SPGYF Q2 2021 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' Second Quarter 2021 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, sir.
Grant Fagerheim: Thank you, Sylvie. Good morning, everyone, and thank you for joining us this morning. Here with me, we have three members of our senior management team: our Senior Vice President and CFO, Thanh Kang; as well as Darin Dunlop, Senior Vice President of Engineering; and Dave Mombourquette, Senior Vice President of Business Development. 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 that we issued earlier this morning. Our second quarter results continued the strong momentum from our first quarter drilling program, achieving record production of just under 117,000 BOE per day, on capital investments of only CAD39 million. The NAL and Kicking Horse transactions has more than doubled our natural gas production to 153 million cubic feet a day within the second quarter, allowing us to capture currently strong natural gas pricing. Our second quarter funds flow was CAD267 million, resulting in fleet funds flow of CAD227 million. In the first half of 2021, we have generated CAD243 million of discretionary potential, after CAD53 million of dividend payments, a significant accomplishment for our company and a testament to the profitability of our asset base. We have also released our 2021 ESG report this morning, highlighted by increased emission intensity reduction targets, after incorporating our recent acquisitions, further scope one and scope two emission reductions, driving our net greenhouse gas emission balance further negative, and the addition of the climate-related performance criteria to our short-term incentive pay program. New to the report is a third-party limited assurance of select emission metrics that will provide our stakeholders with increased confidence in our recorded data. Whitecap is proud of our team's environmental, social and governance, accomplishments in 2020, and we look forward to critical progression through 2021 and into the future. While our new energy team is making good progress towards revenue generating opportunities across the energy transition spectrum, our operating teams are finding ways to reduce the environmental footprint of our current asset base on an ongoing basis, and I commend them for their efforts in this regard. I would now like to pass on to Darin to comment on some more recent operational highlights and provide an update on our second half capital programs. Darin.
Darin Dunlop: Thanks, Grant. From a production standpoint, our second quarter results, outperformed expectations. This was mainly a result of higher initial production rates from our first quarter programs, accelerated timing of bringing these volumes online, and lowered declines from some of our waterfloods assets. Some specific highlights from the first half include, over the first 120 days on production, our conventional multi-leg Frobisher horizontal programs in Southeast Saskatchewan achieved initial rates that were on average 55% better than our tight curve expectations for the area. Many of these wells have paid out in less than three months. This performance is one of the reasons why we executed on the private company acquisition that closed after the second quarter. This acquisition adds 85.9 net locations, many of which are analogous to the drills in our outstanding Q1 drilling program. Our Q1 drilling program also outperformed type curve expectations in our Viking, Lower Shaunavon and Charlie Lake programs. As well we realized production increases as a result of the optimization of our acquired assets, primarily in the Southwest Alberta and Sturgeon lake areas. We have a robust second half capital program where we anticipate spending approximately CAD207 million drilling 57, 42.2 net wells including seven wells in central Alberta, 26 wells and Western Saskatchewan, 17 in Eastern Saskatchewan, and seven wells in Northern Alberta BC. Of note, our second half program includes the fracture stimulation of a four well montney pattern [kakua] (Ph) that was drilled by the prior operator. Execution on this operation was exceptional and we expect to realize completion cost savings that could result in a 10% reduction to our current type curve estimate of CAD11 million per well. We are now in the process of tying in these wells and expect them to be on production early in the fourth quarter. We have also commenced drilling on the first of our two three well kakua montney pads, we expect that all six 4.4 net wells will be completed and on production by the first quarter of 2020. We have increased our 2021 production guidance by approximately 3% to 110,000 to 111,000 BOE per day with no changes to our capital spending guidance. The recent private company acquisition is expected to contribute a third of this increase while the remaining two thirds as a result of continued asset outperformance. Partially offsetting the increase is an unplanned downtime event at waiver and during the third quarter, which will reduce our third quarter production by approximately 1600 BOE per day down to 114,000 BOE per day. I will now pass it on to Tom to comment on our financial results.
