Q3 2019 Earnings Call

Good morning, My name is Joanna and LDR conference operator.

At this time I would like to welcome everyone to what kept resources third quarter 29, keenly felt conference call. All lines have been placed on mute to prevent any thoughts on nice.

After the speaker's remarks, there will be a question and answer session. If he would like just a question. During this time simply press Star then number one on your telephone keypad [noise].

If he would like to withdraw your question. Please press Star then the number two.

I would now like turn it over to White cap President and CEO Mr. got right. You may begin your conference calls.

Thank you good morning, and happy Halloween Happy Halloween, everyone. Thank you for joining us I'm joined by our CFO , John King as well deserved Vice President of engineering during <unk>, and our vice President of operations in production.

Armstrong before we get started I would like to remind everybody.

All statements made by the company. During this call are subject to the same forward looking disclaimer advisory we set forth in our third quarter news release issued earlier this morning.

The third quarter was a very ought to one for wake up on an operational front. We're very pleased with the results. We achieved with average production of 68255 <unk> per day [noise].

On capital spending of 153.8 million much lower than our projected $180 million to $200 million.

We're also pleased to advise that we're on track for achieving or mid case average production for the year approximately 71000 Boe per day on a reduced capital program as a proxy 400 million down from 450 million initially budgeted for the year, but the same level production.

And the first nine months to the year, we've generated free funds flow of $185.9 million [noise], that's the capital investments or 305 million to date, we've returned $122.9 million to shareholders, while continuing to strengthen our balance sheet, which is a primary focus for us in 2019.

But the discipline capital program in 2019, or a couple of business unit or business unit teams have not only delivered on efficient operational execution, but also had the opportunity to focus on technically advancing and expanding our lateral asset base organically. Our achievements here just a year to date in crude organic inventory.

[laughter] 224 gross hundred 64, net wells net locations positive type curve and has been to 56 or 50 gross 50 44.2 net locations and a continued expansion of our enhanced oil recovery projects through analytical analysis and reservoir modeling, which has the potential to answer that.

Paul spoke well reserves in the future [noise].

That's part of the 2020 budget process, we created five detailed budgets is bearing production growth targets and capital investments given the volatility in commodity prices and the uncertain economic environment. We've elected to continue the prudent and disciplined approach to capital investment into 2020. This allows us to end.

Creased free funds flow and our sustainability in a low commodity price environment, we retain the flexibility to rapidly increased production goes.

When realized prices provide further I provide higher returns on capital invested [noise].

Our board of Directors has approved in 2020 capital budget, a $362 million to $380 million [laughter], which is set to deliver arbitrary production at approximately 71000 to 72000 beauty per day, 85% oil and natural gas liquids, [laughter], which is an increase of 3% for debt adjusted share.

Compared to our prior year 2019.

We can maintain production year over year with less capital investments to trial, no corporate decent production decline rate of 19% to 20%. That's one on school Netbacks and strong capital efficiencies we've achieved today.

Referring to slow in 2020 at 55 dollar WH Guy is anticipated to be $263 million, [laughter], which we expect to allocate 40% to 50% towards strengthening the balance sheets and 50% to 60% towards returning capital to shareholders, we're targeting net debt of $1.1 billion.

I was in 20 [noise].

Which would be a second year, a string care about its $119 per year [noise].

With that I will turn it over to daring to comment our technical achievements in 2019.

Thanks Grant.

In addition to the successful execution of our capital program, our technical staff have been busy advancing our organic growth initiatives.

We have internally identified and successfully executed on several opportunities.

Enhance the economics of our current inventory as well as expanding it.

This includes.

Successfully negotiating the montney oil joint venture and to be Basin basin.

Which increases the long term sustainability of our business model.

I intensity fracture stimulations, and our Cardium assets.

Implementing a gas flood pilot and want buddies and the deep basin.

Optimizing and expanding our Viking waterflood assets.

As well as identifying new biking oil development areas.

Incorporating horizontal multi frac completion methods and our conventional boundary Lake waterflood redevelopment.

Expanding our valhalla inventory to be a emerging resource plays in the Charlie Lake and Montney.

And continuing to expand our CEO to capture and utilization technology and Weyburn.

With that I will pass it onto Joel for comments relating to health safety and environmental performance.

Thanks Terry.

Well safety in an environment remains a top priority at wake up and were once again pleased to report very strong results this quarter.

