SPGYF Q3 2019 Earnings Call
Operator: Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to Whitecap Resources Third Quarter 2019 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. [Operator Instructions] I would now like to turn it over to Whitecap's President and CEO, Mr. Grant Fagerheim. You may begin your conference call.
Grant Fagerheim: Thank you. Good morning, and Happy Halloween everyone. Thank you for joining us. I’m joined by our CFO, Thanh Kang; as well as our Vice President of Engineering, Darin Dunlop; and our Vice President of Operations and Production, Joel Armstrong. 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 we set forth in our Q3 news release issued earlier this morning. The third quarter was a very active one for Whitecap on an operational front. We are very pleased with the results we achieved with average production of 68,255 BOE per day on capital spending of $153.8 million, much lower than our projected $180 million to $200 million. We’re also pleased to advise that we’re on track toward achieving our mid-case for average production for the year of approximately 71,000 BOE per day on a reduced capital program of approximately $400 million, down from $450 million initially budgeted for the year with the same level of production. In the first nine months of the year, we have generated free funds flow of $185.9 million after capital investments of $305 million. To-date, we have returned $122.9 million to shareholders while continuing to strengthen our balance sheet, which is a primary focus for us in 2019. With the disciplined capital program in 2019, our capital business unit teams have not only delivered on efficient operational execution, but also had the opportunity to focus on technically advancing and expanding our light oil asset base organically. Our achievements year-to-date include organic inventory additions of 224 gross, 164 net wells – net locations, positive types of enhancement to 56 or 50 gross, 44.2 net locations and a continued expansion of our enhanced oil recovery projects through analytical analysis and reservoir modeling, which has the potential to have significant possible oil reserves in the future. As part of the 2020 budget process, we created five detailed budgets with varying production growth targets and capital investments. Given the volatility in commodity prices and the uncertain economic environment, we have elected to continue the prudent and disciplined approach to capital investment into 2020. This allows us to increase free funds flow and our sustainability in a low-commodity price environment. We retain the flexibility to rapidly increase production growth when realized prices provide further – provide high returns on capital invested. Our Board of Directors has approved a 2020 capital budget of $360 million to $380 million, which is set to deliver average annual production of approximately 71,000 to 72,000 BOE per day, 85% oil and natural gas liquids, which is an increase of 3% per debt-adjusted share, compared to our prior year 2019. We can maintain production year-over-year with less capital investments due to our low corporate production decline rate of 19% to 20%, high funds flow netbacks and strong capital efficiencies that we’ve achieved to-date. Free funds flow in 2020 at $55 WTI is anticipated to be $263 million, of which we expect to allocate 40% to 50% towards strengthening the balance sheet and 50% to 60% towards return of capital to shareholders. We are targeting net debt of $1.1 billion in 2020, which would be a second year of strengthening our balance sheet by $100 million per year. With that, I will turn it over to Darin to comment on our technical achievements in 2019.
Darin Dunlop: Thanks, Grant. In addition to the successful execution of our capital program, our technical staff have been busy advancing our organic growth initiatives. We have internally identified and successfully executed on several opportunities that enhance the economics of our current inventory, as well as expanding it. This includes successfully negotiating the Montney oil joint venture in Deep Basin, which increases the long-term sustainability of our business model; high-intensity fracture stimulations in our Cardium assets; implementing a gas flood pilot in Wapiti in the Deep Basin; optimizing and expanding our Viking water flood assets; as well as identifying new Viking oil development areas; incorporating horizontal multi-frac completion methods in our conventional Boundary Lake water flood redevelopment; expanding our Valhalla inventory via emerging resource plays in the Charlie Lake in Montney; and continuing to expand our CO2 capture and utilization technology in Weyburn. With that, I will pass it on to Joel for comments relating to health, safety and environmental performance.
Joel Armstrong: Thanks, Darin. Health, safety and environment remains a top priority for Whitecap and we’re once again pleased to report very strong results this quarter. Whitecap averaged seven drilling rigs and three frac crudes throughout the third quarter, which contributed to an estimated 1.71 million person hours and 80% increase from Q2. Even with the increased activity, our total recordable injury frequency or TRIF for quarter was 0.43, resulting in a year-to-date TRIF of 0.61. On the environmental front, we’ve been proactively managing fuel vent and flare volumes in addition to spill volumes, which are 50% lower year-to-date compared to the same period last year. Lastly, asset retirement obligations or ARO spent to-date is $6.2 million or 70% of the 2019 budget. This level of spending has allowed us to abandon 74 wells to-date and we continue – sorry and we anticipate a total of 82 wells for the year. We have consistently been proactive in managing our ARO and expect to spend an additional $9 million in 2020. With that, I will pass it on to Thanh to provide some color on our financial results.
