Q2 2022 Whitecap Resources Inc Earnings Call

as evidenced by the strong initial rates from the 12-33 pad reference in our Q2 release.

XTO last drill Monty Wells as part of their winter 2019-2020 program, and we are excited to implement this optimized well designed to our new Monty Acres. thank you.

Moving on to our other assets.

In Southeast Saskatchewan, our 16th Frobors are well from the Q1 program average over 213 BUE per day per well over their first 90 days of production. This is 47% higher than our expectation of 144 BUE 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 421 operated Glock wells now have over 90 days of production for which the average 839 BE-Weep per day per well was 77% liquid.

This is also 57% above our expectations.

Lastly, in southwest Saskatchewan, our four-well lower shonavan program now has been on for over 90 days and has averaged 245 BUE 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 Tonne to comment on our financial results and outlook. Thanks, Aaron. A record fund flow in the second quarter driven by excellent operational results and strong commodity prices with WTI averaging over $108 per barrel and equal over $7 per MCF in the quarter. Tight differential is in a weak Canadian dollar further improve the high benchmark pricing that we realized. The high benchmark pricing that we realized.

Fund flow is $677 million or $8 per share and free funds flow of $589 million or $0.94 per share. We're 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 by-backs.

Second quarter gross capital spending was $88 million relative to our forecast of $75 million. Our budget assumes the $13 million pipeline cost at Wapiti would be net against its subsequent disposition, but under IFRS we have to separate the costs from the disposition. Our 2022 standalone capital budget of $570 million is net of the $13 million Wapiti pipeline disposition.

Our balance sheets 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 a premier Montenegro in Duvernet 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 1.5 times debt to ebay that $50 oil. Our net debt milestone of 1.3 billion represents a debt to ebay ratio of less than 1 times at $50 WTI and only 0.6 times 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 XCO assets into the WhiteCat 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, Dawn. Since the starters of July , our teams have been back in the field, executing on our now-to-third-quarter capital program. We are currently running 10 rigs and will hit a peak of 11 rigs before the end of August .

We have secured drilling rates and completion services through to the end of spring break up next year to execute on the expanded capital program, including the XTO assets being acquired. We remain very positive about the forward commodity price and buyer 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 and 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 percent, and then again by 25 to 30 percent once we achieve our next milestone of $1.3 billion for a total annual dividend of 73 cents per share.

Once this final net debt milestone is reached, our intention is to return up to 75% of our pre-cassified back to our shareholders to give it in and share by bucks.

Lastly, I would like to thank our employees and service providers for their continuous dedication, for our board of directors, for our guidance, for their guidance, and to our shareholders for your own coding support. Thank you.

I will turn the call over to the operator for questions. Thank you.

Thank you. Ladies and gentlemen, as stated, if you do have a question, please press star followed by the number one on your touch tone phone. You will hear a free tone prompt acknowledging your request.

And should you wish to withdraw your question, simply press star followed by 2.

We do ask if you're using a speakerphone to please lift your handset before pressing any keys.

Please go ahead and press star one. Now if you have a question.

One moment for your first question.

Your first question today is coming from William Damian with who is a private investor. Please go ahead.

Good morning, everyone. My question is...

regarding the XTO asset purchase.

It looks like we're increasing cat-backs by $590 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, yes.

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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 began in January .

which would indicate that there was never any intention of forwarding 50% of pre-cashable to investors if.

We were undertaking the next DODO. Thank you.

Hi, good morning. It's Ton here. So I'll answer the first part of the question. 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 DOE per day of production.

For 2023, on a very preliminary basis, our standalone capital was about 750 million. So these assets under our commodity price assumption, $85 oil and 450 gas here, would generate about half a billion dollars in cash flow. The capital required on that asset to grow it from 32,000 B.O.E. per day to 36,000 B.O.E. per day, which is 16% growth, is about 250 million. So about a billion dollars.

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 will 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. 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 at previously from returning share.

Returns back to our increasing our returns back to shareholders. Thank you. Yeah, the only thing I would add to that grant is, you know, 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 here. 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 zero 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 611 million to come back to shareholders through the final four months or six months of the year. We can expect 611 million to come back to the final four months or six months of the year.

and that disappeared.

And as said, 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%. And I do know that you said up to 75%.

Yeah, there's definitely a trade-off for sure. And we're trying to run this business on a long-term basis here. So, you know, when you look at, you know, the

moving the timeframe from a return of capital perspective and we are looking at six to nine months here. We are not years away from being able to achieve 75% back to shareholders here. We think this is hugely beneficial for our shareholders. It is a medium to longer-term trade-off in terms of more free cash flow for short-term improvements from a balance sheet perspective.

