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 2024 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 number two, I'm sorry, star then number one on your telephone keypad. And should you wish to withdraw your question, please press star then number two. I would now like to turn it over to Whitecap's President and CEO, Mr. Grant Fagerheim. You may begin, sir.

Thanks very much, Sylvie. Good morning, everyone, and thank you for joining us. There are four members of our management team here with me today. Our Senior Vice President and CFO, Ton Kang. Our Senior Vice President of Business Development and Information Technology, Dave Malmberg-Kett. Our Vice President of our West Division, Joy Wong. and our Vice President of our East Division, Chris Bullen. Before we get started today, I would like to remind everybody that the statements made by the company today during this call are subject to the same forward-looking disclaimer and advisory that we set forth in our news release issued yesterday afternoon. I am pleased to report that we had a very successful second quarter with record quarterly production averaging over 177,000 BUE per day, especially when compared to our forecast of 170,500 BUE per day. This generated $426 million of fund flow and $23 million of free fund flow. These results are directly attributed to the exceptional work of our exceptional technical teams. Our year-to-date operationally and asset performance-wise has been exceptional, resulting in production outperformance across our entire portfolio. In particular, our southeast Saskatchewan publisher assets, Our Central Alberta Cardium and Glauconide assets, as well as our unconventional Montney and Duvernay assets, all outperformed our internal expectations. Since acquiring XTO assets in August 2022, we have taken meaningful steps to develop our Montney and Duvernay assets, which has underpinned our strong operational performance in our unconventional assets. To date, we have designed and executed on a development plan across both our Montney and Duvernay assets, providing support confidence to the market in the deliverability of our asset base and our operational execution, designed, constructed, and brought on our Mosro battery on time and under budget, developed a long-range plan showcasing meaningful growth and depth of inventory within our Montney and DuVernay assets, and in particular, our next stage of Montney growth and development in our Latour area of Alberta. Subsequent to the end of the second quarter, we also announced a positive FID on our phase one new build Latour facility that is fully funded by PGI. This in addition to the partial working interest disposition of our Musrel and Kebab facilities to strong partners Topaz and PGI for total proceeds of $520 million. Through our extensive scale and depth of our high quality inventory, we've been able to secure additional pipeline and facility access, enhance contract terms and highly competitive fees on our processing, transportation, fractionation, and marketing for all areas of our Montane and Duvernay development. These synergies will enhance our future netbacks and reduce the overall financial impact of infrastructure working interest dispositions. We are very excited to move ahead with both partners and look forward to continued progression of our unconventional Montane and Duvernay development. I will now pass the phone on to Tom to discuss our second quarter financial results. Thanks, Grant.

Our second quarter financial results were equally as strong as our operational results, generating funds flow of $426 million, or 71 cents per share, and free funds flow of $223 million, or 37 cents per share. Our predominantly light oil and condensate production base benefited from crude oil prices averaging over $110 per barrel on a Canadian dollar basis, with total liquids representing 95% of our revenue for the quarter. Our operating costs decreased to $13.49 per BOE in the second quarter, a strong result for our team and reflect higher production and continued focus on cost savings. Cash tax expense of $100 million in the quarter included $33 million, or $0.05 per share, impact on capital gains from the partial infrastructure disposition. Excluding this one-time impact, the tax rate as a percentage of pre-tax funds flowed from six months ended was 12%, which is consistent with our forecast of between 12% to 14% for 2024. Year to date, we have returned almost $250 million to shareholders, including $25 million of share repurchases in July. We plan to use $200 million of the proceeds from the partial infrastructure dispositions towards share repurchases in the second half of the year. Proform of the dispositions, our net debt sits at below $900 million, And after share repurchases, we forecast net debt of below $1 billion at year end. This low level of debt relative to our projected $1.7 billion in fund flow provides us with capital allocation optionality going forward. I will now pass it off to Joey for remarks on our West Division results.

