sorry, Thanh?

I move that PricewaterhouseCoopers LLP be appointed auditors of Whitecap until the next Annual General Meeting or until their successor is appointed and that their remuneration as such be fixed by the Board of Directors.

I second the motion.

Thank you. The next item of business is the consideration of a resolution to approve the reduction of the stated capital account of the common shares of the corporation.

I move that a special resolution on Page 21 of the information circular proxy statement of Whitecap Resources Inc. dated March 6, 2020, be approved.

I second the motion.

Is there any discussion or questions submitted from any registered shareholder or proxy holder on that motion?

Mr. Chairman, there are no questions on that motion.

Thank you. The next item of business is to approve a nonbinding advisory resolution concerning Whitecap's approach to executive compensation.

I move that the nonbinding advisory resolution on Page 22 of the information circular of Whitecap dated March 6, 2020, be approved.

I second the motion.

Thank you. Is there any discussion or questions submitted from any registered shareholder or proxy holder?

Mr. Chairman, there are no questions on that motion.

Thank you. As voting has been enabled for all previous motions, so if the shareholder has not yet voted, please do so now. [Voting]

I've been advised by the scrutineers that all resolutions have been approved by more than the requisite majority, and that those nominated have been duly elected as directors of Whitecap Resources Inc. I declare that the motions carried and the nominees for the Board of Directors elected. At this time, are there any questions submitted to the formal business of the meeting?

Mr. Chairman, there are no questions on the formal business of the meeting. Any questions received for management will be addressed with the CEO's remarks.

Thank you. Then the chair would entertain a motion that the meeting be terminated.

I move that this meeting be terminated.

I second the motion.

The meeting operator is activating a poll to vote on the termination of the meeting. [Voting]

And that's passed. We've now had that carried. On that basis then, I'm going to declare that this meeting is terminated. And I'm going to invite Mr. Fagerheim to deliver his remarks on behalf of Whitecap management. Before we go to that, I'd certainly like to know -- or the shareholders to know that the Board truly appreciates all the efforts of management. These times are extraordinary, and the effort and dedication that your management team has brought forward everyday through this last period has been just absolutely extraordinary. So thank you on behalf of the Board of Directors, Grant, and your team.

