Whitecap is now injecting CO2 into the Frobisher, opening up all sorts of possibilities

Feb 27, 2024

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Ensign Drilling Rg 423 east of Benson drilling for Whitecap Resources on Jan. 27. Frobisher wells like this have been a major focus of drilling in southeast Saskatchewan. Photo by Brian Zinchuk

Whitecap Resource Inc announced 2023 results, reserves, operations and guidance update

 

CALGARY  – Ever since 2000, the Weyburn Unit has injected CO2 into the Marly and Vuggy formations. But starting late last year, Whitecap Resources has begun experimenting injecting carbon dioxide into the underlaying Frobisher formation.

The results could be profound for southeast Saskatchewan, as most drilling activity in southeast Saskatchewan these days is focused on the Frobisher. If additional carbon dioxide was available, the possibilities are enormous. And so far, results have been positive.

The CO2 injection into the Frobisher was one nugget in Whitecap Resources Inc. report of its operating and audited financial results for the three and twelve months ended December 31, 2023.

The company said in its Feb. 21 release, “We have also recently started CO2 injection at a pilot CO2 flood into the Frobisher formation underlying the Weyburn Midale unit. We drilled two (2.0 net) producer wells and three (3.0 net) injection wells in 2023 and initiated CO2 injection in late 2023. Early results are encouraging with a notable production response coming through approximately one month after injection, increasing oil rates on the two producer wells from approximately 40 bpd to over 200 bpd, per well. Further technical analysis to determine commerciality and large-scale development is ongoing, and we will provide updates as next steps are determined.”

While the Bakken formation got all the headlines starting around 2007, the reality is today in southeast Saskatchewan, very few Bakken wells are drilled. Most of the activity, especially in the hotbed Lampman area, has been Frobisher wells. And that area has had Frobisher development for decades. So if the Frobisher responds well to tertiary recovery through carbon dioxide floods, it opens up a lot of possibilities for extending the life of some of Saskatchewan’s most prolific oilfields.

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Strong year

2023 was a strong year for Whitecap both operationally and financially, the company said in a Feb. 21 release, highlighted by 11 per cent production per share growth and the achievement of its second of two net debt milestones, prompting a 26 per cent increase to its base dividend. The ongoing development of its high-quality drilling inventory has yielded exceptional results, the company said, with its team “constantly evaluating options to further improve capital efficiencies and netbacks for increased profitability.”

Average 2023 production of 156,501 boepd, including 103,014 bpd of light oil and liquids and 320,922 mcf/d of natural gas, generated funds flow of $1.8 billion ($2.94 per share) and after capital expenditures of $954 million, resulted in free funds flow of $838 million ($1.38 per share). Dividends declared of $373 million ($0.62 per share) along with $123 million of share repurchases on Whitecap’s normal course issuer bid (NCIB) resulted in shareholder returns of approximately $500 million ($0.81 per share).

“We are committed to strong return of capital to shareholders with a current base monthly dividend of $0.0608 per share ($0.73 per share annually) which will be supplemented with share repurchases on our NCIB,” the company said.

“We are also pleased to report exceptional 2023 reserve values highlighted by per share organic growth across all three reserve categories. These organic growth additions resulted in proved developed producing (PDP) and total proven (TP) production replacement of 107 per cent and 141 per cent, respectively, and reflect our strong 2023 drilling program. Three-year average finding and development (F&D) recycle ratios between 2.6 times and 3.3 times highlight the robust profitability of our asset base through commodity price cycles.

“Our balance sheet remains a priority for us and is in excellent condition with less than $1.4 billion of net debt (0.7 times debt to EBITDA ratio) at year end and approximately $1.7 billion of available capacity on $3.1 billion of total debt capacity. As we continue to allocate a portion of our free funds flow towards debt reduction, this will further strengthen our balance sheet for both downside protection and value enhancing opportunities in the future.”

