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' Q2 2022 Results Conference Call and Webcast. [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.

Thanks, Miranda. Good morning, everyone, and thank you for joining us here this morning. Here with me today are 2 members of our senior management team, our Senior Vice President and CFO, Thanh Kang; as well as Darin Dunlop, Senior Vice President of Engineering. 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 earlier this morning. We are pleased to advise that our second quarter results were excellent across the board with successful operations in each of our 4 business units, paving the way for our record financial results. To give it perspective, our second quarter funds flow of $1.08 per share was higher than the $1.06 per share that we earned for all of 2020, what a difference a year and a half makes. The quarter also ended with the announcement of the -- our acquisition of XTO Canada on June the 28th. We are very excited about this transaction. We are on track to close it before the end of the third quarter. In the second quarter, we generated record funds flow of almost $600 million, which was $175 million of it being returned to shareholders through our base dividend and share repurchases. We also ended the quarter with approximately $675 million of debt, well below our $800 million target that we were leading -- set -- that we set leading into the end of the quarter. Darin will give a few more details on our operational highlights, but I wanted to touch base on our recent Montney wells that we alluded to in our press release this morning. Both the initial well results from the 12-33 pad and the continued productivity from the 14-13 pad validate our assessment of the quality of the Montney opportunity that we have, along with the improvement in well placement and associated completion techniques that we have employed. Our ownership in both of these pads and a total of 34 sections at Kakwa will be increasing to 100% working interest once we close the XTO transaction. We look forward to closing the XTO acquisition and putting capital to work on these assets in the fourth quarter. I will now pass it on to Darin to highlight more of our recent operational achievements. Thank you.

Thanks, Grant. Our Q2 production outperformance was driven by one, continued identification and implementation of production optimizations on our acquired assets, particularly in Central Alberta, and 2, our Q1 drilling program significantly outperforming initial productivity expectations. Since taking over operations at Kakwa in mid-2021, we have been utilizing advanced analytics and modeling to proactively optimize the design and implementation of our Montney fracture stimulations. This includes optimizing wellbore placement within the Montney package and refining volumes, rates, entry point design and spacing. As a result, our frac efficiency continues to improve as evidenced by the strong initial rates from the 12-33 pad referenced in our Q2 release. XTO last drilled Montney wells as part of their winter 2019-2020 program, and we are excited to implement this optimized well design to our new Montney acreage. Moving on to our other assets. In Southeast Saskatchewan, our 16 Frobisher wells from the Q1 program averaged over [ 213 ] BOE per day per well over their first 90 days of production. This is 47% higher than our expectation of [ 144 ] BOE per day. These wells are also declining in a much lower rate than expected, which accounts for some of the outperformance. In Central Alberta, our 4 Q1 operated Glauc wells now have over 90 days of production, for which they averaged [ 839 ] BOE per day per well with 77% liquids. This is also 57% above our expectations. Lastly, in Southwest Saskatchewan, our 4-well Lower Shaunavon program now has been on for over 90 days and has averaged [ 245 ] BOE per day, which is 72% higher than our expectations. This program includes a reservoir extension well to the Northeast that will likely upgrade the expectations for 15 to 30 locations. I would now like to pass on to Thanh to comment on our financial results and outlook.

