SPGYF Q4 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’ Fourth Quarter and Year-End 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 your conference call.

Grant Fagerheim: Thank you, Jessica, and good morning, everyone, and thank you for joining us here today. Here with me are three members of our senior management team: our Senior Vice President and CFO, Thanh Kang; as well as Joel Armstrong, Senior Vice President of Production & Operations and Dave Mombourquette, Senior Vice President 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 was issued earlier this morning. 2021 was an exceptional year for Whitecap, capping off the successful execution of our strategy to improve the profitability and sustainability of our business through multiple transactions over the past 18 months. As a result of the consolidation initiatives that we embarked upon in early 2020, we have positioned the Company to accelerate return on capital to shareholders while maintaining financial flexibility through a strong balance sheet and disciplined capital spending. Although 2021 was a year filled with several asset and personnel integrations, our teams kept their foot on the gas and ensured that the ongoing operational and financial success was achieved for our shareholders. For 2021, we generated $1.1 billion of fund flow on capital spending of $428 million before acquisitions. We also paid $126 million in dividends and bought back $164 million worth of common shares for $290 million of direct shareholder returns. Along with the continued operational momentum that we have shown with our fourth quarter results released this morning, we also announced a 33% increase to our dividend, which is the fourth increase since the start of 2021, to $0.36 per share annually or $0.03 per share on a monthly basis. This new dividend level is now [ph] consistent with our return of capital priority and our 2022 capital allocation plans, but this is sustainable down to a stress-tested level of $45 WTI and below that for the foreseeable future. With respect to our new energy team advancements, we continue to progress several carbon capture initiatives related to the energy transformation to a lower-carbon economy. An example of this is the announcement yesterday to manage the carbon sequestration hub to serve industrial facilities in Alberta’s Heartland -- Industrial Heartland. We believe that this partnership between ourselves, Wolf Midstream, Air Products and other industrial parties along with the indigenous ownership group, will be successful, given our diverse backgrounds and experience with several aspects of the proposed project. At this time, I would like to pass this on to Joel Armstrong to comment on our ongoing operations.

Joel Armstrong: Thanks, Grant. 2021 was a very busy year with the fourth quarter being the busiest with our accelerated capital program and the full impact of new acquisitions. Whitecap and contractors completed 2.3 million person hours with only three minor recordable injuries. This delivered an exceptional safety performance with a total recordable injury frequency rate of 0.25 for the quarter and 0.26 for the full year. The quarter and full year were also notable for significant expenditures on ARO throughout our operations where we were able to abandon 369 wells and received 38 reclamation certificates throughout the year. Finally, the business was able to manage through the worst of pandemic with no meaningful impact on business continuity or performance. We’re in the middle of a very active first quarter program, which peaked at 12 drilling rigs and deployed upwards of 3 frac crews and expect to spend approximately 50% of our full year capital program in the first half of the year. As we think about the second half program, we do see continued inflationary pressures with WTI currently trading above $90 a barrel and AECO above $4 a GJ. We are in constant dialogue with our service providers in an advantageous position due to our scale. And over the next month, as we complete our contracting for services, we will have a better sense as to the potential cost escalations to expect in the second half of the year. I’ll now pass it on to Thanh to comment on our financial results and outlook.

