Whitecap Resources Inc. (OTCPK:SPGYF) Q3 2022 Earnings Conference Call October 27, 2022 11:00 AM ET
Company Participants
Grant Fagerheim – President and Chief Executive Officer
Joel Armstrong – Senior Vice President, Production and Operations
Thanh Kang – Senior Vice President and Chief Financial Officer
Darin Dunlop – Senior Vice President of Engineering
Conference Call Participants
Patrick O’Rourke – ATB Capital Markets
Jeremy McCrea – Raymond James
Chris Jones – Haywood Securities
Operator
Good morning. My name is [Sylvie] [ph], and I will be your conference operator today. At this time, I would like to welcome everyone to Whitecap Resources Q3 2022 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]
And I would like to turn the conference over to Whitecap’s President and CEO, Mr. Grant Fagerheim. You may begin your conference.
Grant Fagerheim
Good morning and thanks, [Sylvie] [ph]. Good morning, everyone, and thank you for joining us here today. Here with me are four members of our senior management team, our Senior Vice President and CFO, Thanh Kang; our Senior Vice President, Production and Operations, Joel Armstrong; our Senior Vice President, Engineering, Darin Dunlop; as well as Dave Mombourquette, Senior Vice President, Business Development and Information Technology. Before we get started today, I would like to remind everyone 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.
I’m once again pleased to report another strong quarter for Whitecap where we achieved our second highest quarterly cash flow per share result in the company’s history. This is despite the volatility in commodity prices and the backdrop of recessionary fears impacting the global economy at this time. Operationally, we had a very active quarter as we ramped up to 10 rigs by the start of August and drilled 84 gross wells in the quarter.
The outstanding execution of our capital program for each of our business unit teams, along with the asset level outperformance resulted in corporate results ahead of our internal expectations. We also closed the acquisition of XTO Canada during the third quarter on August 31, another milestone for our company. As a result of significant effort and coordination among our various teams, the integration of the new assets and staff has been seamless.
Optimization efforts of existing production is well underway and has been successful today. As mentioned in the press release earlier today, our recent Montney results continue to outperform our expectations. Since acquiring the [indiscernible] assets from the private company in mid-2021, we have brought on 16 Montney wells on-stream by the end of this year and expect to drill an additional 23 wells next year.
The latest two pads referenced are evidence that the improvement in drilling and completion designs over the past three to four years is significant and we will continue to use our technical expertise to continually optimize our drilling program. We believe that our asset base is unique and provides a very differentiated advantage.
Our base conventional assets across Alberta and Saskatchewan, our lower decline oil-weighted properties that generate significant free funds flow. This is balanced with our unconventional condensate rich assets in the Montney and Duvernay, which are high impact and will be primary source of growth for our company into the future.
Considering our sizable land position with over 2,000 locations in the Montney and Duvernay, in addition to our facility ownership, this provides us with opportunities for improving capital efficiencies, decades of sustainable per share growth, and stronger shareholder returns.
Our near term focus is to reload our balance sheet by reducing net debt to $1.8 billion by the end of this year and $1.3 billion in mid-2023. This will ensure that we have the financial flexibility to withstand commodity price volatility and market cycles and to take advantage of further consolidation opportunities should they arise in the future.
We are excited to continue to advance our business on behalf of our shareholders as we progress towards our near-term financial and operational goals. I will now pass this on to Joel to comment on our ongoing operations.
Joel Armstrong
Thanks, Grant. I want to briefly touch on the inflationary impacts in our current and forecasted operations. We’re currently running 9 rigs across our asset base and we’ll run between 10 and 11 rigs over the majority of 2023 outside of spring breakup. We’re either fully contractor, we have the right to extend all drilling rigs through the end of 2023 at a minimum.
Our 2023 budget of $900 million to $950 million that was announced at the end of September includes all known and forecasted cost increases due to inflation across all of our service providers based on WTI between $80 and $85 a barrel. Next, I want to discuss our third quarter operating costs, which came in higher than our original expectations. Most of the increase in third quarter is expected to be one-time in nature and is related to higher than expected power prices.
August and September averaged over $260 per megawatt hour in Alberta, which compares to just over $100 per megawatt hour in the preceding 12 months. These prices have somewhat stabilized to average approximately $100 per megawatt hour over the past two weeks. Going forward, we’ve increased our power price assumptions, but are still forecasting operating costs to decrease approximately to $13 per – $13.50 per BOE going forward from our Q3 operating cost of $14.85 a BOE.