Thanks, Tom. Our Mutney and Duvernay assets continue to perform well. with updated data showing that our recent wells are outperforming on both an initial and longer-term basis. As we progress development of this asset base, incremental data is analyzed by our team and informs production strategies and forecasting models for existing wells, while also helping to shape development and expectations for our plans going forward. As we highlighted in our investor day in early June, our approach to customized pad design, completion parameters, and development plans has yielded positive results across our Montney and Duvernay assets at Kakwa, Latour and K-Wel. Our recent results on our first eight wells at Musroe are another data point that validates this approach. Over the first 90 days, the eight wells have averaged 1,600 buoys a day per well, with almost 1,100 barrels per day of condensate per well. At times, we were producing at over 80% of our condensate stabilization capacity of our new facility, and after bringing on our third four-well pad in late Q3, we expect to be producing consistently at sales condensate capacity of almost 11,000 barrels per day. The economics of these first eight wells are very robust and are projected to pay out in only five months. In total, we plan to bring on 15 Montigny and Duvernay wells in the second half of the year after bringing on our latest Duvernay three-well pad at 11 of 34B in the second quarter. Although we would define each area as drilling liquids-rich natural gas wells, The liquids, and more specifically the condensate volumes, drive the economics of each area. When running sensitivities on our KBOB Duvernay plus CACWA Latour and Musrell Montney type curves, we can run $0 natural gas prices for the first four months of production and still achieve average payout in less than one year across the four areas. This is why it makes sense for us to adhere to our schedule and continue to bring wells on production despite the challenging natural gas environment at this time. I'll now pass it on to Chris for his comments on the East Division.

Thanks, Joey. As you've heard, consistently strong results are the theme so far, and the East Division results are no exception. Momentum carried through from our first quarter drilling program, and we are very pleased with what our assets and teams were able to accomplish in the second quarter. We brought on a total of 26 20.4 net wells during the second quarter, 14 of which carried over from the first quarter and 12 were spud in the second quarter. Outperformance relative to our expectations has come from both the new 2024 wells and higher than forecasted base production levels. In southeast Saskatchewan, our 2024 Frobisher results have been exceptionally strong with expectations for these wells to pay out in less than six months. Highlighting the attractiveness of these assets is that not only in the initial payout, very quick, we actually forecast these wells to pay out our capital investment three times in the first three years. This is truly a top tier asset and we are very pleased with the land position we have built in only three years since entering the play to the torque acquisition in early 2021. Moving west to our Viking assets in west central Saskatchewan, where the initial results on recently acquired land in the Elrose area are meeting our expectations and are above historical results for the area. We continue to advance enhancement opportunities as we have just bought our first 1.5 mile DRH in the Elrose area. The ability to drill ERH wells into the newly consolidated land position will improve capital efficiencies and enhance our future inventory. In Alberta, we have achieved strong production results from our recent lochanite drilling program, as our first six wells online continue to significantly outperform expectations. A combination of flowing unrestricted through alternative infrastructure, along with attractive subsurface qualities, despite being a challenging area to drill, has initial liquids production outperforming our expected rates by 40% over the first 90 days on production. I also wanted to take a moment to highlight a recent operational enhancement initiative in our Central Alberta Cardium program. We recently drilled a four-well pad in West Pamina and successfully implemented an updated frac design which increased our daily sand placement by 25 to 50% compared to previous, resulting in 6% total cost savings on completions relative to budget expectations. We are actively investigating the applicability of this new frac design across our conventional asset base. Our recent West Pembroke results have been very strong, and these well-cost savings are improving the already robust economics of our Light Oil Cardium assets. Although some of our East Division plays don't receive the same notoriety as our unconventional assets, our teams continue to do an excellent job of improving the long-term sustainability and profitability of these assets, thereby further strengthening our corporate free cash flow. With that, I'll turn it back over to Grant for his closing remarks.

Thanks, Chris, Joey, and John, for your remarks.

As you've heard, the first six months of the year have been very strong for Whitecap, and we look forward to building off this momentum in the second half of the year. We have not changed our production guidance of 167,000 to 172,000 hewi per day, but given the success to date, we do expect to come in close to the higher end of the range, if not higher. As we advance through the remainder of the year, we expect our price realizations to remain very robust, given our exposure to light oil as well as a strong U.S. dollar, although commodity price volatility is expected to continue. We are in an advantageous position financially with low net debt. Our low decline rate further supports long-term sustainability and profitability across our commodity cycles. The outlook for White Calf continues to be positive, and we are looking forward to the second half of this year as we develop and grow our assets into 2025 and beyond. With that, I'll now turn the call over to the operator, Sylvie, for any questions.

Thank you, sir. Ladies and gentlemen, as stated, if you do have questions, please press star followed by one on your Dutch-tone phone. You will then hear a three-tone prompt acknowledging your request. And should you wish to withdraw your question, simply press star followed by two. 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 1 now if you do have any questions. And your first question will be from Dennis Fung at CIBC. Please go ahead.

