Q3 2022 Whitecap Resources Inc Earnings Call
Our base conventional assets across Alberta, and Saskatchewan.
Our lower decline oil weighted properties that generates.
Significant free funds flow.
This is balanced with our unconventional condensate rich assets in the Montney and Duvernay, which are high impact and will be primary source of growth for our company into the future.
Centering our sizable land position with over 2000 locations in the Montney and Duvernay and.
In addition to our facility ownership this provides us with opportunities for improving capital efficiencies decades of sustainable per share growth and stronger.
Shareholder returns our near term focus is to reload our balance sheet by reducing net debt to $1 8 billion.
By the end of this year and $1 $3 billion in mid 2023. This will ensure that we have the financial flexibility to withstand commodity price volatility and market cycles and to take advantage of further consolidation opportunities should they arise in the future. We are excited to continue to advance our business on behalf of our shareholders.
As we progressed towards our near term financial and operational goals I will now pass this onto Joel to comment on our ongoing operations.
Thanks, Greg.
While I'll briefly touch on the inflationary impact on our current and forecasted operations.
We're currently running nine rigs across our asset base and will run between 10 and 11 rigs over the majority of 2023 outside of spring breakup.
They are fully contracted we have the right to extend oil drilling rigs through the end of 2023 at a minimum.
Our 2023 budget of $900 million to $950 million that was announced at the end of September includes all known and forecasted cost increases due to inflation across all of our service providers based on WTO between 80% and $85 a barrel.
Next I want to discuss our third quarter operating costs, which came in higher than our original expectations. Most of the increase in third quarter is expected to be onetime in nature is related to higher than expected power prices.
August and September averaged over $260 per megawatt hour in Alberta, which compares to just over $100 per megawatt hour in the preceding 12 months.
These prices have somewhat stabilized to average approximately $100 per megawatt hour over the past two weeks.
Going forward, we've increased our power price assumptions, but are still forecasting operating cost to decrease approximately $213 $13 50 per Boe.
Going forward from our Q3 operating cost of $14 85, a Boe.
I'll now pass it on a time to discuss our financial results.
So as Scott mentioned third quarter funds flow of $547 million or <unk> 88 per share was the second highest in our company's history and resulted in $339 million of free funds flow after capital expenditures of $208 million.
Of that $339 million of free funds flow of $138 million was returned to shareholders through our base dividend and $71 million in share repurchases through our CIB. The remaining $200 million help fund our cash purchase of X deal that closed on August 31 for a net consideration of $1 7 billion after working capital adjust.
<unk>.
Our balance sheet is in excellent shape with net debt at the end of the third quarter of $2 2 billion, resulting in a debt to EBITDA ratio of only <unk> eight times and we have over $900 million of liquidity on our credit on our credit facility.
I mentioned this will be further reduced to $1 8 billion by year end.
We forecast production to average approximately 165000 boe's per day in the fourth quarter, an increase of 13% over Q3 production.
Our full year 2022 capital program of between $670 million to $690 million is unchanged.
As Joel mentioned removal of certain onetime items, along with a full quarter of ex fuel volumes is expected to reduce our operating costs by 9% to approximately $13 50 per Boe in the fourth quarter.
We also expect our royalty rate to decrease despite several wells coming off royalty holiday holidays earlier than expected, which slightly increased our third quarter royalty rate to 21%.
At U S $85 <unk>, we forecast a royalty rate of approximately 19% for the fourth quarter.
In the third quarter, we incurred one time transaction costs of $11 million relating to the <unk> acquisition for legal accounting and advisory fees.
For 2023, our budget of $900 million to $950 million and average production of 170 to 172000 Boe's per day is unchanged. Our 2023 budget generates annual production per share growth of 21% and that $80 <unk> and $5 equal we forecast over $1 2 billion.
A free funds flow.
Our sensitivities are every U S $5 per barrel change in <unk>, our funds flow is impacted by $110 million.
For every 50 change in April our funds flow is impacted by $45 million and every penny change in the FX rate for our funds flow is impacted by $30 million.
As a reminder, approximately 90% of our liquids production is linked to light oil or condensate pricing and is not impacted by the recent widening of heavy oil differentials.
I will now pass it back to grant for his closing remarks.
Thanks, John one additional item that I wanted to touch on this morning.
Continued success of our new energy team.
That has been achieved.
We have two new carbon Hudson, we recently selected by the Alberta government for further evaluation, one in central Alberta, and the other in southern Alberta.
This brings us to a total of three Alberta hubs and one Saskatchewan hub.
Subsurface experience and advanced technical knowledge and operating Sidoti sequestration facilities has made us a top choice for industrial emitters to partner with and support we are confident in our partnerships across the <unk> value chain will provide not only.
New revenue.
Troy cap, but also provides support for decarbonization plans across multiple industries. We're.
We are excited to advance our business forward with an active winter drilling season ahead of us in Atlanta site to reaching our net debt milestones and increasing the return of capital to our shareholders.
What you'll also note that we have five smaller size disposition packages in the market that have executed arm would accelerate the achievement of our debt targets. However.