I’ll now pass it on to Thanh to discuss our financial results.
Thanh Kang
Thanks, Joel. As Grant mentioned, third quarter funds flow of 547 million or $0.88 per share was the second highest in our company’s history and resulted in 339 million of free funds flow after capital expenditures of 208 million. Of that 339 million of free funds flow, 138 million was return to shareholders through our base dividends and 71 million in share repurchases through our NCIB.
The remaining 200 million helped fund our cash purchase of XTO that closed on August 31, for net consideration of 1.7 billion after working capital adjustments. Our balance sheet is in excellent shape with net debt at the end of the third quarter of 2.2 billion, resulting in a debt-to-EBITDA ratio of only 0.8x and we have over 900 million of liquidity on our credit facility.
As Grant mentioned, this will be further reduced to 1.8 billion by year-end. We forecast production to average approximately 165,000 BOEs per day in the fourth quarter, an increase of 13% over Q3 production. Our full-year 2022 capital program of between 670 million to 690 million is unchanged.
As Joel mentioned, removal of certain one-time items along with the full quarter of XTO volumes is expected to reduce our operating costs by 9% to approximately $13.50 per BOE in the fourth quarter. We also expect our royalty rate to decrease despite several wells coming off royalty holidays earlier than expected, which slightly increased our third quarter royalty rate to 21%.
At U.S., $85 WTI, we forecast a royalty rate of approximately 19% for the fourth quarter. In the third quarter, we incurred one-time transaction costs of $11 million relating to the XTO acquisition for legal accounting and advisory fees. For 2023, our budget of 900 million to 950 million and average production of 170,000 to 172,000 BOEs per day is unchanged.
Our 2023 budget generates annual production per share growth of 21% and at $80 WTI and $5 AECO, we forecast over 1.2 billion of free funds flow. Our sensitivities or every U.S. $5 per barrel change in WTI. Our funds flow is impacted by 110 million. For every $0.50 change in AECO, our funds flow is impacted by 45 million and every penny change in the FX rate for our funds flow is impacted by 30 million.
As a reminder, approximately 90% of our liquids production is linked to light oil or condensate pricing and is not impacted by the recent widening of heavy oil differentials.
I will now pass it back to Grant for his closing remarks.
Grant Fagerheim
Thanks, Thanh. One additional item that I wanted to touch on this morning was a continued success of our new energy team that has been achieved. We have two new carbon hubs that were recently selected by the Alberta government for further evaluation. One in Central Alberta and the other in Southern Alberta. This brings us to a total of three Alberta hubs and one Saskatchewan hub where our subsurface experience and advanced technical knowledge of operating CO2 sequestration facilities has made us a top choice for industrial emitters to partner with and support.
We are confident that our partnerships across the CCUS value chain will provide not only add new revenue source to Whitecap, but also provide support for decarbonization plans across multiple industries. We are excited to advance our business forward with an active winter drilling season ahead of us and align our sight to reaching our net debt milestones and increasing return on capital to our shareholders.
We want to also note that we have five smaller size disposition packages in the market that have executed on would accelerate the achievement of our debt targets. However, as we are in a position of strength, execution of any transaction will only be done so that a value that improves the returns relative to just cash flow flowing the assets over the longer-term.
With those comments completed, I will turn the call over to our operator, Sylvie, for any questions. Thank you.
Question-and-Answer Session
Operator
Thank you, sir. [Operator Instructions] And your first question will be from Patrick O’Rourke at ATB Capital Markets. Please go ahead.
Patrick O’Rourke
Hey, good morning guys. I know you commented on the wells that were brought on the former Kicking Horse land here, certainly, what we’re seeing in the public data corroborates really strong well performance in [62, 5 West to 6] [ph], we’re seeing that from a gas rate perspective. I’m wondering if you could perhaps comment on what you’re seeing on the liquid deal, particularly condensate performance there?
Darin Dunlop
Yes, it’s Darin here. Yes. No, for sure. It’s commensurate like obviously there’s different condensate gas ratios across that pool, but it’s commensurate with what the gas rates we’re seeing. So, if you were using condensate gas ratios that you’re seeing from companies that reported that they are in-line.
Patrick O’Rourke
Okay, great. I know certainly just to the East of [country] [ph] gas ratios are pretty strong, so we’ll try to extrapolate that. Just sort of moving over to the return of capital framework here, there’s been a little bit of commodity volatility, but when you announced the XTO transaction, I think you did a very good job codifying the milestones for incremental dividend growth here and you’ve obviously reiterated that today.
