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

Good morning. My name is Miranda, and I will be your conference operator today. At this time, I would like to welcome everyone to Whitecap Resources acquisition of XTO Canada Conference Call. [Operator Instructions] I would now like to turn it over to Whitecap's President and CEO, Mr. Grant Fagerheim. You may now begin your conference call.

Thank you, Miranda. Good morning, everyone, and thank you for joining us here today. Here with me are 4 members of our senior management team, our Senior Vice President and CFO, Thanh Kang; as well as Joel Armstrong, Senior Vice President of Production and Operations; Darin Dunlop, Senior Vice President of Engineering; and Dave Mombourquette, Senior Vice President, Business Development and Information Technology. 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 very excited to announce the much sought-after speculation that this highly sought after asset that Whitecap is acquiring XTO Canada. This is truly a transformational acquisition for Whitecap in many ways, including the exceptionally large, high-return drilling inventory along with substantial increase in our free cash flow. We have been pursuing a portion of these assets for quite some time now, and getting our hands on the entire asset base significantly enhances the long-term sustainability and profitability for Whitecap Resources. The all-cash net purchase price of $1.7 billion includes current production of approximately 32,000 BOE per day, over 2,000 drilling locations, over 600,000 acres of drill rights. Of these locations, approximately 500 locations are Tier 1 locations, providing us with over 20 years of drilling inventory. Included in the purchase price is also a 165 million cubic feet a day shallow gas cut processing facility that we believe to be very strategic. Through prudent debt management, we've been able to execute on this acquisition with no equity dilution to shareholders, and our balance sheet remains in excellent shape with debt to EBITDA expected to be 0.8 on closing and $1 billion of unused credit capacity. The assets themselves are high quality with robust well economics. The Montney play is well known, and not only have we achieved excellent results in the Kakwa since acquiring Kicking Horse in 2021. Recent industry well results offsetting the acquired acreage have been very impressive. This is a coveted asset that has been undercapitalized and future growth will primarily come from a sizable Tier 1 Montney inventory. This acquisition also marks our entry into the Duvernay play at Kaybob. The Duvernay asset is liquid rich, and we now own and operate a shallow gas processing facility in the area that also processes third-party volumes. Recent results and economics on this and surrounding acreage have improved significantly over the past couple of years, and we will utilize industry well designs, along with our recent earnings in the Montney to continue developing this acreage in an efficient and economic manner. After the technical work has been completed on this asset, our team was even more excited to get their hands on it. With all required infrastructure in place, the asset is now in development mode and as part of our near-term and long-term plans, the team is concentrated on further improving the already top decile economics that this asset generates. With this announcement, we are also enhancing our return of capital framework. Effective with the July dividend payable in August, we are increasing our dividend by 22% to $0.44 per share annually. We also wish to advise that we are targeting additional dividend increases once we achieve our debt milestones of $1.8 billion and $1.3 billion and ultimately would like to get our dividend to $0.73 per share, which is over a double of our current $0.36 per share dividend. Once we reach the $1.3 billion, which we anticipate will happen sometime in the first half of 2023, we would return 75% of our free funds flow back to shareholders. I would now like to pass the call on to Thanh to comment on the financial details of the acquisition.

Thanks, Grant. This acquisition checks all the boxes for us. It's highly accretive to shareholders with accretion of 27% on fund flow, 20% on free funds flow, 27% of production, 50% on reserves and 28% on net asset value. We obtained the commitment from NBF TD, CIBC and RBC for $1.1 billion 4-year term loan, which provides us with total capacity of $3.1 billion on closing of the acquisition. The balance sheet is in excellent shape. On closing, we forecast net debt of $2.1 billion and a debt-to-EBITDA ratio of 0.8x on current strip prices. Stress testing was down to $50 WTI and $4 AECO results in a debt-to-EBITDA ratio of 1.5x, which is well below our debt covenant of 4x. The balance sheet continues to strengthen as we move through the year and on current strip prices, we expect year-end net debt of $1.5 billion and a debt-to-EBITDA ratio of 0.6x. In terms of guidance, we're increasing our 2022 spending to $620 million, and average annual production by 8,000 BOEs per day to 139,000 BOEs per day based on the closing date of October 1. We are assuming fourth quarter production on acquired assets of 32,000 BOEs per day. Our preliminary 2023 forecast is to spend between $900 million and $1.1 billion, with average production between 168,000 and 174,000 BOEs per day, approximately 65% being liquids. At $85 WTI and $4.50 AECO, we forecast funds flow of approximately $2.1 billion after taxes and free funds flow of $1.1 billion. Based on this forecast, we anticipate reaching our $1.3 billion net debt milestone in the first half of 2023. And as Grant mentioned, once we hit this milestone, we plan to distribute 75% of free funds flow back to shareholders through either increased base dividends, share buybacks and potentially special dividends. On hedging, given our strong balance sheet and our preliminary 2023 plans are fully funded down to a stress tested price level of $50 WTI and $4 AECO. We don't anticipate entering into any additional positions for 2023. I'll now pass it to Dave to talk about the acquired assets.

