Whitecap Resources on Synergy Realization and Basin Optionality

Speaker 1:
Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.
Aaron Bilkoski:
We're at the second annual TD Energy Conference in New York. We're having a series of conversations with leaders shaping Canadian energy's landscape. I'm excited to be speaking with Thanh Kang, CFO of Whitecap Resources, and Joey Wong, who runs the Unconventional Division. Thank you for being here.
Thanh Kang:
Yeah, thanks for having us.
Aaron Bilkoski:
Whitecap's evolved pretty significantly over the last few years. Could you talk a little bit about what prompted that evolution and how you've proceeded over the last five years reforming your asset base?
Thanh Kang:
Yeah, thanks for that question, Aaron. Whitecap started in September of 2009. Our starter kit was 850 barrels a day of production. And over the last 16 years, we've grown organically as well as through acquisitions. But it's never been about a production target that we're looking to achieve. It's always about building a better company through each iteration of Whitecap Resources here.
And so it just happens that the output is 370,000 BOEs per day. But our objectives when we look at the returns that we're providing to our shareholders is a total return in that 10 to 15% [inaudible 00:01:32], a combination of moderated growth in that 3% to 5% per share, supplemented by our dividend yield, as well as continuing to buy back shares and improving our capital structure to get to that 10 to 15% there. And so as the company has evolved, the strategy has remained the same, which is to provide that return profile to our shareholders over the long-term.
Aaron Bilkoski:
Thanks. You're obviously in the process of digesting a relatively large acquisition. You just acquired Veren. At the time of the acquisition, you publicly stated some synergy numbers. I think with the 2026 guides, you blew the street, certainly me, out of the water with expectations. I think stronger synergies, better capital efficiencies were the key takeaway in your latest release. Could you talk a little bit about where those improvements are coming from?
Thanh Kang:
Sure. If you look at just Veren and Whitecap on a standalone basis, A plus B, our capital program to achieve a 3% growth rate, would've been about $2.6 billion. And now through the magnitude of the synergies we're achieving, as well as asset level outperformance, we're able to run a much more capital efficient program. So to achieve the same growth rate growing from 370,000 BOEs per day to 380,000 BOEs per day on basically a capital efficient program that is $500 million lower.
So the CapEx values for 2026 is 2.0 to $2.1 billion. And I would say the breakdown of that synergy, that 500 million, is really about 150 of that is associated with capital improvements, better capital efficiencies. A hundred million of that is roughly, considering the overlap of the asset base here, there's less infrastructure spending that's required on a go forward basis. So about 100 million.
Now, the remaining difference is around asset outperformance, whether that's on new drills and type curve outperformance or base level production outperformance. And so we do see this as being a structural change on a go-forward basis. So our capital efficiency on a pre-Veren would've been about 21,000 per flowing. And now what's embedded in our 2026 program is about 19,000 per flowing in terms of efficiency there.
Now, the improvements that we've seen are on both sides of the ledger, both on the capital as well as reducing our cost structure to improve our profitability. Operating costs on a standalone basis, we were thinking somewhere in that 13.50 to $14. And now what we're seeing, and you would've seen that in this third quarter report, is operating costs are down by 8% to $12.50. And again, we think that's structural, where we're forecasting that for the fourth quarter of this year, but also into 2026 as well.
But maybe, Joey, you can elaborate on where specifically we're seeing those synergy improvements.
Joey Wong:
Yeah. So like Thanh said there, the magnitude is coming in ahead of expectations, but it's also the pace at which we're realizing them. So initially when we set up the expectations, we said somewhere between six and 12 months it would take us to realize these things. And really on day one, we were able to realize these. And that's as a result of the teams coming together, having access to the technical teams ahead of time, and making sure we could identify where's the low hanging fruit, what are those optimization opportunities, and really being ready to execute on those on day one.
So by category, I'll speak at a high level to them. There was the optimization of the rig lines that we have. There was strengthening some of the relationships we have between some of our service providers and utilizing the size and scale to see if we can drive some efficiencies there. And then there's also the application of technical workflows. And again, we're taking the best technical workflows, whether that be from the legacy Whitecap side or the legacy Veren side. It's all one now, and making sure we just apply whatever we can to the asset base and turn out the best result we can.
Aaron Bilkoski:
So you've optimized development, you've driven down capital cost, you've squeezed OpEx out of the system. That ultimately results in a wider free cash flow wedge. What are you going to do with that incremental free cash flow?
Thanh Kang:
Yeah, that's a good question, Aaron. The way that we think about free cash flow allocation is more cyclical in nature or being countercyclical in nature. And so I think the first important thing for us is maintaining our balance sheet strength. So that's going to have a big check mark there.
