Whitecap moves capital program forward, bumps up wells, dividends, share buybacks, and expects vendor rates to increase

CALGARY – Whitecap Resources Inc. isn’t waiting until January to get moving on its capital program. In announcing its 2022 budget on Oct. 14, the company said it was accelerating part of its capital program to the fourth quarter of 2021. It’s also bumping up its dividend by 38 per cent. It means more drilling within Saskatchewan, and spreading that drilling out so that it will use fewer rigs, but use them more consistently.

The announcement was made by conference call led by president and CEO Grant Fagerheim.

Next year’s capital spending is set at $470 – $490 million, and is expected to generate average production of 121,000 – 123,000 boepd (73 per cent liquids). The budget is $90 million lower than preliminary expectations, with approximately $55 million due to acceleration of capital into late fourth quarter of 2021 “to solidify service sector requirements while optimizing the 2022 capital program, and approximately $35 million from continuation of the capital efficiency improvements achieved during 2021,” according to the release.

Capital spending is now expected to be $425 – $435 million for 2021, which adds 39 (34.7 net) wells to their fourth quarter 2021 program. “Starting our 2022 capital program early and locking in key services will help to ensure the efficient execution of our 2022 capital plans. We are also increasing our 2021 average production guidance to 111,000 – 112,000 boepd (76 per cent liquids) primarily due to the continued outperformance of our base 2021 program and from the increase in fourth quarter capital,” the company said.

Expectation vendor rates will go up

The oilfield service sector saw large hits on their vendor rates when the oil downturn hit in 2014, and to this date, much of that has not yet been recovered for many service companies. There’s an acknowledgement within Whitecap’s announcement that service costs are going to be going up.

“We have conservatively assumed an average 5 per cent price increase for services and materials for our 2022 program,” said Darin Dunlop, senior vice president, engineering.

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Asked by Pipeline Online about the impending labour shortage, and, given seven years of reduced vendor rates, if five per cent will be enough to cover rising labour costs, Fagerheim replied, “You’re right on labour costs. We think they should go up, and will go up. We also think that there’s steel costs that are coming in higher. But inflationary costs, we think between, four and seven per cent.

“But when we look at the overall asset, to our capital efficiencies, that’s where we talk about up to a five per cent increase in the overall cost structure, going forward.

“We don’t lay out exactly each one of our specific areas, whether time, labour or materials. They all have varying components of inflation. But we look at what we can offset here, with our internal operations, and overall, I think our team has done a very good job on minimizing the impacts of higher costs, going forward.”

Weyburn Unit

The Weyburn Unit is anticipated to see 15 wells drilled, similar in number to recent years. Asked about that, Dunlop said they’ve outlined 15 wells for Weyburn in 2021, “But Weyburn is also part of our accelerations, with another five wells, for a total of 20 being done in the program, which is an increase from previous years.

“One of the things that we do look at is, as we get results on drilling within, and expanding the flood, we learn all the time. So, it is prudent to take a bit more of a measured approach on development, and learn from our results and optimize our program. So yes, in the future, you will see some bigger programs, but it won’t be exorbitantly bigger.”

Impact of possible CO₂ investment tax credit

In September, Fagerheim joined Minister of Energy and Resources Bronwyn Eyre at the Weyburn Unit, where she announced a strengthened policy meant to encourage more carbon capture, utilization and storage, with an emphasis on utilization through enhanced oil recovery (EOR). Fagerheim at the time had pointed out that it depends on the federal government implementing an investment carbon tax credit.

Asked by Pipeline Online about any movement on that front, Fagerheim said, “What we’re looking for, from the federal government, is what an investment tax credit is going to look like. We hope that they’ll come out before the end of the year with their clean fuel standard, as to how they’re positioning for Canadian energy.

He added, “If we’re reasonable people here, I think what we should be expecting from our federal government is that they take into account the energy crunch that we’re going into at this particular time, and take a little bit more responsibility on this underinvestment that we’ve had in energy, worldwide, as well as in Canada, and not be so demonizing to Canadian energy.