Thank you, Ken. I appreciate that. Good morning, everyone, and thank you for your time and interest in attending our 2020 virtual AGM. I do hope that each of you and your family members have been able to remain healthy and safe, both physically and mentally, to this very disruptive period of time in our lives. Online with us today includes our management team, along with many of our valued Whitecap employees that continue to be strong and persevere through this period. I want to acknowledge our entire team for their commitment that each of you are making to ensure that we are well prepared and stronger when we come to the other side of this difficult time. My sincere thanks. Importantly, we have all of our Directors online with us today. The guidance and positive support through this time has been invaluable. Thanks to each of you. By way of introduction, our Directors include our Chairman, as you heard from, Ken Stickland, who joined us in 2013; Steve Nikiforuk, from the onset of 2009; Grant Zawalsky, from our start-up as well, in 2009; Greg Fletcher, joined us in 2010; Glenn McNamara, in 2010; Daryl Gilbert, in 2015; Heather Culbert, in 2017; Brad Wall, in 2019; and myself, from the start of the company, Director, President and CEO, since we started in September of 2009. I also want to mention, as referenced earlier, Shannon Gangl has been our Corporate Secretary since 2009. I will briefly run through a summary of our 2019 year before I move forward with our thoughts and strategies on 2020. Our average production in 2019 was 71,050 BOE per day, 84% oil and liquids. We generated funds flow of $675 million or $1.67 per fully diluted share. We increased our debt-adjusted year-end reserves on a PDP total proved and approved plus probable basis by 7%, 9% and 11%, all with efficient capital spending metrics and strong recycle ratios. We funded organic growth and our dividend with internal funds flow, with a total payout ratio of 81%. We sequestered and stored 1.8 million tonnes of CO2 at our Weyburn CO2 project, more than offsetting our direct and indirect emissions; reduced our common shares outstanding by 4.63 million through our normal course issuer bid; reduced our outstanding debt by $103 million to $1.19 billion at year-end 2019; and we maintained the balance sheet strength and financial flexibility for moving forward, all pretty good. And now on to 2020. Exiting 2019 and coming into 2020, I must admit, we were feeling very good about the prospects for energy and our plan for Whitecap. Our competitive advantages include high funds flow netback, a low base decline rate of 19%, a strong balance sheet with robust liquidity and no near-term maturities; a robust hedge book for 2020; an enviable inventory of future drilling opportunities; ownership and operator in one of the world's largest CO2 sequestration and storage facilities in the world; a dedicated team of talented and committed staff focused on long-term success and value creation; and a management track record of being strong stewards of capital and financial discipline. We were well positioned and started the year with a very active capital investment program with 10 drilling rigs operating across our Western Canadian asset base through the first -- through much of the first quarter. In the first quarter, we drilled 79 wells, spending below our forecasted guidance of $160 million to $170 million, and increasing our production for the quarter to above the high end of our guidance of 72,000 to 73,000 BOE per day. Our financial results for the quarter were also very strong as the economic shocks caused by COVID-19 pandemic together with the battle for oil market share between the world's largest oil producers were not felt until late in the quarter. As the severity of the unprecedented economic impact was being felt, in early March, we elected to make significant changes to our 2020 plan. And on March 17, we announced our decision to reduce our total capital program from $360 million to $380 million to 100 -- $200 million to $210 million, a reduction of 43%, leaving us $50 million for the remainder of the year at set $5 million to $7 million per month, principally on CO2 purchases and asset integrity. Together with the capital reduction announced, we reduced our production by 4,000 BOE per day to 2020 average of 67,000 to 68,000 BOE per day from 71,000 to 72,000 BOE per day, a 6% decrease. As well, we reduced our dividend by 50% to now $0.17 -- $0.171 per year versus $0.342 per year. Now at a cost of $5.83 million per month, thereby saving us $70 million on a full year basis. The actions taken since the onset of the pandemic: #1, our first priority was to ensure our employees in the office and field were protected and able to work in a safe environment. 100% of our office personnel are capable of working from home. And for those that elect to come into the office, they are required to work behind closed doors and maintain social distancing in full accordance with the Alberta government's strict guidelines. There are many Skype and Zoom meetings taking place daily through our various working teams. Secondly, ensuring a sustainable strategy for maintaining -- managing through this demand and supply-shock crisis, we embarked on a rigorous review of our cost structure in all areas to become the lowest-cost producer that we possibly can. We are also focused on being prepared to accelerate capital in the future when we were able to get the COVID-19 environment managed and behind us, and having a more clear understanding of the demand and supply picture for crude oil moving forward. Key characteristics of Whitecap. Firstly, our decline rate. Current Q1 ending decline rate of 20% to 21% is expected to further decrease to drop to 13% to 15% by year-end, with minimal capital program announced on March 17. Secondly, our hedging risk management. We have 46% of our oil production hedged in the first half of 2020, with a CAD 66.73 floor price, 43% in the second half of 2020, with a floor price of CAD 63.32. 21,000 barrels a day of collars and 2,000 barrels a day of fixed pricing after royalties. We only have 5% of our production collared in 2021 at CAD 60 by CAD 81.53. Thirdly, credit capacity. All of our debt has been termed out with the earliest maturity in January 2022 on CAD 200 million. On 66% of our term debt, we have a fixed cost of borrowing at 3.6%. We are well within our existing covenants and have no concerns for the balance of the year at current strip pricing. We have 2 financial covenants, debt-to-EBITDA ratios of not greater than 4x and interest rate coverage of 3.5x. With our strong hedge book this year, we don't foresee any issues on covenants [ relied ] or liquidity. We know that if the current oil price environment persist into 2021, debt-to-EBITDA levels will be elevated for all producers, including Whitecap. However, our commitment to our lenders is that we will maintain our liquidity position by spending less than funds flow, so our absolute level of debt is either neutral or declining. Since 2021 and beyond, the levers that we have available to us ensure that we spend within funds flow, including ongoing cost reductions, efforts on operating G&A and royalty expenses, in addition to our go-forward capital plans and dividend payments. Our top 3 priorities, at this time, include: #1, a full bottom-up analysis of our costs in all areas to ensure that we have our lowest cost possible when we come through this difficult time, whenever that may be. Operating costs. Through fee negotiations, reduced chemical consumption and pricing, workforce optimizations and a deferral of activity, we are targeting a minimum 10% from current cost structure Royalties. We continue to engage in discussions with both the Alberta and Saskatchewan governments on this initiative. However, to this point in time, we have not obtained any definitive plans for reductions on existing production by either government. G&A. We are targeting a minimum 10% reduction to G&A, including a 10% voluntary reduction to management salaries and direct-to-cash compensation. And where possible, we reduced our nondiscretionary spending, minimized or eliminated our discretionary