However, as we are in a position of strength execution of any transaction can only be done.
So that the value that improves the returns relative to just cash flow flowing the assets over the longer term.
But those continents completed I will turn the call over to our operator for any questions. Thank you.
Thank you Sir.
Ladies and gentlemen, if you would like to ask a question. Please.
One on your telephone keypad, you will Dan here.
Prompt acknowledging your request and if you would like to withdraw from the question queue. Please press star followed by two and if you're using a speaker phone. We ask that you. Please lift your handset before pressing any keys. Please go ahead and slowly press star one now if you have a question.
And your first question will be from Patrick.
ATB capital markets. Please go ahead.
Oh, Hey, good morning, guys. I know you commented on the wells that were brought on the former kicking horse land here soon.
Certainly what we're seeing in the public data corroborate.
Really strong well performance and 62.
Five to six.
Seeing that from a gas rate perspective, I'm wondering if you could perhaps comment on what youre seeing on the liquids yield, particularly condensate.
Performance there.
Yes, it's darin here yeah, Yeah, no for sure. It's commensurate like obviously, there is different the condensate gas ratios across that pool, but it's commensurate with what the gas rates. We're seeing so if you were using condensate gas ratios that you are seeing from companies that.
Reported that they are in line.
Okay, Great I know certainly just to the east.
It's a gas ratios are pretty strong so we'll try to extrapolate that.
Just sort of moving over to the return of capital framework here.
There's been a little bit of commodity volatility, but when you announced the <unk> transaction I think you did a very good job codifying the milestones for our incremental dividend growth here and you've obviously reiterated that today I'm wondering at the time you had pointed to the potential for <unk>.
Somewhere in the neighborhood of $2 million to $300 million in share buybacks for the balance of the year and I'm wondering with everything that's gone on in commodity adjustments all of the talks.
<unk> talked about on the on the call here today is that still a good number for investors to have in their homes.
Yeah, Hey, Patrick it's Tom here I think in the near term here as you mentioned, we're really focused on reloading, our balance sheet and getting to that $1 eight and then ultimately that $1 3 billion of.
Net debt and ultimately targeting that 73 per share dividend I think what you're referencing and that sure.
Share buyback of that $200 million to $300 million is really our ability to return more cash back to our shareholders. After we've achieved that $1 3 billion of debt debt I mean, even in the quarter. Here you saw that we spent a little bit of money here is $71 million on the share buybacks and we will continue to pick at it but I think from a meaningful perspective.
Here, we will look at doing that once we receive we achieved the $1 3 billion of net debt.
Okay. Thank you very much.
Thanks, Patrick.
And next question will be from Jeremy Mccrea at the Raymond James. Please go ahead.
Yeah, Hi, guys just to follow up with Patrick's question, there a little bit just with these asset.
Assets that you have up for sale.
If you are successful in getting a good price for that and you know really expedites.
Reaching a debt target sooner could we expect the dividend bump in the dividend to be paid sooner potentially even as early as Q1, if youre successful.
Yes, Jeremy it's grant for sure. That's one of the things that we've talked about an asset management team and board.
Should we be successful in.
And selling some of the assets and reducing our debt levels.
Levels quicker to the $1 8 billion.
We'll be increasing our dividend.
Two as we've talked about.
To that to a higher level at that particular time with the ultimate objective to get to the $1 $3 billion or under to take our dividend from what is currently 44.
All the way up to that.
73 and Thats.
What was that.
Looking to do and we expect.
The context of the market today.
With prices, where they are that we should be able to achieve both our first milestone.
Late this year 2022 and <unk>.
Within the first half of 2023 of course, it's all subject to commodity prices, but that's what we're looking for.
And I'm very excited about being able to take it to the to those levels and still have plenty of free cash flow leftover for whether it's.
Any other return of capital, we would like to do whether it's share buybacks or incremental dividends at that particular time.
Okay.
And then just kind of a just a one last question just looking out beyond 2023 here kind.
Kind of let's say over the next five years do you see yourself allocating more and more capital to the Montney.
Versus where it is now or how do you do you think is like it's always going to be kind of in that.
50% of Capex here.
Pending.
Yes. It is really is I think that we have to.
There is a very large inventory of opportunities and we acquired from <unk>. So we will have a base level of capital put into that but part of this is commodity price dependent obviously, we've got a very plus.
<unk> oil opportunity as well as.
As well in Saskatchewan and Alberta.
So a combination of.
And we're always looking as we talk about organic growth between 3% to 8% per share per year supplemented with acquisitions or share buybacks.
So we'll look to continue to advance that but you have to look at it in the context of what the commodity prices are as well.
Right now we will set a base level of next year, we're talking about 23 wells in the Montney.
That we're drilling and that would probably be a base level of wells into the future as well.
Okay.
Thanks Randy.
Yeah.
Your next question will be from Chris Jones at Haywood Securities. Please go ahead.
Just to follow up on the first two questions related to returns to shareholders and maybe.
