Whitecap Resources Inc. Q1 2023 Earnings Call
Good morning, My name is Sylvia and I will be a conference operator today at this time I would like to welcome everyone to Whitecap resources Q1, 2020 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 and we'd 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 to number two and I would like to turn the call conference over to Whitecaps present.
And CEO Mr. Grant figure high you May begin your conference Sir.
Thanks, Sylvia and good morning, everyone and thank you for joining US here today here with me are three members of our senior management team.
Our senior Vice President and CFO , Tom <unk>.
Senior Vice President production and operations, Joel Armstrong as well as David <unk> Senior Vice President.
This 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.
There has been a significant commodity price volatility to start the year and I'm proud of the way our team has made adjustments to our program and the results. We delivered in the first quarter, we generated almost $200 million of free funds flow in the quarter as our total liquids production of approximately 103000 barrels per day, including oil and condensate outperformed our.
Spectation or we spent approximately $50 million less in <unk> than anticipated compared to our plan released in September of last year, our first quarter capital spending of $254 million included the drilling of 69 gross 68 net wells, resulting in average production of 155001.
Third 24 BOE per day in the first quarter. We also completed the disposition of 10500 Boe per day of high cost non strategic assets during the quarter.
But our commitment to returning a significant amount of free funds flow back to our shareholders. We returned $121 million in the first quarter over 60% of free funds flow through our base dividend of <unk> 58 per share annually and over $30 million in share repurchases. We ended the quarter with net debt of $1 $4 7 billion.
Which is nearing a second to that milestone targets of one 3 billion.
At current strip prices, we are forecasting that we reached this milestone in mid 2023 and at the time at Tinder and at this time intend on increasing our dividend by 26% to 73 per share annually and returning a total of 75% of free funds flow back to the shareholders through increased.
Base dividend as well as share buybacks.
Not only were our teams active in drilling 69 gross wells in the quarter early in the year. It became apparent that natural gas prices, we're not going to be as strong as originally forecasted and we made the decision to begin reallocating capital towards a higher netback drilling inventory the primary enhancement to our capital program, including the additions of five.
Gross for Fortinet.
Hi, liquid he'll walk in EDA growth.
And the removal of one.
Lower liquid clockwork quadrille as well as the addition of four wells Duvernay pad as a substitute for our Montney pad that mature.
These changes are forecast to result in higher netback at current strip prices and in particular these specific duvernay wells are expected to have higher liquids rates than the planned montney patent mature and will increase the utilization of our 100% owned 15 to seven gas processing facility at KBR.
Since the closing of the <unk> acquisition, our teams have advanced their technical understanding of the duvernay through.
Offset operator activity along with significant seismic data that we own across the asset which provides us with the confidence to accelerate the development of our Duvernay play from a technical and operational perspective.
Our production guidance of 160 to 162000 Boe per day, and capital spending guidance of $900 million to $950 million has not changed despite the delays we encountered earlier this year earlier this year.
Drilling and completion program to a third party supply chain issue.
The outperformance of both of our Central Alberta, and Saskatchewan business units in the first quarter along with the continued execution of the remaining capital program is expected to help offset the delay I will now pass it onto Joel Armstrong to provide more detailed operational update Joel.
Thanks Grant.
First I'd like to walk through a quick update on our health safety and environmental progress throughout the quarter.
We continue to have a strong track record of outstanding health and safety performance.
Well, we accumulated a record $3 5 million person hours in the first quarter. Our trip was outstanding at 0.17, which compares to our already low average of 0.4 over the preceding three years.
We're always striving for continuous improvement, but also want to commend our staff and contractors for keeping safety as a top priority at all of our sites.
From an operational perspective, and our central Alberta business unit, we brought on production four of the eight block night wells spud in the first quarter with the remaining expected to be on production by the end of June .
Since we acquired a larger position in the southern Alberta lock in early 2022.
Our well results have consistently outperformed our expectations.
Our four most recent wells with over one year of production have produced 11% more than our type curve on a Boe basis, but more importantly, the oil and liquids production has outperformed with first year average rates that are approximately 50% higher than our type curve, which provides white cap was stronger funds funds slower than projected.
As part of our capital enhances you've chosen to add five or $4 four net glauconite wells to our 2023 program targeting the higher liquids yields area of our outset, while we've removed one well in our western portion of our assets that are expected to have lower liquid yields are full year program.
<unk> 15, or 13.8 net glauconite wealth.
Now moving over to our northern Alberta business unit, where supply chain issues contribute in a deferral of $40 million of capital into the third and fourth quarters, resulting in no additional Monty wells being spud in the first quarter.