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“We’ll see, ultimately, if they get the message strong enough, because a lot of people, what we’ll call consumers, are going to feel the crunch on exports, whether through supply chain and food costs, or transportation, mobility.

“So, what we’re thinking is that the federal government may do a re-look as to, and accelerate what they’re going to be doing, with the investment tax credit to partially or totally offset the carbon tax that they set in place. We’ll wait and see what type of ruling they come up with, hopefully before the end of 2021.”

The company has earmarked $28 million for CO₂ purchases, as a capital purchase. The company has been injecting roughly two million tonnes per year. Fagerheim said they are under contract until 2024 to pay for the CO₂. “But beyond that, what that looks like, as far as some initiatives we’re working on, different emitters that we’re talking to, the two components are: should we be paying for CO₂ into the future? And then the second component is, where there’s even greater upside, is what does it investment tax credit market look like? So there’s two components that can be quite substantial.

“And if you think about this, when we’re sequestering two million tons a year at this particular time, when we get to 2022, at $50 a ton, it’s $100 million of incremental value that could be established. Not saying that we’re there yet, but if you do get full credit, offset credits to the carbon tax, at $50 a tonne and two million tons a year, is very substantial, can be very substantial for us on a go-forward basis. So those are the things that we’re anxiously waiting to have discussions on, once we get to the ruling from the federal government on clean fuel standards. Hopefully they make the right decisions here, or we start moving capital over the border.”

Load levelling

Instead of waiting until the new year and going hard, Whitecap is spreading things out and moving some of their capex forward, into the last quarter of this year. Dunlop explained, “The primary drivers behind this movement include: one, level loading or activity to mitigate the service sector constraints from higher industry activity expected to Q1; two, early access to premium equipment, people, and materials will provide certainty to our service providers, which in turn results in optimal pricing and performance. Three, efficiency gains by designing longer, and steadier program during seasons of optimal efficiency. And four, a more balanced program, allow for consistent crews and services, ensuring safe and efficient operations, which is of the utmost importance to us.

“By accelerating our program, we are now peaking at 10 rigs in Q4 and Q1, as opposed to 16 without the acceleration. We were also able to maintain a more continuous year-round drilling program, which will promote additional cost optimization.”

It means there will be 39 wells (34.7 net) drilled in the last quarter of 2021, and $11 million for infrastructure preparation.

Saskatchewan Viking drilling

Dunlop said, “In western Saskatchewan, we are continuing to reap the benefits of our industry-leading Viking results by drilling 35 (32.1 net) horizontal Viking wells, of which two will be injection wells in Kerrobert, to continue to build out on our waterflood success in that pool.”

The company expects to spend $95 – $100 million to drill 60 (49.8 net) wells. In addition to the 35 Viking wells, there are 25 (17.7 net) wells planned in Southwest Saskatchewan, with most drills targeting the Atlas and Lower Shaunavon formations.

Weyburn Unit wells

“In our eastern Saskatchewan business unit, we plan to spend 135 to $140 million in 2020, which include the drilling 15 (9.8 net) wells at Weyburn. This includes seven injection wells, which are part of the expansion of the CO₂-EOR flood into a new area. This expansion will provide an incremental CO₂ storage capacity, in addition to the targeted incremental oil reserves,” Dunlop said.

Frobisher and six month payouts

He continued, “The remaining 47 (41.8 net) wells in eastern Saskatchewan will be focused on a highly economic Frobisher conventional oil, which will make up 80 per cent of our activity. At $70 oil, these wells, on average, are expected to pay out in less than six months. The incredibly rapid and efficient integration of the acquired assets by our team, new and old, has allowed us to make significant improvements to our capital efficiency, which is reflected in our 2022 budget.”

There will be 26 (22.3 net) multi-leg horizontal wells. A further eight (7.9 net) wells are targeting other Mississippian formations along with one Torquay well.

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Central Alberta

Whitecap expects to spend $75 – $80 million to drill 23 (15.6 net) wells in Central Alberta. This business unit will utilize two rigs running through the first and third quarters, with a program focused on further evaluation of the multi-zone potential across its expanded land base. They plan to drill 12 (10.0 net) Cardium wells, 9 (3.6 net) Glauconite wells and two (2.0 net) Ellerslie wells as part of its 2022 program.