When we look at our debt today, between 3.3 to $3.5 billion, that's one times debt to cash flow. And we stress test our organization down to $50 WTI where we can maintain our production, we can pay for that dividend, and we can still maintain a good balance sheet at 1.2 times. Our liquidity doesn't change at the 1.6 billion because we're spending less than our cash flows, even in a distressed commodity price environment.
Now today at 60, that's our base case. We can grow our production 3%. We can pay for a dividend, which is yielding somewhere in that six to 7% range there, and we can buy back 2% of our flow. So 1.2 billion of free cash flow generates 12% total shareholder returns there. Now there's an ability for us to outperform through asset or through execution as well as through improving commodity prices there.
But where we want to prioritize our free cash flow today is buying back our shares. And there's a few different reasons for that. Number one, when you look at our cost of funding, the last bond issuance that we did was 3.76% and on an after tax basis, it's closer to 3%. So it makes more sense for us to be buying back our shares and earning six to 7% versus paying down debt and earning 3%. We're also trading at a significant discount to our intrinsic value, so Whitecap's long-term net asset values. So trading in this $11 range, it's important for us to be buying back our shares at a discounted price. And that allows us to not only improve our capital structure over time, but it improves the long-term sustainability of the dividend as well.
Now, what if commodity prices go from 60 to 70 as an example there? Well, our free cash flow increases by about 500 million. And so in that type of environment there, what we want to do is we want to pivot away from buying back shares and building up dry powder for the long-term because we are in a cyclical business. And so as commodity prices are volatile here, we want to be able to capture opportunities in the lows of the cycle. And that requires more dry powder, a better balance sheet.
Very, very similar to what we did in 2022 with the XTO transaction that really gave us a strong footprint into moderning the Duvernay, increased our depth and our duration of inventory quite significantly. It was a large transaction for us at that time. We had very low leverage, 0.5 times debt to cashflow, and we did the 1.88 billion transaction all within the balance sheet there. No equity out into the market, but in a very short period of time, we were able to pay down that debt through asset dispositions as well as increasing free cash flow. And that's really what positioned us for the Veren transaction. So Whitecap, again, had very low leverage, Veren, a little bit higher leverage, but together we're one times debt to cash flow.
And so that's how we think about free cash flow allocation and the strategy around that is being countercyclical. In the lows, continue to buy back as many shares as we can at a discounted value, and in the highs, start replenishing and improving the balance sheet and positioning ourselves to capture opportunities in the future.
Aaron Bilkoski:
My next question's for Joey. La Torre is your next specific asset growth area. Can you talk a little bit about the funding strategy and what you expect out of La Torre over the next two to three years?
Joey Wong:
Yeah, we're super excited about La Torre. So just to level set, La Torre is a portion of our land base that exists within the Montney. We've got a facility that we plan to have coming on stream in Q4 of 2026. It'll have a productive capability of somewhere in the range of 35,000 to 40,000 BOEs per day, about 40 to 50% liquids.
It does represent, like I say, like you suggested there, a nice little leg of growth available to us in the Montney. And we've been planning for this for some time. So when we initially acquired this portion of the asset base from XTO, we observed and said, "Hey, this is a really high quality liquids prone, very thick, high pressured reservoir that just is really in need of an infrastructure solution." That area really had been starved from an infrastructure perspective for quite some time.
And to your question there of how have we solved for that, so like I say, there's that facility that's being built. We do have a funding partner there that is providing the funding for it that we would have announced. It would have been not this past July, but the July before, with PGI. They'll be funding the build. I'll be doing the engineering and construction of it, and construction is, like I say, is underway and ready to go for Q4.
Aaron Bilkoski:
So when you're creating your capital program, how important is the underlying natural gas price to your decision making process? I think a lot of people are worried about Canadian natural gas prices because guys like you are making capital decisions on oil weighted plays that still produce a lot of gas.
Thanh Kang:
Yeah. You wouldn't necessarily know this, but we'd be the fifth largest natural gas producer in Canada, producing 850 million a day going to a BCF of natural gas. So it is an important part of our portfolio, but to your point, it doesn't drive the economics ultimately. I mean, you look at our third quarter and ACO is 63 cents, and we have a great marketing team and they were able to help us double that price realization, but still, that's still a buck 20, right?
And so when we look at that spectrum of opportunity within our portfolio here, all the way from light oil to liquids rich to dry natural gas, that's the optionality. And that's the ability for us to allocate capital to the best return projects to improve that free cash flow and that return on invested capital there. And so as we think about natural gas longer term, we think it will be stronger. It depends on the timeframe that you're thinking about.
