SPGYF Q1 2020 Earnings Call
Operator: Good morning. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to Whitecap Resources 2020 First Quarter Financial and Operational Results Conference Call. All lines have been place on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. [Operator Instructions] And I would now like to turn it over to Whitecap's President and CEO, Mr. Grant Fagerheim. Please go ahead.
Grant Fagerheim: Good morning everyone, and thank you for joining us this morning. 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, our VP of Productions and Operations. 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 the quarter news release issued earlier this morning. We came into 2020 well-positioned and started the year on very strong note, not feeling the effects of the oversupplied oil market coinciding with the demand shocks caused by COVID-19 until later on the first quarter. Our production in the first quarter was about expectations at 73,452 BOE per day and capital investments were lower-than-expected at a $138.8 million. This allowed us to generate funds flow of $131.8 million or $0.32 per share in the quarter. The lower oil demand due to coronavirus and crude oil supply graph has created an oil crisis that is unprecedented as crude oil recently trading off significantly to historic lows. Whitecap has taken real time measures to deal with the crisis. And today, we have identified $300 million of cash reductions through capital spending, operating expenses, general and administrative costs and our dividend. The quality of our assets is evident as only 2,000 BOE per day of production is currently deferred due to our low crude oil price environment, and we anticipate these assets were return to production at approximately $40 WTI, depending on geographical region. Our criteria include capital payouts of less than one year for recovers. Our operating team has done an exceptional job of scrutinizing our assets down to a field level, and in some cases, down to a world level to determine the uneconomic production, which we define as shut-in operating income greater than ongoing operating income. We do not expect significant voluntary production shut-ins at this time on our assets, as our base production has an operating breakeven are approximately $16.50 a barrel. We'll be discussing our netback analysis and further detail shortly. Our team has also been busy planning for the potential of involuntary shut-ins due to the pending storage constraints in North America. Our objective, if we're focused to shut-in, is to do this in a methodical manner starting with the lowest netback assets, with consideration given to cost and ease of startup, operational constraints, technical reservoir considerations and current marketing commitments. In most of our operating regions, we were able to suspend the material amount of production with minimal negative reservoir and operational impacts. We also expect restart of operations in most cases will be straightforward with minimal capital spending. Storage becomes full in North America, and we are required to involuntarily suspend production. We have the ability to suspend up to 50,000 BOE per day corporate production at a minimum incremental cost or risk. I'll now pass on to Joel to provide more color on our shut-in analysis and provide an update on our health safety and environment results to date.
Joel Armstrong: Thanks, Grant. In response to the potential for forced production suspensions, we created a detailed interactive tool to analyze our netbacks at a property level, to provide us with operating income sensitivity including shut-in fixed costs. This it allows us to further scrutinize the data down to the well level. As mentioned 2,000 BOE a day current production remain shut-in as an economic for incremental capital do not meet our minimum return requirements at this time. On our remaining production, we continue to generate positive operating income and we’ll continue to produce these levels unless it requires work over capital, the design meet or our return thresholds or forced suspensions occur. The operating income breakeven WTI price within our business units ranges from $12.25 per barrel in West Central Alberta to $19.50 per barrel in Northwest Alberta and BC, with a corporate operating income breakeven WTI price was $16.50 per barrel. Health, safety and environmental performance was exceptional with a TRIF rate of 0.33, which is less than our two year average and better than any quarter in 2019. Spill performance was also vastly improved from previous years in both frequency and volume. The quarter was concluded with substantial efforts put towards addressing the COVID-19 crisis including development of our field policy to ensure personnel safety and minimize business continuity risk, procedures were developed for the entire company in the event that someone at a worksite test positive. Two policies were developed for managing both construction and well servicing work sites. The policies will allow Whitecap to minimize the risk of infection and ensure contractors have developed and are following COVID-19 procedures. We've had no incidents of COVID-19 in our field operations or head office. With that, I will pass over to Thanh to provide some color on our financial results.
