CALGARY, ALBERTA–(Marketwired – Nov. 13, 2017) – Whitecap Resources Inc. (“Whitecap” or the “Company”) (TSX:WCP) is pleased to announce that it has entered into an agreement to purchase high quality light oil assets in southeast Saskatchewan for cash consideration of $940 million before closing adjustments (the “Acquisition”). The Acquisition includes a 62.1% operated working interest in the Weyburn Unit (14,600 boe/d) and 200 boe/d of production from minor assets in southeast Saskatchewan (the “Assets”). The Weyburn Unit (the “Unit”) is a world class carbon dioxide (“CO2“) enhanced oil recovery (“EOR”) development with a low base decline rate of less than 5%, high operating netback of $31.86/boe, and significant short and long term development and expansion opportunities. The Assets also include extensive infrastructure in place to facilitate future development plans.
The Acquisition will be funded with a $92.5 million non-brokered private placement (the “Private Placement”) and a concurrent $332.5 million bought deal equity financing (the “Prospectus Offering” and collectively, with the Private Placement, the “Financings”) and by the Company’s credit facilities. Whitecap’s credit facilities are anticipated to increase to $1.7 billion upon closing of the Acquisition.
STRATEGIC RATIONALE
The Acquisition is a continuation of Whitecap’s strategy to enhance our existing portfolio with assets that exhibit lower production declines, high operating netbacks and significant growth opportunities with strong capital efficiencies to further enhance our future free funds flow. The Unit is a self-sustaining operation that generates strong free funds flow even in a low commodity price environment and requires minimal capital investment to maintain production volumes and associated funds flow. In 2018, our base case assumptions are to invest 35% of the net operating income from these Assets to maintain production at 14,800 boe/d which we anticipate will result in significant additional free funds flow of approximately $112 million. We estimate that over the next five years, the base Assets have the potential to grow to approximately 17,700 boe/d and generate cumulative free funds flow of $459 million using a flat operating netback of $31.86/boe. Refer to the Increased 2018 Guidance section of this press release for the commodity price assumptions. The significant free funds flow from the Assets in combination with those generated by our other core asset areas allows Whitecap to also announce an additional increase to our monthly dividend of 5% to $0.0257 per share ($0.3084 per share annualized) from $0.0245 per share ($0.2940 per share annualized) effective for the January 2018 dividend. This represents a cumulative 10% dividend increase including the previously announced increase on November 1, 2017.
In 2018, pro forma the Acquisition, Whitecap is set to deliver 14 – 16% production per share growth and 25% funds flow per share growth along with an increased annual dividend of $0.3084 per share and a total payout ratio of 81%. Whitecap’s balance sheet remains strong with net debt to funds flow ratio of approximately 1.7 times.
The Unit is one of the largest carbon capture, utilization and storage projects in the world. It is recognized globally as one of the most successful developments of its kind from a technical, economic and environmental perspective. Over 100 technical papers have been written on its development and progress. The vendor has been the operator of the Unit since its inception in 1963 and has conducted over 250 site tours to interested parties from around the world.
There has been minimal development of this asset over the last few years with only 12 infill wells drilled in 2015 and one CO2 expansion phase added in 2014. Due to low commodity prices, capital spending has been limited to production maintenance over the last few years. Whitecap anticipates spending approximately $60 million in 2018 on the Unit, which represents 35% of anticipated net operating income from the Assets, to maintain a flat and stable production profile.
The Unit is anticipated to be a multi-decade source of self-funding growth and annual free funds flow with meaningful near and long term growth opportunities. There are significant optimization and expansion opportunities within the Unit including:
- 34 waterflood and EOR area infill drills;
- Reservoir optimization of the mature EOR patterns to minimize decline and improve CO2 utilization;
- 8 identified and planned CO2 expansion phases which include the drilling of 93 (57.8 net) production and 62 (38.5 net) injection wells; and
- Recovery of hydrocarbons liquids from recycled CO2 stream prior to reservoir reinjection.
The 8 EOR expansion phases are conservatively booked to an ultimate recovery factor of 31% compared to an average ultimate recovery factor of 54% booked on the existing 13 phases. To date, the 13 existing phases have recovered on average 42% of the original oil in place (“OOIP”) with some of the more mature phases recovering over 60%. The 8 expansion phases will develop a significant portion of the remaining 44% of the Unit area that has yet to benefit from the CO2 injection. The hydrocarbon liquid recovery from the CO2 stream, prior to re-injection, is also expected to provide an extremely stable and significant source of free funds flow.