Completion activities on the seven wells Spud last year are ongoing and on stream dates. The two pads are expected by the end of the second quarter.
Both pads are in the category area, where liquid rates are expected to be strong and are driving the robust economics.
As mentioned, we have substituted out our montney pad at mature and replace it with the Duvernay pad to begin drilling later in the second quarter. As these wells are expected to have higher liquid rates than the patent with tour.
In addition, we expect to bring on 12 Montney wells prior to the end of the year, while 10, Montney wells will commence drilling operations in 2023 with on stream dates in the first half of 2024.
Good morning wells have been strong with quicker cleanup periods and higher liquid rates than initially expected or most recent four well pad at CAC, while that came on production in late 2022 has achieved an average rate of 200 Boe per day per well over the first 150 days of production condensate rates of 570 barrels.
Per day, or approximately 3% higher than our type curve expectations.
As a result, these wells are expected to payout in approximately eight months after coming on production.
Well the Duvernay, we commenced drilling operations a few weeks ago with our first three well pad, which we are currently planning to have on stream in through in the third quarter.
<unk> to drill the follow up four well pad. After breakup. This pad is expected to be on production in the fourth quarter.
In Saskatchewan.
Results across our west Central southwest and southeast Saskatchewan regions, all exceeded expectations in the first quarter.
Our first 14 Frobisher wells were a mix of single dual and triple leg wells with results from the five wells on production for more than 60 days old.
Performing our expectations by over 20%.
Southwest, Saskatchewan or lower Sean them and drills were extremely positive.
Forming our type curve by a wide margin with two wells, adding a secondary impact from improving upwards of 30 inventory locations and offsetting sections.
Lastly, I want to touch on cost inflation.
We experienced 2% to 4% inflation in the first quarter compared to the fourth quarter of 2022 on both capital and operating costs. The two most significant contributors on capital costs or frac spreads in tubular.
Empower labor on operating costs. Despite the continued inflationary pressures, we still anticipate being within our capital guidance of $900 million to $950 million for the year and on operating costs are expected to trend towards under $13 per Boe in.
In the fourth quarter with higher production volumes.
I will now pass it on a time to discuss our financial results.
Thanks, Joe we had a strong first quarter generating $448 million of funds flow or 73 per fully diluted share on capital spending of 254 million.
<unk> hundred $94 million of free funds flow or approximately 32 cents per fully diluted share.
While first quarter W. T I prices averaged approximately 76 U S per barrel with the weak Canadian dollar W. T I averaged over $100 Canadian per barrel.
Eco averaged $3.05 per GJ in the quarter significantly below our budget price deck and as grant mentioned.
This resulted in us reallocating a portion of our capital towards higher netback assets.
As part of our funds flowing that back we recorded a cash tax expense of 93 per Boe or approximately $13 million. This equates to an approximate pre funds flow tax rate of 3% as the year progresses, we will adjust the tax rate based on our forecast for full year cash tax expense and true up on our current expense in the subsequent quarters.
Prior to the final full year assessment.
We caution that the tax rate can be volatile over the course of the year and May result in larger variations in a quarterly record of expense at the end of the first quarter, we had $3 9 billion of tax pools remaining.
Our net debt at the end of the first quarter was $1 47 billion as we reduced net debt by over 400 million since the end of 2022 and over 700 million since the closing of the <unk> acquisition in the third quarter of 2022, and now have over $1 8 billion of liquidity on our credit facilities.
We remain focused on balance sheet strength and anticipate that we will reach our $1 3 billion net debt milestone sometime in mid 2023 at current strip prices.
I'll now pass it back to grant for his closing remarks.
Thanks, Todd in 2023, <unk> is well positioned to deliver strong performance on both cash returns and per share growth to shareholders.
12, Montney and Duvernay wells scheduled to come on production before the end of the year at the same time. We also expect the glaucoma program in Central Alberta, and a lighter oil drilling program throughout Saskatchewan and will continue to be successful and provide modest growth and strong free cash flow generation for our company.
But the capital allocation changes to address the lower natural gas price environment. Our production additions will now be more weighted towards the second half of the year and our fourth quarter production is expected to average approximately 170000 Boe per day. This represents a growth rate of 10% from the fourth quarter of 2022 after adjusting for the dispositions.
[noise] completed here earlier this year that we spoken to lastly, I want to take the time to pay special tribute.
Thanks, Greg Fletcher, who has chosen not to stand for reelection to our board of directors at the upcoming AGM in mid May Greg.
Greg has been a founding director with White cap and has provided valuable guidance to our company over the past 13 years.
Greg will continue to be a supporter of whitecap provided insights to us on a go forward basis sincere. Thanks from all of Us Greg.
