Whitecap Resources Inc.

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 Q1 2023 Results Conference Call. Note that all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. And if you would like to ask a question during this time, simply press star then the number one on your telephone keypad. And if you would like to withdraw your question, please press star then number two. And I would like to turn the conference over to Whitecaps President and CEO, Mr. Grant Fagerheim. You may begin your conference, sir.

Thanks, Sylvia, 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, Ton Kang, our Senior Vice President, Production and Operations, Joel Armstrong, as well as Dave Armbroquette, Senior Vice President, Business Development and 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 issued yesterday afternoon. There has been a significant commodity price volatility to start the year, and I'm proud of the way our team has made adjustments to our program and the results they've delivered in the first quarter. We generated almost $200 million of free funds flow in the quarter as our total liquids production of approximately 103,000 barrels per day, including oil and condensate, outperformed our expectations, while we spent approximately $50 million less in capital than anticipated compared to our budget released in September of last year. Our first quarter capital spending of $254 million included the drilling of 69 gross 60.8 net wells, resulting in average production of 155,124 BUE per day in the first quarter. We also completed the disposition of of 10,500 BUE per day of high-cost non-strategic assets during the quarter. Consistent with our commitment to returning a significant amount of free funds flow back to our shareholders, we returned $121 million in the first quarter, or over 60% of free funds flow, to our base dividend of 58 cents per share annually and over $30 million in share repurchases. We ended the quarter with net debt of $1.47 billion, which is nearing our second of two debt milestone targets of $1.3 billion. At current strip prices, we are forecasting that we reach this milestone in mid-2023 and at this time intend on increasing our dividend by 26% to 73 cents per share annually and returning a total of 75% of free funds back to the shareholders through increased base dividend as well as share buybacks. Not only were our teams active in drilling 69 gross wells in the quarter, early in the year it became apparent that natural gas prices were not going to be as strong as originally forecasted. And we made the decision to begin reallocating capital towards our higher net pack drilling inventory. The primary enhancement to our capital program included the additions of five gross 4.4 net high liquid yield gloconitic wells and the removal of one lower liquid Glock drill, as well as the addition of four-well Duvernay pad as a substitute for a Montney pad at Latour. These changes are forecast to result in higher net back at current strip prices, and in particular, these specific Duvernay wells are expected to have higher liquids rates than the planned Montney pad at Latour and will increase the utilization of our 100% owned 15-7 gas processing facility at K-BOT. Since the closing of the X2O acquisition, Our teams have advanced their technical understanding of the DuVernay through offset operator activity along with significant seismic data that we own across the asset, which provides us with the confidence to accelerate the development of our DuVernay play from a technical and operational perspective. Our production guidance of 160,000 to 162,000 BUE per day and capital spending guidance of $900 million to $950 million has not changed despite the delays we encountered earlier this year. on our mountaineering drilling and completion program to a third-party supply chain issue. The outperformance of both of our central Alberta and Saskatchewan business units in the first quarter, along with the continued execution of the remaining capital program, expects it to help offset the delay. I'll now pass it on to Joel Armstrong to provide more detailed operational update. Joel?

