Q4 2022 Whitecap Resources Inc Earnings Call

Good morning, My name is Sylvia and I will be your conference operator today at this time I would like to welcome everyone to Whitecap Resources Q4, 2022 result 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 would like to ask a question. During this time simply.

Press Star then the number one on your telephone keypad and if he would like to withdraw your question. Please press Star then number two.

And I would like to turn the.

The conference over to Whitecaps, President and CEO . Mr. Grants figure Hutton you may begin your conference.

Thanks, Shelley and good morning, everyone and thank you for joining US here today here with me are four members of our senior management team, our senior Vice President and CFO Tom <unk>.

Senior Vice President of production and operations Joel Armstrong.

Our senior Vice President of Engineering Darin Dunlop.

Well as Dave <unk> Senior Vice President business development and information technology before we get 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 issued yesterday afternoon.

We had a very successful 2022 across all aspects of our business.

Solving and record funds flow free funds flow and an extremely strong year, an independent reserves evaluation strong operational and financial execution resulted in continuous outperformance on our base assets. Despite the various headwinds the industry has faced such as supply chain issues.

Larry pressures.

This past year. There's also the culmination of our consolidation strategy that started with the collapse in crude oil prices in 2020, our counter cyclical acquisitions strategy added significant per share value for our shareholders and resulted in a much stronger and more resilient business with scale.

Our all in $1 $7 billion acquisition of X T O that closed at the end of August last year was made possible through prudent management of our balance sheet and an extremely thorough technical evaluation of asset.

Multi decade unconventional inventory that we added in the Montney and Duvernay complements or no decline.

Back oil weighted assets and sets us up for long term sustainable profitable growth.

This transformation our company over the past couple of years has been remarkable increasing our production base from 64000 Boe per day in the fourth quarter of 2020 up 266000 beauty per day in the fourth quarter of 2022.

Proved developed producing reserves over that time period have increased by 23% on a per share basis. While total proved reserves per share have increased by 49% with a before tax proved net present value at 10% discount rate of $19 per share based on our independent reserve evaluation.

In addition to growing our asset base and future drilling inventory, we continue to focus on cash returns to shareholders.

After re resetting our dividend early in 2020.

We had an internal target to get our dividend.

To 2014 levels through strategic acquisitions, and free cash flow growth, we anticipate reaching our net debt target of $1 3 billion over the next several months and inspirational Devin dividend 273 cents per share on a per annum basis cash returns to shareholders have been and continue to be.

A core priority for us.

We continue to be in or we did upstream producer with 64% of our production being oil and natural gas liquids and 36% natural gas.

Although 36% of our production is natural gas it only represents 14% of our revenues and therefore, the recent decrease in natural gas prices is not as impactful as the cash flows as one might have expected.

We remain bullish on long term North American natural gas prices with the continued build out of LNG export capacity the use of natural gas as a transition fuel for industries, such as power generation and for Western Canadian prices, specifically it was encouraging to hear the commentary from shell last week, there's a second phase of LNG.

Canada is progressing we also have a very positive outlook.

Crude oil prices well into the future as a result of the massive underinvestment that has created a near term near term.

Medium term supply demand imbalance.

With these comments I'll now pass on to Joel.

Armstrong to comment on our operations. Thanks Joel.

Thanks Grant.

Our company has experienced rapid growth over the past two years, we are proud to say that we maintain our strong safety record.

Fourth quarter Alliance, our trailing 12 months and two year averages.

Always seeking out ways to improve our operations and safety is an integral part of this.

We're also pleased to report that in 2022, we decommissioned over 200, well bores had active surface reclamation activities on over 200 sites and received 52 reclamation certificates.

In aggregate, we spent $20 million net on decommissioning activities. This past year and as discussed in September we have $37 million included in our 2023 budget for decommissioning activities.

Strong execution in the fourth quarter resulted in production of 166392 Boe per day, which was above our guidance of 165000 Boe per day.

