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Edited Transcript of WCP.TO earnings conference call or presentation 1-Aug-19 3:00pm GMT

Q2 2019 Whitecap Resources Inc Earnings Call

Aug 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Whitecap Resources Inc earnings conference call or presentation Thursday, August 1, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Grant Bradley Fagerheim

Whitecap Resources Inc. - President, CEO & Director

* Thanh C. Kang

Whitecap Resources Inc. - CFO

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Conference Call Participants

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* David Popowich

CIBC Capital Markets, Research Division - Director of Institutional Equity Research

* Jeremy McCrea

Raymond James Ltd., Research Division - Energy Analyst

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Presentation

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Operator [1]

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Good morning. My name is Silvy, and I will be your conference operator today. At this time, I would like to welcome everyone to Whitecap Resources Second Quarter 2019 Results Conference Call. (Operator Instructions)

And I would like to turn the call over to Whitecap's President and CEO, Mr. Grant Fagerheim. Please go ahead. You may begin the call.

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Grant Bradley Fagerheim, Whitecap Resources Inc. - President, CEO & Director [2]

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Thank you. Good morning, everyone, and thank you for joining us. I'm joined today with our -- by our CFO, Thanh Kang; as well as our VP Engineering, Darin Dunlop; and our Vice President of Operations and Production, Joel Armstrong.

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 Q2 news release issued earlier this morning.

Our second quarter was a relatively quiet one from a capital expenditure perspective. We achieved average production of 70,611 BOE per day in the second quarter, which was flat to our first quarter production of 70,666 BOE per day on capital spending of only $26.5 million or 30% lower than we had -- that may have projected. Capital expenditures for the first 6 months totaled $151.4 million compared to $249.1 million for the first 6 months of 2018, a decrease of 39%.

Our ability to maintain production with minimal capital is a direct result of our low corporate production decline rate currently at 19%. Combining this with our high fund flow netbacks along with our strong capital projects have allowed us to generate high rates of return on capital deployed as evidenced in the first half of the year.

Whitecap's objective to maximize free funds flow in the first half of the year resulted in $117.2 million in free funds flow, which was primarily allocated towards further strengthening our balance sheet. With the first half of the year behind us, we have geared up for a very active second half drilling program, where we anticipate drilling 174 or 151.3 net wells and increasing average production to 77,000 barrels a day in the fourth quarter, which -- with continued focus on light oil projects across our asset base.

With respect to our commitment to corporate stewardship, advancing technologies and cleantech initiatives, we are happy to advise that our operated world-class CO2 sequestration project in Weyburn, Saskatchewan is running well or better than we anticipated since we acquired it in December 2017.

In 2018, we sequestered just shy of 1.8 million tons of CO2 into the project, which more than offsets the CO2 emitted from our total operations across our entire company, resulting in Whitecap being a net negative emitter of CO2. We continue to progress this technologically advanced project and look forward to providing future updates.

I'm also pleased -- very pleased to announce that Brad Wall, past Premier of Saskatchewan, is appointed to the Board of Directors on July 30 this year. Brad brings with him a wealth of knowledge and experience with energy-related matters and economic policy at both the provincial and federal government levels. Brad will serve as a member of our health and safety committee as well as our newly created Sustainability & Advocacy Committee that includes specific focus on ESG initiatives within Whitecap. We look forward to working with Brad as we advance our company moving forward.

With that, I will turn it over to Thanh to provide some color on our financial results for the quarter.

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Thanh C. Kang, Whitecap Resources Inc. - CFO [3]

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Thanks, Grant. WTI averaged $59.81 per barrel compared to $54.90 per barrel in Q1 '19, a 9% increase. Canadian crude oil price differentials continue to be tight with the Edmonton Par differential averaging $4.63 per barrel compared to $4.85 per barrel in Q1 of '19. Realized prices prior to hedges and tariffs were $58.32 per barrel compared to $53.97 per barrel in Q1 '19, an increase of 8%.

So royalty rate of 19% was higher than the first quarter royalty rate of 17% due to higher crude oil prices in addition to prior period adjustments for Saskatchewan Crown Royalties and capital taxes. Operating expenses for the second quarter were $12.45 per BOE, consistent with the first quarter at $12.68 per BOE. We anticipate operating cost of $12.75 per BOE in the third quarter decreasing to $11.50 per BOE in the fourth quarter as we ramp up on our production.

Transportation expense of $2.20 per BOE, general administration expense of $1.04 per BOE and interest and financing expense of $2.05 per BOE are expected to remain relatively flat for the balance of the year.