Thanks, Grant. First, I'd like to walk through a quick update on our health, safety, and environmental progress throughout the quarter. We continue to have a strong track record of outstanding health and safety performance. While we accumulated a record 3.5 million person hours in the first quarter, our TRIF was outstanding at 0.17, which compares to our already low average of 0.4 over the preceding three years. We're always striving for continuous improvement, but I also want to commend our staff and contractors for keeping safety as a top priority at all of our sites. From an operational perspective, in our central Alberta business unit, we brought on production four of the eight Glock night wells spud in the first quarter, with the remaining expected to be on production by the end of June. Since we acquired a larger position in the southern Alberta Glock in early 2022, our well results have consistently outperformed our expectations. Our four most recent wells with over one year production have produced 11% more than our type curve on a BOE basis, but more importantly, the oil and liquids production has outperformed with first-year average rates that are approximately 50% higher than our type curve, which provides Whitecap with stronger funds, funds slower than projected. As part of our capital enhancements, we've chosen to add five or 4.4 net to our 2023 program targeting the higher liquid yields area of our asset while we've removed one well in our western portion of our assets that are expected to have lower liquid yields. Our full year program includes 15 or 13.8 net well. Now moving over to our northern Alberta business unit where supply chain issues contributed in a deferral of $40 million of capital into the third and fourth quarters. resulting in no additional Montney wells being spud in the first quarter. Completion activities on the seven wells spud last year are ongoing and on-stream dates for the two pads are expected by the end of the second quarter. Both pads are in the Calgary area where liquid rates are expected to be strong and are driving the robust economics. As mentioned, we have substituted out a Montney pad at Latour and replaced it with a Duvernay pad to begin drilling later in the second quarter as these wells are expected to have higher liquid rates than the Paddock Latour. In addition, we expect to bring on 12 Maunee wells prior to the end of the year while 10 Maunee wells will commence drilling operations in 2023 with on-stream dates in the first half of 2024. The Maunee wells have been strong with quicker cleanup periods and higher liquid rates than initially expected. Our most recent four-well pad that came on production in late 2022 has achieved an average rate of 1,200 BOE per day per well over the first 150 days of production. The rates of 570 barrels per day are approximately 3% higher than our type curve expectations. As a result, these wells are expected to pay out in approximately eight months after coming on production. We commenced drilling operations a few weeks ago with our first three-well pad. which we are currently planning to have on stream in the third quarter. We are expecting to drill the follow-up four-wheel pad after breakup, and this pad is expected to be on production in the fourth quarter. In Saskatchewan, results across our west-central, southwest, and southeast Saskatchewan regions all exceeded expectations in the first quarter. Our 14 Frobisher wells were a mix of single, dual, and triple leg wells, with results from the five wells on production for more than 60 days outperforming our expectations by over 20%. In southwest Saskatchewan, our lower Shoneman drills were extremely positive, outperforming our type curve by a wide margin, with two wells adding a secondary impact and improving upwards of 30 inventory locations and offsetting sections. Lastly, I want to touch on cost inflation. We experienced 2% to 4% inflation in the first quarter compared to the fourth quarter of 2022 on both capital and operating costs. The two most significant contributors on capital costs are frack spreads and tubulars and power and labor on operating costs. Despite the continued inflationary pressures, we still anticipate being within our capital guidance of $900 million to $950 million for the year and on operating costs we're expecting the trend towards under $13 per BUE in the fourth quarter with higher production volumes. I'll now pass it on to Tom to discuss our financial results.

Thanks, Joel. We had a strong first quarter generating $448 million of funds flow or 73 cents for fully diluted share on capital spending of $254 million resulting in $194 million of free funds flow or approximately 32 cents per fully diluted share. While first quarter WTI prices averaged approximately 76 U.S. per barrel, with the weak Canadian dollar, WTI averaged over $100 Canadian per barrel. ACO averaged $3.05 per GJ in the quarter, significantly below our budget price deck. And as Grant mentioned, this resulted in us reallocating a portion of our capital towards higher netback assets. As part of our funds flow netback, we recorded a cash tax expense of $0.93 per BOE, or approximately $13 million. This equates to an approximate pre-fund flow tax rate of 3%. As the year progresses, we will adjust the tax rate based on our forecast for full-year cash tax expense and true up on our current expense in the subsequent quarters prior to the final full-year assessment. We caution that the tax rate could be volatile over the course of the year and may result in larger variations in our quarterly recorded expense. At the end of the first quarter, we had $3.9 billion of tax pools remaining. In the first quarter, we completed the disposition of non-core assets for proceeds of approximately $400 million. And as such, we've removed $426.4 million from assets held for sale and $110.9 million from liabilities on assets held for sale on our balance sheet. Our net debt at the end of the first quarter was $1.47 billion as we reduced net debt by over $400 million since the end of 2022 and over $700 million since the closing of the XDO acquisition in the third quarter of 2022. and now have over $1.8 billion of liquidity on our credit facilities. We remain focused on balance sheet strength and anticipate that we will reach our $1.3 billion net debt milestone sometime in mid-2023 at current strip prices. I'll now pass it back to Grant for his closing remarks.

Thanks, Tom. In 2023, Whitecap is well positioned to deliver strong performance on both cash returns and per share growth to shareholders with 12 Montney and 7 Duvernay wells scheduled to come on production before the end of the year. At the same time, we also expect the Glauconite program in central Alberta and our light oil drilling program throughout Saskatchewan will continue to be successful and provide modest growth and strong free cash flow generation for our company. With the capital allocation changes to address the lower natural gas price environment, our production additions will now be more weighted towards the second half of the year, and our fourth quarter production is expected to average approximately 170,000 BWE per day. This represents a growth rate of 10% from the fourth quarter of 2022 after adjusting for the dispositions completed earlier this year that we've spoken of. Lastly, I want to take the time to pay special tribute of thanks to Greg Fletcher, who has chosen not to stand for re-election to our Board of Directors at the upcoming AGM in mid-May. Greg has been a founding director with Whitecap and has provided valuable guidance to our company over the past 13 years. We know that Greg will continue to be a supporter of Whitecap and provide his insights to us on a go-forward basis. Sincere thanks from all of us, Greg. We are also pleased to announce that Vanita McGuire has agreed to stand for election at our board of directors at the upcoming Andrew Jenner meeting. Vanita brings a wealth of industry experience and we are looking forward to her joining the board and having her assist us grow our business into the future. With that, I will now turn the call over to our operator, Sylvie, for any questions. Thank you.