White cap averaged seven drilling rigs in three frac crews throughout the third quarter, which contribute contributed to an estimated 1.7 to 1 million person hours and 80% increase from Q2.

Even with the increased activity, our total total recordable injury frequency or trips for the quarter was 0.43, resulting in a year to date trip 0.61.

On the environmental front, we've been proactively managing Fuelband flared volumes. In addition to spill volumes, which are 50% lower year to date compared to the same period last year.

Lastly, asset retirement obligations or Arrow spent to date is 6.2 million or 70% of the 20 2019 budget. This level of spending has allowed us to about 74 wells to date would continue sort and we anticipate a total of 82 wells for the year.

Consistently been proactive in managing our arrow expects to spend an additional $9 million employed 20.

With that I'll pass through all the time to provide some color financial results.

Thanks, Joel WCS, WTI averaged $56.45 and third quarter compared to $59, an 81 cents per barrel into second quarter, a 6% decrease.

Canadian crude oil price differentials were comparable comparable to the prior quarter at approximately $4, an 80 cents per barrel.

Realized oil prices prior to hedges in tariffs were $65 in seven cents per barrel compared to $71.40 per barrel in the second quarter 2000 that I see a decrease of 9%.

Realized natural gas.

NGL prices averaged $14, an 85 cents per barrel compared to $22, a six cents per barrel for the second quarter 2019.

Increase of 34%.

The decrease is mainly due to low propane and butane prices, which represents 66% of our NGL mix. However, NGL revenues in the quarter, we're only 2% of total revenue.

Realized natural gas prices averaged $1.12 cents per mcf compared to $1.22 grams, yet in Q2 of 19.

The decrease was consistent with a decrease in equal natural gas prices.

Natural gas revenues are the quarter represents 2% of total revenue.

The royalty rate in third quarter was consistent with the second quarter at approximately 90%.

We anticipate a royalty rate approximately 17 to 17 and half percent in the fourth quarter and into 2020 based on a W.G.I. prices $55.

Operating expenses for the third quarter were $12 in 56 cents per view is consistent with the second quarter at $12.45 for field.

We anticipate operating costs.

Approximately $12.40 to $12, a 60 cents for full year 2019.

In 2020, we anticipate this increase by approximately 5%.

The increase power costs and higher trucking inflows of cost that Wafi a car as we increase our production in those areas.

Transportation expense of $2.23 per view, we see in a sense of the dollar for an interesting findings financing expense of $1.80 for feely, which includes realized and unrealized hedging gains and losses are all consistent with the second quarter operating metrics and are expected to remain relatively consistent.

For the balance of here and its 2020.

As Greg mentioned earlier, our balance sheet is in great shape and that $55 W. T. I, we anticipate to further reduce net yet in excess of 100 million in 2020.

In a $45 W.T.I. environment, we would maintain or dividends and can further reduce our capital program with minimal impact or funds flow and still maintain a total payout ratio of less than 100%.

I'll now pass it onto grassroots closing remarks.

Thanks, Tom.

We should start as we enter into 2020, we're expecting to experience continued price volatility vacillating between 50 to $60 W.G. I would natural gas prices in the dollar 70 to $1.80 per GJ range, we anticipate the Canadian dollar to remain in the 75 to 76 that range. We also anticipate just paying differentials.

On MSW at approximately $5 Doug.

<unk> differential and WSS WCS at $15 per barrel of each I differential.

We're pleased to provide our father followers I look at our 2020 budget at this time, we felt it necessary to design or program.

That will allow us to grow production modestly.

And fund our dividend well within funds flow and provide substantial level if refunds from <unk>.

With the free funds flow.

We retain full optionality to continue to strengthen our balance sheet buyback shares through the normal course issuer bid for accelerate growth plans for the future that's appropriate time.

Outside of our usual development plans across our assets.

For the upcoming 2020 year, we've entered into a joint venture with a private energy company focusing on the oil rich windows and the Alberta Deep basin.

This joint venture comprises a large contiguous land block, where we have the opportunity to earn 34 sections of land after lumpy completes one well in 2019 and drills and completes an additional two wells over the next two years [noise].

We feel this is what's very effective manner in which to earn into a very favorable well rich lands, but a very astute technical partner, we look forward to providing you with results from this initiative.

However, as we progress in the future.

We will also continue to look for additional organic growth opportunities to enhance shareholder returns in the future.

In closing I want to express our appreciation to both Jason Kenney, it's gotten all for taking the leadership they have in support of our Canadian energy industry, we're optimistic that of energy sector will once again be recognizing respected sports level.