Thanh Kang: Thanks, Darin. Crude oil prices once again improved through the quarter with WTI ending the quarter round CAD73 with the average for second quarter at $66 US per barrel. The Canadian light oil differential also improved through the quarter to average $3.31 U.S. per barrel discounted WTI while the Canadian heavy oil differential widens throughout the quarter, but was CAD1 tighter than the first quarter at approximately $11.50 U.S. per barrel on average for the quarter. For natural gas equal average just over CAD3 Canadian for GJ in the quarter, with price strength continuing into the third quarter and through the winter on the forward curve. Our average realized crude oil price this will be prior to the impact of hedges and tariffs was CAD73.50 per barrel in the second quarter compared to CAD26.55 in the Q2 2020 and CAD65.11 per barrel in Q1 2021. Our second quarter oil realizations compared to Canadian dollar WTI was relatively consistent with the first quarter at between 89% to 91%. Our average realized natural gas price prior to the impact of hedges and tariffs, was CAD3.26 per MCF in the second quarter, compared to CAD2.14 per MCF in Q2 of 2020 and CAD3.34 per MCF in Q1 of 2021. Our royalty rate of 15.8% was higher than the first quarter primarily as a result of higher pricing. Operating and transportation expenses were CAD13.73 per BOE and CAD2.32 per BOE for the second quarter, up from CAD13.36 and CAD2.05 in Q1 of 2021, due to a full quarter production from acquired assets. We anticipate higher operating cost per BOE in the third quarter due to the downtime at waiver that Darin had mentioned, and then normalizing in the fourth quarter. G&A expenses came in as expected of CAD1 in the second quarter, and we expect it to remain consistent for the remainder of the year. One time transaction costs relating to the acquisition recorded in the quarter were CAD1.5 million. Fund flow for the second quarter of CAD267 million equates to CAD0.43 per share, which generated a total payout ratio of only 26% after capital invested and dividends paid to our shareholders. Whitecaps net debt at June 30th was CAD1.4 billion on total capacity of CAD2 billion. Our debt-to-EBITDA ratio is 1.4 times and EBITDA to interest ratio was 20.6 times both well within our debt covenants. Subsequent to the quarter end, we closed the acquisition of private company with operations primarily in the Weird Hill area of Southeast Saskatchewan for CAD67 million, which was comprised of 3.6 million Whitecap shares and 44.4 million in cash. We have subsequently repurchased the entire amount of the shares issue for the transaction to make it an all cash deal. We expect that, by the end of the year here, our debt is going to be CAD1.2 billion. As a result of the acquisition, we have increased our preliminary 2022 production outlook to 122,000 BOEs per day with our preliminary capital spending outlook remains at the 560 million to 580 million. At WTI prices in the CAD55 to CAD65 range, we would generate 400 million to 650 million of free funds flow before annual dividends of 123 million. This shows how robust our profitability is today, even at prices below current strip. At these levels, we would still be able to reduce our net debt to zero in three years. From a breakeven standpoint, WTI prices have to average less than CAD44 per barrel on an annual basis, for us not to be able to cover sustaining CapEx of around 500 million and the dividend with our fund flow. With our hedges in place for 2022, this breakeven price drops to CAD42.50, which is 35% lower than current strip prices. So, even at these depressed prices, our debt-to-EBITDA ratio would remain at only 1.8 times, well below our covenant at four times, further highlighting the sustainability of our business model. I will now pass it onto Grant for his closing remarks.
Grant Fagerheim: Thanks, Thanh. It is truly remarkable how far we have come over the past year. Well, sometimes it feels like forever ago, we are reminded that only a year ago, we were doing everything to maintain the optionality and flexibility for better days that we believed are ahead of us. So, we are able to maneuver through 2020 oil price collapse by having an already strong balance sheet and low decline rate asset base and the flexibility to make the tough and right capital allocation decisions. A year later, you have shown that we were able to take advantage of the low price environment to strengthen the asset base and sustainability. Our second quarter results have provided further evidence, so we are now a more profitable and sustainable company than ever before. We will continue to seek out ways to further improve the profitability of our business, while maintaining our focus on strong balance sheet and financial flexibility for increased returns for shareholders into the future. On behalf of our management team, and our entire Board of Directors, we would like to thank our shareholders for your support, and the support of Whitecap. And with that, I will turn the call back over to Sylvie, for any questions, you may have. Thank you.
Operator: Thank you, sir. [Operator Instructions] And your first question will be from Travis Wood with National Bank. Please go ahead.
Travis Wood: Yes, good morning, guys. Question is related to sustainability. Obviously, you have increased guidance this year around the acquisition, but also some decline mitigation. Could you remind us where that declines sits today, kind of how you see that trending into 2022? What you are using for 2022 in the updated preliminary number? And then as well, the last part of that question is what was the unplanned downtime waiver?
