Q2 2020 Whitecap Resources Inc Earnings Call

Three members of our senior management team, our CFO, Tom Ken as well as during <unk>.

You have engineering and Joel Armstrong, our vice President of production and operations before we get started today I would like to remind everybody that all statements made by the company. During this call are subject to same forward looking disclaimer and advisory that we set forth in our second quarter news release issued earlier this morning.

The second quarter of 2020 was extremely busy for white cap as we put in place real time measures to deal with the effects of the covert 19 pandemic. Our priority was the health and safety of our office staff and field personnel, while we continue to deliver solid operational performance.

We will continue to update corporate policy is to maintain the safety of our personnel and to minimize any business disrupt disruption.

Our production in the second quarter as provided in our press release earlier today was at the high end of our expectations at 70807 BOE per day with a development capital expenditures of 21.3 million. We also acquired an asset in our core northwest, Alberta Peace River arch area for 5.2 million dollar.

There's which included 220 beauty per day up production, along with numerous drilling locations for future development.

As well as as well during the quarter in response to the near term collapse in oil prices, we voluntarily suspended approximately 2000 beauty per day, which impacted average production in the quarter by 1300 Boe per day.

Approximately 1000 Mmbtu per day of the suspended production has now been brought back on production, while the remaining productive capability requires further price recovery in order to restore.

[noise] crude oil prices experienced unprecedented volatility in the second quarter as a result of the demand destruction from coated 19 with us Wi Fi trading in the range of negative $37.63 to positive $40.46.

Okay, plus production cuts in North America producer shut ins helped alleviate the decreased demand.

With W. CCI recovering to 38 31 in the month of June.

Our risk management program minimize the financial impact of the volatility and we realize $51.4 million crude oil hedging gains in the second quarter.

Despite the collapse in crude oil prices and volatility, where we were able to generate $78 million of funds flow in the quarter of which we spent 21.3 million on capital 17.5 million on the dividend bought back 1 million shares at two to $2.30 per share to keep our share count our share.

Count flat and $5.2 million consolidation production in inventory in our Chardonnay price net of all activities, we managed to reduce net debt by $32 million.

We started the quarter with a strong balance sheet and our phase one and Phd actions helped us maintain this competitive strength as we move forward through 2020.

I'll now pass on this onto Joel to provide more color on our very strong operational performance and provide an update on our HG health safety and environment initiatives Joel.

Thanks Grant the number one priority for operations group with field offices is always the health and safety of our people.

Covert 19 has resulted an extensive review of our company policies at the field level and head office our success in avoiding it offensive in of Cobot 19. Today is the result of the hard work by all White cap staff to develop and follow the new guidelines.

Our second quarter safety and environmental performance was exceptional with no injuries, which ranks as the best quarter in the past five years as still volumes were 45% lower than the same period.

And the same period in 2019, I'd like to take the opportunity to thank our HSC asset integrity and operations teams for their continued diligence professionalism to achieve these results.

The operations team is focused on various cost reduction initiatives and real time analysis are well level operating income as crude oil prices fluctuated. This detailed analysis allowed us to maximize area netbacks by maintaining production volumes on the wells the generated positive operating income.

The second quarter was strong from a production perspective, considering the challenges with a temporary decrease in crude demand and building inventories.

Operating expenses per view, we were reduced by 8% quarter over quarter as a result of the cost structure review, which has implemented in late Q1.

It is anticipated a component of the reduction will continue forward. Although the majority is associated with activity based operations.

Lastly from an SG perspective, we continue to demonstrate our strong efforts by reducing our mission intensity by 37% since 2017 and have implemented a target to further reduce 20% over the next three year period of note. Our report now conforms to sustainability accounting standards.

Board savvy and task force on climate related financial disclosure Tcf de framework.

Further details are available on our recently issued yesterday report, which is located on our website.

With that I'll pass it on a ton of provide some color on the financial results.

Thanks, Joel Wi Fi average you asked $27, an 85 cents per barrel in the second quarter compared to $46 in 17 cents in the first quarter, a 40% decrease Canadian crude oil prices differentials improve from the first quarter with the second part differential averaging $6 in 14 cents use.

Realized oil prices prior to hedges and tariffs were $26.55 per barrel compared to $47 in 48 cents in Q1 as 20.

A decrease of 44%.

Realized NGL prices averaged $13 in 17 cents per barrel compared to $12.30 in Q1 of 2000, an increase of 7%.

The increase is mainly due to higher propane and butane prices, which represent 62% of our NGL mix.

Realized natural gas prices were consistent with the first quarter and average $2 in 16 cents per mcf compared to $2, an 18 cents in Q1 of 20.

The royalty rate in the second quarter was 9%, which was lower than the first quarter rate of 15%. This was driven primarily due to lower crude oil prices.

Operating expenses, the second quarter were $11.18 per view.

8% lower than the first quarter.

As Joel mentioned the decreases attributed cost reduction initiatives in response to the low commodity price environment.

In addition, our transportation expense of $2.39 were consistent with the first quarter.

DNA of 79 cents per BOE were 12% lower than the first quarter.

The decrease is attributed to a full corporate review of all expenses, including a voluntary 10% reduction.

