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

Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Whitecap Resources 2023 Budget Conference Call. [Operator Instructions] I would now like to turn it over to Whitecap's President and CEO, Mr. Grant Fagerheim. You may begin your conference call.

Thank you, Michelle. Good morning, everyone, and thank you for joining us here today. Here with me are 3 members of our senior management team, our Senior Vice President and Chief Financial Officer, Thanh Kang, our Senior Vice President of Production and Operations, Joel Armstrong; as well as 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 yesterday evening. We are pleased to announce that our 2023 budget is comprised of capital expenditures of between $900 million to $950 million to increase our production per share by approximately 20% in 2023, resulting in an average production of 170,000 to 172,000 BOE per day. We anticipate exiting 2023 at 180,000 BOE per day, an increase of 8% over 2022 exit rates. The budget has been designed to increase long-term profitability and sustainability, while still prioritizing free funds flow generation, and ultimately higher returns to shareholders in the near term. The 2023 capital budget is balanced across our portfolio of opportunities, with 45% of the capital allocated to Northern Alberta and British Columbia, growing production in this business unit by 20%. 36% of our capital will be allocated to Saskatchewan and 17% in Central Alberta to keep production relatively flat in those business units, which, on strip pricing, is generating significant free cash flow, supporting current and future cash returns to shareholders. In total, we plan to drill 253 or gross 214 net wells across 3 business units in 2023. Capital allocation is level loaded throughout the year to optimize capital efficiencies with approximately 30% invested in Q1 and Q3 and 20% invested in each of Q2 and Q4 of '23 as compared to a more aggressive 1Q program in previous years. In the Northern Alberta, British Columbia business unit, we are -- we'll be running with a 2-drilling rig program, in the Montney drilling 23 wells, 8 Charlie Lake wells and we will add a third rig in Q3 to drill 3 Duvernay wells. In total, we will be spending $420 million to drill 40 gross, 36 net wells in the business unit. Our recent well results in the Montney continue to exceed initial expectations. The latest 4-well 12 to 33 pad, 100% owned by Whitecap, has achieved an average production rate of over 2,000 BOE per day, 42% liquids per well over the first 90 days of production. The 3-well 14 to 13 pad, also 100% owned by Whitecap, continues to exceed expectations now being on production for approximately 260 days, with current production of approximately 1,800 BOE per day per well flat to the 90-day average. These results continue to validate the quality of the XTO acreage acquired, and we look forward to building on success in our 2023 program. In Saskatchewan, we plan to spend $330 million to drill 180 gross, 153 net wells, which will be primarily focused on the Frobisher formation in Southeast Saskatchewan, lower Shaunavon, success in Atlas formations in Southwest Saskatchewan and the Viking formation in West Central Saskatchewan. We will also continue to invest capital into our EOR project at Weyburn, in which has a production decline of less than 5% and generates significant free funds flow for the company. In Central Alberta, we plan to spend slightly over $150 million to drill 33 gross, 25.2 net wells. Drilling plans are predominantly focused on the Cardium in West Pembina, and also builds on the success we've experienced in our 2022 Glauconite program. Overall, the business unit has achieved significant operational success subsequent to our consolidation and optimization strategy in the area, beginning with the NAL acquisition approximately 2 years ago. The increase in confidence and execution of, and ability to utilize extended reach horizontal wells, along with production optimization through own facilities, has improved capital and operational efficiencies in the area. 2023 is expected to be another exceptional year for this business unit. Lastly, our 2023 New Energy budget. We're planning on our first evaluation wells for both our Alberta and Saskatchewan carbon hubs over the winter drilling season. These wells are important to confirm our understanding of the saline aquifer reservoir to continue with our pre-FID work as we progress towards first injections in late 2024. We plan to spend $10 million on our 2 carbon hubs in 2023. Our balance sheet remains a priority. And based on current strip prices, we are on track to meet our first step milestone of $1.8 billion by the end of the year, and reaching $1.3 billion in 2023, which would result in dividends being increased to the targeted $0.73 per share and a 75% free funds will be returned back to shareholders. Looking forward, once we achieve our net debt milestone of $1.3 billion, Whitecap generates approximately $1.1 billion of free cash flow annually at $75 WTI, of which $450 million will support $0.73 per share dividend, $350 million to be used for share buybacks and/or special dividends, and the remaining $300 million will be used to reload our balance sheet for future optionality. I will now pass it on to Thanh to provide some additional commentary on our budget. Thanh?