Responsible development practices imports contribution to the Canadian economy, as we move forward.

Thank you to each of you on this call for your support and interest in White cap with that I'll turn the call forward the operator for any questions.

Thank you.

Ladies and gentlemen, we will now begin the question and answer session.

Next question. Please press the star followed by the one on your Touchtone phone.

You will hear lets say, Tom Pathologic Everquest should you wish declines on the planning process. Please press star followed by <unk>.

And your first question is from EMEA <unk> I've Cormack Securities. Please go ahead.

Thanks, Good morning, guys.

A couple of quick questions for Ya, just the capital spending grant it was up and it was positive.

Surprise in terms of both for this quarter and your guidance for next year I'm. Just curious does that is that reflecting improved capital efficiencies from changes to the way you're completing wells or is it lower service costs or is this just the timing of capital expenditures that's affecting.

Yeah, it's that Tanir Amir you know some of it is certainly optimizations within our program, but the full year program of 400 million still remains intact. So a lot of that is timing with respect to spending within the third and fourth quarters.

And then the capital efficiency improvements is that coming from service cost changes or is it just a lower decline rate I guess as you had to 2020.

Yeah, It's Darren Dunlop here its a combination with regards to improving capital efficiencies on each of our plays as we optimize our completion and not but you know a big component to that is our continued.

Spending and the allocation of capital to our waterflood projects and not to continually a knock down our our base decline.

Okay sounds good and then on the JV, a oh, sorry, I missed your comments to grant was it a commitment of three wells to turn into the acreage.

Yeah. So.

It was a first of all was a completion that has been has been done that won't do tied in here, but we expect by the end of November and then at least two additional wells will be commencing the drilling at the first of those wells here late in I think it's putting today actually [laughter] Charles for its that well the spudding today.

And then will be a drilling another well in 2020.

And that will provide US then we'll go back into it redevelop the continue to develop the area on a joint venture basis with the private private company.

Okay and then the JV, obviously gives you more resource capture <unk> just curious how you see the.

JV capital relative to your corporate capital allocation between other opportunities you have.

You have that Darren just yeah, I do have that said funny slip to the [noise].

With regards to how much spending we're gonna be doing in the I'm on the JV. It upwards of you know on our total capital is upwards of $14 million to $15 million in 2020 in 2000, 20-F, 22, and yeah. I was just curious in terms of how you see.

It's more strategically in terms of is it just is it the resource capture it has a better returns is it just the way to sort of add another.

Another area of focus it's I mean from our perspective, it's another growth area for US. We think this is a substantial growth area.

After earning we end up at a majority lands at 65% I'm one side of the river. We end up at 50 50 with the partner, but if it becomes another growth area for us as we continue.

In and around the region, where we're already playing so it's not a not a specific kind of stepped out of any by any stretch of the imagination. It's an area that we play.

Already it's just a.

Oil window, where our technical people worked up for a long period of time.

And.

Well I was just a focus there.

Sounds great. Thank you.

Thank you. Your next question is from Travis West from National Bank. Please go ahead.

Yeah. Good morning, guys I just wanted to hear years.

Comments around how the JV came about.

Kind of just extending on the last question there in terms of.

You know how youre thinking about it strategically what your views are in terms of how this sets up for the future you commented on growth in inventory and kind of just how that initial conversation kicked off perhaps.

Sure.

Our our Geo technical staff.

The preferred areas, where they would like to play.

And we had approached earlier this year a with a view.

The the private company, we had approached them earlier this year, what's your view to work on the technical joint venture.

As we as we move forward.

So rather than buying the inventory we thought it was best to drill to earn with the type of set up this is a good environment where.

Outside equity capital and debt is restricted so we believe this is an area that.

We could through drilling at a measured growth profile.

Pretty substantial on a go forward basis that we're looking at somewhere between 20 to 30000 barrels a day as we move through time and we didn't have to pay for that upfront. We patriot through earnings. So we thought it was much better use of a of capital on a go forward basis.

Okay. That's good thank you.

[noise]. Thank you. The next question is found Jami Mcrae from Raymond James. Please go ahead.

I guess I know you guys mentioned you had quite different budgets here and I just want to know if that relates anything towards this montney and so a few questions on that as you know is there the ability to expand more than the two wells for next year. What is maybe than 2021 look like because I'd like a you know TMO program 20, well or another.