Having 10000 BOE shut in due to extreme cold weather in late December .

Fourth quarter spending of $179 million resulted in drilling 50, and 35 two net wells.

Switching over current operations, we've had an active first quarter and recently hit our peak 12 drilling rigs and plan to run an average of 10 drilling rigs in the first quarter prior to breakup drilling 75 wells.

We had forecasted inflation, peaking in the first quarter of 2023 and remaining relatively stable as part of our 2023 budget, which is based on U S $80 per barrel <unk>.

And we will continue to monitor our key cost inputs for both California operations in real time.

I will now pass it on it darrin to discuss our reserves.

Our reserves valuation.

Thanks Joel.

We are very pleased with the results of our year end reserve evaluation is performed by our independent reserve engineer Mcdaniels.

Through our successful 2022 organic capital program PDP F&D costs continue to decrease.

Our 2022, PDP F&D cost of $13 20 per BOE was down 19% from last year and 40% from 2020 and resulted in a very strong PDP F&D recycle ratio of three six times.

Our capital efficiency and converting undeveloped reserves to producing reserves was better than forecast a testament to the strength of our assets as well as our execution.

Folding the X T O assets into our reserves resulted in a per share growth of 19%, 49% and 61% for.

For PDP total proved and total proved plus probable reserves respectively.

Pro forma our recent dispositions we.

We had now have over 6500 identified locations on your asset base of which only 36% had been booked in our reserve report.

This inventory provides us with over 25 years of profitable and sustainable growth.

Outperformance of our existing southeast, Saskatchewan, Frobisher, Horizontals and Wayburn unit wells combined with our Central Alberta block, an attic wells contributed to almost 11 million Boe and positive technical revisions to our PDP reserves are approximately three.

<unk> clothing balance and.

The one P and two P cases, these positive technical revisions were offset by proactive negative adjustments in some of our legacy assets.

Including some of those which have been disposed already.

These adjustments resulted in minor technical revisions of less than <unk>, five and one 5% of the closing.

Balances in both one P and T P cases, which is well within expectations.

I will now pass it onto time to discuss our financial results.

Thanks, Darren we had a record financial results in 2022 with funds flow of over $2 3 billion or $3 74 per share generating free funds flow of over $1 6 billion.

$480 million of total returns to shareholders were split approximately 50 50 between dividends and share repurchases.

Net income for 2022 was $1 7 billion or $2 70 per share compared to net income of $1 8 billion or $2 95 per share in 2021.

Net income decreased primarily due to a larger noncash impairment reversal of $1 9 billion in 2021 compared to $661 million in 2022 offset by higher funds flow.

For the fourth quarter, we generated funds flow of $594 million or <unk> 97 per share in free funds flow of $450 million.

We paid $67 million of dividends and reduced net debt by approximately $300 million in the fourth quarter, resulting in year end net debt of $1 9 billion.

Our year end debt to EBITDA ratio was <unk> seven times and EBITDA to interest ratio of 45 times well within our covenant of less than four times greater than three five times respectively.

Subsequent to year end, we closed three non strategic dispositions, which resulted in $426 $4 million of assets and a $110 9 million of the associated decommissioning liabilities being reclassified as held for sale on the balance sheet.

Dispositions, bringing our current net debt to approximately $1 5 billion, giving us $1 6 billion of available debt capacity.

Our forecast of debt to EBITDA ratio of <unk> seven times at current strip prices I.

I will now pass it back to grant for his closing remarks.

Thanks, very much John .

For 2023, our production guidance is unchanged at a 160000 to 160 to 2000 <unk> per day.

And capital between $900 million to $950 million at $80 per barrel, <unk> and a $3 per GJ equal.

Forecast funds flow of approximately $1 $8 billion of refunds.

Free funds flow.

$900 million.

Look forward to utilizing the significant free funds flow generated in 2023 to meet our near term financial milestones. These milestones include number one achieving net debt of $1 3 billion.

