SPGYF Q3 2021 Earnings Call
Operator: Good morning. My name is Jessica and I will be your conference operator today. At this time, I would like to welcome everyone to Whitecap Resources’ Third Quarter 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 call.
Grant Fagerheim: Thanks Jessica. Good morning everyone. And thank you for joining us here today. Here with me are four members of our senior management team: our Senior Vice President and Chief Operating Officer, Thanh Kang; as well as Darin Dunlop, Senior VP of Engineering; and Joel Armstrong, Senior VP of Production & Operations; and Dave Mombourquette, Senior VP of Business Development & 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 that we issued earlier this morning. We were pleased with our third quarter operating and financial results. The execution by each of our teams has been exceptional over the past year with strong corporate results, proving that we have successfully integrated multiple acquisitions in all areas. While also keeping focused on performance of our own base assets, production of approximately 116,000 BOE per day, on capital investments of $135 million in the quarter speaks to the asset outperformance and the capital efficiency improvements being made across the business. As outlined in our budget release two weeks ago, these capital efficiency improvements have translated into lower capital requirements moving forward and therefore higher returns for our shareholders. What we have highlighted in our press release this morning is an indication of how broad the accomplishments are across each business unit. Not only have the wells drilled in our 2021 program outperformed, but we have also enhanced and added to our inventory of high quality drilling locations over the past nine months. Net debt at the end of the quarter was $1.3 billion. And with receiving the proceeds of $188 million from the Weyburn royalty sales and discretionary funds flow of over a $100 million in the fourth quarter, we expect to achieve our internal net debt target of $1 billion by year-end this year. I would now like to pass on to Joel Armstrong to comment on some of our health, safety and environment results today.
Joel Armstrong: Thanks Grant. The third quarter is very busy operationally with a strong capital program in our highest activity level to-date at $2.2 million person hours. That said this was one of our best quarters in the past five years and overall outstanding safety performance across our operations. Our total recoverable injury frequency rate continues to trend down seeing all quarters in 2021 below our previous two year average is another testament to the work put in by our operations team to ensure the safe and efficient integration of the new assets and personnel. From an ARR perspective, we cut and cap 55 wells during Q3 for a total of 196 so far in 2021, we have executed on $20 million of ARR capital year-to-date, which includes Whitecap and government funding. We are on track to meet our internal ARR budget of $10 million and have increased our 2022 budget to $18 million. And I’ll pass it on to Thanh to comment on our financial results and outlook.
Thanh Kang: Thanks Joel. Strong quarterly funds flow of $294 million or $0.46 per share was driven by increased production and higher crude prices with WTI averaging over US$70 per barrel and Edmonton Par averaging almost CAD$90 per barrel during the quarter. The third quarter average equal natural gas price of $3.60 per GJ was as strong of a quarterly price as we seem since 2014 and with our natural gas production increasing still over 170 million cubic feet per day. Our natural gas production has become an increasingly material portion of our cash flows. Our third quarter realized oil and natural gas price before the impact of tariffs and hedging were $81.02 per barrel and $3.79 per MCF, which were 70% and 55% higher than the third quarter of 2020 and 10% and 16% higher than Q2 of 2021. Our commodity prices resulted in hedging losses of $6.83 per BOE, while our average royalty rate of approximately 16% was consistent with the second quarter. Operating expenses of $13.71 per BOE and transportation expense of $2.29 were both consistent with prior quarters and our expectations. G&A expense of $1 per BOE is consistent with our historical average. We also recognize an impairment reversal of $1.9 billion or $1.4 billion after tax. The reversal was recognized across each business unit and as a result of higher forward benchmark commodity prices. We also announced a $200 million increase to our credit facility and a one-year extension to the maturity date, which is now May 31, 2026. Our Q3 net debt of $1.3 billion has been further reduced by $188 million with the closing of the Weyburn royalty sale. And as mentioned, we expect to reach our debt target of $1 billion by year end. Our current plan is to use the increased credit facility to repay the senior notes due in January 2022 and maintain our total credit capacity at $2 billion. Our guidance for 2021 and 2022 reported last week is unchanged. We expect operational momentum to continue with production averaging 118,000 BOEs per day in the fourth quarter and averaging 111,700 BOEs per day for the full year. For 2022, we were forecasting mid case average production of 122,000 BOEs per day on capital spending of $480 million. With that, I’ll pass it back to Grant for his closing remarks.