More a bit more exploration and and just generally you know these two wells that you're drilling next year are they going to be more exploration in terms of just let's do a smaller frac design or is it really going to try and say what can this play really start to deliver just trying to get a little bit more intensity of what you guys are planning here for the area.

Sure I mean.

Until we've earned.

There will be no joint wells that are being proposed and we will have earned in 2020, and then we'll come back with it.

Our.

The two technical teams white cap in the private company and we're looking at step outs. These are not this is not wildcat exploration. This is a in a very well known trend I think you would know it and listened very sound industry players in the area. So we're looking into 2020 as it doesn't provide us.

Stansell amount of growth, but into 2021, because we're thinking more of 2020, as an earning year and into 2021 in the back half of 20 or into 2021.

Depending upon result, how aggressive will get and working again, hopefully with our joint venture, we're not going to outrun them, we're going to work with them.

On a go forward basis.

Okay.

And then in terms of like Frac design is that kind of similar to what guys. Other guys are doing area or is it couldn't be.

You know like you really trying to showcase what this thing could really do.

[noise] excuse me, Israel Armstrong well, the Frac design to be consistent with what's been employed in the area already it's not a.

Downgraded version by any means the fracs are very substantial.

Looking to maximize our productivity from each well.

Okay. Thanks, guys.

[noise] [noise]. Thank you. Your next question is found one child from TD Securities. Please go ahead.

Yeah [laughter] excuse me. Thanks, guys. Good morning can you give us a bit more color on.

What types of economics, you see from this JV.

Kind of hinted at well costs I guess, good sense of where you are just curious where you see the economics.

Yeah, Darrin Dunlop here.

Have obviously several type curves in this area depending on different links in Horizontals and different designed but I'll give you. The one the economics associated with the one that represents the majority of our inventory.

No it's for a two mile.

Manuel.

Total capital at 11.2 million.

I P 90 is about 1200 BOE a day.

Reserves associated with it again is about one to 1.2 million barrels.

Oil and liquids waiting in the first year is about 60% and all that generates a P. I have I've just over one rate of return of 115% payout under a year, what the F. Indian around $9 I'd Bailey.

A lot more color that I expect it looks like your prepared for it.

<unk>. The other question I guess I have is.

Obviously, if you went through the process and just falls on troughs question posed to look had to do this organically, we look at some acquisitions et cetera.

The question I have for you guys is you know if you like what you see in next year does that mean, you could actually look to grow it a little bit bigger via acquisitions.

I think you'd have to look at the time, driven I think we have to look at the timing.

Acquisitions again.

Since 2017, we've really not been overly aggressively looking at acquisitions 2018, 19 has been focused on organic growth.

And we'd have to look at the environment at that might be opportunities, but at this particular time with their capital being restricted across the Canadian basin Western Canadian Basin, we thought it was more appropriate to use from a and earning perspective and that's so potentially acquisitions might but no we're not forecasting out.

At this particular time.

Got you that's helpful and then the three wells I mean I.

Obviously the license in a in the public data.

Question as well the other two wells.

<unk> close to that welders, you can kind of try to.

Delineate the 64 sections that you're looking [noise].

Generally proximity, but anywhere where within a township for one another were not within a section of one another.

Great. That's helpful. So it has.

Yeah.

Thank you and the next question is from Adam Gilchrist <unk> capital. Please go ahead.

Hi, Good morning, gentlemen, I'm high level question, the capital program or how much of this programs going towards no on the drilling completion and you are investment like batteries batteries gathering system build out gas handling allocation of land spending and how does that compare to your 2018 and 2019 investment levels.

Hey, Adam it's a ton here. So you know on land and seismic in 2019, we would have spent about 5 million Bucks, we're forecasting about 3 million in 2020.

On the facility side 2019 are forecast to spend about 14 million.

And that compares to about 11 million 2020.

And then we also had budgeted.

Right.

Asset integrity health safety as environment, which don't add any production.

We spend about $12 million this year in 2019 and focusing in on 2020 as well.

Good for that.

Your next question is from Josef Schachter at sector Energy Research. Please go ahead.

Good morning Grant.

Couple of questions for you starting first with eco now at $3 do you have shot in gas that you could bring gone for the strong winter season that that's not in your numbers.

[noise], so sorry, Joseph I think it just so I think your question was.

Around gas, we don't we don't have any independent gas wells all of our gas is associated with our oil production that is currently on stream.

I think that was your question yeah, it's hard to see if there's anything there was shot in that could come on that with separate from from your production with oil.