Thank you, sir. Ladies and gentlemen, as stated, if you do have a question, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. And should you wish to withdraw your question, simply press star followed by two. And we do ask that if you're using a speakerphone to please lift the handset before pressing any keys. Please go ahead and press star one now if you do have any questions. And your first question will be from Luke Davies at RBC. Please go ahead.

Hey, good morning, guys. What do you think you could just provide some specifics on outages in terms of volume impacts as well as the supply chain issues and just how that impacted Q1 and how that impacts the balance of the year?

Can you repeat that just one more time? We had trouble hearing that. Sorry.

Yeah, no worries. I was wondering if you could just provide a few more specifics just in terms of the outages and supply chain issues and what the actual impact was on Q1 and then through the balance of the year.

Yeah, hey, Luke. It's Todd here. Yeah, I mean, the supply chain issue effectively, and Joel can provide some more details around this, but it was mud contamination that ultimately resulted in waxing issues on the surface there that created 60-day delays effectively on the two pads that we drilled late in 2022. So what we're expecting is from a Q2 perspective, production volumes to be relatively flat. And then as we bring in on the both the Montney and the Duvernay pads there, we'll see production increase both in Q3 and Q4. And as Grant mentioned, we're looking at about 170,000 BUEs per day average production for fourth quarter of this year.

Gotcha. That's helpful. And then can you expand a little bit just on your initial comments regarding inflation, anything you're doing to mitigate that? And then I know it's pretty early still, but what your expectations would be heading into 2024 in terms of capital outlay?

Yeah, it's Joel here. I mean, we're just, don't forbid, for the balance of our Our program in 2023, but early indications suggest that we're at least going to be flat, if not some cost recovery in the balance of the year. So that would be our expectation.

I think it goes to we're able to make commitments on a larger program with more activity that will be consistent throughout this year and run through and actually increase into 2020. into 2024. So that actually acts to stabilize with our service providers that they're going to be consistent and growing with us as we move forward.

Great. Thank you.

Thank you. Next question will be from Jack Austin at Jack A Capital. Please go ahead.

Hi, guys. Can you hear me?

Yes, I can. Thank you.

Awesome. Congrats on another solid quarter. So I know you guys are approaching the debt target. You're about 200 million away, say, and I can see that you guys are planning to increase about 5%, you say three to 8% annual growth. And I see the reserves as well. So I'm kind of asking is what's the plan after the dividend increase from there? Like what's the, the plans after that, would you consider going to like just getting rid of all the debt and, or even going to, uh, 100% return to shareholders, or how do you see really beyond once the dividend increase happens? I know it's a bit of a tough question to ask because it depends on oil prices and everything else, but yeah.

Yeah, first of all, once we achieve our $1.3 billion of the debt milestone that we provided, increasing our dividend up to that 73 cents a share, and then what we're looking for is to, from a dividend perspective specifically, is have our dividend grow at the pace that we grow our business going forward. And right now we're projecting between 3% to 8% per share growth per year. And the 75% of our free cash flow to be returned back to our shareholders in either the form of dividends on an ongoing consistent basis as well as share buybacks. And the other 25% of the free funds flow to be used through what we'll call reduced debt on our balance sheet. And that has really The purpose of that, we think that having debt as part of our capital structure is important because of the return characteristics we're getting in this pricing environment. So our return on our invested capital is so strong that what we should be doing is using a responsible level of debt. So instead of running with no debt, we've stress-tested our organization down to $50 oil and $3 gas. And at those levels, you're probably not going to look to our expectation is not to grow aggressively. And we want to keep our debt to cash flow well under one times. So that's a stress tested level that we use at the $50 level, WTI level. So ultimately, you'll see us looking to increase our dividend commensurate with our growth rate into the organization as we move forward.

Sounds great. Thank you. And just one more little question. I know you can't answer directly, but is the company looking at any big M&A? I know you're active as a chief. Are you active or not?

Not at this particular time. What we wanted to do this year is demonstrate on the assets that we have under management that we're just going to look to operational execution and performance and optimizing our assets as best we possibly can. Again, it goes consistent with our financial strategy of looking to continue to walk down the amount of leverage we have. Certainly, as Tom talked about, we have plenty of capacity of $1.8 billion at this particular time once we get to the $1.3 billion. But 2023 is a year for focused on operational performance and putting our business development initiatives on hold and looking, we can look at that into 2024-25 as we move forward.