Thanh Kang: Thanks, Joel. WTI averaged $56.45 in the third quarter, compared to $59.81 per barrel in the second quarter, a 6% decrease. Canadian crude oil price differentials were comparable to the prior quarter at approximately $4.80 per barrel. Realizable oil prices, prior to hedges and tariffs, were $65.07 per barrel, compared to $71.40 per barrel in the second quarter of 2019, a decrease of 9%. Realized natural gas NGL prices averaged $14.85 per barrel, compared to $22.50 per barrel in the second quarter of 2019, a decrease of 34%. The decrease was nearly due to propane and butane prices, which represents 66% of our NGL mix. However, NGL revenues in the quarter were only 2% of total revenues. Realized natural gas prices averaged $1.12 per Mcf, compared to $1.22 per Mcf in Q2 of 2019. The decrease was consistent with the decrease in AECO natural gas prices. Natural gas revenues in the quarter represent 2% of total revenues. The royalty rate in the third quarter was consistent with the second quarter at approximately 19%. We anticipate a royalty rate of approximately 17% to 17.5% in the fourth quarter and into 2020 based on a WTI price of $55. Operating expenses for the third quarter were $12.56 per BOE consistent with the second quarter at $12.45 per BOE. We anticipate operating costs of approximately $12.40 to $12.60 for full-year 2019. In 2020, we anticipate this to increase by approximately 5%, due to increased power costs and higher trucking and deposit costs at Wapiti and Cardium as we increase our production in those areas. Transportation expenses of $2.23 per BOE, D&A expense of $1.04, and interest and financing expense of $1.80 per BOE, which includes realized and unrealized hedging gains and losses were all consistent with the second quarter operating metrics and are expected to remain relatively consistent for the balance of the year and into 2020. As Grant mentioned earlier, our balance sheet is in great shape, and at $55 WTI, we anticipate to further reduce net debt in excess of $100 million in 2020. In a $45 WTI environment, we would maintain our dividend and can further reduce our capital program with minimal impact to our funds flow and still maintain a total payout ratio of less than 100%. I will now pass it on to Grant for his closing remarks.
Grant Fagerheim: Thanks, Thanh. I appreciate that. As we enter into 2020, we’re expecting to experience continued price volatility oscillating between $50 to $60 WTI with natural gas places in $1.70 to $1.80 per GJ range. We anticipate the Canadian dollar to remain in the $0.75 to $0.76. We are also anticipating differentials on MSW at approximately $5 WTI differential and WCS at $15 per barrel WTI differential. We are pleased to provide the following as I look at our 2020 budget at this time. We felt it necessary to design a program that will allow us to grow the production modestly and fund our dividend well within funds flow and provide substantial level of free funds flow. With the free funds flow, we retain full optionality to continue to strengthen our balance sheet, buyback shares through normal course issuer bid or accelerate growth plans for the future at the appropriate time. Outside of our usual development plans across all assets, for the upcoming 2020 year, we have entered into a joint venture with a private energy company focusing on the oil-rich window in the Alberta Deep Basin. This joint venture comprises a large contiguous landlock, where we have the opportunity to earn 34 sections of land after Wapiti completes one well in 2019 and drills and completes an additional two wells over the next two years. We feel this is what's a very effective manner in which to earn into a very favorable oil-rich lands with a very astute technical partner. We look forward to providing you with results of this initiative of our – as we progress in the future. We will also continue to look for additional organic growth opportunities to enhance shareholder returns in the future. In closing, I want to express our appreciation to both Jason Kenney and Scott Moe for taking the leadership they have and support our Canadian energy industry. We are optimistic that our energy sector will once again be recognized and respected for its level of responsible development practices and for its contribution to the Canadian economy as we move forward. Thank you to each of you on this call for your support and interest in Whitecap. With that, I will turn the call over to the operator for any questions.
Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And your first question is from Amir Arif of Cormark Securities. Please go ahead.
Amir Arif: Thanks, good morning, guys. A couple of quick questions for you, just the capital spending, Grant, it was – it was a positive surprise in terms of both for this quarter and your guidance for next year. I’m just curious is that reflecting improved capital efficiencies from changes to the way you’re completing wells? Or is it lower service costs? Or is this just the timing of capital expenditures that’s affecting it?