I'm asking the same question framed it for me to date buybacks have largely been tactical in nature, just wondering going forward do you expect share repurchases.
Representing a growing share of free cash flow in 2023 or do you.
<unk> kind of seen a moderating at some of those at least none larger blocks have already been repurchased.
And then just a quick follow up to that related to any special dividends. In 2023 do you expect to pre announce those or will they sort of use them to pad cash returns at the end of the year.
To satisfy their target is to return about 75% of free cash flow to shareholders. Thank you.
Yes, thanks for that.
Question, There, Chris I think if we think about the business and return of capital on a go forward basis there.
Once we achieve that $1 3 billion, which as Greg mentioned sometime in the first half of 2012.
'twenty three there.
Our free cash flow if you look at it going forward and this is using 75 dollar W. T.
There is about $1 1 billion.
Silver returning 75% of that back to our shareholders that's about $800 million.
Of that $800 million about 450 is going to be used to service. The 73 dividends that were targeting here. So we have another 350 million effectively to return back to shareholders either in the form of the CIB or additional dividends.
It's in the form of special or variable there. So lots of Optionality in terms of what we can do I think that relative to where white cap. This is certainly trading at today, our preferences to to focus on share buybacks and those are important from a dividend sustainability perspective, because if we can reduce the amount of shares that we put out there.
The market.
That means that we can increase and have more dividends available to our shareholders. There. So that's the way that we see.
I think our priorities as we look forward number one is.
Looking at reloading, our balance sheet number two increasing that.
<unk> level to the 73.
And then I think the third priority would be around share buybacks at this particular time.
Okay. Thank you very helpful.
Thank you.
Ladies and gentlemen, if you do have a question. Please slowly press star followed by one on your Touchtone phone.
And your next question will be from Jack Austin Jackie Capital. Please go ahead.
Hi, there guys I'm just wondering how you guys see the labor market right now where you guys see it and how it is and then as well if you guys see the difference between Canadian energy prices, and then U S oil prices, improving or getting worse going forward and especially I think with the with the LNG terminal in <unk>.
Vancouver is if a wherever coming on in 2024.
Yes.
Hi, it's Jack as Joel Armstrong.
In reference to your first question on the labor market I think.
Things have started to.
Level out I would say in terms of.
Pricing and or the labor front, so we've been pretty consistent with our programs and that was by design to make sure that we kind of maybe going back in time, we'd always front end load our capital programs toward a level load throughout the year for that exact reason.
Make sure that we can manage the labor side and execute our capital program as best as possible.
We're very fortunate.
All our capital programs have been executed so far so my comment is things are in good shape.
And just just for you.
Thanks, Joel just regarding your second question on.
Well, we would foresee.
On commodities going forward I think youre going to continue to see we believe youre going to continue to see.
Strengthen on oil prices.
The <unk> and Brent.
And.
When we talk about the strength I mean, we're in today and that $89 range.
And but somewhere between 80 to 90, maybe there I'm.
Im sure Theres going to be times, where it's out of those.
Out of that band for a short period of time.
But this is a very healthy band and when you look at that relative to the Canadian when you put the foreign exchange to the Canadian dollar trading in that $73 73, 5% range.
That ends up with a $120 oil price.
So very very healthy.
<unk> when I talk about differentials your question I think is.
Really it goes down the path.
What happens to differential we've got.
WCS.
Reading very wide at this particular time, we're not as exposed to WCS pricing.
At Whitecap resources, because we're primarily a lighter oil producer but.
But we do see.
The fourth quarter being challenged.
WCS pricing.
And into the first quarter.
Joe.
And that goes back to the refinery.
<unk>, we have in the U S right now in the U S Midwest and Toledo and other other areas.
The component we have on and we're focused on light, which is trading on about a $2 differential between and within budget at $3 50.
A range so well.
Well within our range there so forecasting once we see <unk> coming on.
We think that do reach the entire system, which will be sometime in the back half of 2023.
It brings on that incremental between five to 600000 barrels a day of incremental capacity, we hope to pick up <unk> system as far as natural gas is concerned and shift over.
To that we think that Canada is pretty well balanced just yes do we.
Producing about 17% to 17, five Bcf a day today, which is upgrade down substantially from what we were but I think that as you move forward into 'twenty.
25, 2025, you may see that differential.
From Nymex pricing back on the differential in natural gas prices to be stronger, but in the meantime.
Canadian natural gas prices once we get Trans Canada through the end of this month and early into November I think that differential definitely squeezes.
From where it is at this particular time, so lots of lots of <unk>.
On the differential side, both on oil and natural gas going forward.
Okay got it thank you.
Thank you and at this time Mr. <unk>, we have no other questions if I understood. Sir Please proceed.
Okay. Thank you Sylvia and thanks to each of you for taking the time and interest and listened to the call today.
We're excited to execute on an active winter drilling season program.
And believe that our company is very well positioned to manage through this current price volatility. We look forward to updating you on our progress over the next few months pushing.
Wishing you all the best.
Bye for now.
Thank you Sir.
Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines enjoy your afternoon.