Awesome. Thank you very much. Congrats on the quarter again. Thank you.

Next question will be from Patrick O'Rourke at ATB Capital Markets. Please go ahead.

Oh, hey, guys. Good morning. And thanks for providing some color in terms of the outlook for the return of capital strategy post the $1.3 billion milestone. I was also curious on that. Maybe I'll move to my other question, though, just very quickly. You know, with the shift of some capital away from the money at Latour, over to the DuVernay here. Just wondering, in the current sort of pricing paradigm where on a relative basis oil is strong relative to gas, is this something that we can anticipate to be more structural in terms of the way that you're directing capital out into 2024, 2025, and beyond? Will there be sort of more emphasis on these volatile oil-rich duvernay windows relative to gas-year money targets?

Yeah, I mean, from our perspective, I think that we have to always be aware of the pricing environment around us, and that's from crude oil, natural gas, differentials, the effect of the Canadian dollar. So overall, what we can say is that we're looking at the highest net back assets that we can generate on a longer-term basis. Our principal growth is going to come up, we believe, from the Montigny and secondarily from the DuVernay. But that's not to say that the balance of our assets in central Alberta and Saskatchewan are able to grow. They provide a very significant amount of free cash flow for us. And it's how we allocate that moving forward. But with the backdrop of when we're looking at it from a structural perspective, at $2 or sub $2 gas, we're not trying to grow that business overly aggressively. And we're coming into a summer time period where the natural gas price does have an impact You know what's interesting, and if I can comment on it this way, 66% of our production is oil and liquids, but it generates between 89% to 92% of our cash flow from 66% of our production, which would mean that the natural gas side is important to us, it is, as we move forward, but from a cash generation perspective, it isn't as important as the oil and liquids component of our business.

Okay, thank you very much.

Thank you. As a reminder, ladies and gentlemen, if you do have any questions, please press star followed by one on your touch-tone phone. And your next question will be from Joseph Schachter at Schachter Energy Research. Please go ahead.

Thank you for taking my call. Questions a grand ton. I'm Joel. First thing, on the portfolio now, you've had some non-core asset dispositions. Are you happy where you are right now, or are there still some assets that are non-core that might help you get quicker to your debt target?

Yeah, we're happy, very pleased with the portfolio of opportunities we have with us right now. We're not looking for future dispositions at this particular time. Again, as we cycle through our business longer term, when assets become more with limited growth on a go-forward basis or limited value opportunity for us, we'll look to monetize. But we think we did a very good job in, we'll call, monetizing the assets that we weren't putting capital towards over the next five-year period of time. So with the suite of assets we have today, the inventory we have, we're very comfortable with the assets that we have and won't be looking for dispositions at this particular time.

Okay, super. And this one probably is for Zillow. With the success of the four-well pad at the Montney beating your tight curve and 52% liquids versus your expectation of 40, has that changed around your Tier 1 locations? And do you end up, because of the success here, having many more locations than you thought you might have had when you did the acquisition?

I'm sorry, Joseph, I don't think it's not going to have an impact on the balance of our inventory in Kakwa. We still have a pile of Tier 1 locations to drill there.

And how many wells would you be looking to drill? Is it a drill-to-fill situation?

Well, I think the ongoing strategy is going to be a balance of, you know, all those particular plays. So every time it goes through capital allocation, that's the context that we're thinking of.

So, yeah, just to add on to that, you know, what we're looking at in the Montney, and Joel's referenced it, as he talked about, with the Kakwa, Masro, Latour, Rest Haven on the Montney side. And then we also have other Montney assets at Valhalla, et cetera, what we'll call more of the conventional plays. But K-Bob, we're looking in the Montney that, about 20 to 25 wells a year. And in the KBOB, we'll call it a DuVernay play, we're looking anywhere between five to eight wells per year at this particular time. Now, commodity price dependent, results dependent, we can move capital around. And that's the, I think it's the benefit of the program that we have in northern Alberta, but also with the benefit we have on assets right across from southeast Saskatchewan through to the deep basin of Alberta. So We can actually alter programs around. And we have to be, you know, cautious that that doesn't happen on, you know, just overnight. We have to be very thoughtful in our planning on those going forward. So, ultimately, I think that we have an exceptional blend of opportunities in front of us. And with the principal growth, the largest exposure to growth coming from the Montanay and the Duvernay up in Cabot.

Thank you. And at this time, we have no further questions. Please proceed.

Okay. Well, thanks, everyone. And thanks, Sylvie, for your directions today. And I want to thank each of you for taking the time and interest to listen to this call today. And we look forward to updating you on our progress over the next several months as we move through the balance of 23 and into 24. Until then, thanks very much. All the best.

Thank you, sir. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.