Thanh Kang: Thanks, Joel. We had a record year in 2021, generating $1.1 billion of funds flow and $670 million of free funds flow. On a per share basis, this is up 72% and 92% over the prior year as commodity prices regained momentum throughout the year, and we realized the benefits of our acquisition strategy that started in 2020. For the fourth quarter, funds flow was $351 million or $0.55 per diluted share, was driven by strong fourth quarter production of approximately 120,000 BOEs per day and WTI averaging just over US$77 per barrel and Edmonton Par averaging over C$93 per barrel. The combination of our natural gas production being over 100 million -- 180 million cubic feet per day and AECO natural gas prices of $4.66 per Mcf during the quarter had a positive impact on revenue, with our fourth quarter natural gas revenue being 43% higher than all of last year. From a cash cost perspective, we were able to meet or exceed our guidance for the fourth quarter. The teams continued to work hard to meet these numbers, especially from an operating perspective given the severe cold snap that hit at the end of December. The 33% dividend increase announced today equates to $56 million of incremental dividends on an annual basis, further contributing to our return of capital strategy. We also have 7 million shares remaining on our current NCIB, and we’ll look to renew that when it expires in May. Our balance sheet remains in great shape with net debt of approximately $1.2 billion at year-end and over $800 million of liquidity on our credit facility. Debt to EBITDA ratio at year-end was 0.9 times and is expected to further improve in 2022 with 50% of our discretionary funds flow being allocated to the balance sheet for the financial flexibility to improve our business through strategic M&A if the right opportunities present themselves. We’re also transitioning to a sustainability-linked loan with our banking syndicate on our full credit facility. The loan is linked to two key emission reduction performance targets, being a 15% reduction to our scope 1 and 2 greenhouse gas emission intensity by 2025 and a 30% reduction to our methane emission intensity by 2025. The cumulative pricing adjustment related to these two targets is 5 basis points, which now ties financial incentives to our emission reduction targets. To follow up on Joel’s comments on inflationary pressures. We do have to look at cost inflation in the context of changing cash flows. When we first put our 2022 capital budget to the market, we were using a $70 WTI price deck, and now we’re using $80. And obviously, the current WTI price is much higher than that. The incremental cash flow on $10 is approximately $300 million relative to any potential inflationary pressures we expect to see in the second half of the year. Our team will be doing the best to mitigate these pressures as we continue to contract these services. Our guidance for 2022 is unchanged at this time and will be further reviewed once we complete our first quarter drilling and operational activities. We forecast average production between 130,000 to 132,000 BOEs per day on capital spending between $510 million to $530 million. On strip pricing, we’ll be generating funds flow in excess of $2 billion, resulting in discretionary funds flow of approximately $1.3 billion after capital and the increased dividend. I’ll now pass it on to Dave to go through some of our recent new energy highlights.

Dave Mombourquette: Thanks, Thanh. We have made good progress on several initiatives over the past few months. Our experience and technical expertise with carbon sequestration has proved to be a significant advantage as industrial companies look to find reliable partners to move forward with decarbonization efforts. The Alberta Carbon Hub proposal that was announced yesterday is a very unique partnership between multiple groups that have a lot of experience across the project life cycle. The partners include Wolf Carbon Solutions, who operates the ACTL, which is the largest existing CO2 trunk line in Canada; Whitecap with our extensive sequestration experience, which includes our MMV, measurement, monitoring and verification program, to ensure that carbon stays permanently sequestered; and also the indigenous ownership group who brings strong stakeholder relationships and traditional knowledge and historical perspective for the project; as well, industrial parties that have signed agreements such as Air Products bring the industrial expertise and drive to transition to a lower carbon economy. We feel that this project can provide a safe, reliable, low-cost solution that will be available to all the companies in Alberta’s Industrial Heartland in an expedited time frame, given the infrastructure already in place. At Joffre, we recently extended our CO2 supply contract and have opted in to Alberta’s TIER program. As a result of this, we expect that we can fully offset our CO2 costs through generating TIER credits beginning in 2023. Although the dollar amounts with this project are small, we believe that this model is something that can be replicated and are encouraged by what we have been able to accomplish with this asset after acquiring it early last year. Lastly, on our Saskatchewan Carbon Hub project. We announced today that we have three MOUs signed, which represent an aggregate reduction in CO2 emissions of 0.9 million to 1.6 million tons per year. Our initial feasibility work on this project is ongoing with full FEED study expected to commence in the second half of 2022. I will now pass it back to Grant for his closing remarks.

Grant Fagerheim: [Technical Difficulty] With that, I’ll now turn the call over to the operator for questions. So, will the operator jump in for any questions we might receive?

Operator: Pardon me, technical difficulties. My apologies. Thank you. [Operator Instructions] Our first question comes from Patrick O’Rourke of ATB Markets. Please go ahead. Patrick O’Rourke: Hey, guys. Good morning. And thank you for taking my question here. I don’t know if you discussed this. I had a little bit of a technical difficulty where things went blank for a few moments there. But I just wanted to -- and not to beat a dead horse here because I know you get this question nearly every quarter. Just wanted to think about capital allocation, free cash flow, capital allocation priorities back to shareholders. Obviously, you increased the dividend 33% with the current quarter. And how you think about that growth glide path there? It’s only 11% right now. You talk about a $45 breakeven to fund that dividend. Some inflationary pressure, obviously, you’re also mentioning here. So maybe that comes up. Is it you start to see the downside of oil goes from 45% to 55%, and that’s how you adjust the dividend going forward, or how are you guys thinking about those decisions?