Hi. Good morning. Congrats on the second quarter results as well as the strong wall performance. I've got a couple questions here. The first one kind of goes back to the well performance and the multi-bench development. I was actually hoping to get a little bit more clarity or understanding around what you view would be or what results you're frankly looking for to help you confirm both your development strategy and then secondarily feel more comfortable rolling out a kind of an improved type curve throughout both guidance and kind of your five-year plan that you outlined at your investor day.

Hey Dennis, Joey Wong here. So the first question in terms of what we're looking for on results, and of course the results themselves on a production basis, we put in our release there that at 1600 barrels per day or so, that's slightly above our reference type curve. So the short answer on what we're seeing on results is that they're a slight beat to our expectations, which is good. What we're also looking for, which won't be quite as visible on the production, is the interaction between wells, be it on a short-term or long-term basis, and I think we had talked about that a little bit in the last call there, is that what we're looking at is do we see the wells interacting with each other, whether that be on initial completion, whether that be kind of in the short-term production period, whether that be in the long-term production period. In the short-term production period and the interaction on frac, what we're seeing is actually some really, really encouraging results that the wells are just barely seeing interaction from each other, which is kind of what we want to see. As we move to the balance of our asset base, what we're going to do is look at how the Roth changes, look at how the condensate ratios change, and tailor our development plan from there. But that's a long-winded way of saying we're liking what we're seeing and it's reaffirming the plans we've got right now.

Great. I appreciate that context. The second question that I have, and it might be a little bit early for this, obviously, just given it's still kind of mid to late summer and you guys are probably just starting your capital budget planning. How should we be thinking about the CapEx cadence going into 2025, especially with the now, we'll call it accelerated, quote-unquote, development of Latour with that recently signed infrastructure deal? Thanks.

Yeah, thanks for that question, Dennis. It's Tom here. I think as we look at production and capital spending for the balance of the year here. Q3 will be higher than Q4, but expect to be within the range there, somewhere in that billion to one point billion for 2024. Thinking about 2025, and certainly this wouldn't be budget quality at this particular time here, but I would use 5% growth, which gets us to about 180,000 DOEs per day, Capital plans, despite kind of the acceleration of Latour with the PGI funding there on the facility, I would still expect to see between 1.1 and 1.2 billion for 2025.

Great. I appreciate that context. I'll turn it back.

Thank you. As a reminder, ladies and gentlemen, if you do have any questions, please press star followed by one on your touchstone phone. Next question will be from Aaron Bilkoski at TD Cowan. Please go ahead.

Thanks. So I guess I'll start with asking the prequel question to one of Dennis's questions. I'm curious about the cadence of the new Motney and DuVernay tie into the back half of this year. And I guess the second part of that is how you're thinking about the shape of the production profile through your end.

Yeah, thanks for that, Aaron.

Yeah, I think the, you know, when we look at, you know, our Montney and Duvernay productions, you know, it is chunky in terms of production ads throughout the balance of the year here. Again, when we look at it on an average for the full year basis, you know, as Grant mentioned there, we're very comfortable that we'll be at closer to the high end of the productions guidance, closer to the 171, 172,000 VUEs per day. When we look at the third quarter with respect to the unconventional, there really isn't any wells that we're expecting to come online until August 25th at the earliest there. So a lot of our production ads will certainly come in the fourth quarter. So again, expect that we'll be at the top end of our guidance range there between the 167,000 to 172,000 buoys per day.

Thanks. Maybe a follow-up question to that. Given the lumpiness of the production additions, is there any way to maybe feather wells in over time to avoid relatively lumpy quarters, or is that just operationally not particularly feasible?

You know what? That's a good question. You know, it's something that we'll certainly look at as we develop our budget for 2025 to smooth it out through the quarters. You know, what we've been focusing on really is maximizing cash flow for the year. And so, you know, it's been designed – Certainly with that in mind for 24, but smoothing it out is definitely a consideration for 2025.

Just to add to that, Aaron, is that what we're looking at as we focus moving forward into the 2025, 26, 27 budget timeframes is when do we add incremental drilling rigs in both the unconventional and into the conventional part of our assets? Again, we want to ensure that part of this facility infrastructure transaction that we did. I want to make sure that there's facility infrastructure in order to produce our wells. And as Thomas is saying, focus on our net back and our ability to increase our cash flow on an ongoing basis. So we'll look to, as part of the budget process for the next three years going forward, is how do we blend and smooth the production, the lumpiness of the production profile out as we advance through those years.