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In west central Saskatchewan, the company added additional Viking properties. Whitecap said, “Near the end of the fourth quarter, we completed a tuck-in acquisition of light oil Viking assets in one of our core areas in western Saskatchewan for cash proceeds of $154 million, prior to closing adjustments. The acquisition consolidates an active area of our Viking drilling program, was completed at attractive acquisition metrics, and was highly accretive to funds flow per share and free funds flow per share. Our team is now actively executing on production optimization opportunities on this 100 per cent light oil asset base.”

The company provided the following fourth quarter and full year 2023 financial and operating highlights:

  • Funds Flow. Full year and fourth quarter funds flow netbacks of $31.36 per boe and $30.16 per boe, respectively, were strong despite average 2023 WTI crude oil prices being 18 per cent lower and natural gas prices being 50 per cent lower than in 2022. Operating costs of $14.10 per boe were down 3 per cent from 2022, despite inflationary pressures persisting through the year. Full year funds flow of $1.8 billion equates to $2.94 per share, while fourth quarter funds flow of $462 million equates to $0.76 per share.
  • Drilling Program. Whitecap was the fourth most active driller in Western Canada in 2023, drilling 215 (189.0 net) wells, including 181 (158.2 net) wells in its East Division and 34 (30.8 net) wells in its West Division. Of the $954 million of capital expenditures incurred in 2023, 80 per cent was allocated to drilling and completions, while 17 per cent was directed to facilities spending, including initial work on its Musreau battery to support Montney production additions in 2024 as well as an expansion to our 3-27 facility supporting regional Montney and Charlie Lake development in the Peace River Arch.
  • Increasing Return of Capital. Whitecap increased its dividend for the seventh time in three years to $0.73 per share annually in October 2023. We have been focused on delivering a strong return of capital to shareholders since paying our first dividend at the start of 2013, returning a total of $1.8 billion in dividends over the past eleven years. These returns have been further enhanced by repurchasing over 76 million shares for $612 million since 2017. Total return to shareholders of approximately $500 million in 2023 demonstrates a continuation of this strategy, the company said.
  • Balance Sheet Strength. Year end net debt of $1.4 billion equated to a debt to EBITDA ratio of 0.7 times and an EBITDA to interest expense ratio of 27.0 times, both well within its debt covenants of not greater than 4.0 times and not less than 3.5 times, respectively. “We have significant financial flexibility with over $1.7 billion of available capacity on $3.1 billion of total credit capacity,” the company said.
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OPERATIONS UPDATE

East Division

Whitecap said, “2023 was a very strong operational year for our East Division with outperformance across all four regions. We drilled 181 (158.2 net) wells during the year, which included 151 (134.9 net) light oil wells into the Cardium, Frobisher, Glauconite, and Viking formations that are characterized by quick payouts and high netbacks. With over 50,000 boepd of production under secondary and tertiary recovery, we also spent a total of $110 million on these assets in 2023. Approximately 60 per cent of this capital was directed towards drilling producing wells in areas under secondary and tertiary recovery while the remaining 40 per cent was directed towards injector drills and conversions along with base volume maintenance activities, to preserve our low decline rate of 20 per cent for the Division.

“In Eastern Saskatchewan, we drilled 46 (41.0 net) wells, primarily focused on the Frobisher formation. We have been utilizing open hole multi-lateral technology, drilling dual and triple leg laterals consistently since early 2021, and have incorporated longer laterals and additional lateral legs where viable. As a result, our average total lateral length increased by 45 per cent (700 metres per well) as compared to 2022. After providing for the impact of longer laterals, our 2023 program has been very successful, generating average IP(90) results that are 13 per cent above expectations. We have an active 2024 program underway with three rigs currently running in Eastern Saskatchewan with plans to drill 23 (21.1 net) wells in the first quarter.”

As for the other side of Saskatchewan, Whitecap said, “Our Western Saskatchewan region includes both low decline waterflood assets along with quick payout, high netback Viking light oil assets. On average, our 2023 Western Saskatchewan well results exceeded our expectations by 9 per cent on an IP(180) basis, which includes our Viking drilling program that averaged a capital payout of six months in 2023. The integration of the acquisition completed in late December is ongoing with combined production in the Elrose area now at 6,500 bpd which represents over 40 per cent of our total high netback, Viking light oil production. Our secondary/tertiary recovery enhancements and greater use of extended reach horizontal wells are some of the many inventory enhancement initiatives that our technical team has undertaken in Western Saskatchewan over the past several years.”

