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 Q2 2023 Results Conference Call. 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 1 on your telephone keypad. And if you would like to withdraw from the question queue, please press star, then number 2. And I would like to turn the conference over to Whitecaps President and CEO, Mr. Grant Fagerheim. Please go ahead, sir.

Thank you, Sylvie. 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, Engineering, Darren Dunlop, and our Senior Vice President, Business Development and Information Technology, Damon Burkett. Before we get started today, I would like to remind everybody that all the 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 yesterday afternoon. Our second quarter results emphasize the advantage that we have with our diversified asset base as we were able to partially mitigate the impact of the wildfires in north central Alberta through outperformance of our lighter oil-weighted Saskatchewan and central Alberta block development programs. In the second quarter, we generated $197 million of free funds flow, bringing our total free funds flow to $392 million in the first half of the year, of which 53%, or $208 million, has been returned to shareholders through our base dividend and share repurchases. During the second quarter, we spent $218 million, including $177 million of drilling and completions capital and $37 million of facility expenditures. We sped 43 gross, 41.6 net wells during the quarter, 34, 32.6 net of which were in our east division, where breakup conditions subsided earlier than anticipated, and our teams were able to get back in the field in June. Strong results across our east division have continued, and the team has done a tremendous job on both of our legacy assets, as well as those acquired over the past two-year period of time. In our west division, we commenced drilling nine wells, a three-well Montney pad at Kakwa, and six wells of our seven-well Duvernay program at Kaibab were stud in the second quarter. Since acquiring the XTO assets 10 months ago, we've been able to reduce net debt by $800 million from $2.2 billion at the end of the third quarter of 2022 to now $1.36 billion currently. The balance sheet is in pristine shape with debt to EBITDA at 0.6 times and $1.7 billion of unused debt capacity. The balance sheet has always been a priority for us and has allowed us to not only effectively manage through the commodity price cycles, but to also capture value enhancing opportunities on behalf of our shareholders. We are close to reaching our $1.3 billion debt milestone, which due to the wildfires has deferred this to the second half of the year. This is an important milestone for us as it represents debt to EBITDA ratio of less than one times using $50 WTI and a $3 per GJ April price assumption, which will then allow us to return 75% of our free funds back to shareholders, inclusive of the targeted $73 per share, $0.73 per share annual dividend. Given the significant growth we have undertaken over the last couple of years, we have realigned our business units into two divisions, East and West, to better streamline reporting processes and to drive operational excellence. The East division consists primarily of conventional assets which have lower decline rates, annual production growth rates of 1% to 2%, and generally outsize free funds flow of the capital expenditures. Our west division is primarily our unconventional resource plays, which include the Montney and the DuVernay, and will have a higher annual growth rate of 10% to 15% given the depth and quality of inventory in this division. Our extensive portfolio of 6,584 gross, 5,675 net drilling locations allows us to continue to generate significant pre-fund slow while growing 3% to 8% production per share to organic growing towards the 200,000 BUE per day over the next five-year period of time. As reported yesterday, results in our montane of CACWOD continue to be strong, with 82% of our wells drilled to date achieving payout in less than one year or less, some even paying out in less than five months. The free funds flow potential and results to date from this asset that validates our initial technical evaluation of the XTO assets. Furthermore, our teams continue to make significant strides in further enhancing their understanding of the Montney assets, and we believe the continual refinement of our development plans specific to individual areas and pad selection, such as targeted intervals within the Montney benches, wall spacing, completion design, and production operation efficiency, will further increase the return characteristics and profitability of this expansive set of assets moving forward. In our west division, we have now drilled and completed our first three-well pad and have commenced drilling our second pad, a four-well pad in the Duvernay. We look forward to having the first three wells tied into permanent facilities non-production in late August, while the four-well pad is expected to be on production in the fourth quarter. We are very encouraged by the execution of our drilling and completion operations to date, as well as our initial production test rates. Second quarter facilities capital included $15 million towards the expansion of our 3027 facility in the Valhalla region, as well as initial capital for our Musrell Lake battery. This battery is expected to be completed in the second quarter of 2024, allowing us to efficiently develop one of the most attractive areas in the Monteney that was acquired as part of the XTO transaction last year. Drilling operations at Muswell Lake are expected to begin later this year with production ads coinciding with the completion of the battery. Our longer term development planning for the larger undeveloped mountain acreage includes the expansion and increased utilization of current infrastructure as well as new infrastructure to support and maintain control over our unconventional growth plans. I will now pass the mic on to Ton to discuss our financial results.