Thanks for that. If I could follow up with one more financial question, and that's, given your commitment to the NCIB through the back half of the year, I'm curious why share repurchases were fairly minimal in Q2, despite having, I think, excess free cash flow to do more.

Yeah, so the way that we're thinking about the NCIB purchases, Aaron, is it's really looking at it on a six-month basis there, just with the way that the cadence for capital is. We'll typically have our highest capital programs in the first quarter and the third quarter, and then they'll taper down in Q2 and Q4 there. So it's better for us to look at it in six-month increments. Effectively, in the first half of the year here, free cash flow was directed both to the balance sheet as well as the dividend. And as you mentioned there, as we get into the back half of the year, will generate more free cash flow to be able to execute on our NCID. So the way that we're looking at it today in the back half of the year, this is using our deck at $80 WTI here, we have about $30 to $50 million. That's over and above our dividend obligation that we'll use on the NCID. And then as per our press release there, we're carving out an additional $200 million that we'll use on the proceeds from the disposition towards the NCIB. So the capital allocation, or I should say the free cash flow allocation, hasn't changed. We're still looking at 75% return back to shareholders in the form of the dividend and share buybacks, but the $200 million is incremental to that.

Just the last comment to add into that is that we have to be mindful of our trading blackout periods of time as well. So as we go into different time periods, we're very respectful of trading blackouts, which we're very stringent on at Whitecap Resources. So that plays into our overall time period as raising information to the market. We were in a long discussion with not only the infrastructure sell-down, but we were in a time period here with just dropping into our quarterly reporting as well.

Thank you both. I appreciate that.

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

Oh, hey. Good morning, guys. Strong quarter there. Great to see the well results. I have a couple of mostly financial questions here for you. You alluded to with the sort of the room you've made on the balance sheet post the infrastructure dispositions. You alluded to capital allocation flexibility. But Tom just pointed to what were pretty narrow goalposts with respect to 2025 capital spend and production at this point in time. So I'm just wondering if you can maybe walk us through with respect to the flexibility and things you could do sort of rank order what your priorities would be in terms of dividend growth, acquisitions, incremental production growth that could be above and beyond what you just talked about or spoke to on 2025.

Yeah, sure. Thanks for that question there, Patrick. Yeah, as we go through the list of, you know, returns back to shareholders here, the dividend, you know, at the 73 cents there, you know, sustainable down to $50 WTI. You know, the yield from our perspective is too high, so there's certainly no rush for us to increase the dividend at this time. The priority would be around share buybacks, and that's why, you know, we've allocated the $200 million towards buying back our shares. Could we potentially use more? Yeah, absolutely we can. I think the billion dollars that we're targeting in net debt at the end of the year feels comfortable for us, but I would say priority is the NCIB over any dividend increases at this particular time. And the reality is when we continue to buy back our shares here, we reduce that overall dividend obligation and we are increasing it on a per share basis there. Optionality around the balance sheet outside of returning capital to shareholders would be around smaller tuck-in acquisitions where we have a working interest, we're the operator there, and really it's just a consolidation of a play that we have expertise in versus larger scale M&A activity at this particular time.

Okay, and then maybe just build a little bit or add a little bit of nuance to Aaron's earlier question with respect to execution on the buyback. You have a $200 million number that's out there. You spoke to looking at it in six-month increments, and obviously the first half of the year is a higher capital obligation, just given the way the cadence of the drilling programs tend to play out, or in particular the first quarter. Just wondering how you look at that $200 million in the back half of the year, can we expect it to be sort of executed on a very rateable basis, on a month-by-month basis, or is there going to be a bit of finesse to that around sort of the share price performance and the blackout periods that Grant touched on?

Yeah, I mean, I think the way that we look at it is if you look at the third quarter here, you know, we'll likely spend somewhere in that $125 million on the share buybacks on a very methodical and consistent basis here. And then in the third quarter, you know, you've got the $75 million plus whatever free cash flow is left after paying the dividends. So, as I mentioned in that $30 to $50 million. So, expect to see an excess of $100 million in the fourth quarter based on our forecast at this time here.

Okay. Thank you very much.

Thank you. And at this time, gentlemen, there are no other questions registered. Please proceed.

Well, thank you, everyone, for your time to listen to our call today. And we would like to wish everyone a very pleasant remainder of your summer weather and summer holidays. Bye for now. Thank you.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, would you ask that you please disconnect your lines.