Thanh Kang: Yes, its Thanh here, Amir. You know some of it is certainly optimizations within our program, but the full-year program of $400 million still remains intact, so a lot of that is this timing with respect to spending within the third and the fourth quarters.
Amir Arif: Okay. And then, the capital efficiency improvements, is that coming from service costs changes? Or is it just a lower decline rate I guess as you head into 2020?
Darin Dunlop: Yes, its Darin Dunlop here. It’s a combination, you know, with regards to improving capital efficiencies on each of our plays as we optimize our completion and – but, you know, a big component of that is our continued spending and allocation of capital to our water flood project in that to continually knock down our base decline.
Amir Arif: Okay. It sounds good. And then, on the JV, I’m so sorry, I think I missed your comments Grant, was it a commitment of three wells to turn into the acreage?
Grant Fagerheim: Yes, so it was a – first of all, was a completion that has been done. That will be tied in here by the – we expect by the end of November, and at least two additional wells will be commencing the drilling of the first of those wells here late in – I think its spudding today, actually. So, Joel, sorry, it – that well is spudding today and then we’ll be drilling another well in 2020, and that will provide us – then we will go back into redevelop the – continue to develop the area on a joint venture basis with the private company.
Amir Arif: Okay. And then, the JV obviously gives you more reserves capture, but just curious how you see the JV capital relative to your corporate capital allocation between other opportunities you have?
Grant Fagerheim: You have that, Darin?
Darin Dunlop: Yes, I do have that, just let me flip through that. With regards to how much spending we’re going to be doing in – on the JV, it’s upwards of – you know on our total capital, it’s upwards of $14 million to $50 million.
Grant Fagerheim: In 2020?
Darin Dunlop: In 2020, yes.
Amir Arif: 2020. Yes, I was just more curious in terms of how you see it more strategically in terms of is it just – is it the resource capture to the better returns? Is it just a way to sort of add another area of focus?
Grant Fagerheim: It’s a – I mean from our perspective it’s another growth area for us. We think this as a substantial growth area. After our earning, we end up at majority of the lands at 65% from one side of the river. We end up at 50:50 with a partner, but it becomes another growth area for us as we continue in and around the region where we’re already playing, so it's not a specific step forward of any – by any stretch an imagination it’s in the area that we play already. It’s just an oil window where our technical people have worked up for a long period of time and allows us to focus there.
Amir Arif: It sounds great, thank you.
Operator: Thank you. Your next question is from Travis Wood from National Bank. Please go ahead.
Travis Wood: Yes, good morning, guys. I just wanted to hear your kind of comments around how the JV came about kind of just extending on the last question there in terms of, you know, how you are thinking about it strategically? What your views are in terms of how this sets up for the future? You commented on growth and inventory and kind of just how that initial conversation kicked off perhaps?
Grant Fagerheim: Sure. Our geotechnical staff have the preferred areas where they would like to play and we had approached earlier this year with a view – the private company, we had approached them earlier this year with a view to work on a technical joint venture as we move forward. So, rather than buying the inventory we thought it was best to drill to earn. With the type of set up, this is a good environment where outside equity capital and debt is restricted. So, we believe this is an area that we could through drilling have a major growth profile, a pretty substantial on a go-forward basis that we’re looking at somewhere between 20,000 to 30,000 barrels a day as we move through time, and we didn't have to pay for that upfront. We paid through – it through earnings, so we thought it was much better use of a – of capital on a go-forward basis.
Travis Wood: Okay. That’s good, thank you.
Operator: Thank you. The next question is from Jeremy Mccrea from Raymond James. Please go ahead.
Jeremy Mccrea: Hi, guys. I know you guys mentioned you had five different budgets here and I just wanted to know if that relates to anything towards Montney? And so, a few questions on that is, you know, is there the ability to expand more than the two wells for next year? What does maybe in 2021 look like? Is that like a, you know, a 10-well program, 20-well or another more – bit more exploration? And just generally, you know, these two wells that you’re drilling next year, are they going to be more exploration in terms of just smaller frac design? Or is it really going to just try and say when can this play really start to deliver? Just trying to get a little bit more intensity of what you guys are planning here for the area?