costs. We have one of the lowest G&A per BOE cost at $1.05, and our target is to reduce it even lower to below $0.95, and we will get there. Note, it's paramount that we do not sacrifice the safety and health of our people or our assets through this particular study. Secondly, debt availability and credit capacity. I do want to make a special mention of our Chief Financial Officer, Thanh Kang, who has had an active dialogue with our banking syndicate and note holders to ensure that they are supportive of our strategy and plans in this environment. We do not foresee any liquidity concerns for Whitecap. #3, netback analysis by asset. Scrubbing each area in detail to determine the variable and true fixed costs, along with the level of cash flow being generated by each asset at the various pricing levels. As a result of this review, we have initiated a process of reducing, suspending or shutting in production in various areas that are not generating some type of positive cash flow. This exercise is real-time exercise, and as many factors that must be considered, including technical reservoir consideration, marketing commitments, future restart costs and of course, realized crude prices. We do not have a definitive amount of production that we expect to suspend at this point as we are working in real time, as I have mentioned. However, we can say that maybe significant in the short term, not a simple exercise, but a necessary one. With personnel safety as a backdrop, we are intentionally focused on near-term corporate survival, but more importantly, what we look like when we come through the current economic crisis. We expect this quarter to be perhaps the most difficult one to manage through. We will get through this. And at Whitecap, we believe we'll be stronger in many ways when that time comes. Behavior patterns will vary by company, and we expect that the energy space will look quite different in the future. We believe that those companies that have the lowest cost -- that are the lowest-cost producers and have the ability to live within cash flow, the cash flow they generate will not only survive, but also provide superior returns to their shareholders into the future. Consolidation will take place. However, we anticipate that this will be delayed until we get through this pandemic and oversupply crisis. Understanding the pace of demand recovery is of utmost importance as this will drive coinciding commodity price outcomes. We are of the mind that Canadian producers, including ourselves at Whitecap, are going to have success if we have a competitive long-term cost structure, becoming larger and comparatively more relevant in terms of size and scale. We are optimistic about the medium to longer term, but cautious in the near term to oil and gas prices as well as differentials. Flexibility and the ability to accelerate capital spending and production when proper price and supply demand signals present themselves will be very important. We will continue to evaluate the development of pipelines that provide line of sight to get Canadians products to world market and what effect that is to realize prices. All Canadians deserve to enjoy the benefits of our natural resources at undiscounted prices. Areas we are watching with great interest: demand levels, including storage builds, both oil and downstream refined products builds; the value of the Canadian dollar relative to the U.S. dollar, we have been surprised with the strength of the Canadian dollar to this point; prices, WTI and Brent prices, differential prices of various crude types, NGL condensate pricing and natural gas prices. Obviously, we'll watch government actions to support the energy sector. And lastly, producer behavior of OPEC Plus, including Saudi Arabia, Russia, U.S. as well as Brazil and Norway and other countries, and of course, our Canadian oil sands conventional producers, like ourselves. The levers we have available to us, as I referenced earlier, ongoing cost optimization, to be most cost competitive moving forward. Forward capital plans, including necessity of return on capital at varied pricing -- various pricing levels in the future, return of capital in the form of dividend payments at various pricing levels moving forward. Before closing, I ask you for a couple more minutes of your time to provide you some comments about the current state of affairs from my perspective. There are a few facts that I feel need to be provided about oil and the oil and gas energy sector, along with the opportunity that are in front of us to capture. Canada is uniquely positioned with one of the largest natural resources in the world, geographically situated in Western Canada. Through innovation, creativity and old-fashioned hard work, Canada has and continues to demonstrate leadership in extracting and developing its natural resources, and is recognized as a leader in clean energy by other nations around the world. The energy sector has provided over 800,000 jobs to Canadians from coast-to-coast as part of the energy's industry and the nationwide supply chain, and has done so while providing immense wealth to every single province and person in our country. While our population is small, we are highly educated. We have world-class technical capabilities, and we are mighty and punch well above our weight when it comes to making positive changes for the world to emulate. We are geographically diverse with an extremely large land base. We depend upon fueling our supply chain, including planes, trucks, trains in order to deliver groceries, necessary supplies and critical medical care equipment to Canadians across the country, as evidenced in this time of current pandemic crisis we are living through. Oil is the core ingredient in life-saving machines, hand sanitizer, plastics and medical personnel protective equipment. The game of life has changed, and now, Canada has the opportunity for a total reset of its priorities for each of us to better understand the benefits of our natural resources, the job opportunities it creates, the funds it provides for all Canadians to enjoy and to celebrate the responsible matter that we produce our products in. A reset will take an open mind. It will take hard work, sufficient funding and commitment from everyone at every level to bring Canada back to the leader it has been historically, from construction workers, to educators, to store owners, to health care professionals, to financers and politicians. Our focus must change by allowing polarization of ideologies to stop us from returning to a strong, vibrant and expanding economy that our children and grandchildren can obtain employment in, work, play, travel and raise the families in the way we have been able to do. In resetting our priorities and policies, it does not mean that we have to abandon environmental or climate goals, but challenge everyone to assist in making change through energy diversification, recognize and respect where we are today with regards to responsible energy development, along with the benefits it brings to Canadians. At Whitecap, we encourage realism and pragmatism. We embrace advocacy for our energy sector, and we understand the need for our balanced approach, moving forward with respect to the 3 big Es: energy, environment and the economy. Although $50 or $60 WTI seems like a dream away at this time, I do strongly believe that we can attain these price levels in the not-too-distant future. Over the past 10 years, beginning in September 2009, our Whitecap team has been able to deliver a sustainable business model through the varying commodity cycles. And yes, I recognize that this is new and unprecedented challenge. I can say that I have absolute faith and full confidence in our team of dedicated employees, both in this office and in the field, with the assets we have under management, the processes we use on a daily basis and the opportunity set we have to provide long-term value growth and superior returns to our shareholders. We will not disappoint. On behalf of all of us at Whitecap, thank you for your time today, your interest in our Whitecap story and your support of our company. I will now entertain questions from any listeners.