Darin Dunlop: Yes, Travis. Darin here. Yes, our base decline on wholesale, you are going to get all your questions answered. But remind me if I miss one, our, our base, decline is anticipated to be 20% in that ballpark, as for 2022, and beyond that is going to depend on what, what allocation we put into our capital program, but I can't see it being much, much different than the 20%, we have been seeing as of now. And in Weyburn what that was we had a failure on one of our CO2 recycle compressions, compressors, and as a result, we had to shut-in some production to conserve our CO2 injection. And we expect that compressor to be repaired and back online in mid September.
Travis Wood: Okay, that is, that is perfect. So, 20% is flat line into the end of this year, and potentially some upside to that percentage as, as Weyburn comes back on or fully operational from the CO2 side through the end of the year?
Darin Dunlop: Yes, the volumes Weyburn are so small that it is not going to really impact our base decline. This changing 1600 barrels a day, you definitely are that way.
Travis Wood: Okay, I appreciate the color Darin. Thank you.
Operator: Thank you. Next question will be from Christopher Jones at Haywood Securities. Please go ahead.
Christopher Jones: Hey congrats on what appears to be another solid quarter. My question is on uses of free cash flow. Previously, you guys laid out pretty good detail around how you wanted to allocate free cash flow. So with that, just curious if you could provide that same level of detail, particularly in light of rising commodity prices, which has helped accelerate free cash flow and in sort of sped up that prepayment. May we see larger allocations to returning capital to shareholders or, or sort of how do you see that breakdown between debt reduction and returning capital going forward?
Thanh Kang: Thanks, Chris. Just on that first priority, we will continue the balance sheet management and objective here as we had talked about was taking our debt to CAD1.2 billion or under this year. So, once we get to that particular level, and that could happen as early as late September, early October in this current commodity price environment. But, the funds above that, then would be, you would be looking for the potential of a return of capital back to shareholders, rather than a return on capital. We won't be, we are not expecting to be increasing our capital development program for the remainder of this year, but the optionality does exist for whether it is future acquisitions or increased dividend payments or the potential for increasing our capital program going into 2022 to set that up. So, priorities number one, balance sheet; number two, return of capital to our shareholders, and then the optionality on acquisitions or increasing our capital going into the 2022 year.
Christopher Jones: Okay, great. Thank you.
Thanh Kang: Thanks, Chris.
Operator: Thank you. [Operator Instructions]. And your next question will be from [Joe Koppel] (Ph) Investor. Please go ahead, Joe.
Unidentified Analyst: Thank you. Great job again. You guys are superlative and you lead the industry. One pie is on former energy strategy. Davis Research and Michael Khalil, former Goldman Sachs commodity trader. Both agreed that in backwardation, you are looking at increasing oil prices. So, why are you hedging into steeply, backward dated oil markets, you are giving up so much of the upside. Thank you.
Thanh Kang: It is Thanh here Joe. I think the way that we think about it from a hedging perspective is, looking at and making sure that we are fully funding, not only our capital program, but our dividends to a low commodity price environment. With the objectives that our view too as is yours is that, crude oil prices will continue to improve as we move through time here. So, leaving as much upside as we can, but also protecting the downside. So, when you look at our hedge book today, we are about 18% hedge for 2022, but what that allows us to do is really lower that breakeven price. So, what I mean by that is even WTI down to CAD44, it allows us to cover our capital program as well as our dividends. So, it gives that base level that we are comfortable with in terms of the growth profile, as well as the dividends. But exposing our shareholders significantly to the upside there. So, we are comfortable with the book that we have right now from a hedging perspective, and it is really thinking further down the road and how we can improve our sustainability in 2023 and beyond.
Unidentified Analyst: Thank you. One follow-up question, please. As refine puts and leaving the upside completely open? Is that not a possibility for Whitecap too?
Thanh Kang: Yes, For sure, it is. We run a fully funded model. Cash flow is critically important to us. Our preference is to use, simple structures like cost callers, as well as swaps. So we will use the combination of those, puts depending on the price level that you are trying to protect, can be quite expensive. And if we are trying to lower breakeven down to CAD44, CAD45 WTI, those could be pretty expensive puts that we are putting in place here. We can increase that WTI price, but I think that lowers the protection that we have for our shareholders relative to the dividend protection
Unidentified Analyst: Thank you very much.
Operator: Thank you. [Operator Instructions] At this time gentleman, it appears that we have no other questions, please proceed.
Grant Fagerheim: Thank you. So, as we conclude this quarterly earnings call, we like to thank each of you for your continued interest in Whitecap. And to our full staff here, both in the office and in the field at Whitecap for your diligence, continued energies and direction on making the Company the best that we possibly can and to all of our shareholders and your families, wish you all the best through the remainder of the summer holidays. 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.