Grant Fagerheim: Sure. I mean until we’ve earned, there will be no joint wells that are being proposed and we will have earned in 2020 and then will come back with a – with the two technical teams, Whitecap and the private company, and we’re looking at step outs. These are not – this is not wildcat exploration. This is in a very well-known trend. I think you would know it and with some very sound industry players in the area. So, we’re looking into 2020 as – it doesn’t provide a substantial amount of growth, but into 2021 because we’re thinking more of 2020 as an earning year and into 2021, the back half of 2020 or into 2021 depending upon results, how aggressive we’ll get and working, again, closely with our joint venture, we’re going to run them or going to work with them on a go-forward basis.
Jeremy Mccrea: Okay. And then, in terms of like frac design, is it kind of similar to what guys – other guys are doing in the area? Or is it going to be – you know like you really try and showcase what this thing could really do?
Joel Armstrong: Excuse me, its Joel Armstrong. All the frac design will be consistent with what’s been employed in the area already. it's not a downgraded version by many means. The fracs are very substantial and we’re looking to maximize our productivity from each well.
Jeremy Mccrea: Okay, thanks guys.
Operator: Thank you. Your next question is from Juan Jarrah from TD Securities. Please go ahead.
Juan Jarrah: Yes, excuse me, thanks guys, good morning. Can you give us a bit more color on what types of economics you see from this JV? You kind of hinted at well costs, I guess. We’ve good sense of where you are. Just curious where you see the economics?
Darin Dunlop: Yes, its Darin Dunlop here. You know we have obviously several type curves in this area depending on, you know, different lengths and horizontals and different designs, but I’ll give you the one – the economic associated with one that represents the majority of our inventory. So, it’s for a two-mile Montney well, total capital is $11.2 million, IP90 is above 1,200 BOE a day. The reserves associate with it, again, is about 1.2 million barrels, oil and liquids waiting in the first year is about 60% and all that generates a PI of just over 1, a rate of return 115% payout under a year with the F&D in around $9 BOE.
Juan Jarrah: Oh! Lot more color than I expected, looks like you’re prepared for it. The other question I guess I have is, you know, obviously you went to the process and this falls on Travis' question, the process of looking at do we do this organically, do we look at some acquisitions, etcetera. The question I have for you guys is, you know, if you like what you see in the next year, does that mean you could actually look to grow it a little bit bigger via acquisitions?
Grant Fagerheim: , :
Juan Jarrah: Got you, that’s helpful. And then, the three wells, I mean obviously I see the license in the public data, the question is, will the other two wells be close to that well? Or is that you’re going to kind of try to delineate the 34 sections that you’re looking at?
Grant Fagerheim: General proximity, but I mean we’re within a township of one another. We’re not within a section of one another.
Juan Jarrah: Great, that’s helpful. That’s all I had.
Grant Fagerheim: Thanks.
Operator: Thank you. And the next question is from Adam Gill from Eight Capital. Please go ahead.
Adam Gill: Good morning, gentlemen. A high-level question on the capital program, how much of this program is going towards non-drilling completion and EOR investment like batteries gathering systems, build-out, gas handling and allocation of land spending? And how does that compare to your 2018 and 2019 investment levels?
Thanh Kang: Hi, Adam. Its Thanh here. So, you know, on land and seismic in 2019, we would have spent about $5 million. We’re forecasting about $3 million in 2020. On the facility side, 2019, we’re forecasting to spend about $14 million and that compares to about $11 million in 2020. And then, we also have budgeted for items, you know, asset integrity, health safety and environment which don’t have any production. We spent about $12 million this year in 2019 and focusing in 2020 as well.
Adam Gill: Yes, thank you for that.
Operator: Your next question is from Josef Schachter of Schachter Energy Research. Please go ahead.
Josef Schachter: Good morning, Grant. A couple questions for you. Starting first with AECO now at $3, do you have shut-in gas that you could bring on for the strong winter season that is not in your numbers?
Grant Fagerheim: Sorry Josef, I think – just, I think your question was around gas. We don't have any independent gas wells. All of our gas is associated with oil production that is currently on stream, I think that was your question.
Josef Schachter: Yes. Just trying to see is there was anything that was shut-in that could come on that was separate from of your production with oil. Second, your production was, you know, in the third quarter, was it back ended so that right now your volumes are above the level that you are for the average for the quarter of [68,255]?
