CALGARY, Dec. 18, 2018 /CNW/ – Whitecap Resources Inc. (“Whitecap” or the “Company”) (TSX: WCP) is pleased to announce that its Board of Directors has approved a $425 – $475 million capital budget for 2019 that includes the drilling of 220 (191.5 net) horizontal wells. The 2019 capital program and the annual dividend of $0.324 per share is expected to be fully funded by internally generated funds flow.
Canadian crude oil price differentials, and associated short term contracts, have been positively impacted by the Alberta Government’s recent announcement curtailing 325,000 barrels a day of Alberta crude oil production effective January 1, 2019 to help reduce the excess crude in storage, and their intention to purchase rail cars to transport an additional 120,000 barrels a day out of the province starting in late 2019. Longer term, Canada needs additional export pipelines (Keystone XL, Trans Mountain Expansion and Enbridge Line 3 Replacement) to ensure that we receive a fair price for our natural resources for the benefit of all Canadians. With the extreme volatility in both West Texas Intermediate (“WTI”) and Canadian differentials, Whitecap has elected to take a cautious and defensive approach in the 1H/2019 by reducing capital spending compared to the prior year with a focus on debt reduction. We will continue to monitor the impact of the production curtailments, progress of the export pipelines and commodity prices to determine if any adjustments are required to our preliminary 2H/2019 plans.
In 2016 and 2017, Whitecap was opportunistic in acquiring premium light oil assets with low base production declines and strong operating netbacks. In aggregate, we acquired approximately 30,000 boe/d for $1.4 billion with a base decline rate of less than 10%. With WTI prices currently at US$50 – $55/bbl in combination with wider Canadian crude oil differentials, the benefits of having assets with long life, low production declines and high operating netbacks become increasingly more important. These production assets generate significant free funds flow and complement our short cycle, high rate of return drilling inventory. This balance provides stability in times of volatile commodity prices but also provides flexibility to rapidly increase production growth when realized prices provide higher returns on capital invested.
2019 Budget
The objective of our 2019 budget is to protect our balance sheet, reduce net debt and maintain the current dividend by having a disciplined 1H/2019 capital program in combination with a flexible 2H/2019 capital program. The 2019 capital budget of $425 – $475 million includes drilling 220 (191.5 net) wells for production additions as well as investment in enhanced oil recovery (“EOR”) projects for long-term value creation including the drilling of 9 (7.9 net) horizontal injection wells.
Whitecap prudently invests for the long term by spending capital on EOR projects to ensure that we manage our base production declines. In 2019, 18% of our capital budget or $80 million is anticipated to be spent on CO2 and polymer purchases, injection wells (both conversions and new drills) and waterflood expansions/pilots. We anticipate investments in these decline rate mitigation projects will provide a predictable and stable corporate base decline rate of 18% – 19% while still significantly growing our production base. Our compounded annual growth rate (“CAGR”) on organic production over the next three years is anticipated to be 6%.
The 1H/2019 budget is defensive and focused on balance sheet strength in this time of economic uncertainty in the Canadian energy industry. It is designed to ensure capital spending and dividend payments are fully covered by anticipated funds flow. In the 1H/2019, we are anticipating funds flow of $276 million, capital spending not greater than $135 million and dividend payments of $67 million, resulting in free funds flow of $74 million which will be used to reduce net debt. By design, our first half program mitigates any production impacts from the government-mandated production cuts and allows us to focus a higher percentage of our capital towards long life and high net present value projects such as EOR and waterfloods.
The 2H/2019 capital program is designed to provide maximum flexibility allowing us to increase or decrease capital spending depending upon the realized crude oil pricing environment. Whitecap has high working interest and operatorship in its properties and can therefore control the nature, timing and extent of capital spending in each of our core areas. The 2H/2019 capital budget is expected to deliver Q4/2018 to Q4/2019 production per share growth of 6% and, more importantly, sets us up for a very strong 2020 and targeted organic growth to 88,000 – 90,000 boe/d by the end of 2021 within anticipated funds flow.
The overall expected capital efficiency (IP365) for the 2019 capital program is $23,775 per boe/d which is consistent with our estimated 2018 at $23,380 per boe/d and our 2016-2018 average of $20,114 per boe/d. The slight increase to our three-year average is primarily due to an increase in allocation of capital spending to longer term projects associated with EORs and base production decline mitigation in addition to service cost increases.
Highlights of our 2019 capital budget include the following:
Northwest Alberta and British Columbia ($112 million)
Building on an active and successful year in the Deep Basin, we plan to drill 22 (22.0 net) wells in 2019 of which 3 (3.0 net) wells are in the 1H/2019. The excellent well results and positive outcomes from strategic technical initiatives provide us with confidence to increase the pace of activity in our Wapiti Cardium asset by 82% in 2019 to 20.0 net wells from 11.0 net wells in 2018. These strategic initiatives led to a 50% increase in net well inventory within our Wapiti Cardium asset. The increase is primarily a result of the simulation, piloting and evaluation of well results that support an increase in well densities on most of our lands from four to six wells per section.
A new completion strategy was also tested successfully in Q4/2018 and has the potential to reduce completion costs by 20% going forward. The remaining 2 (2.0 net) wells planned for in the Deep Basin will be focused on expansion of a new area. Due to the increased scope and potential of our Wapiti Cardium asset, in 2018 we acquired a facility interest to secure sufficient firm egress and expanded our central battery and fluid handling facility. The acquisition and expansion will reduce operating costs by approximately 25% as we continue to develop the Wapiti property.