We're also pleased to announce that Vineeta Maguire has agreed to stand for election at our board of directors at the upcoming AGM Energen.
And our general meeting Benita brings a wealth of industry experience and we are looking forward to her joining the board and having her assist and score our business into the future.
With that I will now turn the call over to our operator Sylvia for any questions. Thank you.
Thank you, Sir ladies and gentlemen ask David if you do have a question. Please press star followed by one.
You will hear a prompt acknowledging your request.
Mr. Withdraw your question simply press Star followed by two and we do ask that.
Speaker phone please lift the handset before pressing Andy Keys. Please go ahead Crestar one now.
You have any questions.
Your first question will be from Luke Davis at RBC. Please go ahead.
Hey, Good morning, guys wondering if you could just provide some specifics on outages in terms of volume.
The supply chain issues.
Q1, and how that impacts the balance of the year.
Can you repeat that just one more time.
Troubles hearing that sorry.
Yes, I know what he says.
Was wondering if you could just provide a few more specifics just in terms of the outages and supply chain issues and what the actual impact was on on Q1, and then through the balance of the year.
Yeah, Hey, Lucas a ton here, yeah, I mean, the supply chain issue effectively and if you all can provide some more details around this but it was much contamination that.
Ultimately resulted in waxing issues on the surface there that created 60 day delays effectively of the two pads that we drilled late in 2022. So what we're expecting is from a Q2 perspective production volumes to be relatively flat.
And then as we bring in on the both the Montney and the Duvernay pads. There, we'll see production increase both in Q3 and Q4 and as Grant mentioned, we're looking at about 170000 Boe's per day.
Average production for fourth quarter of this year.
Got you that's helpful. And then can you expand a little bit just on your initial comments.
Regarding inflation.
Anything you're doing to mitigate that and then I know its pretty early still about what your expectations would be heading into 2024 in terms of capital outlay.
Yes, Joel here.
I mean were just out for bid for the balance of our.
Our program in 2023, but early indications suggest that we're at least going to be flat if not.
Some cost recovery in the balance of the year, so that would be our expectation.
Okay, I think it goes to from a we're able to two.
Make commitments.
On a.
A larger program.
With more activity that'll be consistent throughout this year and run through it.
The increase into 2000 and.
Into 2024 or so.
That actually acts to stabilized with our service providers that they're gonna be consistent and growing with us as we move forward.
Okay.
Great. That's helpful. Thank you.
Thank you next question will be from Jack Kauffman.
Please go ahead.
Hi, guys can you hear me.
Yes again, thank you.
Awesome Congrats on another solid quarter. So I know you guys are approaching the debt target here about $200 million.
And I can see that you guys are planning to increase 5%.
8% annual growth.
So I'm kind of asking is what's the plan after the dividend increase from there like what is.
The plans after that would you consider going to like just getting rid of all the debt and or even going to.
100% return to shareholders or how do you see really beyond that once the dividend Kris happens I know, it's a bit of a tough question to ask but it depends on oil prices and everything else, but yeah.
Yes first of all.
Achieve our $1 $3 billion of the debt milestone that we provided increasing our dividend up to that 73 cents a share and then what we're looking for is true too from a dividend perspective, specifically is have our dividend grow at the pace that we grow our business going forward and right now we're projecting between 3% to 8% per share growth per year.
And the.
75% of our free cash flow to be returned back to our shareholders in either of the form of dividends.
On a ongoing consistent basis as well as share buybacks and the other 25% of the free funds flow to be used for what we'll call produced at our balance sheet.
And that is really.
The purpose of that we think that having that as part of our capital structure is important.
Because of the return characteristics, we're getting in this pricing environment. So our return on invested capital is so strong that what we should be doing is using.
Using a responsible level of debt so we've instead of running eight.
With no debt, we stress tested our organization down to $50 oil and $3 gas and and at those levels, you're probably not going to look to our expectation does not grow aggressively.
And we want to keep our debt to cash flow well under one times. So that's a stressed asset level that we use it.
The $50 level.
So ultimately you will see us looking to increase our dividend commensurate with our growth rate into the organization as we move forward.
Sounds great. Thank you and just one more little question I know you correctly, but as a company and looking at any big M&A like I know you just after the well.
Well after the debt targeting the key active or not.
Not at this particular time when we wanted to do this year as demonstrated on the assets that we have under management.
We're just going to look to operational execution and performance.
Optimizing our assets as best we possibly can.
And again it goes consistent with our financial strategy of looking to continue to walk down the amount of leverage we have.
Certainly as Tom talked about.
Plenty of capacity.
Pasty of $1 $8 billion at this particular time once we get to the $1 $3 billion.
But 2023 is a year for focused on operational performance.