Thanks, Thanh. The acquired assets contain an extensive resource across a large land base with extremely robust economics that will be highly repeatable as we grow it to 50,000 BOE to 60,000 BOE per day and maintain that. We have identified over 20 years of drilling locations in areas with the best economics and a further 45-plus years of identified inventory beyond the Tier 1 locations. Total net inventory acquired is 1,910 locations, and we only require 24 to 33 wells per year to maintain production at 50,000 to 60,000 BOE per day. Taking a look at the Montney first, we're extremely excited to further consolidate our interest at Kakwa, Alberta, taking our working interest from 66% up to 100% on almost a full township of land. We have had very strong results with the recent drilling and updated completions in this area and look forward to continuing that success with now 100% ownership of the assets. In the Montney, we have acquired 567,000 net acres of land and have identified approximately 1,700 net drilling locations, of which 372 are Tier 1. Our initial plans are to focus on the Kakwa, Musreau and Resthaven areas, which are characterized by high rate liquid rich wells with significant reserves and strong economics. Larger scale infrastructure in the area is owned by third parties and our growth plans will be supported by significant spare capacity across a number of plants in the area. Liquids are currently being trucked from the area but will have firm service on the third-party liquids pipeline that we expect to be completed and placed in service in the first half of 2023. We will use a combination of acquired and excess Whitecap firm service on the NGTL system for natural gas egress. To specifically address Montney land expiry questions that we've been receiving, the confidential data indicates that 80% of the acreage does not reach an expiry threshold before 2027. There are some licenses listed in the Caribou range that are ready to expire in the first 5-year window, but we have plans to continue that acreage where we see value. In terms of the reserves value, we currently have 0 locations booked in the McDaniel Reserve Report on expiring acreage. Turning our focus to the Duvernay, this transaction marks our entry point into the play. We have acquired 72,000 net acres and have identified 217 net locations on this land base, of which 112 is Tier 1. There are 2 main factors that get us excited about the future development of this asset. The first is the significant strides that industry has made over the past few years in terms of drilling and completion designs, and the subsequent economic improvements that have been achieved. Between the new developments that we have incorporated into our recent Montney wells, along with the modernization of completion designs and frac optimizations, we believe the development of this Duvernay asset will be very impactful to our corporate free cash flow generation into the future. The second factor is 100% ownership and operatorship of the 15-07 shallow-cut gas processing facility. Currently, the plant is processing both operated and third-party volumes that generate approximately $15 million per year of processing fees for Whitecap. Having ownership of this facility provides development optionality for this asset base as we advance forward. Firm service for both liquids handling and natural gas egress via the NGTL system are in place for the Duvernay, and we plan to begin our development of this asset beginning in early 2023. Lastly, I will touch on the reserve report that was independently prepared by McDaniel. The 1P value of $2.5 billion represents 5 years of development, which is based on our initial development plans. The 2P value of $3.8 billion represents an additional 3 years of development, all with Tier 1 locations that could have been booked as 1P if our development plans were to be accelerated. So the reserves reflect 8 years of development in an inventory base, which, as I have mentioned, has over 20 years of Tier 1 locations. These values not only point to the attractiveness of the asset base that we've acquired, but also to our focus on moderate production growth and generating increasing returns to shareholders. I will now pass it back to Grant for his closing remarks.

Thanks, Dave. To close off, I would again like to emphasize to you that the acquisition of XTO Canada is a continuation of our long-term income plus growth strategy and puts Whitecap in an improved position to generate increasing returns to shareholders for the longer term. It is our belief that through the acquisition, we continue to demonstrate our commitment to finding ways to improve the long-term sustainability and profitability of Whitecap while being mindful of our emission intensity footprint, and we're very excited about what we can do for the company and our shareholders, not only immediately as well as into the future. Our team is chomping at the bit to take full control of these assets and extract incremental value for our shareholders, we will go make it happen. With that, I will turn the call over to the operator for any questions.

[Operator Instructions] Your first question coming from Patrick O'Rourke, ATB Capital.

Congratulations on this acquisition here. I know it's been a long time coming and probably a lot of hard work went into it. I'm just wondering on a few fronts here. First, in terms of your staffing and your technical team there. You've got a little bit of expertise in the Montney, you've been developing it for the past couple of years. But does any technical team come with this asset? Or do you foresee the need to go and expand the team?

Sure, Patrick. Thank you. Just regarding the staffing side. When you say we've got a little bit of expertise, we've got a lot of expertise in the Montney, just so you know. Both on -- we'll go through the geological side, the geophysical side, the exploitation engineering and operational side. So we do have a lot of experience in that area. As far as new staff coming in, there are 73 employees, 61 of them staff members of the XTO that are in the field and 12 in the office that we'll be looking to bring on board here once we have conversations with them next week. So but we are very well set with the technical expertise we have inside the company at this time.