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Weyburn Unit

Buying the operating interest in the Weyburn Unit appears to have worked out well for Whitecap. The company said, “The profitability of our Weyburn asset is a function of an extremely low decline rate of 3 per cent and a 100 per cent oil and NGLs production base with 35 per cent of rollout areas still to be converted for CO2 injection. We drilled 4 (3.4 net) producing wells and 4 (3.7 net) injection wells in 2023, with our 2024 program increasing to 9 (6.3 net) producing wells and 8 (5.2 net) injection wells. Net operating income8 from this asset has paid out the purchase price of $940 million 1.2 times since we acquired it in December 2017. The property continues to produce 14,500 boepd net to Whitecap at this time.”

And across the line, Whitecap said, “In Central Alberta, our focus is in the Cardium and Glauconite formations, drilling 16 (10.4 net) wells into the Cardium and 14 (12.8 net) wells into the Glauconite in 2023. Our West Pembina Cardium program achieved strong results with average IP(90) rates exceeding expectations by 10 per cent. Our Glauconite continues to achieve strong results, with average production rates in line with our expectations and liquids rates outperforming by 5 per cent on an IP(90) basis. Our consolidated land position has allowed us to continually test increasing lateral lengths. We plan to drill 5 (4.9 net) Glauconite wells with an average lateral length of 2,700 metres and 8 (5.8 net) Cardium wells in the first quarter.

West Division

“We continue to advance operations in our West Division including a buildout of new facilities and infrastructure to handle our production growth into the future,” the company said. “We are looking forward to our next stage of Montney development at Musreau with the completion of our battery in the second quarter of this year. Our 2023 West Division drilling program has achieved excellent results thus far with average well results performing above type curve expectations, while we also continue to expand our technical knowledge of our asset base.

“At Kakwa, we are encouraged by strong initial results on our two most recent Montney pads, where we have optimized our development strategy for dynamic reservoir and fluid properties in this localized area. Our 3-well (3.0 net) 02-26 (B) pad was brought on production in September and has achieved an average IP(120) rate of 1,889 boe/d (32 per cent liquids) per well which is 26 per cent above our expectations. The 3-well (3.0 net) 03-21 (B) pad that was drilled in the fourth quarter was tied into permanent facilities in early February, with test results showing similar characteristics as the 02-26 (B) pad.

The company said although early, it is are encouraged by the initial results of these two pads and application of this well design and spacing strategy may be transferable to other areas of future Montney and Duvernay development. “While we ultimately believe that individual pad design will be tailored to the various geological and reservoir characteristics across our asset base, successful application of this well design and spacing strategy across a broader area has the potential to meaningfully improve the overall economics of our unconventional drilling inventory well into the future.”

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“We also spud our first two 4-well pads (8.0 net wells) at Musreau in the fourth quarter, which are expected to be completed and ready to be brought on production upon completion of our 20,000 boepd battery. The ramp up of production into this facility will occur during the second quarter, and we target facility capacity being reached as our third and fourth 4-well pads (8.0 net wells) are brought on production at Musreau later this year.”

At Lator, the company recently drilled a 2-well (2.0 net) pad as part of its validation and delineation efforts of this future area of Montney growth. The wells have achieved IP(60) rates of 1,655 boe/d (45 per cent liquids) per well which are approximately 15 per cent above our expectations. Strong return characteristics along with a significant land position will make Lator an area of meaningful growth for the West Division in the coming years. Whitecap said, “We plan to drill an additional two (2.0 net) Montney wells at Lator in 2024. Engineering and commercial work is underway to establish the optimal development and infrastructure strategy for this area.”