Thanks, Darin. Our record funds flow in the second quarter driven by excellent operational results and strong commodity prices with WTI averaging over $108 per barrel and AECO over $7 per Mcf in the quarter. Tight differentials and weak Canadian dollar further improved the high benchmark pricing that we realized. Funds flow of $677 million or $1.08 per share and free funds flow of $589 million or $0.94 per share were all up over 150% from Q2 of last year. And further, we continue to generate strong returns to shareholders by returning a total of $176 million in the quarter through base dividends and share buybacks. Second quarter gross capital spending was $88 million relative to our forecast of $75 million. Our budget assumes the $13 million pipeline costs at Wapiti would be net against its subsequent disposition. But under IFRS, we have to separate the costs from the disposition. Our 2022 stand-alone capital budget of $570 million is net of the $13 million Wapiti pipeline disposition. Our balance sheet is in great shape with net debt of approximately $675 million, well below our target of $800 million and puts us in an even better position to acquire premier Montney and Duvernay assets without issuing any equity into the market. As a reminder, net debt upon closing of the transaction is expected to be approximately $2.1 billion, which represents only 1.5x debt-to-EBITDA at $50 oil. Our net debt milestone of $1.3 billion represents a debt-to-EBITDA ratio of less than 1x at $50 WTI and only 0.6x at $85 WTI. There's no changes to our capital spending or production guidance for the remainder of 2022 and our preliminary 2023 numbers. We're excited to bring the XTO assets into the Whitecap portfolio as they generate strong, sustainable free cash flow and will enable us to continue to increase returns to shareholders long into the future. I'll now pass it back to Grant for his closing remarks.

Thanks, Thanh. Since the start of July, our teams have been back in the field executing on an active third quarter capital program. We are currently running 10 rigs and we'll hit a peak of 11 rigs before the end of August. We have secured drilling rigs and completion services through to the end of spring breakup next year to execute on the expanded capital program, including the XTO assets being acquired. We remain very positive about the forward commodity price environment and have prudently planned our capital program using a lower commodity price deck. We are focused on capital allocation decisions that provide the best returns for the company and to our shareholders. Our intention is to continue to build on recent operational success, improve efficiencies through our processes to increase our free cash flow, achieve our net debt milestones and continue to increase returns to our shareholders. To reiterate, our return of capital framework, once our first net debt milestone of $1.8 billion is reached, we will increase our dividend by 25% to 30%, and then again, by 25% to 30% once we achieve our next milestone of $1.3 billion for a total annual dividend of $0.73 per share. Once this final net debt milestone has reached, our intention is to return up to 75% of our free cash flow back to our shareholders through dividends and share buybacks. Lastly, I would like to thank our employees and service providers for their continuous dedication, for our Board of Directors for guidance -- for their guide -- their guidance and to our shareholders for your ongoing support. With that, I will turn the call over to the operator for questions. Thank you.

[Operator Instructions] Your first question today is coming from [ William Damian ] with -- who is a private investor.

My question is regarding the XTO asset purchase. It looks like we're increasing CapEx by $500 million in order to achieve 40,000 barrels of oil equivalent per day in production at a cost of $1.7 billion for the acquisition. I'd like to see if the panel expand on that a little bit and how that adds to free cash flow for our investors? Second question I have is the perspective on the web page in the beginning of June indicated that 50% of free cash flow would be forwarded to investors throughout the rest of the year. But as I understand, this deal was began in January, which would indicate that there was never any intention of forwarding 50% of free cash flow to investors if we were undertaking the next deal.

It's Thanh here. So I'll answer the first part of the question, and I'll let Grant answer the second one here. So the capital program that we've outlined for 2022, we increased that by $50 million in the fourth quarter here. So their current production is about 32,000 BOEs per day of production. For 2023, on a very preliminary basis, our stand-alone capital was about $750 million. So these assets under our commodity price assumption, $85 oil and [ $4.50 ] gas here would generate about $0.5 billion in cash flow. The capital required on this asset to grow it from 32,000 BOEs per day to 36,000 BOEs per day, which is 16% growth is about $250 million. So about $1 billion in total that we're spending next year to grow production per share, 23%. So you can see that this asset here, this high-quality asset with the inventory that it brings forward is already generating free cash flow today, $500 million of cash flow, approximately $250 million of capital that we'll spend in 2023 there. So it does improve our sustainability, but it also brings more free cash flow per share. And you can see that when we look at the accretion numbers, our free cash flow per share accretion is 20% per share.

