Q4 2021 Whitecap Resources Inc Earnings Call
Good morning, My name is Jessica and I will be your conference operator today.
This time I would like to welcome everyone to Whitecap resources fourth quarter and year end 2021 results conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad. She would like to withdraw. Your question. Please press Star then the number two I would now like to turn it over to white cap.
<unk> President and CEO Mr. Grant <unk> you May begin your conference call.
Thank you Jessica and good morning, everyone and thank you for joining us here today.
Here with me.
The members of our senior management team, our senior Vice President and CFO , Tom K as well as Joel Armstrong Senior Vice President of production operations, and Dave <unk> Senior Vice President of business development.
And information technology before we 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 that was issued earlier this morning.
2021 was an exceptional year for whitecap capping off the successful execution of our strategy to improve the profitability and sustainability of our business through multiple transactions over the past 18 months.
As a result of the consolidation initiatives that we embarked upon in early 2020, we have positioned the company to accelerate our return of capital to shareholders, while maintaining financial flexibility through a strong balance sheet and disciplined capital spending.
Although 2021.
A year filled with several asset and personal.
Personnel integrations, our teams kept their foot on the gas and ensured that the ongoing operational and financial success was achieved for our shareholders for 2021, we generated $1 $1 billion of control on capital spending of $428 million before acquisitions.
We also paid $126 million in dividends and bought back $164 million worth of common shares for $290 million of direct shareholder returns.
Along with the continued operational momentum that we have shown with our fourth quarter results released this morning.
<unk> announced a 33% increase to our dividend.
Which is the fourth increase since the start of 2021 to 36 per share annually or <unk> <unk> per share on a monthly basis.
This new dividend level is consistent with our return of capital priority and our 2022 capital allocation plans, but is this sustainable down to a stress test at a level of $45 <unk> and below that for the foreseeable future.
With respect to our new energy team advancements, we continue to progress several carbon capture initiatives related to the energy transformation to a lower carbon economy. And example of this is the announcement yesterday to manage the carbon sequestration hub to serve industrial facilities in Alberta is heartland industrial Heartland, We believe that this partnership.
Between ourselves with midstream air products.
And other industrial parties, along with the indigenous ownership group will be successful.
Given our diverse backgrounds and experience with several aspects of the proposed project.
At this time I would like to pass this onto Joel Armstrong to comment on our ongoing operations.
Thanks, Greg.
2021 was a very busy year with the fourth quarter being the busiest with our accelerated capital program.
The impact of new acquisitions, Whitecap, and contractors completed $2 3 million person hours with only three minor recordable injuries.
This delivered an exceptional safety performance with a total recordable injury frequency rate of 0.25 for the quarter and 0.26 for the full year.
The quarter and full year were also notable for significant expenditures on arrow throughout our operations, where we're able to about 369 wells and received 38 reclamation certificates throughout the year.
Finally, the business was able to manage through the worst the pandemic with no meaningful impact on business continuity or performance.
We're in the middle of a very active first quarter program, which peaked at 12 drilling rigs and deployed upwards of three frac crews and expect to expect to spend approximately 50% of our full year capital program in the first half of the year.
As we think about the second half program. We do see continued inflationary pressures of the WTO I currently trading above $90, a barrel and eco above $4 a D J.
We're in constant dialogue with our service provider or <unk>.
Contagious position due to our scale and over the next month as we complete our contracting for services will have a better sense as to the potential cost escalations to expect in the second half of the year.
Well I'll pass it around the time to comment on our financial results and outlook.
Thanks, Joel we had a record year in 2021 generating $1 1 billion of funds flow and 670 million of free funds flow on a per share basis. This is up 72% and 92% over the prior year as commodity prices regained momentum throughout the year and we realize the benefits of our acquisition strategy that started in 2000.
'twenty.
For the fourth quarter funds flow with $351 million or 55 per diluted share was driven by strong fourth quarter production of approximately 120000 Boe's per day and W. Ti averaging just over 77 U S per barrel and having him par averaging over $93 Canadian per barrel.
The combination of our natural gas production being over 100 million 180 million cubic feet per day, and equaled natural gas prices of $4 66 per Mcf during the quarter had a positive impact on revenue with our fourth quarter natural gas revenue being 43% higher than all of last year.
From a cash cost perspective, we were able to meet or exceed our guidance for the fourth quarter.