I’m wondering at the time you had pointed to the potential for somewhere in the neighborhood of 200 million to 300 million in share buybacks for the balance of the year. And I’m wondering with everything that’s going on in commodity adjustments, all of the kind of factors that you’ve talked about on the call here today, is that still a good number for investors to have in their head?
Thanh Kang
Yes. Hey, Patrick, it’s Thanh here. I think in the near-term here, as you’ve mentioned, we’re really focused on reloading our balance sheet and getting to that [1.8] [ph] and then ultimately that 1.3 billion of net debt and ultimately targeting that $0.73 per share dividend. I think what you’re referencing in that is the share buyback of that 200 million to 300 million is really our ability to return more cash back to our shareholders after we’ve achieved that 1.3 billion of net debt.
I mean even in the quarter here you saw that we spent a little bit of money here, 71 million on the share buybacks and we’ll continue to pick at it, but I think from a meaningful perspective here, we’ll look at doing that once we receive – we achieved the 1.3 billion of net debt.
Patrick O’Rourke
Okay. Thank you very much.
Thanh Kang
Thanks, Patrick.
Operator
And next question will be from Jeremy McCrea at Raymond James. Please go ahead.
Jeremy McCrea
Yes. Hi guys. Just a follow-up with Patrick’s question there a little bit. Just with these assets that you have up for sale, if you are successful in getting a good price for that and really expedites reaching your debt targets sooner, could we expect the dividend, the bump in the dividend to be paid sooner, potentially even as early as Q1 if you’re successful?
Grant Fagerheim
Yes. Jeremy, it’s Grant. For sure, that’s one of the things that we have talked about and as a management team and Board that should be successful in selling some of the assets and reducing our debt levels, quicker to the $1.8 billion would be increasing our dividend to as we’ve talked about to that – to a higher level in that particular time. With the ultimate objective to get to the $1.3 billion or under, to take our dividend from what is currently $0.40 all the way up to that $0.73 and that’s what we’re looking to do.
And we expect in the context of the market today with commodity prices the way they are that we should be able to achieve both our first milestone late this year 2022, and within the first half of 2023. Of course, it’s all subject to commodity prices, but that’s what we’re looking for.
I’m very excited about being able to take it to those levels and still have plenty of free cash flow left over or whether it’s any other return on capital we would like to do whether it’s share buybacks or incremental dividends at that particular time.
Jeremy McCrea
Okay. And then just kind of a – just one last question. Just looking now beyond 2023 here, I’m going to say over the next five years, do you see yourself allocating more and more capital to the Montney versus where it is now? Or how do you do you think like it’s always going to be, kind of in that 40%, 50% of CapEx here that you’re going to be spending?
Grant Fagerheim
Yes. It really is, I think that we have to – there’s a very large inventory of opportunities that we acquired from XTO. So, we will have a base level of capital put into that, but part of this is commodity price dependent. Obviously, we’ve got a very [plethora] [ph] of oil opportunity as well then Saskatchewan and Alberta. So, a combination of – and we’re always looking as we talk about organic growth between 3% to 8% per share per year, supplement with acquisitions or share buybacks.
So, we’ll look to continue to advance that. But you have to look at it in the context of what the commodity prices are as well. So, that – right now, we’ll set a base level. Next year, we’re talking about 23 wells in the Montney that we’re drilling and that would probably be a base level of wells into the future as well.
Jeremy McCrea
Okay. Thanks, Grant.
Grant Fagerheim
Thanks.
Operator
Your next question will be from Chris Jones at Haywood Securities. Please go ahead.
Chris Jones
Just a follow-up on the first two questions related to returns to shareholders. And maybe, I’m asking the same question framed differently. To date, buybacks have largely been tactical in nature. Just wondering going forward, do you expect share repurchases representing a growing share of free cash flow in 2023 or do you, kind of see them moderating of some of those, at least no larger blocks have already been repurchased? And then just a quick follow-up to that related to any special dividends in 2023, do you expect to preannounce those or will they, sort of use them to pad cash returns at the end of the year to satisfy the targets to return about 75% of free cash flow to shareholders? Thank you.
Thanh Kang
Yes. Thanks for that question there, Chris. I think if we think about the business and return of capital on a go forward basis there, once we achieved that 1.3 billion, which as Grant mentioned, sometime in the first half of 2023 there, our free cash flow, if you look at it going forward, and this is using $75 WTI, is about $1.1 billion. So we’re returning 75% of that back to our shareholders, that’s about 800 million.