Thanh Kang: Thanks, Joel. Net loss for the quarter was $2.1 billion or $5.17 per share. The net loss during the quarter was primarily due to a non-cash accounting impairment expenses of $2.9 billion, consisting of $2.8 billion charge to PPE and $123 million charge to goodwill. The non-cash accounting impairment expense was mainly due to significant decreases to the engineers average priced deck at March 31, 2020 compared to a year end 2019. Forecast of WTI prices in 2020 decreased by 52% from $61 per barrel to $29.17, and on average decreased 38% in the first three years. In addition to the after tax discount rate increased the 13%, compared to 10% at year end to account for increased risk on oil and gas assets. We would expect to unfold any significant changes to the engineer's price deck or the discount rate would result in reversal of previous year's expenses or additional impairment expenses impacting net income. The DD&A rate was $18.72 per BOE in the first quarter, compared to $19.55 in the fourth quarter of 2019. For the balance of the year, we're expecting the DD&A rate to be between $12 per BOE and $13 per BOE. Fund flow for the quarter was a $131.8 million or $0.32 per share, which included realized hedging gains on commodity contracts of $19.8 million. Based on strip pricing, we're forecasting hedging gains of approximately $200 million in 2020. For further details on our outstanding hedges refer to Note 5 on our financial statements. Whitecap's balance sheet remains strong with quarter end net debt at $1.27 billion on total capacity of $1.77 billion. Our debt-to-EBITDA ratio is 1.7 times and our EBITDA to interest ratio was 14 times, both well within our debt covenants. With respect to 2020, we are now expecting capital expenditures of $51 million for the rest of the year for a total of $190 million for 2020. With production deferrals of 2,000 BOEs per day, our average production is anticipated to be between 65,000 BOE per day to 67,000 BOEs per day for the full year. I'll now pass it on to Grant for his closing remarks.
Grant Fagerheim: Thanks, Thanh. We believe that over the last 10 years through our targeted M&A strategy and our focus on balance sheet strength and flexibility the Whitecap is very well-positioned to make rational decisions that align with a reasonable view of the market in medium to long-term. Given the extreme volatility and uncertainty, we feel it is prudent to monitor the market dynamics to the remainder of the second quarter, before making an additional adjustments if any to our monthly dividend. We will be definitive in our positioning of our dividend additional hedges and our capital program heading into 2021 to ensure that, we were able to sustainably advance our company within internally generated funds flow. These factors we are gauging include the total amounts of industry voluntary shut-ins. We will experience as most our wells in North America are not able to generate positive funds flow at current crude oil prices. As tank capacity fills up in North America and storage gets full, there may be significant involuntary shut-ins required as we progress through the second quarter. We don't know when the peak demand destruction for COVID-19 will occur. However, we expect this could happen sometime in this second quarter, and it will be important to have a better understanding of what the pace and shape of recovery looks like going forward. Despite the uncertainties we are facing, we believe that our competitive advantages, including our strong financial position, robust hedge portfolio and the quality of our assets characterized by high operating net backs and low production decline rates allow us to not only survive through this period of extreme disruption, but allow us to capture incremental opportunities both internally and externally to provide stronger returns for our shareholders when the environment improves. I again want to thank you for your interest in support of Whitecap. With that, I will turn the call over to the operator for any questions. Thank you.
Operator: Thank you. [Operator Instructions] Your first question comes from Amir Arif with Cormark. Please go ahead.
Amir Arif: Grant, a quick question for you in terms of the movements in oil and gas prices. When you already thinking of putting some capital back to work? Is there a shift in terms of the specific type of assets you might be thinking about? And if so, you're looking at more payout ratios instead of NPVs? Could you just get some color on that? And at what price do you think it starts to make sense economic sense to start putting the drill bit back to work?
Grant Fagerheim: So, reverse order on your questions. We're looking somewhere in the neighborhood of $40 WTI oil price environment and that is going to be dependent upon what the differential looks like, at that particular time as well. The differentials have come in markedly as you would know tighter than what we were expecting, projecting. That's why I say trying to gauge the behaviors of not only producers, but also what the market is doing is will be interesting over this next three to four months period of time. Our objective would be to go to our highest netback assets firstly, when we recover. We think there will be a recovery, perhaps as late as sometime this year, the back half of 2020. But we would go back to our highest netback assets to put capital to work on an ongoing basis. Again, trying to generate the best returns for our shareholders on an ongoing basis that we can. We're also surprised ultimately here a bit on where natural gas has come to trading for the 2021 year at just around that $2.50 a GJ. So that still doesn't take us away from our target is to focus on the highest netback assets that we possibly can going forward into the back half of '20 and the full year to '21, '22.