There are also material expansion opportunities identified immediately offsetting the existing CO2 scheme which are in the preliminary planning stage. These include vertical and lateral expansion of the existing CO2 EOR scheme of which the combined opportunity set is unbooked and could represent incremental gross reserves of 109 MMbbls and a peak incremental gross production increase of over 13,000 bopd.
The Unit is world class from an operational, safety and environmental perspective. The vendor has operated the Unit since its inception in 1963 and its strong technical and field teams have years of experience operating it or similar fields. Whitecap also has extensive technical and operational experience operating a number of EOR schemes including miscible and alkaline-surfactant-polymer floods. The operation and optimization of this CO2 scheme will utilize many of the fundamentals, processes and technical aptitude that Whitecap already has in place which will be augmented by specific CO2 experience, as a significant complement of the vendor’s technical and field staff will be joining the Whitecap team to ensure that the transition, long-term vision and excellence of the project is maintained and enhanced.
The Assets include an estimated asset retirement obligation of $41.7 million discounted at 10 percent and an excellent Licensee Management Rating of 7.78.
In summary, the key benefits to Whitecap shareholders pro forma the Acquisition and the Financing are as follows:
- 2018 accretion expected per fully diluted share of 12% on funds flow, 11% on production, 30% on proved developed producing reserves, 19% on total proved plus probable reserves, and 7% on net asset value;
- Decreases our current corporate base production decline to 19% from 23%;
- Our oil and NGLs weighting increases from 83% to 86% in 2018;
- Decreases our 2018 total payout ratio (after capital spending and dividend payments) to 81% from 88% even after including the 5% increase to the annual dividend (10% cumulative increase including the previously announced increase on November 1, 2017);
- Significant increase to our free funds flow in 2018 to $134 million (after dividend increase) from $65.7 million;
- Increases our reserve life index by 7% to 17.9 years from 16.7 years; and
- Improves our funds flow netback by 1% to $25.96/boe.
SUMMARY OF THE TRANSACTION
The Acquisition has the following key characteristics:
Purchase price | $940 million |
Current production | 14,800 boe/d (100% liquids) |
Base production decline | <5% |
Proved reserves (1) | 92,324 Mboe (100% liquids) |
Proved NPV10 (1) (2) | $841 million |
Proved plus probable reserves (1) | 121,409 Mboe (100% liquids) |
Proved plus probable NPV10 (1) (2) | $1,219 million |
Proved plus probable reserve life index (3) | 22.5 years |
2018 operating netback (4) | $31.86/boe |
Notes: | |
(1) | Gross reserves are the total working interest reserves associated with the Assets before the deduction of any royalties and including any royalty interests receivable on the Assets. Gross reserve estimates are based on GLJ Petroleum Consultants’ (“GLJ”) evaluation in accordance with National Instrument 51-101, effective June 30, 2017. |
(2) | Before tax net present value based on a 10 percent discount rate and McDaniel & Associates Consultants Ltd.’s October 1, 2017 forecast prices. Estimated values of future net revenues do not represent the fair market value of the reserves. |
(3) | Based on current production of 14,800 boe/d. |
(4) | Operating netback is a non-GAAP measure. Refer to the non-GAAP measures section of this press release. |
Acquisition metrics are as follows:
Production | $63,500/boe/d |
2018 funds flow multiple (1) | 5.5x |
Proved reserves (2) | $10.18/boe |
Proved plus probable reserves (2) | $7.74/boe |
Recycle ratio (3) | 4.1x |
Notes: | |
(1) | Calculated as $940 million /(current production of 14,800 boe/d x $31.86/boe x 365 days) |
(2) | Gross reserves are the total working interest reserves associated with the Assets before the deduction of any royalties and including any royalty interests receivable on the Assets. Gross reserve estimates are based on GLJ’s evaluation in accordance with National Instrument 51-101, effective June 30, 2017. |
(3) | Calculated as operating netback of $31.86 divided by the cost of proved plus probable reserves of $7.74/boe. |
INCREASED DIVIDEND
Whitecap is focused on total shareholder returns and the dividend is an important component of this return profile. Our pre-acquisition budget included a 5% increase to the monthly dividend to $0.0245 per share from $0.0233 per share effective with the December 2017 dividend. With this Acquisition, we continue to improve our decline profile payout ratio, per share funds flow growth, financial strength and significantly increase our free funds flow. As a result, our Board of Directors has approved an additional 5% increase to the monthly dividend to $0.0257 per share ($0.3084 per share annualized) effective for the January 2018 dividend. Whitecap remains committed to returning cash to shareholders in a prudent and sustainable manner to enhance total shareholder returns.