And putting our business development initiatives on hold.
And looking we can look at that into 2024 25 as you move forward.
Awesome. Thank you very much congrats on the quarter again.
Okay.
Our next question will be from Patrick O'rourke ATB.
<unk> capital markets. Please go ahead.
Oh, Hey, guys. Good morning, and thanks for providing some color in terms of the outlook for the return of capital strategy post the $1 $3 billion milestone I was also curious on that maybe I'll move to my other question just very quickly.
With the shift of some capital away from the Montney Atlas tour over to the Duvernay here just wondering in the current sort of pricing paradigm, where on a relative basis oil is strong relative to gas.
Is this something that we can anticipate to be more structural in terms of the way that you're directing capital out into 2020 for 2025 and beyond and will there be sort of more emphasis on these volatile oil rich duvernay windows relative to gas your money targets.
Yeah.
From our perspective, I think that we have two hours.
Be aware of that.
Pricing environment around us and Thats from crude oil and natural gas differentials.
The effect of the Canadian dollar. So overall, what we can say is that the.
<unk>.
We're looking at the highest netback assets that we can generate on a longer term basis, our principal growth is going to come up.
We believe from the Montney and secondarily from the Duvernay.
Duvernay, but that's not to say that the balance of our assets in central Alberta.
Saskatchewan.
To grow they they provide a very significant amount of free cash flow for us.
How we allocate that moving forward.
With the backdrop of or look at it from a structural perspective.
$2 or sub $2 gas.
We're not trying to grow that business overly aggressively in.
And we're coming into a summer time period, where.
The natural gas.
<unk> does have an impact.
It's interesting.
If I can comment on that this week, 66% of our production.
Israel and liquids, but it generates between $80, 89% to 92% of our cash flow.
From 66% of our production.
Which would mean that the natural gas side is important to us it is as we move forward.
From a cash generation perspective, it isn't as important as important as the oil and liquids component of our business.
Okay. Thank you very much.
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 Josef Schachter of Schachter.
Research. Please go ahead.
Thank you for taking my call my questions.
Joe first thing on the portfolio now.
Had some noncore asset dispositions are you happy where you are right now or are there still some assets that are noncore that might help you get quicker to your debt target.
Yes, we're very we're happy and very pleased with the portfolio of opportunities we have with US right now we're not looking for future dispositions.
At this particular time again as we as we cycled through our business longer term.
Assets become.
With limited growth on a go forward basis or limited value opportunity for us well look to monetize but we think we did a very good job and we'll call monetizing the assets that we weren't putting capital towards over the next five year period of time, so with the suite of assets. We have today the inventory we have.
We're very comfortable with the assets that we have and won't be looking for dispositions at this particular time.
And this is probably is for sure.
With the success of the of a four well pad at the botany op eating your type curve and 52% liquids.
Vacation authority has that changed around your tier one locations and you ended up because of the success you're having.
Many more locations than you than you thought you might have had when you did the acquisition.
Yes.
Sorry, Joseph I don't think it's not going to have an impact on the balance of our inventory and cash while we still have a pile of tier one locations to drill there.
And how many wells would you be looking to drill is it a drill to fill situation.
Well I think the ongoing strategy is going to be.
Our balance of.
<unk> tour and cable I've been just managing all of those particular place. So every time you go through capital allocation.
That's the context that we're thinking of.
Just to add onto that.
What we're looking at in the Montney in Joe's reference step as it is he talked about with the <unk> The tour of rest Haven.
On the Montney side and then we also have other montney assets.
Hum Knowhow et cetera, what we'll call more of the conventional players, but K, Bob we're looking at the Montney to about 20% to 25 wells a year and in the K, Bob I'll call. The Duvernay play we're looking anywhere between five to eight wells per year at this particular time now commodity price dependent.
It's dependent we can move capital around and that's the I think it's the benefit of the program that we have in northern Alberta, but also with the benefit we have on our assets right across from from southeast Saskatchewan through to how the deep patient of Alberta. So we can actually ultra programs around and we have to be kept.
Cautious if that doesn't happen.
Overnight, we have to be very thoughtful in our planning on those going forward. So.
Ultimately I think that we haven't got an exceptional blend of opportunities in front of us.
With the principal growth the largest exposure to growth coming from the Montney and Duvernay anthem came on.
Okay.
Thank you and at this time, we have no further questions. Please proceed.
Okay, well, thanks, everyone and thanks for the four.
Youre directions today I don't want to thank each of you for taking the time and interest you to listen to this call today and we look forward to updating you on our progress over the next several months as we move through the balance of 'twenty three 'twenty four until then thanks very much 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 and all the rest of your day.
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