Amir Arif: Just a quick follow-up question. On the 16.50 per BOE breakeven price that you mentioned is that operating netback breakeven or cash flow netback breakeven?
Thanh Kang: That's an operating effect.
Amir Arif: And just one final quick question. Just on the reduction in the operating cost. Is that primarily related to the setting the volumes or is this more structural improvements in your cost structure?
Joel Armstrong: It is a culmination – sorry, it’sJoel here, it's really in two layers. Phase 1 was more of a mechanical side, chemical usage, power optimization R&M and workforce optimization. Kind of Phase 2, if you want to call down additional 22 million is more activity based or strongly associated with workover activity and vendor reductions.
Operator: Next question comes from Josef Schachter with Schachter Energy Research. Please go ahead.
Josef Schachter: You mentioned in the last question about $40 WTI being the trigger for going into your highest netback assets. If in the fourth quarter, the U.S. puts in a tariff, Trump needs those six energy states to get the electoral college votes he needs to be reelected. And let's say North America is covered with him that, not having the tariffs. If the price to go up and you end up with an extra $30 million, $50 million of cash flow, would you put that towards debt and is debt an issue for you or because of all the covenant situation you have, the money would go directly into spending on your best netback assets?
Grant Fagerheim: So, yes. Thanks Josef. Our first objective always, our first priority is going to be debt and balance sheet management. So, in the near-term we would definitely look towards continuing to strengthen the balance sheet. But if there's an extra $30 million that could be applied into 2021, we would love to do that. But again, with the backdrop of understanding what our leveraged position is at that particular time. So first priority continues to be balance sheet management and then we'll look to deploy the capital effectively to get the best returns we can going forward after that.
Josef Schachter: Okay. Thanks. My second question is, with the big write down that you have and the PDP numbers probably coming down. When the bank takes a look at this, are you going to be looking at taking advantage of any of the EDC? We're seeing comments about them handling the portion of loans that are no longer covered by reserve value. Are you looking at all those numbers and is it possible you may need that EDC support?
Grant Fagerheim: You know the way we've looked at that and we have been working directly with EDC on that. We don't think at this particular time is something that we're going to be needing. We think we've got a significant, substantial enough financial flexibility on our lines. So, the liquidity bridge that they're looking at for the one year period of time, unless potentially it's reworked to the different costs. Our cost of debt is 3.6%. So, it's very difficult to take on incremental debt unless it's subordinated, strongly subordinated, but we don't really feel the need to use their debt at this particular time, the way they're structured it currently.
Thanh Kang: Yes. I would agree with that, and just to note that, we have a 4 year committed facility. So, it's a secured by financial competence and so we're not a RBL based lending where subject to fluctuations relative to reserves. Our facility here is much more committed than the RBL base.
Josef Schachter: Lastly, where does your current production right now?
Grant Fagerheim: The current production as now, we were just over
Thanh Kang: 72,000.
Grant Fagerheim: 72,000, 72,400 or something last week.
Josef Schachter: Wonderful. Thank you so much for taking my questions.
Operator: Your next question comes from Dan Healing with the Canadian Press. Please go ahead.
Dan Healing: I just had a question about the involuntary shut-ins that you were talking about as storage fills. And I'm curious, if you can help me out to see what that actually looks like. And also, do you know how much of your production now is going into storage?
Grant Fagerheim: Sure, Dan. So, the involuntary that we're, there's lots of conversation, lots of discussion on that in the market at this particular time, and it's really the pace of shut-in that will determine, I think how much ultimately companies might be forced to shut-in. In the U.S., they've got a very significant component. And then daily, I see that there was another announcement this morning and another 265,000 barrels a day being suspended. In Canada, we're expecting somewhere probably between 1 million to 1.5 million barrels a day being suspended, we're certainly not there at this particular time. But that will, from an overall perspective that will be determined by the behavior of producers and ultimately have helped design the shape of what the backside of this thing looks like. How long it's going to take for us to come out of this. So we don't know on specific to the shorter shortage. We're selling our product as we produce it every day. We've suspended as we've talked about 2,000 barrels a day. But we're monetizing our product every day, and not putting more specific to Whitecap production in the storage at this particular time.