Thanks Grant. Second quarter fund flow of $415 million or $0.68 per diluted share equates to a fund flow netback of approximately $31 per BOE. Strong liquids production, improved differentials on our sour and medium crude sold in Saskatchewan and one-time GCA adjustments all contributed positively to our netback in the quarter. Production shut-ins due to the Alberta wildfires resulted in increased per unit operating costs to over $15 per BOE in the second quarter. Going forward, we forecast operating costs will decrease to approximately $13 per BOE as we increase production in the back half of the year. As Grant mentioned, the balance sheet is in excellent shape with a debt-to-EBITDA ratio of only 0.6 times and $1.7 billion of unutilized capacity. Our balance sheet will continue to strengthen as we forecast net debt passing the $1.3 billion target and reaching approximately $1.2 billion by year-end based on current strip prices. At this point, we will have decreased net debt by $1 billion since the closing of the XCO transaction and returned over $500 million to shareholders through base dividends plus share repurchases. Our 2023 capital spending guidance remains unchanged at $900 to $950 million, and we've adjusted our annual production guidance to 157,000 to 159,000 BOEs to reflect the impact of the Alberta wildfires. Oil and liquids production has been stronger than forecasted through the first six months of the year, and in combination with some of the program changes we've made earlier this year, we're now expecting our annual liquids weighting to increase to 65% from 64% previously. I will now pass it back to Grant for his closing remarks.

Mr. Fagerheim, we cannot hear you.

Thanks, Tom. We are excited for the opportunity set that is ahead of us and look forward to capitalizing these assets to extract as much value from the assets as we can. Our teams continue to refine their understanding of each play that we are in, and we have an expansive inventory depth that we can efficiently develop and hit our growth targets while continually improving profitability and returns to shareholders. With our healthy inventory depth, strong balance sheet, low decline, high net back asset base, Whitecap is in a position of strength and as we advance our business through the remainder of 2023 into 2024 and beyond. The outlook for Canadian oil and gas is positive as long awaited export projects begin to come online and high quality responsibly produced Canadian energy can be utilized in markets around the world. Whitecap has and will continue to be significant supply source of conventional oil and as of recently, a larger supplier of natural gas to end users across North America. We are also advancing our carbon capture utilization in storage hubs across Alberta and Saskatchewan, and as our subsurface expertise and experience with carbon sequestration is highly sought after to assist these large emitters in their decarbonization efforts. We have multiple projects that are scheduled to begin sequestration in late 2024, and while there is still a significant amount of work to be done With all the stakeholders involved, we are confident that the solutions will be found to making significant advancements on moving Canadian energy into a lower carbon economy. With that, I will now turn the call over to the operator, Sylvie, for any questions. Thank you.

Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by 1 on your touchtone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw from the question queue, please press star followed by 2. And if using a speakerphone, you will need to lift the handset first before pressing any keys. Please go ahead and press star one now if you have any questions. And the first question will be from Jeremy McRae at Raymond James. Please go ahead.

Hi, guys. I want to talk about some of your operations. Just based on some of the test results that you've been getting in the Montney, some of the early looks at the DuVernay, are you guys looking at shifting any of your capex within your budget here, maybe later this year, or what you're kind of somewhat thinking here for 2024. And just, is there any new technology that you're seeing from any, maybe even some of your peers that could improve any of these plays here?

Yeah, hi Jeremy, it's Darren here. No, the results we're seeing are within our expectations of what we thought, so our budget allocation, capital allocation is going to remain pretty similar. And as for, you know, Groundbreaking technology changes, not really. You know, the Montigny and Duvernay, for that matter, are both fairly well up the learning curve. So there is, you know, the only modifications and optimizations being made are very specific on a pad-by-pad, well-by-well, reservoir-by-reservoir basis. So nothing earth-shattering from that perspective.

And just to follow on to that, Jeremy, I think that in the Montney, I mean, we're, as Darren referenced, quite far up the learning curve. We've drilled a total of 30 Montney wells to date, including our car and CACWAP areas through our acquisitions, our joint venture with Hammerhead and our acquisition of TimberRock as well as the XTO transaction. So we're quite far up the learning curve as far as using the newest technologies that are available to us and And as Darren said, that getting the results that we're having are as expected and maybe a little bit better than expected. What was new to us, I think, is the DuVernay. And we're seeing some very good test results at this particular time and look forward to advancing those projects and bringing those on stream for a full time and be able to talk to it perhaps at the end of the third quarter.

OK. Maybe kind of just shifting gears here a bit. Now that you're kind of close to your targeted debt levels, any more thoughts on the A&D market, what it's looking like, if you're looking to potentially sell some additional non-core assets, or is there anything that you want to maybe add to the portfolio now that your balance sheet's in a much stronger shape to do a cash acquisition?