In the second quarter, we also increased our credit facility by $70 million to $1.175 billion and extended the maturity dates on our credit facility for another year to May 31, 2023. Our credit capacity is now $1.77 billion on net debt at the end of the quarter of $1.2 billion. Our balance sheet is in great shape. Debt to EBITDA was 1.6x compared to a debt covenant of not greater than 4x, and EBITDA-to-interest ratio was 13.9x compared to our debt covenant of not less than 3.5x.

I will now pass it on to Grant for his closing remarks.

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Grant Bradley Fagerheim, Whitecap Resources Inc. - President, CEO & Director [4]

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Thanks, Thanh. In the second quarter, we achieved results for the 6 months of the year and looking forward to reporting back on results of our active second half capital program. Whitecap's annual production guidance of 70,000 to 72,000 BOE per day on capital spending of $425 million to $475 million is unchanged. Our expectation is to continue with our strategy to generate significant funds flow to cover our capital cost and dividend payments in the back half of the year, while growing our production to 77,000 BOE per day, setting sub for another strong year in 2020. We remain committed to running Whitecap with low leverage, moderate growth within funds flow and generating strong free funds flow after dividends that provides us with full optionality for returns to shareholders, future growth and further balance sheet strengthening. Thanks to each of you for your support and interest in Whitecap.

With that, I'll turn it over to the operator for any questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And it appears, Mr. Fagerheim, that at this time -- we do have our first question from David Popowich at CIBC.

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David Popowich, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [2]

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Obviously, you guys generated a lot of free cash flow in the first half of the year and you're on schedule to, I guess, spend cash flow -- spend in line with cash flow in the second half of the year. I was just wondering if you could give us an update on how you guys plan to approach the NCIB in the second half of the year. If you're going to be continuing that in light of the fact that you'll have 100% payout ratio?

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Grant Bradley Fagerheim, Whitecap Resources Inc. - President, CEO & Director [3]

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Thanh, you want to go ahead?

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Thanh C. Kang, Whitecap Resources Inc. - CFO [4]

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Yes. Thanks for the questions, Dave. Our intention on the NCIB is really to keep our share count flat. So in the first half of the year here, we spent about $5 million to do that. We'd anticipate spending about another $3 million to $5 million in the back half of the year. So not a large component of the free cash flow that's being allocated to that. We think that our balance sheet is in great shape at this time, debt to cash flow at 1.6x in Q2 and just given the volatility in WTI in Canadian crude oil differentials, the best allocation for a free cash flow is towards continue to strengthen our balance sheet to provide that optionality for us to enhance returns as we move over the next 3 to 5 years here. So for the -- for this year, certainly the NCIB, we'll see that allocation in that $5 million to $10 million range.

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Operator [5]

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And your next question would be from Jeremy McCrea at Raymond James.

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Jeremy McCrea, Raymond James Ltd., Research Division - Energy Analyst [6]

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I'm just curious to see how the M&A market has changed just over the last few months, just in terms of your appetite to do something, the opportunities out there. And if that's what you -- your strengthening your balance sheet, is that really what you're trying to gear up for here?

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Grant Bradley Fagerheim, Whitecap Resources Inc. - President, CEO & Director [7]

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Yes. Thanks, Jeremy, it's Grant speaking. And just the -- I don't know if -- I'm not expecting the second half of the year to be overly exciting from an M&A perspective and certainly, it's not something that we are looking at. We're focused on internal operations this year and focused on our own internal runnings of our business and delevering as Thanh had mentioned. We don't see -- there maybe M&A activity, but we will not be a participant in that at this particular time. We think that furthering into 2020 might provide even better opportunities, and we make a decision at that particular time if we participate in the market then if there's assets that would fit our profile.

So long story short is we're not active, and quite frankly, I don't expect it to be overly active myself in the back half of the year. Just with the volatility that we're seeing at this particular time, the limited egress that we do have out of -- for our Canadian products as a result of the political situations we have in Canada at the federal level. So -- and we're hoping that we get an opportunity to build pipe, get access to market and have a free market once again in 2020, '21.

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Operator [8]

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(Operator Instructions) And at this time, Mr. Fagerheim, it appears we have no other questions. So I would like to turn the call back over to you for further comments.

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Grant Bradley Fagerheim, Whitecap Resources Inc. - President, CEO & Director [9]

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I just want to thank everyone. I know that we're going through a very challenging time in the energy sector, and we believe it is a time to focus on long-term sustainability and we think we're doing that very well at Whitecap Resources. We know that the fossil fuel energy is going to be around for a very long period of time and we're keen to play through and not only survive, but thrive through this period of time. So appreciate everyone's support and look forward to a very busy second half of the year and reporting back after our third quarter. So thanks, again, and enjoy the balance of your summer.

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Operator [10]

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Thank you, sir. Ladies and gentlemen, this does indeed concludes 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 the rest of your day.