“With respect to our Duvernay asset at Kaybob, our results continue to outperform our expectations as our first seven (7.0 net) wells (4-well and 3-well pads) achieved an average IP(90) rate of approximately 1,600 boepd (36 per cent liquids) per well, which is 24 per cent above our expectations. We plan to bring eight (8.0 net) wells on during 2024 as we continue to increase production towards our target of 90 per cent capacity of our 100 per cent owned 15-07 gas processing facility by the end of 2025. The first 3 wells of our 2024 program are currently being drilled to a 4,200-metre lateral length, approximately 750 metres longer than our initial seven Duvernay wells.”

As part of the execution of its 2024 capital spending program and long-range planning scenarios, Whitecap has an active water management strategy to mitigate impacts of potential drought conditions in Alberta. They will have a combination of term and temporary licenses along with established water infrastructure to support its 2024 program.

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2023 RESERVES

Operational success and a deep set of highly economic inventory has resulted in strong year end reserve values, the company said. “We continue to see the benefits of our consolidation strategy that began in late-2020 as greater scale and asset optimization opportunities have yielded consistent per share growth and increasing net present values.

“One of the benefits of consolidating acreage has been an ability to drill longer laterals in areas that were previously restricted by ownership boundaries. In addition, we are consistently expanding the applicability of increased lateral lengths to greater portions of our asset base, giving potential for improved capital efficiencies and, therefore, increased profitability. At year end, we have identified 6,400 drilling locations in inventory which provides for over 25 years of sustainable and profitable growth.”

Whitecap highlighted the following 2023 year end reserve report results:

  • Per Share Focus. Debt-adjusted reserves per share increased 6 per cent on a PDP basis, 10 per cent on a TP basis and 7 per cent on a total proven plus probable (“TPP”) basis despite net dispositions decreasing total reserves. Whitecap’s focus on per share metrics along with strong return on capital execution will maximize long-term profits for its shareholders, it said.
  • Production Replacement. Prior to the impact of net dispositions, we replaced 107 per cent of production on a PDP basis, 141 per cent of production on a TP basis and 107 per cent of production on a TPP basis. Strong operational execution along with a prolific asset base provide for increased sustainability over the long term.
  • Long-Dated Inventory. White caps says its has significant inventory life across all its assets, with a PDP reserve life index (RLI) of 6 years, a TP RLI of 13 years, and a TPP RLI of 19 years. These are consistent with the three-year average and are reflective of the expansive opportunity Whitecap has to develop these assets over time.
  • Strong Recycle Ratios. Whitecap’s PDP F&D1 cost of $14.68 per boe, its TP F&D cost of $17.62 per boe and its TPP F&D cost of $20.46 per boe resulted in strong recycle ratios of 2.4 times, 2.0 times and 1.8 times, respectively. The three-year average F&D recycle ratios range from 2.6 times to 3.3 times, which emphasizes its strong asset base and our focus on long-term profitability.
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OUTLOOK

“We have increased our 2024 average production guidance range to 165,000 – 170,000 boepd (8 per cent production per share growth) to reflect the Viking tuck-in acquisition along with the reduction in capital spending. Our capital budget is now expected to be $900 million to $1.1 billion, which is $100 million lower than originally budgeted, providing another year of strong operational execution underpinned by the technical enhancements undertaken in 2023,” Whitecap said.

“WTI crude oil prices continue to be relatively volatile but have been rangebound between US$70/bbl and US$80/bbl and currently at approximately US$75/bbl for the balance of 2024. This, combined with the weak Canadian dollar, results in a very strong Canadian crude oil price in excess of $100/bbl. We also anticipate light and heavy oil differentials to tighten further throughout the year with the completion of the Trans Mountain Expansion project in the coming months, bringing further pricing upside to Canadian crude oil production.

“Natural gas prices are currently challenged with the lack of winter demand resulting in weak AECO prices forecasted through to the end of the summer, and a seasonal increase into next winter is anticipated. While the liquids component of our unconventional assets currently drives the economics, our growth in natural gas volumes is anticipated to coincide with the commissioning of LNG Canada in 2025. Completion of this facility is an important step for Canada, as there will be an ability to deliver natural gas to overseas markets which should reduce gas-on-gas competition within Canada. Further to this, as part of our ongoing efforts to diversify our natural gas volumes, we have joined Rockies LNG Partners to contribute 100,000 mcf/d of natural gas towards the Ksi Lisims LNG project and add exposure to non-North American natural gas prices.