Just regarding your second question, whether it was our intention to return capital, 50% of our cash flow back to our shareholders, we actually had intended, and we're actually into the future going to be returning more back to our shareholders than the 50% that we were talking about earlier. And we -- as far as our intention was concerned, the bids were due on the -- you're referencing back to January, the bids were due on this first -- on the XTO were due in mid-March. There was a process that took us through to the end of April before we were even advised that we were going to be the selected party to negotiate a firm transaction. So our intentions have actually improved, not been reduced from where we were previously from returning -- return back to or increasing our returns back to shareholders.

Yes. The only thing I would add to that, Grant, is certainly, when you look at the quality of this type of transaction, what we're always trying to do is improve the long-term sustainability of the business, which means improving that free cash flow profile, so that we can actually return more back to our shareholders. And so you're referencing the 50% being returned back to shareholders. And what we want to do through this transaction is increase that to 75%. But again, once we reach our debt milestone of $1.3 billion, which we think is going to be sometime in the first half of 2023 year. So we need to balance looking at our business on a long-term basis versus a short-term basis. And we think that's a very fair trade-off in terms of going from 0 leverage to low leverage and bringing in such a high-quality asset that improves our free cash flow profile and improves our ability to return more capital back to our shareholders.

Okay. But when I look at the early June perspective, it's indicating that we can expect $600 million -- or there was $411 million due to come back to shareholders through the final 4 months or 6 months of the year, and that disappeared. And instead, we got an increase of $50 million for the rest of the year. So instead of -- instead of $411 million being returned to shareholders on the plan on June 1, we got $50 million for the rest of the year. And if you change that plan now, how do I know that you don't change that plan later? And I do know that you said up to 75%.

Yes. There's definitely a trade-off, for sure. And we're trying to run this business on a long-term basis here. So when you look at the -- moving the time frame from a return of capital perspective. And look, we're looking at 6 months to 9 months here. We're not years away from being able to achieve 75% back to shareholders here. We think this is hugely beneficial for our shareholders. So it is a medium to longer-term trade-off in terms of more free cash flow for short-term -- for short-term improvements, I would say, from a balance sheet perspective here. So that's something that there was a conscious decision made to ensure that we continue to improve our business from an inventory, from a free cash flow from a production standpoint here. So there's no question that there's a bit of a deferral here. We agree with that. We think the trade-off is immensely beneficial to our shareholders.

Your next question will be coming from Jeremy McCrea with Raymond James.

Just sort of the -- maybe a bit of a follow-up question here as well, too. Just with the XTO asset, I know it's really probably high-graded your asset base here. Does it give you pause here to maybe look at some maybe more non-core positions just to enhance that free cash flow? And if so, what would those non-core dispositions potentially look like? And then you guys have been very busy on the M&A front here. Does this XTO asset give you pause in terms of M&A or are you still looking here pretty proactively?

Sure. Thanks, Jeremy. Just regarding your first question on non-strategic assets, we are in the process of going through an evaluation of assets to put into the market that are non-strategic to the -- non-strategic to Whitecap on a go-forward basis because we haven't applied capital and we will not be planning capital to those into the future. We could produce them out of assets, but it's somewhere between 9,000 BOE per day to 12,000 BOE per day of production that we're doing detailed analysis on, including updated engineering with -- along with the rest of our assets. But we are looking to the potential to put into the market, the assets between 9,000 BOE per day to 12,000 BOE per day. The option being that we could monetize them if there's sufficient bid appetite or we could just continue to produce them out as we have. We haven't applied -- we've looked at this over the last period of time, if we haven't applied capital to them or expect to project to apply capital to them into the future, that was our criteria that we're looking at our assets on. Your second question on M&A, pause, for sure, we're going to pause at this particular time. There's this acquisition we're very, very excited about with the XTO acquisition. And we want to make sure that we fully integrate not only the assets, but the personnel that will be joining us as well, and ensure that through the 2023 year and into the future that we can demonstrate strong results as we have through 2022.

[Operator Instructions] Your next question is coming from Travis Wood with National Bank Financial.