INCREASED 2018 GUIDANCE
The following is the Company’s increased guidance for 2018, after giving effect to the Acquisition and the Financings:
2018 Pre-Acquisition (1) |
2018 Post-Acquisition (2) |
% Change |
|||||
Average production (boe/d) | 58,800 – 60,000 | 73,600 – 74,800 | 25 | % | |||
Per million shares (fully diluted) | 158 | 175 | 11 | % | |||
% oil and NGLs | 83 | % | 86 | % | 3 | % | |
Funds flow netbacks ($/boe) (3) | $25.59 | $25.96 | 1 | % | |||
Funds flow ($MM) (3) | $555 | $703 | 27 | % | |||
Per share (fully diluted) (3) | $1.48 | $1.66 | 12 | % | |||
Development capital ($MM) (3) | $370 – $390 | $430 – $450 | 16 | % | |||
Total dividends | $109 | $129 | 18 | % | |||
Per share (3) | $0.2940 | $0.3084 | 5 | % | |||
Free funds flow ($MM) (3) | $66 | $134 | 103 | % | |||
Total payout ratio (3) | 88 | % | 81 | % | (7 | %) | |
WTI (US$/bbl) | 54.00 | 54.00 | – | ||||
Edmonton Par Differential (US$/bbl) | (3.50 | ) | (3.50 | ) | – | ||
CAD/USD exchange rate | 0.78 | 0.78 | – | ||||
Natural gas (AECO C$/GJ) | 2.25 | 2.25 | – |
(1) | 2018 Pre-Acquisition calculations based on mid case production of 59,400 and development capital of $380 million. |
(2) | 2018 Post-Acquisition calculations based on mid case production of 74,200 and development capital of $440 million. |
(3) | Refer to the non-GAAP measures section of this press release for additional disclosures and assumptions. |
FINANCINGS
Private Placement
Whitecap has also entered into agreements with certain institutional investors who have committed to subscribe for, on a non-brokered private placement basis, 10,512,000 Subscription Receipts at a price of $8.80 per Subscription Receipt for aggregate gross proceeds of $92,505,600. The completion of the Private Placement is subject to customary closing conditions, including the receipt of all necessary regulatory approvals, including the approval of the Toronto Stock Exchange (“TSX”). Similar to the Prospectus Offering, the gross proceeds from the Private Placement will be held in escrow pending completion of the Acquisition. The net proceeds from the Prospectus Offering and the Private Placement will be used to partially fund the purchase price for the Acquisition.
Prospectus Offering
In connection with the Acquisition, Whitecap has entered into an agreement with a syndicate of underwriters co-led by National Bank Financial Inc. and TD Securities Inc. (collectively, the “Underwriters”), pursuant to which the Underwriters have agreed to purchase for resale to the public, on a bought-deal basis, 37,785,000 subscription receipts (“Subscription Receipts”) of Whitecap at a price of $8.80 per Subscription Receipt for aggregate gross proceeds of approximately $332,508,000. Members of Whitecap’s Board of Directors, management and employees intend on participating in the Prospectus Offering. The gross proceeds from the sale of Subscription Receipts pursuant to the Prospectus Offering will be held in escrow pending the completion of the Acquisition. If all outstanding conditions to the completion of the Acquisition (other than funding) are met and all necessary approvals for the Prospectus Offering and the Acquisition have been obtained on or before February 28, 2018, the net proceeds from the sale of the Subscription Receipts will be released from escrow to Whitecap and each Subscription Receipt will be exchanged for one common share of Whitecap for no additional consideration and without any action on the part of the holder. If the Acquisition is not completed at or before 5:00 p.m. (Calgary time) on February 28, 2018, then the purchase price for the Subscription Receipts will be returned pro rata to subscribers, together with a pro rata portion of interest earned on the escrowed funds.
The Subscription Receipts issued pursuant to the Prospectus Offering will be distributed by way of a short form prospectus in all provinces of Canada and in the United States, the United Kingdom and certain other jurisdictions as the Company and the Underwriters may agree on a private placement basis. Completion of the Acquisition and the Prospectus Offering is subject to customary closing conditions, including the receipt of all necessary regulatory approvals, including the approval of the TSX. Closing of the Prospectus Offering is expected to occur on December 4, 2017 and the acquisition is expected to close on or about December 14, 2017.
This press release is not an offer of the securities for sale in the United States. The securities may not be offered or sold in the United States absent registration or an available exemption from the registration requirements of the U.S. Securities Act of 1933, as amended (the “U.S. Securities Act”) and applicable U.S. state securities laws. Whitecap will not make any public offering of the securities in the United States. This press release shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities, in any jurisdiction in which such offer, solicitation or sale would be unlawful.