“At current strip prices, we are forecasting 2024 funds flow of approximately $1.6 billion which results in free funds flow of $600 million, after capital investments. This is more than sufficient to fund our annual dividend obligation of $435 million. We have stress tested our dividend down to US$50/bbl WTI and $2.00/GJ AECO and have further flexibility to reduce our capital program to ensure dividends and capital investments are fully funded by cash flows. Our balance sheet remains in excellent shape with low leverage and ample liquidity to support the business throughout various commodity price cycles.”

Whitecap continued, “Our long term organic corporate growth outlook has been updated and increased to 210,000 boepd by the end of 2028, which represents average organic growth of 5 per cent on an annual basis, driven primarily by our liquids rich Montney and Duvernay assets. At the end of 2028, we will still have over 20 years of drilling inventory remaining, assuming a consistent 5 per cent annual growth rate beyond 2028.

“We would like to emphasize that our objective is to provide sustainable and profitable growth to our shareholders, including a disciplined level of debt, while remaining committed to responsible development of our assets. Our strategy includes advancing our emission reduction strategy and utilizing our expertise in carbon sequestration.

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Financials

Financial ($ millions except for share amounts

and percentages)

 Three months ended Dec. 31 Year ended Dec. 31
2023 2022 2023 2022
Petroleum and natural gas revenues 914.1 1,116.5 3,551.6 4,452.9
Net income 298.3 318.7 889.0 1,676.1
  Basic ($/share) 0.49 0.52 1.47 2.72
  Diluted ($/share) 0.49 0.52 1.46 2.70
Funds flow 1 462.3 593.6 1,791.4 2,322.8
  Basic ($/share) 1 0.77 0.97 2.96 3.77
  Diluted ($/share) 1 0.76 0.97 2.94 3.74
Dividends declared 109.6 67.2 372.8 237.2
  Per share 0.18 0.11 0.62 0.39
Expenditures on property, plant and equipment 2 200.5 179.0 953.8 686.5
Free funds flow 1 261.8 414.6 837.6 1,636.3
Net Debt 1 1,385.5 1,913.1 1,385.5 1,913.1
Operating
Average daily production
  Crude oil (bbls/d) 88,687 91,812 85,718 86,417
  NGLs (bbls/d) 19,241 17,473 17,296 15,521
  Natural gas (Mcf/d) 351,757 342,640 320,922 254,708
Total (boe/d) 3 166,554 166,392 156,501 144,389
Average realized Price 1,4
  Crude oil ($/bbl) 93.98 102.50 95.05 114.68
  NGLs ($/bbl) 37.85 46.84 38.90 55.30
  Natural gas ($/Mcf) 2.48 5.56 2.84 5.62
Petroleum and natural gas revenues ($/boe) 1 59.66 72.94 62.17 84.49
Operating Netback ($/boe) 1
  Petroleum and natural gas revenues1 59.66 72.94 62.17 84.49
  Tariffs 1 (0.42) (0.49) (0.49) (0.46)
  Processing & other income 1 0.80 0.77 0.87 0.68
  Marketing revenues 1 4.57 5.93 4.82 5.99
Petroleum and natural gas sales 1 64.61 79.15 67.37 90.70
  Realized gain/(loss) on commodity contracts 1 (0.14) (1.43) 0.34 (4.66)
  Royalties 1 (10.66) (13.34) (10.83) (16.35)
  Operating expenses 1 (13.41) (14.13) (14.10) (14.54)
  Transportation expenses 1 (2.09) (2.12) (2.17) (2.18)
  Marketing expenses 1 (4.54) (5.87) (4.79) (5.94)
Operating netbacks 33.77 42.26 35.82 47.03
Share information (millions)
Common shares outstanding, end of period 598.0 608.7 598.0 608.7
Weighted average basic shares outstanding 603.2 610.8 605.1 616.5
Weighted average diluted shares outstanding 607.3 613.8 608.6 621.1

 

 

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