Grant Fagerheim: Thanks very much, Thanh. With the strategic acquisitions closed earlier in the year, we are now fully integrated and the rate of change for the better on the acquired assets, both technical and financial has been remarkable. As a reminder, our purchase price for the NAL transaction was $155 million and through the first nine months of 2021, the assets have generated $150 million of operating income and are expected to generate $260 million annually based on our current strip pricing, the Torque assets have also generated over $200 million of operating income in the first seven months and are expected to generate $360 million of operating income annually relative to the purchase price of approximately $1 billion. We must also mention that we were very excited about the Kicking Horse asset as we have increased production by 50% to this point from 8,000 BOE per day to 12,000 BOE per day currently. Our plan in 2022 is to ramp up production over the course of the year and expect to maintain average production in the 18,000 to 19,000 BOE per day range and beyond that. On strip prices, we currently project that this asset will generate $200 million of operating income in 2022, while spending $85 million of capital expenditures. With regards to the new energy initiative we put in place in late 2020, we recently announced the memorandum of understanding with federated co-op to use our carbon capture utilization and storage expertise and as to our recovery project at Weyburn to assist federated co-op in achieving their emission reduction targets. The Weyburn asset continues to not only be very strategic as we look to advance solution for reducing greenhouse gas emissions, but also has been a very significant contributor on free cash flow for Whitecap. We purchased the property in December of 2017, and since then have generated operating income of $600 million on capital expenditures, including CO2 purchases of $170 million. Including the royalty sale, proceeds of $188 million. We have recovered over 80% of the purchase price and still have significant upside remaining in the asset has a very low decline of less than 3% and a long producing reserve life index of 17 years. Remember out of understanding with Federated Co-op is part of a larger strategy to a carbon hub integrator Regina, Saskatchewan area with a longer-term potential as a hydrogen hub. We look forward to updating our shareholders on this and other new energy initiatives as they progress. Whitecap strategy of moderate growth, 3% to 5% per year per share and strategic acquisitions has been very successful to date. And we will continue to look for opportunities to enhance shareholder returns. The set up for Canadian energy and in particular, Whitecap has not looked as strong in many years with WTI just slightly over $80 in [indiscernible] at over $4 per GJ. And when combined with weaker Canadian dollar low interest rate environment, strong capital efficiencies, this results in record pre-fund flow. On strip prices, Whitecap in 2022 is generating almost $900 million of discretionary free funds flow. This is after our capital program of $480 million and our base dividend of $171 million. As previously communicated, we are committed to returning 50% of our 2022 discretionary funds flow to our shareholders, but the remaining 50% being allocated towards our balance sheet to build dry powder for disciplined and targeted acquisitions, as well as new energy initiatives. We remain both optimistic and excited about Whitecap’s future, the returns to be generated for our shareholders and look forward to updating shareholders on our progress. On behalf of our management team, our Board of Directors, we would like to thank our shareholders for your interest and support Whitecap resources. With that, I will turn the call over to Jessica for any questions you might have.
Operator: Thank you. [Operator Instructions] Your first question is coming from Patrick O’Rourke with ATB Capital Markets. Please go ahead. Patrick O’Rourke: Hey guys. Good morning. Thanks for taking my call. And question here, just wanted to ask in terms of the deal that memorandum of understanding that you guys have with Federated Co-op sort of what the opportunity set on the cost offset side is there that you’re thinking about like what the quantum could be for investors. And then as I understand it right now, your carbon injection, you don’t receive an offset credit for that. Is there a pathway to receiving credits there or something you can do with the new energy initiative to offset some of the risk in terms of a potential rising carbon tax that we have here in Canada?