Thanh Kang: Yes. Thanks for the question there, Patrick. It’s Thanh. What we’ve committed to the market is that we would return 50% of our discretionary funds flow. That would be after capital after dividends to our shareholders here. And as you’ve mentioned, to date, we’ve repurchased the shares. We’ve increased the dividend. Given where strip is currently, there’s still approximately $400 million left that we’re going to return to our shareholders here. Just on the dividend side, we do mark everything down to $45 WTI at this particular time. But you’re right. I mean, oil is touching -- or was over $100 this morning here. So, what is that right low case? We’re still using $45 at this time. The other component of that is from a share buyback perspective. We did purchase 19.3 million shares in the fourth quarter last year. If there’s an ability for us to be more chunky towards clearing the market on large blocks that are available, that’s what we’d like to do on a portion of our discretionary fund flow. And then, as we realize the cash flow, there’s considerations around the dividends, whether that’s going to be a variable or special or base. Our priority at this particular time is the base level of dividend. But regardless of the NCIB or dividends, we’ll look to return half of that back to our shareholders. I think what we have to recognize, though, is that we’re just at the end of February right now. So there’s 10 more months that we have to realize these cash flows and actually put it in the bank before looking at distributing it back to our shareholders. Patrick O’Rourke: Yes. Thanks. You guys have done a good job there. I guess, we’re all pretty positive on the commodity and the free cash flow perspective. And just protecting that downside knowing when commodities collapses, we don’t want to see the dividend cut. So, that sounds like a good philosophy. Just to shift gears and one more real quick question. In terms of the announcement yesterday with Wolf. I’m just wondering, with things coming on in 2024, is there a capital commitment outlay from Whitecap, what the time frame of that would be? And then how sort of the revenue stream looks? And just wondering in the longer-term perspective here, you’ve got all these carbon management initiatives. Is there a point in time where we could see sort of a standalone carbon management division out of Whitecap that’s realizing material economics for the Company?

Dave Mombourquette: Hey, Patrick. It’s Dave Mombourquette here. Yes, in terms of talking about the capital allocation, and we’re very early on in the project and, of course, we have some initial estimates. But we’re not really talking about anything at this time because there’s a lot more work we have to do in terms of how many industrial partners we’ll get and the size of the project, et cetera, and then also a FEED study that will have to be done and lots more work on that side. Thanh, in terms of a carbon company or something like that, I think we’re a little far off from that at this point in time. But if you have any other comments?

Thanh Kang: Yes. I think the focus for us at this time is aggregating as much emissions and getting the large industrial emitters signed up both in Saskatchewan and Alberta. I think once we get a little bit more clarity around federal government, ITCs, what the carbon credit market looks like, we’ll be able to structure it. And so, I think the structuring will happen after we get clarity and once we aggregate as much CO2 as we can.

Operator: Your next question comes from Jeremy McCrea with Raymond James. Please go ahead.

Jeremy McCrea: I was curious just with oil being where it’s at, how the M&A market is looking and shaping up here for 2022? You guys were pretty busy last year. Does things look easier or harder for this year? What can we expect for 2022? And then, maybe just a second question here. At what point do you guys look to potentially increase your spending levels? I know a lot of it is being focused on more shareholder returns. But, is there a level of commodity prices where you do look to expand your spending? And especially, do you have any new inventory that kind of works at these prices here now?