Thanks, Grant. Our 2023 budget is robust and expected to generate funds flow of $2.2 billion or $3.47 per share at $80 WTI and $5 AECO gas, which will result in over $1.2 billion of free funds flow. As we move throughout the year, this will translate into increasing returns to our shareholders through base dividend increases and subsequent share buybacks and/or special dividends. We expect to return $2 billion back to shareholders over the next 3-year period. But as Grant mentioned, we will also be simultaneously reloading our balance sheet to prepare us for future opportunities should they arise. To stress test our forward plans, our 2023 capital program and base dividends are fully funded down to $50 WTI and $4 AECO. On an unhedged basis, we can fully fund our maintenance capital and the targeted dividend of $0.73 per share at $50 WTI and $4 AECO. Commodity prices remain volatile and increasing the balance among our production mix is expected to reduce pricing risk. Corporately, for every $5 change in WTI, our funds flow is impacted by $110 million, for every $0.50 change in AECO, our funds flow is impacted by $45 million. The weak Canadian dollar has also been very beneficial to our cash flows as it has cushioned the impact of weaker crude oil prices. The Canadian dollar weakening from $0.78 to currently $0.73 over the last several months has improved our cash flows by $135 million. As we mentioned in the press release, our natural gas volumes are currently exposed to AECO pricing and was subject to the summer price volatility that was recently experienced. That said, with 60% of our physical volumes under contract to end users we've reduced the risk of physical flow restrictions during periods of NGTL maintenance. We're currently evaluating and pursuing gas market diversification for our volumes. However, we do expect that with the NGTL system expansions, along with the start-up of LNG Canada over the next few years, there will be less downside risk to AECO pricing. 2023 will be an important year for the industry and Whitecap in particular, for our contribution to the Canadian economy and helping to support the high standard of living for Canadians. At our price deck of $80 WTI and $5 AECO natural gas, we forecast cash taxes of approximately $350 million, which equates to approximately 14% of pretax cash flow. In aggregate, we expect to pay over $1.1 billion to the provincial and federal governments in the form of royalties and income taxes in 2023. And at $75 WTI, this is what we expect to contribute annually, which is more than our capital investments every year. Additionally, we are increasing our asset retirement obligation of spending in 2023 to $37 million from approximately $21 million in 2022. This spending is fully reflected within our funds flow forecast, and is a reflection of our commitment to continually invest in the communities that we operate in. I'll now pass it back to Grant for his closing remarks.

Thanks, Thanh. There was a significant amount of work that went into the preparation of this budget by our employees, and I would like to thank them for their hard work and diligence especially when considering that we closed XTO acquisition only a month ago. We plan to run between 10 to 11 rigs for the majority of the year, retaining much of the same teams and crews that have made 2022 a very successful year so far, and look forward to executing on another successful program in 2023. Although, with significant volatility, the commodity price environment remains strong, especially in light of the weak Canadian dollar. Whitecap is well positioned with its balance sheet strength and quality and depth of drilling inventory to both manage through the price volatility and to continue to create returns for our shareholders. With those comments completed, I will turn the call over to the operator, Michelle, for any questions. Thank you.

[Operator Instructions] Our first question comes from Travis Wood, National Bank.

You've highlighted some production per share numbers on a corporate level and now with this Montney and Duvernay acquisition closed, I'm wondering if you can help us understand some of the growth and compression maybe across the asset base as we think about that corporate buildup maybe on an average basis? And if you could shed some detail around kind of exit-to-exit numbers as well across specifically the Montney and the Duvernay, I suppose?

Yes. Thanks, Travis. This year -- we anticipate exiting this year on the Montney between 26,000 to 27,000 BOE per day and looking to exit '23 around 43,000 BOE per day. In the Duvernay, we'll see a decline. We're exiting this year, we anticipate, at about 18,500 BOE per day, and actually in the year at about 14,000 to 14,500 BOE per day. So on average, in 2023, we're between 35,000 to 36,000 BOE per day average in the Montney, and in the Duvernay between 15,000 to 16,000 BOE per day. So overall, between the Montney and the Duvernay, 45,000 BOE per day exit this year, 57,000 to 58,000 BOE per day exit in 2023 with an average of between 50,000 to 51,000 BOE per day.

[Operator Instructions] The next question comes from Patrick O'Rourke of ATB Capital.

I didn't hear you, Patrick.

Sorry, is it mean that I missed that? There's Patrick O'Rourke on the line?

Yes. Yes. That's you, live and in-person.

Sorry, guys. We're working through a new phone system there. I apologize for that. I just want to ask a question with respect to the New Energy venture here and the investment. I know it's a small part of the capital budget here of $10 million in 2023. But at what point would we see -- considering that first CO2 injection is planned for late 2024, at what point would we need to see a potential pause of FID? And then sort of what would the cadence of capital deployment look like? I know it's a little bit complex because you have several partners in it. But just wondering if you can provide any color there. It's one of the more interesting parts of the business for us.

Yes. Initially, and I'll make some comments and ask for Dave Mombourquette have any additional comments. But what we're looking at is once we get through the FID process and reviewing the technical aspects, both in Saskatchewan and Alberta, we think the first project that will be the project that we're joined with Federated Co-op in Saskatchewan. We're also working kind of in tandem with the Alberta project with the Wolf -- on the Wolf project with Air Products. So we'll have a pretty good indication by the back half of once we get through the initial geotechnical analysis where we've bought seismic, shot seismic and now we're looking to drill wells in the fourth quarter, first quarter. So by the back half of 2023, we should have a pretty good indication as to what our capital spend profile would look like advancing forward. Dave, do you have any other comments to that?

No, I think that covers it grant. Definitely, as you're implying there's a lot of regulatory steps, a lot of operational steps we have to go through here that will give us the confidence to kind of start talking the contracts that we'll need to have in place to move forward on those larger capital expenditures that you are talking about, Patrick. So I think as Grant says, we've got to get through those next 2 steps of evaluating the saline aquifer on the 2 different projects. And I think Whitecap is quite far ahead on those compared to some of the other projects out there. So we're pretty excited about that.

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

Well, thank you, Michelle, and thanks to everyone for taking the time and interest to listen to us on this call today. We look forward to reporting back to you with our third quarter results at the end of October. And we are excited about the expanded opportunities that we have in front of us today and look forward to creating value from this sizable inventory, Wishing you all the very best. Thanks again. 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.