Of our management team salaries.

Stock based compensation recovery of 2.4 million was recorded in Q2 compared to an expense of 27.3 million in Q1.

The decrease is primarily due the change in the fair value of the total return swaps, resulting in an unrealized hedging gain of 12.3 million.

This was partially offset by a realized loss of 4.6 million on total return swaps that we settled in the quarter.

The DDNA rate was $12.54 per be leaves a second quarter compared to $18.72 in the first quarter 2020.

The decrease is attributed to the noncash impairment expense booked in the first quarter.

Fund flow for the quarter was 78.1 million or 19 cents per share, which generated a total payout ratio of 50% after capital invested and dividends paid to our shareholders.

White cap balance sheet remains in a strong position with quarter end net debt at 1.24 billion on total capacity of 1.77 billion.

Our debt to EBITDA ratio was two times and our EBITDA to interest ratio is 12.7 times, both well within our our covenants.

So very strong quarter for for white cap cap, despite the low commodity price environment. We're on track to achieving our 2020 average production guidance of 65 to 67000 Boe per day on our capital expenditure budget of $190 million.

I'll now pass it onto grant for his closing remarks.

Thanks, John.

As a column.

Mr. Fager high we cannot hear you at this time Sir.

Thats right.

I was just saying as we enter into the second half of the year, we expect to see continued volatility in commodity prices as the covert 19 pandemic continues however, overall she crude oil prices improving as we head into 2021.

When cap is in a solid position with a robust hedge book strong balance sheet low decline rate and high netback assets.

And most importantly, a dedicated team of people at white cap.

We do anticipate through to be an increased amount of industry consolidation that will take place in the back half of 2020 as well as in 2021 and white cap. We are the opinion that size and scale are important factors in driving profitability and longer term sustainability, but that said, we believe that we're well positioned to play a role in the consolidation.

His energy sector is entering into.

Our interest.

Isn't assets and corporations that are principally focused in our core geographic operating regions was preference to light oil has its still drives the strongest operating netbacks in the sector.

With respect to our dividend.

We have not made any changes to our current dividend of point or 17.1 cents per share as we feel the strength of our assets can support the dividend in the current pricing environment as evidenced by our second quarter free funds flow generation.

We will remain diligent.

And to safety offer to safely operate and optimize our assets.

Well the continued focus on capturing additional opportunities to further strengthen white cap and deliver reliable and consistent returns to our shareholders on behalf of our white cap management team our board of directors, who would like to thank each of our shareowners for your interest in support of White cap wishing everyone. Good health and safety through these very disruptive times with that.

I'll turn the call over the operator for any questions. Thank you. Thank you Sir.

Ladies and gentlemen, I stated if you do have a question. Please press star followed by one.

You will hear a sweet home prompt acknowledging you request and should you wish to withdraw your question.

Our followed by too.

Asset.

I guess.

Let's take a handset before passing any key. Please go ahead and press Star one now if you had a question.

And your first question will be from EMEA Arris Cormark. Please go ahead.

Thanks, Good morning, guys. Yeah, just a quick question grant just on the acquisition can you just given some color in terms of the acquisition characteristics that you would look for are you looking to stick with light oil or are you willing to look at shale in other opportunities and.

And stick within your core areas or.

Good to hear like yesterday, which would be willing to step out of exist inquiry.

Sure. So yes, thanks, Amir what were yeah acquisition that we did in the first quarter and future acquisitions, we anticipate staying in and around our existing core areas, where we can drive operational synergies I'm looking to increase our inventory of opportunities into the future without sacrificing.

The the decline characteristics of our assets. So the way, we historically operator assets are quite different from.

The way most companies operate a we prefer to drive things down to a lower decline rate and.

Have each one of the assets.

In essence live within its own cash flow so.

As we did with the small acquisition was a complementary acquisition in the second quarter future acquisitions, you'll look to see potentially larger in scale as we continue to look at a larger.

Asset acquisitions as well as as other corporations, but the key characteristic for us will be focused on lydall, perhaps a little bit of natural gas, but we are focused on light oil.

At this particular time and making our cover a company stronger for the longer term.

Sounds good and just a second final question just on the hedging front. Your wells. This year is definitely helps in the quarter, given what commodity prices when but as we look into 2021 that the <unk>.

The curve isn't there doesn't show a lot of contango for the next few years I'm just curious how you're thinking about hedging at current levels or do you just.

Protected through lower balance sheet levels.

Yes. Thanks for the question here at that time here. So our hedging objective remains the same we're looking to mitigate that price volatility and protect our economic returns as you mentioned, we do have a good portfolio here in 2020, a bit like in 2021 was only 5% hedged a week.

I would take a pause do the program with the pandemic and and ultra low crude oil prices here, but we're still actively looking at getting to that 20% to 40% in 2021 before the end of year here. So you know what you'll see us use.

When commodity prices are in this 40 $50 WT level is cost us color. So gives us a good level of downside protection, but also upside participation as well when we start seeing you know W. T. I, you know approach that $50 plus level, there, you'll see us use a swaps to lock in those economic returns so the object.