To further increasing our dividend to <unk> 73 per share a 26% increase from our current dividend of <unk> 58 per share per annum and number three returning a total of 75% of our free funds flow back to shareholders, which includes a base dividend of 73 per share supplemented with share repurchases.

The remaining 25% of our funds flow will be directed towards further strengthening our balance sheet with net debt estimated to be between one to $1 2 billion.

Prior to the year end 2023.

Looking out for the next five year period of time at a 3% to 8% per annum organic production growth, we can grow to over 200000 Boe per day generating over $4 5 billion.

Free cash flow or $7.35 per share.

How do you $75 <unk> and 350 <unk> priced.

D J.

This would use up only one sixth of our identified drilling inventory that we've spoken to earlier beyond 2023, we look to enhance our 2000 and.

200000, do we per day organic growth target with business development initiatives focused on increasing per share profitability and sustainability should the opportunities present themselves.

Although this 2023 year has begun with a significant amount of oil and gas price volatility. We are excited about the upcoming year and look forward to continued progress towards our financial and operational goals, while generating strong returns for our shareholders.

I will now turn the call back to our operator Sylvia for any questions you might have thank you everyone.

Thank you Sir.

Ladies and gentlemen, as stated if you do have a question. Please press star followed by one on your Touchtone phone you will hear a sweet home prompt acknowledging your request and should you wish to withdraw your question simply press Star followed by too we do ask that you.

If you're using a speaker phone please lift the handset before pressing entities. Please go ahead and Presto and now if you have any questions.

And your first question will be from Jack Austin Jackie capital.

Hey, guys can you hear me.

Okay.

You bet.

So congratulations on the great year I love. It. So I just have one kind of question and then I know you guys have been very clear on the $50 and then $3 50.

The inability, but I'm just wondering if and we have OPEC hanging over us two it's likely it's very unlikely that this does happen, but if it does happen would you guys cut like capital expenditures expenditures you have about $925 million and could you just give some more color on I know, it's very small chance, but if.

If it came down to $50 and 350 or below that thank you.

Sean do you want to go ahead.

Yes for sure.

Thanks for that question there.

I think the way that we look at the business down at that $50 level, though we're certainly bullish on oil.

Oil and natural gas in the longer term here at that level I would say that we wouldn't be looking to grow our business.

We're looking at maintaining our level of production and so the $930 million would be much lower than that it would be about $700 to maintain our production at about 161000 Boe's per day. So there's a lot of.

Ability for us to withstand that volatility even at that low price and still fund our maintenance capital as well as a dividend program and so when we look at lower pricing scenarios. The most important thing for us, which we've focused over the last few years here is maintaining low leverage and so getting to that $1 3 billion is critically important.

For us, but we'll be somewhere between one to $1 $2 billion by the end of this year here, which gives us even more financial flexibility in a lower pricing environment here. So to answer your question for sure we would be cutting capital.

Our objective here on the dividend even at the 73% level is continue to maintain that but more importantly continue to grow it commensurate with our production growth rate of that 3% to 8%.

Yes.

Great. Thank you very much guys love it. Thank you.

Thank you.

As a reminder, ladies and gentlemen, if you do have any questions. Please press star followed by one on your Touchtone phone.

And your next question will be from Christopher Jones at Haywood Securities. Please go ahead.

Hey, gentlemen, I just wanted to ask a question on slide 11 about looking are employing new well designed to improve well performance.

So maybe just talk a little bit about some of the specific changes you've made on the completion side.

And then maybe on the backend what have you seen from a sort of per well EUR or decline profile and any any associated cost creep associated there. Thanks.

Yes, perhaps joel Joel or Andrew or Darren wants to take this question.

Christopher It's Joel here.

I guess just speaking to completion design.

More specifically in the morning every every well every pad.

Go through several iterations through.

Jim mechanical.

Geological Engineering spacing, so every single well.

Looked at differently, it's not really a carbon copy from from one completion to the next overall design mechanics are always very similar plug and perf of course.