<unk> continue to work hard to beat these numbers, especially from an operating perspective, given the severe cold snap that hit at the end of December .
The 33% dividend increase announced today equates to $56 million of incremental dividend on an annual basis further contributing to our return of capital strategy.
Also have 7 million shares remaining on our current MPI and.
And we will look to renew that when it expires in may.
Our balance sheet remains in great shape with net debt of approximately $1 2 billion at year end and over $800 million of liquidity on our credit facility debt to EBITDA ratio at year end was <unk> nine times and is expected to further improve in 2022 with 50% of a discretionary funds flow being allocated to the balance sheet.
What are the financial flexibility to improve our business through strategic M&A, if the right opportunities present themselves.
We're also transitioning to a sustainability linked loan with our banking syndicate on a full credit facility.
Loan is linked to two key emission reduction performance target being a 50% reduction to our scope one and two greenhouse gas emission intensity by 2025, and a 30% reduction to our methane emission intensity by 2025.
The cumulative pricing adjustment related to these two targets, it's five basis points, which now ties financial incentives to our emission reduction targets.
To follow up on your comments on inflationary pressure, we do have to look at cost inflation in the context of changing cash flows.
When we first put our 2022 capital budget to the market, we were using at $70 double UTI price deck and now we're using $80.
The current W. Ti price is much higher than that then.
The incremental cash flow.
On $10 is approximately $300 million relative to any potential inflationary pressures, we expect to see in the second half of the year.
Our team who will be doing the best to mitigate these pressures as we continue to contract services.
Our guidance for 2022 is unchanged at this time and we will be further reviewed once we complete our first quarter drilling and operational activities.
We forecast average production between 130 to 132000 Boe's per day on capital spending between $510 million to $530 million.
On strip pricing, we will be generating funds flow in excess of $2 billion, resulting.
In discretionary funds flow of approximately $1 3 billion after capital and the increased dividend.
I'll now pass it on to Dave to go through some of our recent new energy highlight.
Thanks, Tom.
We have made good progress on several initiatives over the past few months, our experience and technical expertise with carbon sequestration has proved to be a significant advantage as industrial companies look to find reliable partners to move forward with the carbonization effort.
The Alberta carbon hub proposal that was announced yesterday is a very unique partnership between multiple groups that have a lot of experience across the project lifecycle.
The partners include Wolf carbon solutions, who operates the ACP L, which is the largest existing cotr trunk line in Canada Whitecap with our extensive sequestration experience, which includes our <unk> measurement monitoring and verification program to ensure the carbon states permanently sequestered.
And also the indigenous ownership group, who bring strong stakeholder relationships and traditional knowledge and historical perspective part of the project.
As well industrial parties that are signed agreements such as air products bring the industrial expertise and drive to transition to a lower carbon economy.
We feel that this project can provide a safe reliable low cost solution that will be available to all the companies in Alberta, industrial higher land and exited the expedited timeframe given the infrastructure already in place.
At <unk>, we recently extended our <unk> supply contract and have opted into Alberta tier program. As a result of this we expect that we can fully offset our sidoti costs through generating tier credits beginning in 2023.
Although the dollar amount with this project or small we believe that this model is something that can be replicated and are encouraged by what we have been able to accomplish with this asset after acquiring it early last year.
Lastly, on our Saskatchewan carbon hub project, we announced today that we have three Mou signed which represent an aggregate reduction in cotwo emissions.
<unk> nine to $1 6 million tons per year.
Our initial feasibility work on this project is ongoing with full feed study expected to commence in the second half of 2022.
I will now pass it back to grant for his closing remarks.
With that I'll now turn.
Okay.
Call over to the operator for questions.
Okay.
Yes.
Thanks.
Okay.
So will the operator.
Jump in for any questions you might make you hired in the technical difficulties my apologies. Thank you ladies and gentlemen, as stated if you do have a question. Please press star followed by one on your Touchtone phone you will hear three tone prompt acknowledging your request and should you wish to withdraw your question simply press.
Star followed by Q, we do ask that as you move a speaker phone. Please lift your handset before pressing keys.
Please go ahead and press Star one now if you have a question.
Our first question comes from Patrick O'rourke, the APB markets. Please go ahead.
Oh, Hey, guys. Good morning, and thank you for taking my call or my question here.