Between now and the ended the year is to get us do that 20% to 40% hedged for 2021.

Sounds good thanks, guys.

Thank you.

Next question will be from Jerry.

Please go ahead.

Oh I got a couple questions here. The first one is ground. We say you know we need size and scale can you give them a bit more <unk> you know some more numbers around there like do you think you need to be 100000, D., we <unk> hundred 50000, or just some kind of metrics and then also if you can give it a little bit more.

He tells him it's hardly lake.

You know number of locations you have how much capital D.C. shipped into this area, maybe actually even broader just where commodity prices are how do you expect capex to ship throughout your plays here versus say prior years.

Sure just regarding the when we talk about size and scale there the reason we.

We think about her in this context is that capital programs to be most efficient from an operating perspective.

Bringing a capital a program rather than introducing one while other time into our capital program or one or two wells, we'd like to have any more consistent program over a I will say a six month to one year period of time, and you're able to do that when we get to.

I have more.

Size that we can put a program together in each one of the areas with this lower pricing environment that we're dealing with an approximately 40 to $45 W. CCI oil price environment. So.

Theres Dod component from operations perspective, which drives our efficiencies for a lot from a capital perspective, as well, we think that the downstream marketing arrangements that we're going to be entering into or need to entry into you're going to have to be larger in scale. When you're talking about age 21 year commitments on transportation that actually.

As as a the effect of bringing down your debt capacity, so whether that.

We don't have an absolute number but what we can say is that we think at the 70 or 71000 barrels a day, where we are currently we're probably be gonna have to be at least two times outsize I'm moving forward that doesn't select a certain 100000 barrels a day or 120 150, but we do believe.

In order to attract investors, we have to demonstrate the long term so still sustainability of our assets as well. So we were running our program on a go forward basis. So that's the first part of your question I'm trying to make.

The we've continued to add to the in number of locations. We have we added through that the acquisition 20.

Locations.

And.

We are very active with.

Adding additional locations in that and in and around our existing asset base and the in the in the deep basin.

Much of our activity has been confidential in nature as to what we've been doing up there. So.

You asked about the the question on whether we see a shift in capital well, we're definitely see are shifting capital [noise], because we don't we're not spend any count right now, but when we bring capital back and we're anticipating that potentially in the fourth quarter, maybe into the first quarter of next year and it is gonna be commodity price dependent.

And what we'll call a net realized price. So when we look at the return characteristic or <unk> return characteristics around the capital being deployed in each of the areas. Yes, we anticipate putting more into the peace River arch than we have historically.

But at these particular levels.

We're not bringing back capital at this particular time, so we'll make that.

Well make that.

Decision as we move forward, if we see a commodity prices come back to the levels of there where we can get acceptable returns on the capital we deployed.

Okay.

That's great. Thanks, Jeremy.

Thank you.

Next question will be from Adam Gil <unk> capital. Please go ahead.

Hi, Good morning, you guys identified 50 million of cost savings are pretty quick into the downturn do you believe there's any potential to expand on those cost savings through the back half of this year.

Yes, so [laughter] on here original savings that you know we identified that 50 million 42 of that was operating costs eight of that was from a gene a perspective.

And that included the 10% reduction in management salaries here. So I think we're pretty tight I would say from both an operating cost of the gene aiming our DNA cost per be Lee is 80 cents per view, we which is one of the lowest amongst our peer group.

It's not the lowest so I don't think theres much room to move from that perspective on the operating cost side. You know there were some you know negotiations that we had to have with all of our service providers and so I think in a improving price environment that would be very difficult I think to reduce much further if any.

Thing you know our thoughts on that is about 25% to 30% of that Adam would be structural and permanent in nature.

Yes, there'll be a cost inflation factor associated with that as well as a increased activity levels will increase the operating cost as well.

Okay, great. Thank you.

Thank you.

As a reminder, ladies and gentlemen, if you do have a question. Please press star followed by one on your touched on something.

And your next question will be from Chris Jones Act Haywood. Please go ahead.

Hi, good morning, everyone on the unrealized portion of the the hedge book for Q2, a loss of 108 nine reported versus an unrealized gain of 149 million in Q1.

So there's a bit of a differential there and I'm assuming a good chunk of this is tied to improving oil prices, but can you sort of provide a high level walk through on some of your assumptions for the crude that is embedded in unrealized loss number.

Yeah. The it's it's really that's exactly what it is it's the change in commodity prices from March 31st to June Thirtyth based on strip prices on those gates. So you're going to see you know given the volatility here you know big changes to our Mark to market. You know we saw that on the the crude oil hedges as.

Well, but we also saw that on our total return swap working the other way, which provided a unrealized hedging gain of 12.3 million. So the change there is all commodity prices.

Okay, great. Thanks.

Any further questions Mr. John.

No I'm good thank you.

Thank you.

At this time gentlemen, we have no other questions I just wanted to see.

[music].

Well I just want to say thanks to each of you for your time in interest today and White cap resources as we conclude this quarterly earnings call. We hope you remain healthy and strong I have some time to enjoy the silver Sunshine.

The best Thanks again.

Thank you, Sir ladies and gentlemen.

This does indeed [laughter] once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines.

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