Okay. And then just on the hedging front. Obviously, you're taking on some financial leverage for this deal, it makes sense with your capacity here, but you're a little bit lighter hedged, particularly on gas out into 2023. Is there any thought in terms of the hedging program going forward, increasing that level to sort of derisk and ensure that you get to those debt hurdles that you have out there?

Yes, Patrick, it's Thanh here. I mean when we look at our strategy around the hedging there, it's really to ensure that we're fully funded down to a low pricing level. What we're using at this time is $50 oil and $4 gas. And so even with the 11% that we're currently hedged on a pro forma basis for 2023, we're going to be fully funded dividend plus our full capital program, that $900 million to $1.1 billion to below $50 WTI. So given that our balance sheet is in excellent shape, again, even stress testing it down to $50 a peak debt, we're 1.5x debt to cash flow. And by the end of the year here, we'll be 1.1 at $50 oil and on strip will be 0.6x. So the hedging program really has done what it's designed to do, which is mitigate risk. And so we're comfortable with the position at this time and not looking to add any incremental hedges in 2023.

What's interesting, just to add to that, Patrick, for everyone as well that next year that we've been using in our pro forma, the $85 and $4.50 gas rate, only 16% of our revenue still remains -- is coming from natural gas. So just so you're aware of that as well.

And then sort of final question for me, and I'll hand the mic back here. But you've acquired a very, very large piece of acreage here in the Montney. You have pretty ambitious growth aspirations, and the asset base should support that. Do you foresee sort of focusing in on specific areas for development to start? I know you touched on potentially some land tenure drilling that needs to happen over the next 5 years where it makes sense. Will we see sort of a core area that you have in mind right now? Or is it sort of too early to determine that?

Yes, Patrick, it's Darin here. Yes, for sure, we have a core area. Obviously, the -- where we upticked our working interest in the Kakwa area we'll be focusing on, as well as Musreau. And then we will also be continuing on a reasonable development in the Duvernay. So nothing abnormal other than bigger working interest and maybe another rig working in the area. But those will be definitely the focus areas. And we don't really have any immediate land tenure plan. So we're about 5-plus years before we start looking at needing to drill a significant amount of wells to continue lands. And by that time, we'll have identified exactly which lands are we should be focusing on to continue.

Dave here. Just to add one more thing. Yes, if you -- as Darin mentioned, that Musreau area, in particular, if you take a look at some of the offsetting results there, basically in 64.4, West 5 is where Musreau is, I think you'll see why that will be definitely a focus area for us.

[Operator Instructions] Your next question is coming from [Hoffan Jasons] from JC Investments.

Congratulations on the acquisition. I just have a quick question here. With regards to the future dividends and the payout, I understand you're going to be increasing it to 75%. At what value will that dividend payout be, the $0.73 that I read in the report? Is that going to be the final amount? Or will that increase from there as well?

Yes. Thanks for that question there, Jason. So the targeted level of dividend is $0.73. And the way that we come up with that, it's based on running everything down to $50 oil, ensuring that our cash flows cover our maintenance capital, and this would be based on the pro forma production of 163,000 BOEs per day and then covering the dividends. So making sure that we're fully funded even down to 50. And that's what we use at 163,000 BOEs per day. So as we reach our debt milestones of $1.8 billion, which we expect to be before the end of the year and then the $1.3 billion, we'll be increasing it in 25% to 30% tranches there. Now as we improve our capital efficiencies, as we increase our production, that wedge of free cash flow increases over time. So that will give us an even higher ability to increase our dividend as we think about beyond 2023. But the current target is the $0.73 per share.

And your time frame for that would be for next year? Or is that in the 2- or 3-year time period?

Yes. So the initial dividend increase is 22% to get us to $0.44. And then as we reach our first debt milestone, which will be before the end of the year, we're going to be increasing in another 25% to 30%, $0.12 to $0.15. And then sometime in the first half of 2023, we're going to be increasing in another 25% to 30% to get it to the $0.73. So they'll be anticipated another 2x that we're going to be increasing the dividend to get to the $0.73.

Well, gentlemen, if this works out, the acquisition and the numbers sound amazing. Pretty much my biggest investment for my company at this moment. And I just want to say congratulations, and I look forward to speaking to you all again.

And at this time, gentlemen, we have no further questions registered. Please go ahead.

Thank you, Miranda. I just wanted to thank all that we're involved in bringing this deal together on both sides of the equation, along with our employees, for their continued dedication and efforts and our Board of Directors for their ongoing support and guidance and to everyone on the call for your interest in Whitecap. Enjoy your day. Thanks very much for listening here. Bye for now.

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.