Grant Fagerheim: Sure, Jeremy. Thank you. Just regarding M&A, yes, it was an extremely busy year, 2021 and the follow-on to 2020. We think consolidation continues into this year ‘22 and ‘23. But that is really going to be dependent upon what buyer and seller expectations are. I don’t think that you’re -- kind of find anyone that would be looking to buy based on strip pricing today at this particular time. So, it is really going to depend upon what the seller expectations are. I think, we have to -- we all have to understand that we’re in a very, we call, highly charged time from a political standpoint. And we’ll have to wait to resolve that to a little bit to see where commodity prices are. And we have to -- I think on the M&A side, we really have to look at what’s the expectations for commodity prices long term, both as far as oil prices and natural gas prices. So, we’ll look at that. We think there is a lot of consolidation that will continue to take place. We believe that we can play in that market. If it adds value for our shareholders, it makes us more profitable and sustainable. So, we’ll be actively looking at things. So, whether or not we’ll be transacting is -- for the benefit of our shareholders, will remain to be seen. But, we certainly cannot look at today’s price at just shy of $100 WTI oil and expect that that’s going to run for the longer term. As far as spending level, that kind of falls into the next category of spending levels. This year with the amount of free cash flow that’s being generated, we want to make those decisions, as Thanh alluded to, on the potential to increase our capital spending in the back half of the year. But the process that we go through is we’ll get our first quarter capital program. We’ll have our production and a good understanding technically as to where we’re at with the capital, what was being spent in the first quarter. We’ll look at what the future inflationary costs are going to be as well as the backdrop with commodity prices. And that will determine -- that will help us determine if we should, when we should increase our capital program for the balance of the year, potentially in the -- sometime in the back half of ‘22 and into ‘23. So, that’s where we’re at right now. We’re not going to jump ahead. I think that one of the benefits to the North American energy sector has been the amount of discipline that’s been deployed with capital spending and return of capital versus just focused on growth and return on capital. So, we believe that discipline is important to emphasize, and I think that the Canadian energy space will continue to follow suit with that. But we could have marginal increases with capital program as we move forward once we have more results, understanding inflationary pressures and what the commodity price deck will look like for the future.

Thanh Kang: Yes. The only thing I’d add to that, Jeremy, is if you look at our production per share growth this year, it’s already at 11%. So, when we’re thinking about increases to capital, it’s -- the focus is primarily going to be around strategic enhancements to our current inventory as well as looking to position ourselves for another strong year in 2023.

Operator: Your next question comes from Josef Schachter of Schachter Energy. Please go ahead.

Josef Schachter: Good morning, guys. And congratulations on a great year and the dividend increase and the share buybacks. All great here. I have two areas I wanted to cover. With these high prices, where are you on your hedging? And how this windfall or pricing giving you a change where you can maybe lock in some more pricing going later into the year to protect your capital program and also to take advantage of these lofty prices, which may or may not last a few weeks from now, once things settle down on this invasion issue?

Thanh Kang: Yes. It’s Thanh here. And I think when we look at our hedging program, the objective that we have is really to use it as a tool to ensure that our cash flows can cover off both our dividend, including the increased dividend that we just announced as well as our capital, including our growth capital as well. And so, if you look at our hedge book today in 2022, we’re about 16% hedged. And our breakeven to cover capital and dividends is about $40 WTI. And then, in 2023, with just 20 -- or just 12% hedged, our breakeven is actually $45 WTI. So, the hedge book and our cost structure is very strong. That allows us to be able to fully fund ourselves down to these levels. What we don’t want to do is add speculation into our hedging strategy. And so, that’s really been the objective. We’re happy with the ‘22 and ‘23 positions at this time here, really to take advantage of what we’re seeing as high commodity prices. And we don’t know where it’s going to go at this particular time. We just did a position this morning, looking out to 2024. We did 2,000 barrels a day. And with the backwardation in the curve, we’ve been focused more on the costless collar positions. We did an 80 by 112 collar. Those are very, very strong numbers to be able to achieve that in 2024. So really, that’s what we’ve done on our hedge here, not be speculative, but really just make sure that our breakevens are $45 or below.

Grant Fagerheim: And Josef, just to kind of emphasize Thanh’s point, I mean the -- what we’re trying to do is ensure that we have enough capital on a go-forward basis for the next three-year period of time for our maintenance capital to keep our production at least flat and pay a dividend -- consistent dividend on a go-forward basis. So, as Thanh referenced, the backwardation from current prices of $97 to going out to 2024 right now at $74, that is a huge amount of backwardation. When I talked about the M&A market earlier, we have to be aware of what the market looks for the longer term at this particular time. So, hedging, all we’re trying to do is protect our cash flows for maintenance capital as well as growth capital and then our dividend on a sustainable basis.

Josef Schachter: Okay, good. Second question for me, if I may. In terms of your F&D costs versus the M&A pricing now, there must be -- your refining costs must be, of course, much lower than the current transactions that may or may not be from the seller’s point of view, what they might want. Does it pay for you to increase the amount of spending that you do for land around your core areas? Go to the ground and do farming [ph] on and some people who aren’t active and get yourself a bigger drilling inventory?