Grant Fagerheim: I’ll be as concise as I can on this Patrick, but it’s complicated. It ends up being quite a complicated answer. Number one, just regarding the memorandum of understanding. What we’re waiting for to better understand commercial and economic terms is what the clean fuel standard is going to look like in Canada where the investment tax credit has to be established by the federal government. So as you know, as our shareholders would know, we pay for our CO2 at this particular time and we do not receive carbon credits on the other side. So what you’re referencing is offset credits. What we’re looking for is what the investment tax credit market will look like as well as what we’re trying to do is minimize our costs of buying CO2 and we have two contracts right now that expire in late 2024 and one in 2026. So the two components are offsetting the costs with lower or no cost for taking CO2. And then what is the carbon credit market look like and what the federal governmental going to do as far as offset credits, as they look to escalate carbon tax from $40 a ton today to $170 a ton, what does that going to look like on the offset credit side? So at this time, we’re just we think there is a large amount of upside, and we also believe that the most efficient pathway to a lower carbon economy is through carbon capture that we have the technology on. So we’re waiting anxiously as I think most Canadians are as to what the carbon offset market will look like going forward. Patrick O’Rourke: Yes, I think we all are. And then just maybe shifting gears a little bit here really impressive results at Kakwa on the Kicking Horse wells there. Thinking about that 43% liquids cut that you’re kicking off of that, are you guys able to break down sort of how much of that is really high value, obviously quantitative prices are extremely strong right now. We have had a premium to even brent. And then, what percentage or sort of marketing you’re doing on the NGL side of that 43% as we think of that asset developing.
Darin Dunlop: Yes. Darin here. Yes, the majority of that liquid volume is field condensates. I would say over 90% and ask for the marketing of it, I’ll pass it on to Grant.
Grant Fagerheim: Sure. So yes, what we’re doing is marketing at this particular time into the market centers in Alberta. And then we’re looking as we grow our production. We’re looking for longer-term arrangements that were in the market actively on at this particular time. So because it is such a new venture for us there, both the Kakwa on the Kicking Horse side we’re now getting substantial enough to be able to do longer-term contracting for liquids. Patrick O’Rourke: Okay, great. Thank you very much.
Operator: Thank you. [Operator Instructions] Your next question comes from Josef Schachter of Schachter Energy Research. Please go ahead.
Josef Schachter: Good morning, Grant and fellows, and congratulations, a very nice quarter on the integration of the acquisitions. Great timing on that. In this quarter, you did corporate acquisitions. So what’s your feeling now on M&A is sellers market and you really have to be choosy and things that really fit into yours. Did you see economics that are upside and why not look at buying more land? Is your land available in all your core areas? I would assume land prices are very cheap and the governments will be pretty happy to put them up and have more revenue coming in from that side of the coin?
Grant Fagerheim: Yes. Thanks, Josef. And I appreciate that acknowledgements of the transactions we had done before, just on M&A, our belief is that when we’re looking at M&A opportunities we always look at – not the current price environment. But we look at the what the three to four year price environment and our expectation of that what that would look like. So at this particular time, it’s always, I call it the magic of crossing over between buyer and seller expectations. Many sellers, I expect that the current pricing environment and – but the current pricing environment to us is actually over a three to four year period of time that we expect it to be. So you had referenced about land prices and that goes back into the strategy around acquisitions. We have a very strong inventory of opportunities. We can’t even capitalize on all the opportunities we have now, so it would have to compete on the acquisition side, they compete with our existing inventory of opportunities. So what we can do with those to advance forward and has to be substantial enough where we get greater returns for our shareholders and demonstrates it will be more sustainable longer term. As far as land prices, land prices have come back quite markedly. And we look at more specifically in the deep basin and up into Northern Alberta are very strong prices. So why I answered that in that context is, we don’t have to chase land sales. We’ll participate if they’re in and around our existing assets, but we do not have to chase prices up around because we have strong enough inventories in each one of our areas.