Northern Alberta and British Columbia

For 2022, in northern Alberta and B.C., 60 percent of their $165 – $170 million program will be on unconventional Montney and Kakwa and Karr assets. “We will have one rig dedicated for most of the year drilling and completing wells, four separate multi-well pads and assembly line fashion,” Dunlop said.

Broader context

In a broader context, Fagerheim said, “The past year has been a transformational year for Whitecap. We are excited to announce our initial plan for 2022, along with advancing our priority of increasing cash returns to our shareholders. We have significantly improved our long-term sustainability through lowering capital expenditure break-evens, increasing our capital expenditure efficiencies, and significantly improving our balance sheet, through our timely strategic acquisitions, along with strong operational and financial results. Our accelerated fourth quarter 2021 capital, and our 2022 capital plans, generate exceptional returns on capital and significant free funds flow. The 2022 budget is expected to generate $1.4 billion of funds flow, over $900 million of free funds flow and over $740 million of discretionary free fund flow, using $70 WTI oil, and $3.75 per gigajoule gas prices.”

He noted that on Oct. 5, the company announced the sale of a five per cent gross overriding royalty on the Weyburn Unit. That will result in a year end 2021 net debt of approximately $1 billion.

Dividend boosted

“We believe this level of debt is prudent, as it provides us with $1 billion of unused capacity, and a stress-tested debt to EBITDA ration of 1:2 times at $40 dollar WTI oil, relative to our bank covenant of not greater than four times. At $70 WTI, our debt to EBITDA ratio is 0.3 times. With our long-term debt target achieved, we have elected to increase cash returns to shareholders through our base dividend, increasing our monthly dividend by 38 per cent, to 27 cents per annum. It is consistent with our objective of providing shareholders with a sustainable and growing dividend long term. This new dividend level represents only 12 per cent of our 2022 funds flow, and if commodity prices remain strong, we have an opportunity for continuing increases in 2022,” Fagerheim said

The 38 per cent increase to its dividend is an increase to the monthly dividend to $0.0225 per common share from $0.01625 per common share. That equates to an annual dividend of $0.27 per common share. The increase will take effect beginning with the October dividend payable in November.

The company said in a release, “Inclusive of the dividend increase, Whitecap expects to be able to fully fund its 2022 capital program and dividend with funds flow down to approximately US$40/bbl WTI and at US$70/bbl WTI the dividend represents only 12 per cent of 2022 funds flow, highlighting the sustainability of the increased dividend level.”

Asked about commodity cycles, Dunlop said, “The number one objective when we think about the dividend, and its sustainability, is to make sure that it is fully-funded, so both capital and dividend, both down to $45 WTI.”

Share buybacks

Fagerheim said, “Today we also announced for the 2022, we plan to allocate half of our forecasted $740 million of discretionary free funds flow, after capital and dividend at 27 cents per share, back to our shareholders through a combination of incremental dividends, and/or share buybacks. We have significant room in our normal course issuer bid, which expires in May of next year, and we’ll apply for a new normal course issuer bid for the remainder of 2022, to continue with targeted share buybacks. The other half the discretionary funds will be allocated to our balance sheet.”

He noted that they will be able to “opportunistically capture tuck-in acquisitions, without issuing equity.”

The company could repurchase approximately 30 million common shares or 5 per cent of its common shares outstanding on an annual basis.

 

Editor’s note: If you want to see the difference on how PipelineOnline.ca makes energy stories relevant to Saskatchewan, check out the same story on BOE Report, and EnergyNow amd Yahoo! Finance, which were just copied and pasted press releases. BNN had a live interview with Grant Fagerheim, but focused on dividends and cashflow. The Calgary Herald piece didn’t even mention Saskatchewan. As of the morning of Oct. 15, there were no stories on CTV, CBC, SaskToday.ca or the Financial Post.

If you want to know what’s going on in Saskatchewan, this is where you’re going to find it.

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