2 questions for you. One, could you help us understand kind of the cadence of OpEx on a pro forma basis as you integrate these lower-cost Montney assets and kind of what that pro forma BOE number would look like through next year? And then the second question is a little bit of a carry on from Jeremy's there just in terms of what low-hanging fruit do you see kind of within the XTO assets that you could start to enhance the margins, improve some kind of operating synergies? And I know Darin kind of alluded to some of those. But could you give us some more color around how you plan on optimizing and potentially improving performance coming out of that asset as well?

Travis, this is Thanh here. I'll answer the first question. From an operating cost perspective, Q2 was higher than normal, and that's due to higher turnarounds and workovers that we typically do in the second quarter here. But also with the NAL acquisition that we did, we did acquire the old gas plant, and we did a turnaround there as well that's typically done every 3 years. As we move into the third quarter from a Whitecap stand-alone basis, we'd expect that to trend down to that $14.25 per BOE range. But there's a step change with the XTO acquisition and those assets being folded in because they come with a much lower cost structure. So pro forma, we're expecting about $13 operating cost for BOE in the fourth quarter as well as moving into 2023 as well.

Perfect. And then, yes, just some of the opportunities you see within the XTO asset base where you could start to enhance some margin over and above kind of a base plant?

Yes, Travis, it's Darin here, I'll take that. So in the press release, what we're talking about with regards to optimization, that was primarily down in Central Alberta. And that would -- that's a different situation, where there's rerouting of production to more efficient plants, lowering line pressures, stuff like that. So a lot of optimization that's happened there by consolidating assets. Up in the -- on the XTO assets a little bit different. We -- that wasn't a -- I guess, wouldn't be considered a core asset for the XTO Exxon portfolio. So a lot -- they hadn't been active there since 2019, 2020. So one optimization there will be just applying what the learnings on frac design, development design, well spacing in that, that has evolved over the last 3 years, 4 years in the Montney to those assets on developing them. And as well, there are some opportunities for lowering line pressure, optimizing well performance in that. But that being said, there's a lot less wells, but they are a lot bigger. So any percentage gains you gain on an individual well will be significant. So a little bit different, but still we see some opportunities.

Your next question is coming from Josef Schachter with Schachter Energy Research.

Congratulations on the quarter and the XTO deal. Question, as mentioned by Darin just recently, the production activity by Exxon and Imperial with -- after 2019 kind of stalled and stopped. Where was the production at the peak? And given the facilities that they have, are they running their plants and facilities at 70%, 75%, so that you have a lot of growth potential before you have to spend money on more infrastructure? Maybe you can put some color on that just to help me understand what XTO was doing for the last few years and the upside capture for yourselves?

Yes, Josef, thanks for the question. Yes. So if we're -- obviously 2 different gathering systems with the Montney and the Duvernay, but I'll just talk to Duvernay. So in 2020, that's when XTO Duvernay production had peaked. Right now with the recent completion of -- by Crescent Point of their 16 DUCs, we are now reaching close to capacity, but that will be short-term. So in the Duvernay, we plan to live within drilling 5 to 8 wells a year to fill to -- to drill-to-fill on the Duvernay, but our primary growth will be in the Montney, where we will be drilling over the next few years some upwards of 20 to 25 wells a year in the Montney. And that is we have a lot of options for takeaway and processing capacity within 5 different plants there.

Okay. Just going to that, where was the peak production on the 2 assets in 2019, just to get an idea of the [ 32 ] that you're getting now versus what was the peak that they had prior to stopping spending money?

At the total peak in -- I'm looking at a graph right now, probably in around [ 40,000 to 45,000 ].

Quite a bit of upside there?

Yes.

Mostly on the Montney then?

Yes.

Yes.

And at this time, gentlemen, we have no other questions registered. Please proceed.

Thanks very much, Miranda. Thanks to each of you on the call today as we look forward to reporting back to you with the closing of the XTO acquisition in the third quarter here. Until then, I hope everyone has a pleasant remainder for your summer holidays. Thanks very much. Enjoy the rest of your day.

Thank you, sir. Ladies and gentlemen, it 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.