I don't know if you discussed this I had a little bit of a technical difficulty where things went blank for a few moments there, but I just wanted to and not to beat a dead horse here because I know you get this question nearly every quarter just wanted to think about capital allocation free cash flow and capital allocation priorities.
Back to shareholders, obviously, you increased the dividend, 33% with the current quarter and how you think about that growth bypass there. It's only 11% right now you talked about a $45 breakeven to fund that dividend.
Some inflationary pressure obviously, you're also mentioning here so maybe that comes up is it.
You start to see.
The downside of oil goes from 45 to 55 and Thats, how you adjust the dividend going forward or how are you guys thinking about those decisions.
Yes. Thanks for the question there Patrick its a ton what we've committed to the market is that we would return 50% of our discretionary funds flow that would be after capital after dividends to our shareholders here as you've mentioned.
To date, we've repurchased some shares we've increased the dividend.
Given where strip is currently theres still approximately $400 million left that we're we've kind of returned to our shareholders here just on the dividend side, we do mark everything down to $45 <unk>. At this particular time, but you are right I mean oil is touching or it was over $100. This morning here in so what is that right.
Low case, we're still using 45 at this time.
The other component of that is from a share buyback perspective.
We did purchase 19 3 million shares in the fourth quarter last year. If there is an ability for us to be more chunky towards clearing the market on large blocks that are available thats, what wed like to do on a portion of our discretionary fund the slope.
And then as we realized the cash flow.
Considerations around the dividends, whether thats going to be a variable or special or base. Our priority. At this particular time is the base level of dividend, but regardless of the CIB or dividends, we will look to return half of that back to our shareholders. I think what we have to to recognize though is that we're just at the end of February .
Now so there is 10 more months.
We have to realize these cash flows.
And actually put it in the bank before looking at distributing it back to our shareholders.
Yes. Thanks, you guys have done a good job there I guess.
We're all.
Pretty positive on the commodity and the free cash flow perspective and.
Jim.
Testing that downside 911 is the collapses you don't want to see the dividend cut so.
That sounds like a good philosophy just to shift gears on one more real quick question in terms of the announcement yesterday with wall I'm just.
Please coming on in 2024 is there a capital commitment outlay from white cap, what the timeframe of that would be and then how sort of the revenue stream looks and just wondering in the longer term perspective here you've got all these carbon management initiatives is there a point in time, where we could see sort of a <unk>.
Standalone carbon management.
Division out of White cap.
Realizing material economics for the company.
Hey, Patrick it's Dave remember Ken here.
Yes in terms of talking about the capital allocation and that we're very early on in the project and of course, we have some initial estimates, but we're not really talking about anything at this time, because there is a lot more.
We have to do in terms of how many industrial partners will get in the size of the project et cetera, and then also a feed study that will have to be done and lots lots more work on that side.
Don in terms of a carbon company or something like that I think are a little far off from from that at this point in time, but do you have any other comments I think the focus for us at this time is aggregating as much emissions and getting the large industrial meters signed up both in Saskatchewan, and Alberta, I think once we get a little.
More clarity around federal government itc's with the carbon credit.
Credit market looks like we'll be able to structure it and so I think the structuring will happen after we get clarity and once we aggregate as much Cotwo Ken.
Okay. Thank you very much.
Thanks, Patrick.
Your next question comes from Jeremy Mccrea with Raymond James. Please go ahead.
Yeah, Hi, guys I was curious just with oil being where it's at how the M&A market is looking in shaping up here for 2022, you guys were pretty busy last year.
Things look easier harder for this year, what can we expect for 2022 and then maybe just a second question here at what point do you guys look to potentially increase your spending levels I know a lot of it is being focused on no more shareholder.
Returns, but.
Is there a level of commodity prices, where you do look to expand your spending and especially do you have any new inventory that kind of works at these prices here now.
Sure Jeremy. Thank you just regarding M&A, yes, it was an extremely busy year.
2021 on a follow on to 2020, we think consolidation continues.
This year 22 and 23.
But that is really going to be dependent upon where buyer and seller expectations are.
I don't think that you're kind of find anyone that we would be looking to buy based on strip pricing today.
At this particular time so.
It is really going to depend upon what the.
Seller expectations are.
I think you have to we all have to understand that we're in.
Larry.
Recall highly charged time from a political standpoint.