Just waiting for questions. So one of the questions that has come forward is, are your hedging contracts dominant and denominated in Canadian or in USD? They are denominated in Canadian dollars. We've been asked about just our hedging program. Thanh, do you want to talk just for a moment about some of the additional hedges that we've been entering into?

Yes. So I mean the second quarter here, we expect to be one of the most challenging, which is where we've focused our efforts on. And right now, we've got 46% of our crude oil positions hedged on WTI, 26% that we hedged on the light oil differential, and 49% that we've hedged on the heavy differential. So we continue to work on enhancing our May and June positions. And those are relative to what we've done as part of the year-end and incremental to year-end as well.

Also, just on that, another question that come in. What's the additional hedging positions we have? We do have our quarter end Board meeting with our Board of Directors next week. We'll be disclosing with our press release -- quarterly press release, we'll be disclosing our positions at that particular time. A full disclosure of our positions we have at that particular time. Are there any other questions? This is all we've received at this particular time. Okay. I guess if there's no further questions, I, again, want to say thank you very much for your attention today. I certainly appreciate it, and we do appreciate I know it's very difficult times, but we are doing our best. All of us are doing our best to provide returns to our shareholders, and we will continue on a go-forward basis. Please stay safe, stay healthy, and we will get to the other side. Goodbye for now.

That concludes today's webcast. Thank you.