SPGYF Q4 2019 Earnings Call
Operator: Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to Whitecap Resources 2019 Fourth Quarter and Year-end Results and Reserves Evaluation Conference Call. [Operator Instructions] And I would now like to turn it over to Whitecap's President and CEO, Mr. Grant Fagerheim. Please go ahead sir.
Grant Fagerheim: Thank you. Good morning everyone, and thank you for joining us. I'm joined by three members of our Senior Management Team, our CFO, Thanh Kang; as well as Darin Dunlop VP of Engineering and Joel Armstrong, VP of Operations and Productions. 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 fourth quarter and year end news release issued earlier this morning. We were an excellent year in terms of operational performance as well as being able to navigate through a volatile year for crude oil prices and Canadian differential pricing. Our original capital budget was set on December 18, 2018 at $425 million to $475 million delivering average production of 70,000 to 72,000 BOE per day. As a result of our strong organic operating results, we were able to reduce our capital down to $400 million with no change to our average production for the year. The final tally for the year included achieving annual average production of 71,050 BOE per day. On development capital spending of $404 million significantly below what was initially contemplated. Total capital including net acquisitions was $407 million compared to $518 million in the prior year. Our program allowed us to improve our balance sheet strength by $103 million to $1.19 billion. We were also able to enhance return to shareholders by increasing the dividend by 5.6% effective with May. The May dividends and purchase 4.6 million shares through the normal course issue a bit during the year. With respect to our Montney program, the first non-operated well was drilled and completed in 2019 and on production on December 5. The inflow from the first half, which was drilled as a step out by our direct venture partner is as expected. Water cuts on the wells are still stabilizing and are consistent with the wells in the area, and the well was farthest removed from existing tests so increased variability in results are expected. Our first operated well is drilled and completed and we anticipate this role will be onscreen by mid March. Our second operated well was drilled with completion expected after breakup. We also participated in non-operated well which is currently drilling. Limited results today are within the range of expectations and we look forward to providing updates as the program progresses. You will continue to prioritize both return on invested capital as well as return of capital to shareholders through dividends and opportunistic share buybacks. A key component of our strategy is to maintain a strong balance sheets and liquidity position and to manage commodity price risk. As I mentioned earlier, net debt at the end of the year was 1.1 9 billion, resulting in 580 million of unutilized capacity of our existing $1.77 billion bank line providing us with significant amount of financial flexibility. We continue to execute our hedging strategy to mitigate risk and now I have 47% of our crude oil production hedged in the first half of 2020 and 40% hedged in the second half of the year. Tom will provide more details to our hedge porker later in the call. Environmental, social and governance issues remain topical, not only in the investment community, but as well as with our Board of Directors. In 2019, we created a board level sustainability committee focused on evaluating risk and strengthening disclosure of our emissions and related factors. We believe that our ESG performance is a competitive advantage for Whitecap having a real shift in operating one of the largest carbon capture utilization and storage projects in the world. In this project in Weyburn, Saskatchewan, we store 1.8 million tons per year of CO2 annually, which is more CO2 than we emit corporately on an annual basis. We anticipate publishing or buying an annual sustainability report by midyear 2020, which will include additional opportunities to improve carbon efficiency in the future. I would like to now pass on to Joel for comment on our ESG accomplishments in 2019.
Joel Armstrong: Thanks Grant. On health safety environment 2019 was another strong year for the company. We remain firmly committed to ensuring our outputs are developed in a manner that minimizes adverse impact to the environment and at the same time ensuring our employees and consultants are in a safe workplace. In 2019, we posted a combined employee and contractor total recordable injury frequency rate of 0.61 this rate is within our average range for past 3 years and well below oil and gas industry averages. The total number of pipeline failures decrease for a third consecutive year while at the same time growing our inventory of active pipe. This trans speaks to the success asset integrity team and their initiatives performed throughout the year. 2019 was the fifth consecutive year where we were able to reduce emission intensity and achieve significant reductions in both flared and vented gas intensity. Like the prior year, we safely stored more CO2 underground at waver as part of our enhanced oil recovery process then we admitted from all operations. Making Whitecap the only intermediate oil and gas company with net negative direct and indirect emissions. Lastly, we executed on an aggressive asset retirement program, spending $9.4 million on liability reduction in Alberta, British Columbia and Saskatchewan. We've increased the number of wells abandoned by 20% in 2019 over 2018 and will continue to advance our asset retirement program going forward. With that I'll pass it on a Darin to discuss our year end reserves valuation.