We'll have to wait to resolve that to a little bit to see where commodity prices are and we have to I think on the M&A side, we really have to look at.
What's the expectations for commodity prices long term, both as far as oil prices and natural gas prices. So.
We will look at that we think there is a lot of consolidation that will continue to take place.
We believe that we can play in that market.
If it adds value for our shareholders. It makes us more profitable and sustainable so what will be.
Actually looking at things now whether or not we'll be transacting.
As for the benefit of our shareholders.
We will remain to be seen but we certainly cannot.
Look at today's price.
Just shy of $100 a W.
W. China on unexpected thats going to run for the longer term as far as spending levels.
Kind of falls into the next category of spending levels.
This year with the amount of free cash flow that's being generated.
We want to make those decisions as Tom alluded to on the potential to increase our capital spending in the back half of the year.
But the process that we go through as we will get our first quarter capital program will have a production and a good understanding technically as to where we're at.
With the capital being spent in the first quarter, we'll look at what the future inflationary costs are going to be.
As well as the backdrop with commodity prices and that will determine that will help us determine.
If we should when we should increase our capital program.
For the balance of the year potentially sometime in the back half of 'twenty and into 'twenty three so.
That's where we're at right now.
We're not going to jump ahead, I think that one of the benefits to the North American energy sector has been the amount of discipline that's been deployed.
With capital spending and return on capital versus just focusing on growth and return on capital. So we believe that the discipline.
It is important to emphasize and I think that the Canadian energy space will.
We will continue to follow suit with that.
But we could have marginal increases with capital program as we move forward. Once we have more results understanding of inflationary pressures in.
Once the commodity price decks will look like for the for the future.
Yeah, the only thing I'd add to that Jeremy or would you look at our production per share growth. This year, it's already at 11%. So when we're thinking about it.
Increases to capital at the <unk>.
<unk> is primarily going to be around strategic enhancement to our current inventory.
As well as looking to position ourselves for another strong year in 2023.
Okay perfect. Thanks, Ed.
Your next question comes from Joseph Schechter Schachter Energy. Please go ahead.
Good morning, guys and congratulations on a great year and the dividend increase in the share buybacks.
Greg here.
Two areas I wanted to cover with these high prices where are you on your hedging and how does this.
Windfall, where pricing, giving you a change where you can maybe lock in some more pricing.
Later into the year.
Chuck Your capital program and also to take advantage of these lofty prices, which may or may not have glass.
A few weeks from now after that once things settle down.
Innovation issue.
Yes, it's Don here.
I think when we look at our hedging program. The objectives that we have is really to use it as a tool to ensure that our cash flows can cover off both our dividend, including the increased dividend, we just announced as well as our our capital, including our growth capital as well.
So if you look at our hedge book today, and 2022, we're about 16% hedged and our breakeven to cover our capital and dividend is about $40 of UTI.
And then in 2023 with just 20 or just 12% hedged our breakeven is actually $45 <unk>, So the hedge book and our.
Cost structure is very strong that allows us to be able to fully fund ourselves down to these levels. What we don't want to do is add speculation into our.
Into our hedging strategy and so that's really been the objective we're happy with the 22% and 23 positions at this time here.
Really to take advantage of what we're seeing is high commodity prices and we don't know where it's going to go at this particular time, we just did a position. This morning looking out to 2024, we did 2000 barrels a day and with the backwardation in the curve we've been focused more on the Costless collar positions. We did an 80 by 112 color you know those are very.
Very strong numbers to be able to achieve that in 2024. So really that's what we've done on a hedge here is.
Not be speculative, but really just to make sure that our break evens are $45 or below.
Josef just to.
Kind of emphasize.
Tom's point I mean.
The <unk>.
What we're trying to do is.
Ensure that we have enough capital on a go forward basis for the next three year period of time for maintenance capital to keep our production at least flat and pay a dividend consistent dividend on a go forward basis, So as John referenced the backwardation from current prices of $97.
Two going out to 2024 right now at $74.
A huge amount of backwardation and when I talked about the M&A market earlier.
We have to be aware of the what the market looks for the longer term at this particular time. So hedging all we're trying to do is protect our cash.
Cash flows for maintenance capital as well as growth capital and then our dividend on a sustainable basis.
Okay got it second question for me.
In terms of your F&D costs versus the M&A pricing now there must be.
Refining costs must be of course, much lower than the current transactions.