Outside of that I think we've proven up or our other plays.

Cardiome glauconite.

Sort of completion design.

Yes, no real no real major changes on that.

<unk>.

In terms of on the cost side I don't think.

As we talked about earlier, we're starting to see.

Seeing our kind of our peak inflation in Q1.

We've tweaked where we could.

<unk> maintain our cost structure best possible don't foresee any upward pressure right now at the current commodity pricing.

If there is a correction in commodity pricing, we will expect to see the.

The capital side.

Relate to that.

No. If there is anything else I can offer on that Darren.

No I'll just reiterate what Joel saying you know we look at a lot of factors when designing our development program and that changes, obviously that frac design and Wellbore design, where we place wells in that and that is included our outlook on pricing.

So different spacings for different pricing regimes.

Okay very helpful. Thank you.

Thank you next question will be from Peter Linda Investor. Please go ahead.

Yes, good morning, gentlemen.

Got a question on your ex deal acquisition Oh.

What plans do you have for this year.

You started drilling on it yet since you acquired it.

And.

Basically how much you're going to spend on these lands in 2023 and by the way great results.

Peter I'll start off and then I'll ask John to continue one we certainly have began drilling on these lands and just for clarity.

When we bought the Montney and the Montney acreage that we bought from <unk>.

At a 65% working interest on the Calico allows us already to the previous acquisition that we've done.

With kicking horse so we've been on this for over two year period of time actually with activity, but specific to our activity. This year, maybe Tom we can talk about how we're looking to capitalize on a number of wells we're looking.

For 2023.

Yes for sure grant so this year as.

As we mentioned our capital budget is between $900 million to $950 million, 45% of that budget is going to be allocated to our northern Alberta business unit there.

Which 24 wells will be in the Montney and right now we're anticipating three wells in the Duvernay there.

36% is going to be allocated to our Saskatchewan business unit and then the remaining 17% in central Alberta.

Both keeping production relatively flat.

Our anticipation in the Montney in particular.

Is to grow that to about 38000 Boe's per day.

And when you look at our target over the next five years to get to 200000 Boe's per day that has the montney growing to about 65000 Boe's per day there. So that's good.

I mentioned we.

<unk> been drilling in the Montney already.

Being 65% working interest in CAC, Lynn XD being 35%, there and we would've drilled 12 wells in 2022, so look to continue to.

To expand on that with the additional 24 wells in 2023.

Is it fair to say that you are pleased with the results so far.

Yeah.

Yes for sure.

What we will look to do with the results that we've seen last year as well as build audit through our first quarter capital programs here with more data points, we will look for a more fulsome operational update as part of our first quarter results.

Great. Thank you very much.

Thanks Peter.

Thank you next question will be from Anthony Linton at Barclays. Please go ahead.

Hey, good morning, guys and congratulations on a strong year.

Just one question a couple of questions for me just just to start there's a line in the release obviously the focus for 2023 remains on operational execution.

There's a line in the release talking about business development activities beyond 2023, just wondering how that might look as you kind of think about it and you think about the opportunities today.

I'll take a stab at that first lien how skinny barb.

A nice presence to jump in so this is a year and we wanted you to ensure to our to our shareholders.

As of year for operational excellence, what we wanted to do is make sure that.

We have such a very strong inventory of opportunities within the organization. This is 2023 is a year or two to ensure that we are.

Refine our operational capabilities.

Making sure that we execute strong execution on that.

Vas you heard Joel talking earlier about some of the well placement in some of the well design.

For us to really focus on that activity as we move through 2023.

So on the business development front.

A quiet year for us it'll be a much quieter year by half since 2021 and 'twenty two.

We look to.

Really drive performance from organic and that's why we say beyond 2023, if theres opportunities.

Can't compete or add to our inventory of.

High quality inventory and long term profitability and sustainability, we will look to do that.