Darin Dunlop: Thanks Joel. 2019 with another strong year for Whitecap. As we continue to focus on organic reserves growth, we were able to successfully replace production and increase reserves across all categories while only spending 60% of our funds flow. Our PDP 1P and 2P reserve additions replaced 100%, 133% and 169% of production respectively. PDP 1P and 2P reserves for debt adjusted share increased by 7%, 9% and 11% respectively. We achieved these increases in a very cost effective manner with a PDP, FD&A costs of $14.45 per BOE resulting in a very profitable PDP recycle ratio of 2.1 time. Whitecap is focused on maximizing our cost efficiency and in organically converting undeveloped reserves to cash flow. The level of this efficiency is measured by PDP, F&D, and ours has been very consistent over the last five years. It has ranged between $11.25 and $14.46 per DOE to average $13.13 per BOE. What's your result of an average PDP recycle of ratio of 2.3 times over this period. We liked the measure of PDP, F&D as it removes the subjectivity of undeveloped reserve booking practices and the associated changes in future development costs. We believe PDP, F&D any associated recycled ratio is a true measure of our ability to economically support our business model and the dividends in the long term. Our total proven FD&A costs were $17.95 per BOE and our 2P were $21.6 per BOE generating and recycle ratios, a 1.7 and 1.4 times respectively. In addition to PDP, F&D, we also maintain an emphasis on 1P and 2P gross. This grows supplies the feedstock for our PDP reserves and associated funds flow growth. Over the last five years, we have grown our 1P and 2P reserves by 1345% and 131% on a BOE basis. On an oil basis this jumps to 167% for 1P and 158% for 2P. This has more than kept pace with our PDP drove insuring Apple feedstock for us to sustainably grow on souls. The 2019 reserves evaluation includes expanded ARO liabilities as recommended by Kogi. The extended definition of ARR will now include suspended service Wells gathering system facilities and surface land development. The 2019 McDaniel report included ARO cost of 924.1 million undiscounted or 114.9 million when discounted at 10%. This is our $167 million increase over 2018 or just 26 million when discounted at 10%. Our resulting total proof plus probable reserve values discounted at 10% is now 6.3 billion. With that, I'll pass it onto Thanh to provide some color on our financial results.
Thanh Kang: Thanks Darin. Today I will compare results from the fourth quarter of 2019 to the third quarter of 2019 un-follow in the fourth quarter of 19 increased 20% to 184.5 million compared to 154.3 million in the previous quarter. 14.5 million of the increase was attributed to higher production volumes and 15.7 million was due to higher cash net back. Funds flow per share increased 22% or $0.45 per share compared to the previous quarter. Net loss for the quarter was 203.9 million or $0.50 per share. The net loss during the quarter was due to a non-cash accounting impairment expense of 296.9 million in our West central Alberta and West central Saskatchewan business unit. The non-cash accounting impairment expense was primarily due to the engineer's price deck decreasing at December 31, 2019 compared to December 31, 2018. On average USD WTI decreased by approximately 7% and Canadian MSW crude oil prices decreased by approximately 6% across all years on the reserve engineer's price deck. We would expect going forward, any significant changes to the engineers' price deck would result in additional impairment expense or reversal of previous year's expenses. Excluding the non-cash accounting impairment expense, net income was 93 million or $0.23 per share. Whitecap balance sheet remains strong with year-end net debt at 1.19 billion on total capacity of 1.77 billion. Adjusted EBIDA ratio is 1.6 times in 2019 a decrease of 4% compared to 2018. On our risk management contracts for calendar year 2020 we have WTI Costas callers with a notional amount of 20,000 barrels per day at an average price in Canadian dollars of $64.39 by $83.6 and a swap was a notional amount of 2000 barrels per day for the first half of the year at a six Canadian price of $80.93. For further details in our standing hedges is referred to note five on her financial statements. With respect to 2020 we are expecting to spend development capital of 350 million to 370 million of which 150 million to 170 million will be spent in the first quarter. Q1 production is expected to average between 71,000 to 73,000 BOE per day. We are closely monitoring the recent drop in oil prices so sure that our spending profile for the remainder of the year as well within our fund slope. As a result of her current risk management program, our shell will decline assets and a strong capital efficiencies. We're able to withstand near term price volatility without altering our capital budget for the year. Turtle oil prices remain low for an extended period of time. We will look to adjusted capital spending profile for the balance of the year. We feel that we well positioned in this environment where the cost of debt fixed and trimmed out a strong balance sheet and the dedicated motivated teams continue to further it has the return profile for Whitecap shareholders. We look forward to making advancements through 2020 and recording back to you with our progress. This concludes our remarks and we'll be happy to answer any of your questions. I will now turn it over to the operator.
Operator: [Operator Instructions]. And your first question will be from Luke Davis at RBC. Please go ahead.
Luke Davis: Hey, good morning guys. Just relating to the acquisition in Q1, just wondering how much incremental ARO you would have taken on with that?
Grant Fagerheim: We will get back to you with that Luke. The exact number we're not sure about.
Luke Davis: Okay. And then just as a follow-up, wondering if you can comment broadly on what you're seeing in the M&A market and where you guys might see a opportunity going forward?
Thanh Kang: Our focus really is to look at transactions that complement our existing core areas here and similar to what we did with the a small acquisition for 16.2 million in the first quarter as well as the joint venture transaction that we did in the Montney there. Those are the types of styles of transactions that we would look to focus on in 2020 here.
Operator: [Operator Instructions]. And at this time, gentlemen, we have no other questions registered. Please proceed.
Grant Fagerheim: We want to thank each of you for your interest in Whitecap and the progress we've made to date. We understand that investing in the energy industry at this time has been challenging. You should know that we will continue to do everything we can to improve the returns for shareholders and an environmentally and socially responsible manner, wishing you all the best for the day and the year. Thank you.
Operator: 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.