Yeah, just on the portfolio. the M&A market, and I've got Dave Marbuquet sitting here. He's anxious to get going again, for sure, with his team. But no, what we're looking at is we think that, as I referenced earlier, I think in the last call, that when we did the cleansing of the assets that we weren't going to capitalize that we did in the first quarter of the year, bringing in $400 million of cash to our balance sheet, that was helpful to us. And I think we're very comfortable with the well, we are very comfortable with the asset suite that we have now. One of the areas we may bring on assets that we're not looking to drill over the next 7 to 10-year period of time, we may look to bring in third-party capital into some of the areas because we have such an expansive opportunity set in front of us. So that's an area that we'll look at, but we have to be cautious to ensure that if we're truly not going to capitalize them, that maybe we can get others to But that would be something we'll look at as we move into the balance of this year and into 24. As far as specific acquisitions, we're not, we said that this is a year we're going to be focused on operations and we're committed to that.

Okay. Perfect, guys. Thank you very much.

Thanks, Jeremy. Next question will be from Josh Chernich at Haywood Securities. Please go ahead.

Hey, guys. Strong quarter and thanks for taking my questions. My first question is on the I was hoping if you could add some color on what specific opportunities you're seeing to enhance capital efficiencies in the region.

Yes, Darren here. Can you repeat that?

I missed the middle part.

Yeah, I was wondering if you could add some color on what specific opportunities you're seeing to enhance capital efficiencies in the region.

Yeah, primarily just continue to exceed what our expectations are with regards to proper placement, fit for purpose rack designs, depending on what the reservoir characterization is, going through controlled facilities to optimize our cash flow in the short term. Like I said in the last question, nothing groundbreaking, just continual improvement piece by piece.

Okay. My second question is on the Duvernay. How do you think about optimizing the asset going forward, either on the drilling or completion side, now that you've taken over the asset? And what would you, or what would increase the confidence to accelerate the development of the play in 2024?

Yeah, first of all, just a You know, we walked into this cautiously, the Duvernay play, just when we acquired it. We had not been drilling up in this place. We wanted to do more geoscience and engineering work on it before we went in, and we're very pleased with what we've seen on our first three-well pack, not just from the drilling but from the completion and the test results that we're having at this particular time. And that allowed us to shift our capital around and drill the four-well pad that we're on right now. We're on the third well of a four-well pad, drilling that out that we talked about earlier about bringing on by the end of the year, the second pad. So we're tiptoeing into the play. I would expect that this year we'll have drilled seven wells, but moving forward, we'll set our budget up. depending on results as to what we get here, Darren and the engineering team, together with our geoscientists and operations guys, we'll put together a budget for, you know, 24, 25, that will include probably advancing these projects a little bit more. We're not capacity, facility capacity constrained there. We own the 15 to 7 plant, and it is only utilized to the tune of about 65% today. So we have capacity to move our product through that.

Okay, thanks. That's all for me.

Okay, thank you. Thank you. A reminder to please press star one if you do have any questions. Next will be Travis Wood at National Bank. Please go ahead.

Yeah, thanks. In terms of the facility that came with XTO. It's about 65% full room to help on the cost side, I expect. But maybe on caps, with caps up and running, are you guys seeing any wiggle room to improve costs both on transport on the liquid side now and on the processing side with some incremental space left at 15 to 7?

Yeah, just a – and I think – Your two-part question is, first of all, the 15 to 7 facility. Obviously, we'll continue with more throughput. We'll drive down costs on a per unit basis. So that will be an area that we'll look to advance. And as far as the CAP pipeline and getting tied into that, that will take place in the first quarter as well. So first quarter leading into the second quarter. Which we do have capacity. We have capacity into the CAP system. So I think we're in very good shape here. Increasing production, driving down costs. I think it's in these bigger, what we'll call more as the unconventional resource place, both in the Duvernay and the Montney.

Okay, that's perfect. So kind of leveraging off the pipeline in Q1 of next year.

That's correct. Yeah, that's right.

Okay. Okay, thanks, Grant.

Okay. Thank you. And at this time, Mr. Fagerheim, it appears that we have no other questions. Sir, please proceed.

Well, that was quick. We could keep going here for quite a while. But anyway, thanks, Sylvie. And once again, I want to thank each of you for taking the time and interest to listen to our call today. We are excited to advance our company forward with a strong total returns to shareholders, and we look forward to updating you on the progress from an operational perspective over the next several months. All the best. Have a good day. Enjoy the balance of your summer.

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.