It may not be.
From a seller's point of view, what they might want doesn't pay for you to increase the amount of spending that you do for land.
Around your core areas got it.
Go to the crowd.
Farm ins on people who are active in.
Get yourself, a bigger drilling inventory.
So it's interesting at this time, we have a very large inventory, where we expect to drill somewhere between 180 to 190 wells. This year. Joseph then and we have 5400 wells in inventory.
We've just updated Jive with type curves et cetera.
We run all economics on all of our inventory to see what that looks like so at this particular time I don't think.
We have to go out and look to.
Unless it.
Very robust economics.
Look to add more land to our inventory.
We're always looking to increase our inventory and improve our inventory from a sustainability perspective, but we have a very large inventory of opportunities at this time to be selecting from it and one of the areas. I think we were spending time looking at is how do we advance cost effectively some of the inventory to take advantage of the higher commodity price environment.
So we're doing so lots of analysis with the teams are doing lots of analysis on that at this particular time, so just Brian incremental land.
At this particular time Im not sure is that.
The best.
Use of our capital.
Going forward.
Super Thanks for your information Thanks for taking my questions and congratulations again.
Thanks Joseph.
Thank you as a reminder, ladies and gentlemen, if you do you have any questions. Please press star followed by one on your Touchtone phone.
Your next question comes from Brian Zanuck with pipeline online. Please go ahead.
Good morning, gentlemen.
Im curious about the memorandum of understanding regarding <unk> in Saskatchewan.
Last fall you did one fed rate co op or are the other two which.
We do have one of the MLB uses with K plus S. The potash company out there in about playing area and we're not disclosing the names of the other parties at this time.
We need approval you need to disclose names.
Can we expect that anytime in the near future.
Well for sure we will once we complete the feasibility stage Brian .
We'll work together on the feasibility studies with them.
So about particular time when theres not more.
Disclosure that we can provide.
Then we will do that we'll provide to the market the information as we havent as and when we have it available to us.
Yes, it's Dave here again, and as you can imagine all of these parties that we're dealing with they all have their own plans in terms of announcing their carbon decarbonization strategies. So some of them are very large companies across the world et cetera. So they always need to see at what time point. They on their time schedule as we wanted to release that there they're doing these.
Activities, but we definitely have very strong conversations and agreements in place with several of the parties.
Do you have.
Many other companies Youre talking to or is this kind of thing.
Used up the list of who you are looking at for potential.
Clients for this.
Yes, Brian we're in conversation with large industrial emitters across Western Canada at this particular time.
Okay and one other thing here.
<unk>.
Now I've noticed that white.
White cap is probably the most active it's been for the number of drilling rigs in Saskatchewan that I recall.
The other larger producers.
My question point.
Ms Li.
<unk> been drilling at one quarter to one shift of what they used to have for the number of rigs compared to just before COVID-19 .
Is something going on on that.
They are flying out the door with.
With oil prices being in the nineties.
Capital discipline.
Brian I mean, there's a lot of things that go into answering that but I think consolidation is obviously going to play a role in why the overall rig activities are lower than they were before.
Speak to the to the other parties, but.
We have a fairly well balanced capital deployment program across all of our assets.
Yes, I'd say consolidation is probably the front runner as to why there's a lower rig count in my opinion.
Thank you very much.
Thanks, Brian .
And at this time gentlemen, we have no other questions registered please proceed.
Okay, well just in essence to close off.
I do want to emphasize is that 2022 is shaping up to be another strong year for white cap and our shareholders.
Our ability to take advantage of the market conditions to increase the profitability of our business and improve our sustainability over the long term along with our focus on operational execution and pursuing new revenue streams across the energy transition.
A competitive advantage.
We are excited towards white cap is able to accomplish this year not only from a financial standpoint, and the returns that we generate for our shareholders, but how are we able to further position whitecap as an ESG leader is it.
World transitions to a lower carbon economy I feel it is important and appropriate to provide kudos to our valued employees for your continued efforts over the past year to our board of directors for your ongoing support and guidance and to everyone on the call for your interest in Whitecap on closing it is.
I hope that the events unfolding in there.
In the Ukraine that piece can be found for those directly affected caring for the safety of <unk>.
To live in freedom and security sincere thanks to everyone for participating on the call today. Thank you.
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.
Okay.
Yeah.