So, of that 800 million, about 450 million is going to be used to service the $0.73 dividend that we’re targeting here. So, we have another 350 million effectively to return back to shareholders either in the form of the NCIB or additional dividends, whether it’s in the form of special or variable there. So, lots of optionality in terms of what we can do. I think that relative to where Whitecap is certainly trading at today, our preference is to focus on share buybacks. And those are important from a dividend sustainability perspective because if we can reduce the amount of shares that we put out into the market, that means that we can increase and have more dividends available to our shareholders there.
So, that’s the way that we see, I think our priorities as we look forward. Number one is, looking at reloading our balance sheet. Number two, increasing that dividend level to the $0.73 and then I think the third priority would be around share buybacks at this particular time.
Chris Jones
Okay. Thank you. Very helpful.
Operator
Thank you. [Operator Instructions] And your next question will be from [Jack Austin at Jack A Capital] [ph]. Please go ahead.
Unidentified Analyst
Hi there guys. I’m just wondering how you guys see the labor market right now? Where you guys see it and how it is and then as well, if you guys see the difference between Canadian energy prices and then U.S. oil prices improving or getting worse going forward, and especially I think with the with the LNG terminal in Vancouver, is it [or wherever] [ph] coming on in 2024?
Joel Armstrong
Yeah. Hi, it’s – Jack, it’s Joel Armstrong. In reference to your first question on the labor market, I think things have started to level out, I would say, in terms of pricing and/or the labor front, so we’ve been pretty consistent with our programs and that was by design to make sure that we, kind of maybe going back in time, we’d always front end load our capital program, try to level load throughout the year for that exact reason just to make sure that we can manage the labor side and execute our capital program, as best as possible and we’re very fortunate on how the capital programs have been executed so far. So, my comment is, things are in good shape.
Grant Fagerheim
Thanks Joel. Just regarding your second question on what we would foresee on commodities going forward, I think you’re going to continue to see – we believe you’re going to continue to see strength on oil prices. The WTI price, WTI and Brent, and that – when we talk about the strength, I mean, in this today, in that [$89] [ph] range, but somewhere between [$80 to $90] [ph] maybe I’m sure there’s going to be times where it’s out of those – out of that band for a short period of time, but this is a very healthy band.
And when you look at that relative to the Canadian – when you put the foreign exchange to it, the Canadian dollar, trading in that [$0.73, $0.735] [ph] range. That ends up with a $120 oil price. So very, very healthy prices. When I talk about differentials, your question I think is, really goes down the path of what happens to differential. We’ve got WCS trading very wide at this particular time.
We’re not as exposed to WCS pricing at Whitecap Resources, because we’re primarily a light oil producer, but we do see the fourth quarter being challenged on WCS pricing and into the first quarter until we’re – and that goes back to the refinery challenges that we have in the U.S. right now, in the U.S. Midwest and [Toledo] [ph] and other areas. The component we have on, and we’re focused on [light] [ph], which is trading on about a $2 differential between and we’ve been budgeting at $3.50 range. So, we’re well within our range there.
So forecasting, once we see TMX coming on, we think that [divides] [ph] the entire system, which will be sometime in the back half of 2023. It brings on that incremental between 500,000 to 600,000 barrels a day of incremental capacity. We hope to think that [divides] [ph] the system as far as natural gas is concerned and shift over to that.
We think that Canada is pretty well-balanced. Yes, we’re producing about 17 to 17.5 BCF a day today, which is up quite substantially from what we were, but I think that as you move forward into 2025, you may see that differential from [9x] [ph] pricing back on that, the differential natural gas prices to be stronger. But in the meantime, Canadian Natural Gas prices, once we get TransCanada through the end of this month and early into November, I think that differential definitely squeezes in from where it is at this particular time.
So, lots of, we’ll call it tailwinds on the differential side, both on oil and natural gas going forward.
Unidentified Analyst
Thanks. Awesome guys. Thank you.
Operator
Thank you. And at this time, Mr. Fagerheim, we have no other questions registered. Sir, please proceed.
Grant Fagerheim
Okay. Thank you, Sylvie. Thanks to each of you for taking the time and interest to listen to this call today. We are excited to execute on an active winter drilling season program, and believe that our company is very well-positioned to manage through this current price volatility. We look forward to updating you on our progress over the next few months. Wishing you all the best. Bye for now.
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. Enjoy your afternoon.
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