As we move forward, but really 2023, we wanted to ensure from our perspective its shareholders understand that this is a year.

We'll call it organic growth or an opposite optimization from our existing assets.

Okay, that's great to hear thanks, and then.

Maybe just coming back to the five year growth plan looking at that 3% to 8% production growth I know you've talked about that in the past how does how does the capital allocation across your business units kind of evolve over that timeframe.

Sure Sean do you want to.

I'm just trying to call on that.

Yes, its Don here I mean, if you look at our business. Today is there are three business units, we're looking at central Saskatchewan and in Northern Alberta, So Saskatchewan in Central Alberta.

Our really our free cash flow generating business units. So what we'll look to do within that portfolio is really keep it relatively flat, 1% to 2% growth over the next five year period of time the.

The key growth area for us, we will definitely be coming from northern Alberta, which is primarily the.

Reagan.

Our montney and the Charlie Lake area. There. So we're looking to grow that somewhere in that 15% per annum over the next five year period of time, so the capital allocation that we're looking at in 2023 as I mentioned, 45% in northern Alberta, 36% in Saskatchewan in 2017 in Central Alberta that should remain relatively stable.

Over the next five years.

Just a just a small note on that Anthony.

John referenced John Vegas meeting he met the Duvernay Duvernay, yes, sorry about that.

[laughter] gotcha, Okay awesome, that's great color I'll turn it back thanks.

Thank you next question is from Patrick <unk> at ETB capital markets. Please go ahead.

Hey, good morning, guys.

Just wanted to clarify something I heard in the opening salvo, there NCO sort of evolves here and are a little bit of scenario analysis I believe that it was mentioned that you guys are going to be running 10 rigs up until breakup.

Wondering how that looks in the second half of the year from a rig count perspective, and then Tom mentioned sort of a maintenance capital level at 700 ish million dollars there to hold flat at 160 ish.

161000 Boe per day.

What sort of rig count would be required to sustain that going forward.

Joel.

Turn it over to you that works.

Yes, I mean, Patrick.

Patrick It's Joel here.

We're spending $320 million in Q3 versus say $2 60 for Q1, So we will be at a similar rig count than what we are right now.

I don't think we will see 12, but that.

10, 11 rigs in Q3.

Okay, and then in the downside scenario I think it's unlikely from a commodity price perspective, as well, but what sort of rig count would be required Fulton business flat.

You are talking $50 Debbie.

<unk> scenario.

Yes.

Okay.

Patrick I don't we're kind of making up numbers here, but.

700, 870 rigs to kind of maintain our base level somewhere in there yes.

Yes, you could Darin here, yes, you could probably just take a ratio would be.

Yes.

Yes.

Okay.

And then kind of as a second question shifting gears here I know that gas revenue as a percentage of overall revenue is fairly low here, but.

Are you guys looking at.

Anything on the more sophisticated gas marketing, Brian here some of your peers sell gas into the mid continent, California.

LNG deals any anything that you are looking at from a business development front on that perspective that could potentially extract a little bit more value out of it.

Yeah.

We are certainly.

Looking at that at this particular time.

First of all to understand where we came from we talked about.

2020, we were producing about 60 million a day and now we're about 320 to 330 million a day of natural gas. So this is a big change for us what we're looking at is not just only the pricing centers in North America, but also offshore into LNG markets. So we are looking to.

Altera color.

We take our products to.

The key is transportation to make sure that we can transfer transport it to the market centers and then when reviewing each one of the market centers.

And that work is aggressively on Boeing.

We'll come back in as we move through this year, we'll have more of an update as it relates to the 2023 or.

Greater update on that Patrick.

Okay. Thank you very much.

Thanks.

Thank you and at this time gentlemen, we have no further questions registered please proceed.

Yeah.

Thank you Sylvia and thanks to each of you for taking the time and interest and listen to our call today, and we will look forward to updating you on our progress.

There is different items as we move through the next several months. So thanks very much enjoy your day all the best.

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.

[music].