So our objective here is in the short to medium term, really lean on the oil side of the portfolio and the liquids rich to drive our cash flows that are free cash flow and create that optionality longer term where if natural gas prices improve, we can put more capital towards that side of the business there. So if you look at our sensitivities as an example, for every dollar change to WTI, that's 50 million. $10, that's 500 million. But on the gas side, for every 10 cent change, it's 20 million. So if natural gas prices improve by a dollar, we're looking at an incremental 200 million of free cash flow relative to 1.2 billion of free cash flow at $60 WTI.
Joey Wong:
And while we are very excited about La Torre, and rightfully, it's probably worth highlighting that La Torre isn't our only leg of growth available to us. So as it stands right now, we're producing approximately 100,000 BOEs per day in the Kaybob area, got productive capability there that we'll grow into for about 115,000 BOEs per day. In 2026, we've got Gold Creek and we've got Karr. We've got all of these areas with which to grow. So while it is important and it is going to be a leg of growth, it's not our only leg of growth. And we do think that that's an important differentiator for us in terms of the growth prospects that we have in the Montney and Duvernay.
Aaron Bilkoski:
And Joey, maybe this is another question for you. I'd be curious how you think now about weighing development at the Kaybob Duvernay relative to your liquids rich money assets. Do you see better predictability in one versus the other or better returns and inventory in one versus the other?
Joey Wong:
Yeah, for sure. So I mean, it's liquid-rich Duvernay and liquid-rich Montney. Not to be parsing words there, but we do look at the two asset bases as very much almost interchangeable, borderline fungible, whatever kind of a word you want to use. They are very high returns to us. And like I mentioned there, we do have availability of infrastructure to grow into in the Duvernay, so that makes it appealing to us in the near term. The half cycle quality is there. The certainty on the understanding of the subsurface is there. Our execution's been fantastic.
And so as a result, we're more than happy to put capital to work there, again, in advance of the next legs of growth, wherever they may come from. We do view Kaybob eventually as being more of a stabilizer asset. So we'll grow it to that 115,000 viewers per day in that range, and then start to hold it flat. And at that point, then it transitions into more of a stay flat and return of free cash flow type of a property that we then put to work in the balance of the asset base.
Aaron Bilkoski:
Thanks. Thanh, I think the next question's going to be for you. We started the conversation with assets that you've acquired, but moving assets out of the portfolio has also been a big part of your strategy. Is there anything left within the portfolio that you think is no longer core?
Thanh Kang:
Since we've started in September of 2009 and we've grown the company quite significantly, obviously through organic growth and acquisitions, but along the way, we've been high grading and we've done dispositions as well. Part of the Veren transaction, we disposed of 8,000 BOEs per day in the [inaudible 00:14:58]. So it feels very comfortable right now from where the portfolio is at. I don't see any big holes in it in terms of dispositions.
Now, there will be opportunities, I would say, as commodity prices improve, to either, number one, continue to cash flow these assets; two, sell them if the multiple is correct; or three, potentially bring in third party capital to accelerate the NPV, but that does require higher commodity prices. So at this particular time, there's no assets within the portfolio that we would see as being disposition candidates.
Aaron Bilkoski:
Whitecap has entered, call it facility development arrangements with PGI. Veren had done something similar previously. Why do you think there is increased willingness for producers to enter these types of contracts with third party facility owners that they would've been reluctant to do so in the past?
Thanh Kang:
Yeah, that's a good question, Aaron. I think that it comes back to the strategy, and some producers will have different strategies. The most important thing for us when we think about infrastructure is we can control and influence the timing of when the production comes on stream. So our arrangement with our midstream partners like PGI is that we would do the construction, they would be the third party finance or they would finance the project for us, and we would construct build, but we also would be the operators so that we can control the timing of when the production comes on, mitigate any type of downtime. We think that the free cash flow that we generate is better utilized towards drilling wells, which is what we're good at, and it generates a better return.
Now on the midstream side, it's lower return, longer capital payouts, and they quite frankly have a better cost of capital than we do. And so it's better suited towards that model. For us, as La Torre as an example, it's 250 to 300 million. We'd rather see that towards drilling oil wells where we get capital payouts in less than a one year period of time and generates very strong profit and investment ratios.
Aaron Bilkoski:
Well, thank you very much for joining us. I appreciate both of you coming here.
Thanh Kang:
Yeah, thanks for your time.
Joey Wong:
Yeah, thank you, Aaron.
Speaker 1:
Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.