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. I think the trade-off is immensely beneficial to our shareholders.

Thank you.

Your next question would be coming from Jeremy McCray with Raymond James. Please go ahead. Please go ahead. Please go ahead.

Hi guys. 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 dispositions just to enhance that pre-cash flow? And it's so what would those non-core dispositions potentially look like? And then you guys have been you know very busy on the M&A frontier. Does the sex deal asset give you pause in terms of M&A or are you still you know looking here you know pretty proactively?

Sir, 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 weak, non-strategic to white cap on a go-for basis because we haven't applied capital and we will not be applying capital to those into the future. We could produce them out.

assets, but it's somewhere between 9 to 12,000 Buie per day of production that we're doing detailed analysis on, including updated engineering along with the rest of our assets, but we are looking to the potential to put into the market assets between 9 to 12,000 Buie per day. The option being that we could monetize them, if they're sufficient, bid appetite.

or we can 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's the 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 to vote 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 from results.

as we have in 2022.

It's in 2022. It's in 2022.

Ladies and gentlemen, as a reminder, should you have a question, please press star at number one.

Your next question is coming from Travis Wood with National Bank Financial. Please go ahead.

Yeah, good morning guys, two questions for you. One, could you help us understand kind of the cadence of off X on a pro forma basis? As you integrate these lower cost Montenegro 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.

you see kind of within the SEO assets, but you could start to enhance and margin, improve some kind of operating synergies. And I know Darren 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?

Hey Travis, it's Ton 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 NEL acquisitions that we did. We did acquire the old gas plant and we did a turnaround there as well that's typically done every three years. As we move into the third quarter from a Y-cap stand-alone basis, we'd expect to...

trend down to that $14.25 per BUE range. But there's a step change with the XBO 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 costs for BUE in the fourth quarter, as well as moving into 2023 as well. And we're expecting about $13 operating costs for BUE.

Perfect, thank you. And then, yeah, just some of the opportunities you see within the XDO asset base where you can start to enhance and some margin over and above base plant. And some margin over and above base plant.

Yeah, Travis, Darren here. I'll take that.

So in the press release what we were talking about with regards to optimization that was primarily down in central Alberta, you know, and that was that's a different situation where there's you know rerouting of production to more efficient plants lowering line pressures stuff like that. So, you know a lot of optimization that's happened there by consolidating assets.

up in the on the XDO assets a little bit different. You know, that wasn't a...

I guess wouldn't be considered a core asset for the XOX on portfolio. So they hadn't been active there since 2019-20. So one optimization there will be just applying what the learnings on practice design, development and design well spacing and that that has evolved over the last three, four years in the morning to...

to those assets on developing them. And as well, there are some opportunities for lowering line pressure, optimizing well performance and 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. A little bit different, but still we see some opportunities.

Okay, thanks very much for the color. That's all.

That's all.

Your next question is coming from Joseph.

Shacker with Shacker Energy Research. Please go ahead.

Good morning guys and the congratulations on the quarter and the X-Tio deal. Question, as mentioned by Darren, just recently, the production activity and by Exxon and Imperial was not, after 2019 kind of installed and stopped. Where was the production at the peak and given the facilities that they have.

Are they running their plans and facilities, you know, that's 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, you know, what X-Til was doing for the last few years of the upside capture for yourselves. One of the upside capture for yourselves.

Yeah, Joseph, thanks for the question. Yeah, so if we're obviously two different gathering systems with the Montney and the Duvernay, but I'll just talk to Duvernay. So in 2020, you know, that's when XTO Duvernay production had peaked. Right now, with the...

what the, uh,

the recent completion of by Crescent Point of their 16 ducks, you know, we are now reaching close to capacity, but that will be short term. So in the Duvernay we plan to live within, you know, drilling five to eight wells a year 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 morning. And that is we have a lot of options for takeaway and processing capacity within five different plants there.

Just going to the real worth of peak production on the two assets, you know, in 2019, just a good idea, you know, the 32 that you're getting now versus what was the peak that they had prior to stopping spending money. You know, at the total peak, I'm looking at a graph right now, probably in around 40 to 45,000.

Quite a bit of up to right there. Yeah, mostly on the Martin event. Yeah, mostly on the Martin event.

Yeah.

Great, thanks very much. Thank you for the call. Thanks.

Thank you very much, thank you. Thank you.

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.

And 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.

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 BUE per day per well over their first 90 days of production.