In Boundary Lake, we have had excellent results from the identification and implementation of waterflood optimization initiatives which have decreased our base production decline rate from 15% to 10% in this area. As result, 40% of our capital spending in this area will be allocated to waterflood optimization and expansion. In addition, we plan to drill an additional 2 (2.0 net) wells in this area in Q4/2019.
West Central Alberta ($81 million)
The 1H/2019 program is focused on setting the stage for drilling waterflood supported horizontal wells in the 2H/2019 including preparation of the property for full development and maximum resource recovery. We anticipate drilling 26 (23.6 net) wells in 2019 of which 3 (2.6 net) will be horizontal injectors. Capital spending will be focused primarily in West Pembina and Ferrier.
West Central Saskatchewan ($112 million)
We anticipate drilling 11 (10.9 net) wells in 1H/2019 including 2 (2.0 net) horizontal injection wells in our Kerrobert waterflood where we have experienced encouraging response from water injection. The 1H/2019 program includes a 6 (5.9 net) well drilling program and $2 million in facility and injection expansion in the Dodsland Viking waterflood. This will allow for accelerated growth and recovery from this pool where we have seen exceptional results to date.
Our capital program in the Viking is extremely flexible and our plans are to ramp up activity in the 2H/2019 drilling 92 (83.0 net) wells for a total of 103 (93.9 net) wells for the full year.
Southwest Saskatchewan ($94 million)
With the exceptional results in 2018 on both the resource plays and waterfloods, the capital budget for 2019 has been increased by 10% compared to the prior year. We plan to drill 62 (46.9 net) wells in 2019 of which 19 (15.9 net) will be drilled in the 1H/2019.
We anticipate 47% of our drills to target the Atlas resource play, 13% Upper Shaunavon resource play, 22% Roseray and Success conventional waterflood re-development and 18% in a new play development which includes 9 (7.4 net) wells to follow-up on our outstanding Lower Shaunavon results in the Bench area.
In addition to our drilling capital, we expect to spend $32 million on waterflood expansion and optimization efforts to lower base decline rates and increase reserve recovery.
Southeast Saskatchewan ($45 million)
We anticipate spending only 31% of Weyburn’s operating income to keep production flat year over year. The capital program includes drilling 5 (3.1 net) infill wells and approximately $27 million on CO2 purchases and optimization initiatives. We expect to spend less than 50% of the area’s operating income to deliver a CAGR on production of 3% in future years.
2019 Budget Summary
2019 Budget (1) (2) |
Budget |
Estimated |
Q4/Q4 Change |
|
Average Production (boe/d) |
70,000 – 72,000 |
77,000 – 79,000 |
73,500 |
6% |
Per million shares (fully diluted) |
169 |
186 |
176 |
6% |
% oil and NGLs |
85% |
85% |
85% |
– |
Funds flow netback ($/boe) (4) |
$23.75 |
$26.70 |
$20.80 |
28% |
Funds flow ($MM) |
615 |
192 |
141 |
36% |
Per share (fully diluted) |
$1.47 |
$0.46 |
$0.34 |
36% |
Capital expenditures ($MM) |
425 – 475 |
75 – 125 |
85 |
18% |
Dividends ($MM) |
135 |
34 |
34 |
– |
Free funds flow ($MM) (5) |
30 |
58 |
22 |
164% |
Total payout ratio (5) |
95% |
70% |
84% |
(17%) |
WTI (US$/bbl) |
$55.00 |
$55.00 |
$60.00 |
(8%) |
Edmonton Par Differential (US$/bbl) |
($9.00) |
($8.00) |
($26.00) |
(69%) |
WCS Differential (US$/bbl) |
($17.50) |
($17.00) |
($40.00) |
(58%) |
CAD/USD exchange rate |
0.75 |
0.75 |
0.76 |
(1%) |
Natural gas (AECO C$/GJ) |
$1.37 |
$1.50 |
$1.40 |
(7%) |
Notes: |
|
(1) |
2019 budget calculations based on mid-case production of 71,000 boe/d and capital expenditures of $450 million. |
(2) |
Incorporates the estimated impact from the government-mandated production cuts. |
(3) |
Q4/2019 calculations based on mid-case production of 78,000 boe/d and capital expenditures of $100 million in the quarter. |
(4) |
Funds flow netbacks represent funds flow divided by production for the period. |
(5) |
Refer to the non-GAAP measures section of this press release for additional disclosures and assumptions. |
Hedging
We continue to maintain a disciplined and prudent approach to debt management through our risk management program. Our objective is to mitigate price volatility to provide more predictability to our funds flow and lock in economic returns on capital spending. The Company has now hedged approximately 40% of 2019 forecasted crude oil production using a combination of fixed price swaps at an average price of C$74/bbl and costless collars providing average downside protection at C$72/bbl and average upside participation to C$92/bbl. In 1H/2020, we have approximately 13% of our forecasted crude oil production hedged using costless collars providing downside protection at C$69/bbl and average upside participation to C$89/bbl. In addition, given the volatility in Canadian crude oil differentials, we have fixed the mixed sweet blend (“MSW”) differential using both financial and physical contracts at an average price of approximately US$10.90/bbl on approximately 3,000 bbls/d in the 1H/2019.
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