Second your production was.

Third quarter or was it back you back ended so that right now your volumes are above the level that you were a for the average for the quarter of 68 to five five.

Yes, so what we're looking at is two to exit.

Were up over 72000 barrels a day now at this particular times. So we're looking for a lot of the capital that was spent in 2000 I mean, sorry in the third quarter production came on either late or engine into the October timeframe late September into October and it continues to ramp up as we move through this particular.

<unk>.

For the fourth quarter, so a very strong exit going into a their 2020 or as well.

Thank you.

No question for.

On the if we have a low oil price at December 31 are you concerned about a goodwill write down on the balance sheet.

Yeah, you know I mean, we'll we'll have to take a look at what that a environment looks like it's at this particular time on the the price forecast certainly I think when you look at the price deck at December 31st 2018, compared to where strip is a at this particular time. It is it is lower.

But we'll have to see what that pricing environment looks like relative to what are our reserves are as well that at the end of the year here.

Thanks last question for me is using 55 and 175, if things turn out much better and we have a you know better pricing environment Sixtyv in Q2 heading three if there's a good more optimism when would you change your approach to Capex and.

And are there any specific areas you'd like to focus on the news spending if you see right. So the commodity is more cooperative.

Yeah, I mean, the first priority for US is our balance sheet and we're targeting you know in excess of 100 billion of continued debt reduction that would be to the first priority. So you know as commodity prices improve I think we'll hit that target sooner rather than later and then we'll look to redeploy that whether that's return on capital or return of capital.

And we can make that decision at that time.

Thanks very much.

Thanks Jos.

Thank you, ladies and gentlemen, as a reminder, should you have any questions. Please press star followed by one.

The next question is from Christopher Jones of Haywood Securities. Please go ahead.

Hey, good morning, guys. Thanks for taking my question within your operational update you highlighted as a result of some completion improvements some pretty impressive results a in the Cardium. Just wondering if you are comfortable using this new approach on subsequent wells or do you guys need a little bit more time to see how recover.

He's unfold.

Yeah, Darren here, Yeah, I know, we're very comfortable using it in the appropriate situations you know it it's not going to be a blanket. There's there's particularly reservoir characteristics, where this technology is applicable on we've identified a significant amount of our inventory that we can upgrade with.

This what this high intensity Fracs technology.

Great. Thank you.

[noise].

And the next question is a follow up some I mean I've Cormack Securities. Please go ahead.

Hey, guys. Yeah, just couple of quick real follow ups here just on on the sure about buybacks I noticed you did become a little more aggressive on the buybacks this quarter versus the first half. So just curious on your thoughts on utilizing additional buybacks does it does not move up as the stock price moves down or does it move up as there's more free cash flow in your <unk>.

In terms of your budgets based on <unk>.

Yes, if you could be on the buybacks.

Yes, it's Todd here there I I think you know from our perspective, we want to focus on reduction of our of our net debt first of the strengthening our balance sheet. If we have more free cash flow, we'll look at considering a more aggressive buyback at at that particular time, our objective similar to this year was to keep our share count.

Flat to slightly declining it won't be a huge component of our free cash flow allocation unless we have.

Much for free funds flow.

Excessive what we're currently forecasting here, but expected component of that to be directed towards a share buyback similar to this year into 2020.

Okay sounds good and then just on the whopper the Cardium gas flood, perhaps Joel if you could just give us a little color on.

It is is that being driven just because of where gas prices are or is this something that.

<unk>.

Just technically makes sense to to look at and also when you expect any kind of production response from that.

Yeah, it's Darren here yeah. It it's it whether it was driven primarily from a reservoir perspective, you know increased <unk>. As you know you also source water for a a waterflood up in that area is is harder to come by and also that gas prices did have some play into it but its prime.

Merrily and you are opportunity, where we see that we can you know.

Significantly upwards to double our recovery factor by via gas injection. So.

And then timing for a response and like Oh, sorry, so were going to commence injection here in the month in November and we're anticipating response and you know based on the current pair that we're we're piloting within a 12 to 24 months.

Perfect. Thanks.

Thank you there no further questions you May proceed.

[noise], Okay. So if there's no further questions I just want to once again thank everyone.

For your time, an interesting wake up and we look forward to reporting back to you on our progress into 2000, 2021 and 22, so have a great day and thanks very much for your time.

Ladies and gentlemen, this concludes the conference call for today, we thank you for participating and we ask that you. Please disconnect your lines.

[noise].