Grant Fagerheim: Yes. So, what we’re looking at is to exit. We’re up over 72,000 barrels a day now at this particular time. So, we’re looking for a lot of the capital that was spent in – I mean sorry in the third quarter. Production came on either late or into the October timeframe, late in September into October and that continues to ramp up as we move through this particular quarter into the fourth quarter. So, we’ll have a very strong exit going into the 2020 year as well.
Josef Schachter: Okay, thank you. And a question for Thanh, on the – if we have a low oil price at December 31, are you concerned about a goodwill write-down on the balance sheet?
Thanh Kang: Yes, you know – I mean we’ll have to take a look at what that environment looks like at this particular time on the price forecast. Certainly, I think when you look at the price deck at December 31, 2018, compared to where our strip is at this particular time, it is lower, but we’ll have to see what that pricing environment looks like relative to what our reserves are as well at the end of the year here.
Josef Schachter: Thanks. And the last question for me is you’re using [55 and 175], if things turn out much better and we have, you know, a better pricing environment, you know, on the 60s in Q2 heading into Q3 and there’s a bit more optimism, when would you change your approach to CapEx? And are there any specific areas you’d like to focus on – you’ll be spending if the price of the commodity is more cooperative?
Thanh Kang: Yes. I mean the first priority for us is our balance sheet and we’re targeting, you know, in excess of $100 million of continued debt reduction, that would be the first priority. So, you know, as commodity prices improve, I think we’ll hit that target sooner rather than later, and then, we’ll look to redeploy that whether that's return on capital or return of capital and we can make that decision at that time.
Josef Schachter: Thanks very much.
Grant Fagerheim: Thanks, Josef.
Operator: Thank you. [Operator Instructions] And next question is from Christopher Jones of Haywood Securities. Please go ahead.
Christopher Jones: Hi, good morning, guys. Thanks for taking my question. Within your operational update, you highlighted as a result of some completion improvement some pretty impressive results in the Cardium. Just wondering if you're comfortable using this new approach on subsequent wells? Or do you guys need a little bit more time to see how recoveries unfold?
Darin Dunlop: Yes, Darin here. Yes, no, we’re very comfortable using it in the appropriate situation. You know it’s not going to be a blanket. There’s particular reservoir characteristic where this technology is applicable and we've identified a significant amount of our inventory that we can upgrade with this high-intensity frac technology.
Christopher Jones: Great, thank you.
Operator: And the next question is a follow-up from Amir Arif of Cormark Securities. Please go ahead.
Amir Arif: Hi, guys. Yes, just a couple of quick real follow-ups here, just on the share buybacks I noticed you did become a little more aggressive on the buybacks this quarter versus the first half, so just curious on your thoughts on utilizing additional buybacks? Does it – does that move up as the stock price moves down? Or does it move up as there’s more free cash flow in your – in terms of your budgets based on, you know, how aggressive you could be on the buybacks?
Thanh Kang: Yes, its Thanh here, Amir. I think, you know, from our perspective, we want to focus on production of our net debt versus strengthening of balance sheet. If we have more free cash flow, we’ll look at considering a more aggressive buyback at that particular time. Our objective similar to this year was to keep our share count flat to slightly declining. It won’t be a huge component of our free cash flow allocation unless we have, you know, much more free funds flow in excess of what we’re currently forecasting here. But expect the component of that to be directed towards share buybacks similar to this year into 2020.
Amir Arif: Okay, sounds good. And then, just on Wapiti Cardium gas flood, perhaps, Joel, if you could just give us a little color on – is that being driven just because where gas prices are? Or is this something that just technically makes sense to look at? And also, when you’d expect any kind of production response from that?
Darin Dunlop: Yes, it’s Darin here. Yes, it was driven primarily from a reservoir perspective, you know, increase because – as you know, you know, source water for a water flood up in that area is harder to come by, and also, gas prices did have some play into it, but it's primarily an EOR opportunity where we see that we can, you know, significantly upwards to double our recovery factor by – via gas injection.
Amir Arif: And timing for a response from that gas?
Thanh Kang: Oh! Sorry. So, we’re going to commence injection here in the month in November and we’re anticipating response in – you know based on the current pair that we were piling within 12 months to 24 months.
Amir Arif: Perfect, thanks.
Operator: Thank you. There are no further questions. You may proceed.
Grant Fagerheim: Okay. So, if there’s no further questions, I just want to once again thank everyone for your time and interest in Whitecap and we look forward to reporting back to you on our progress into 2020, 2021 and 2022. So, have a great day, and thanks very much for your time.
Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.