Grant Fagerheim: So, it’s interesting. At this time, we have a very large inventory. We’re -- we expect to drill somewhere between 180 to 190 wells this year, Josef. And we have 5,400 wells in inventory that we’ve just updated with type curves, et cetera. And we run all economics on all of our inventory to see what that looks like. So, at this particular time, I don’t think we have to go out and look to -- unless it’s very robust economics, look to add more land to our inventory. We’re always looking to increase our inventory and improve our inventory from a sustainability perspective. But we have a very large inventory of opportunities at this time to be selecting from it. And one of the areas I think we we’re spending time looking at is how do we advance cost effectively some of the inventory to take advantage of the higher commodity price environment? So, we’re doing lots of analysis with the teams. We’re doing lots of analysis on that at this particular time. So just buying incremental land at this particular time, I’m not sure is the best use of our capital funds going forward.

Operator: [Operator Instructions] Your next question comes from Brian Zinchuk with Pipeline Online. Please go ahead.

Brian Zinchuk: Curious about the memorandum of understanding regarding CO2 in Saskatchewan. Last fall, you did one to Federated Co-op. Who are the other two with?

Dave Mombourquette: We do have one of the MOUs with K+S, the potash company out there in Belle Plaine area. And we’re not disclosing the names of the other parties at this time.

Grant Fagerheim: We need approval to disclose names. Yes.

Brian Zinchuk: Can we expect that any time in the near future?

Grant Fagerheim: Well, for certain. We will, once we complete the feasibility studies, Brian. We’ll work together on the feasibility studies with them, so. And at that particular time when there’s more disclosure that we can provide, then we’ll do that. We’ll provide to the market the information as we have -- as and when we have it available to us that we are allowed to.

Dave Mombourquette: Yes. And it’s Dave here again. And as you can imagine, all of these parties that we’re dealing with, they all have their own plans in terms of announcing their carbon -- decarbonization strategies. So, some of them are very large companies across the world, et cetera. So, they always need to see at what time point they -- on their time schedules they want to release that they’re doing these activities. But, we definitely have very strong conversations and agreements in place with several other parties.

Brian Zinchuk: Do you have many other companies you’re talking to, or is this kind of like used up the list of who you’re looking at for potential clients for this?

Grant Fagerheim: Yes. Brian, we’re in conversations with large industrial emitters across Western Canada at this particular time.

Brian Zinchuk: Okay. One other thing here, if you don’t mind. Now, I know that Whitecap is probably the most active it’s been for the number of drilling rigs in Saskatchewan that I recall. But the other larger producers, particularly Crescent Point and Cenovus, they’ve been drilling at 1 quarter to 1/5 of what they used to have for the number of rigs compared to just before COVID. Is something going on in Saskatchewan that the rigs aren’t flying out the door like they used to with oil prices being in the 90s?

Grant Fagerheim: Capital discipline.

Thanh Kang: Brian, I mean, there’s a lot of things that go into answering that. But I think consolidation is obviously going to play a role in why the overall rig activities are lower than they were before. I can’t speak to the other parties, but we have a fairly well-balanced capital deployment program across all of our assets. And I’d say consolidation is probably the front runner as to why there’s a lower rig count, in my opinion.

Operator: And at this time, gentlemen, we have no other questions registered. Please proceed.

Grant Fagerheim: Okay. Well, just in essence, to close off, what I do want to emphasize is that 2022 is shaping up to be another strong year for Whitecap and our shareholders. Our ability to take advantage of the market conditions to increase the profitability of our business and improve our sustainability over the long term, along with our focus on operational execution and pursuing new revenue streams across the energy transition is a competitive advantage. We are excited for what Whitecap is able to accomplish this year, not only from a financial standpoint and the returns that we will generate for our shareholders, but how we’re able to further position Whitecap as an ESG leader as the world transitions to a lower-carbon economy. I feel it is important and appropriate to provide kudos to our valued employees for your continued efforts over the past year, to our Board of Directors for your ongoing support and guidance, and to everyone on the call for your interest in Whitecap. On closing, it is my hope that the events unfolding in the Ukraine that peace can be found for those directly affected, praying for the safety on those seeking to live in freedom and security. Sincere thanks to everyone for your participating in the call today. 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.