Josef Schachter: Okay. And now for somebody who’s not so informed on this, once we know what the carbon credits are going to be, do you see this something that gives you opportunities in new areas in Western Canada for storage? Is this something that you could take into Eastern Canada into the states or given your technical expertise, how far of a range of businesses should we be looking at just in Saskatchewan, Alberta or something even larger than that as you take the technologies and skillsets elsewhere?
Grant Fagerheim: Yes, no, just regarding carbon capture. I think it is principally focused at this time in Western Canada. And what’s an interesting to note and Eastern Canada, I’m sure it may have some opportunities it’s not as understood geologically as Western Canada is. So we have a very good understanding of where the partially depleted reservoirs are. We have an understanding where filling storage could be effective. And what’s interesting to note, and I think it gets missed by many in Canada versus U.S. because of the land tenure system in Canada with us having the majority of land owned by the crown, with the crown being whether it’s provincial or federal government, majority provincial governments. They’re much easier to put together carbon storage opportunities versus what it is in the U.S. we’re only about 10% to 13% of their lands are actually owned by crown or majority are owned by freeholders or the undivided interest. There’s a large undivided interest up to 100 to 200 people, even on a quarter section of land that participate. And that’s why you’re seeing many of the carbon storage projects in the U.S. that will go off shore versus we have the added advantage in Canada of having a crown tenure system that has to be more clearly understood including by our federal government. So we think that we’re in very well positioned Canadian energy producers, and those that are in the carbon capture world have an opportunity to really advance this and continue to demonstrate, the new technologies that are available to us and being able to be utilized in Western Canada.
Josef Schachter: Super. And last one for me. You drilled 53 wells in a quarter and 109 for the first nine months. What do you see is the total well count for this year? And what’s your forecast given your budget for well count drilling in 2022?
Darin Dunlop: Yes, it’s Darin here. Let me pull these up, but I believe in our budgets release of last week, I guess it was 163 for the next year – 168 for next year. And for the remainder of this year, I don’t have that off the top of my head here, but it’s going to be with the acceleration, although it is – acceleration is going to be 160 for this year and 124.8 net, 49 – that’s 49 and 38.4 net in the fourth quarter.
Josef Schachter: Okay. Okay, good. One last one from me, sorry I’d to push one more. How do you see the cost side going for both drilling and fracking and other inputs? And what do you see as kind of the limitations, like number of frac crews and in the Trican call, they talked about 27 of frac crews available now, and is there going to be a chance to get the 200 rigs if there is in Canada, there just isn’t enough frac crews. So maybe you can give us some inputs there?
Grant Fagerheim: Josef, you’re one question over.
Josef Schachter: I know, but I have to.
Grant Fagerheim: Anyway, let me hand it off to Joel Armstrong, VP of Operations to talk about that. Thanks.
Joel Armstrong: Yes, Josef. So obviously there’s been a lot of margin expansion or the service providers and we recognize that early in the process. So we’ve secured all of our critical services for the upcoming Q4 and 2020 – early 2022 programs. So all our rigs are contracted, we’re aligned with our frac pumpers. Costs have returned to pre-pandemic and now we’re starting to see margin expansion beyond that. So we don’t carry current prices in our budget either. So, we’re not carrying expanded capital costs either. So we expect those two would balance each other out. There is definitely a correlation between commodity prices and service costs.
Josef Schachter: Okay. Super. Well, again, congratulations on the great quarter and a great year. And I think that compliment deserves the extra question.
Operator: At this time, gentlemen, we have no other questions registered. Please proceed.
Grant Fagerheim: Okay. Well, thank you, everyone. First of all, I do want to say, I give a special shout out to our valued employees for their continued efforts also to our Board of Directors for your support and guidance over this past year and to everyone on the call for your continued interest in Whitecap resources and a sincere thanks to all. Have a good day. Thanks very much.
Operator: Thank you, sir. Ladies and gentlemen, this does concludes your conference call for today. Once again, thank you for attending. And at this time we do ask that you please disconnect your lines.