Dan Healing: So when you talk about involuntary storage that means if you can't find a buyer for your barrel you just don't produce it?
Grant Fagerheim: Correct. Yes.
Operator: Your next question comes from Luke Davis with RBC. Please go ahead.
Luke Davis: Op costs in Q1 were roughly in line with what you posted through 2019. My understanding was that you were previously anticipating a bit of an increase through 2020. Can you maybe just comment on what might have changed there? And then that same maybe from prior questions, can you comment on whether there are any more levers to pull here as it relates to the current cost structure you're running with?
Thanh Kang: Sorry, what was that first comment there, on the operating relative to Q1 there, Luke?
Luke Davis: Q1 was basically in line with 2019. When we've previously spoken, Thanh, my understanding was that you had expected an increase through '20, and that would be prior to making all these adjustments. Can you just maybe comment on what might have changed there? And I mean why they were presumably lower than what you would have expected?
Thanh Kang: Couple of things. I mean, obviously, the ones, the comments that Joel made in terms of our op cost initiatives that we've taken. We started that kind of late in the first quarter there. So that impacted some of that. Production obviously, with higher than what we anticipated. So on a per unit cost, it ended up being lower as well. So those two combined really resulted in the better than forecast operating costs.
Luke Davis: Got it. And then any more levers you can pull in terms of where you are currently?
Joel Armstrong: I don't think this process ever goes away. There's really no finish date. So we'll continue to evaluate our cost structure ongoing. I think we've hit it pretty hard. So I wouldn't expect big changes to that, but the process is never done.
Luke Davis: Got it. And then, Grant, just as it relates to the federal aid package, which is obviously focused on ARO. Based on your current understanding here, can you just provide your general view and just outline whether there's any benefits to Whitecap and maybe anything you're working on now as it relates to potential ARO reductions?
Joel Armstrong: It's Joel here. I think there's been a lot of learnings last couple days in terms of the structure of this program. We do think there's opportunity for us and we're going to try to maximize that as best possible is our understanding that the program's basically set up that $30,000 maximum per service vendor per project. So, we're going to make sure that we have applications in place for May 1. We're not sure if the first tranche of $100 million will qualify at this point in time. We're not sure if we'll qualify for the second tranche for the $100 million. But we're certainly hopeful within the $1 billion program that Whitecap will qualify and we're going to do everything we can to maximize it.
Operator: Your next question comes from Juan Jarrah with TD Securities. Please go ahead.
Juan Jarrah: Excuse me. Good morning guys. Just further to the previous question. Can you give us a breakdown of CapEx, production OpEx, et cetera for the remaining three quarters?
Grant Fagerheim: Sure. From a CapEx, it's explosive. It's about $5 million, somewhere between $4 million to $6 million a month. So, and that really is not on capital, the majority of that, over 50% of that comes to our CO2 to purchases the carbon sequestration progression and so Southeast Saskatchewan. So from a capital perspective, we really have nominal amount of capital. We had previously put out $210 million and have been able to reduce that back to $190 million for the year. So from a capital's perspective, we're not expecting a much more. What were the other components that you would ask.
Juan Jarrah: For example, the production, now that you've got the 2000 shut-in, is not shut-in right now. It is not material, but just trying to get our numbers right.
Grant Fagerheim: Yes. It is shut-in right now and as I say, that's why we altered our forecast from what we were previously 67,000 to 69,000 barrels a day that we put on our March 17 to now 65,000 to 67,000 barrels a day. So, we've also get about 2,000 barrels a day and that we shut-in.
Juan Jarrah: And then on the OpEx front. Obviously production is decreasing but you found $42 million of savings for the year. Just trying to think how that factors quarter-over-quarter.
Thanh Kang: Yes. So, I mean it's roughly flat in terms of what our operating costs are. I mean, our expectation is that, we're about $300 million on a full year basis for operating costs there. It's going to run on average somewhere between 24 million to 25 million on a monthly basis.
Operator: Thank you. [Operator Instructions]. And at this time gentlemen, we have no further questions registered. Please proceed.
Grant Fagerheim: As we conclude this quarterly earnings call, we wish each of you good health, safe social distancing and an optimistic attitude. All the best until next time. Thank you.
Operator: Thank you, sir. Ladies and gentlemen, this does 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. Have a great day.